This year’s conference corresponds with an important shift in U.S. monetary policy. The first rate cut in over four years is only a few short weeks away. Would Powell signal the Fed is ready to move forcefully to get ahead of unfolding weakness in the labor market and economy? Or might this be a more cautious, data-dependent Powell feeling much more confident about inflation, yet hesitant to endorse Wall Street forecasts for aggressive cuts?
Some were clamoring for more. “The Stakes Are High for Powell at Jackson Hole,” is the title of Mohamed El-Erian’s Monday Bloomberg Opinion piece:
“This year’s presentation by Chair Jerome Powell is eagerly awaited due to the economic fluidity and financial volatility that the US has been experiencing, and its spillovers to the rest of the world. It comes in the context of an ocean of genuine uncertainty, both domestic and global, that’s amplified by the erosion of three key anchors of stability: steady and predictable economic growth, effective forward policy guidance, and only small pockets of technical vulnerability involving over-leveraged positions and excessive risk-taking by market participants. This is why it is critical for Powell to take advantage of the golden opportunity he has this Friday to regain control of the economic and policy narrative. The Fed’s paramount goal this year should be to re-establish the effectiveness of its forward policy guidance.”
I’m on board with “over-leveraged positions and excessive risk-taking.” We can only hope Mr. El-Erian is correct (and I’m wrong) in his “only small pockets of technical vulnerability.”
As far as re-establishing the effectiveness of forward guidance and regaining policy and economic narratives, Powell’s presentation fell short. The Fed Chair was more focused on the past than the future. Markets might have fancied a more cultivated essay on enhancements to the Fed’s policy framework, reaction function and transmission mechanism, but they got what they wanted: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Powell: “At this podium two years ago, I discussed the possibility that addressing inflation could bring some pain in the form of higher unemployment and slower growth. Some argued that getting inflation under control would require a recession and a lengthy period of high unemployment. I expressed our unconditional commitment to fully restoring price stability and to keeping at it until the job is done.”
August 23 – Associated Press (Christopher Rugaber): “In what amounted to something of a victory lap, Powell noted… that the Fed had succeeded in conquering high inflation without causing a recession or a sharp rise in unemployment, which many economists had long predicted. He attributed that outcome to the unraveling of the pandemic's disruptions to supply chains and labor markets and a reduction in job vacancies, which allowed wage growth to cool.”
Before our central bankers dangle a “Mission Accomplished” banner outside the Marriner S. Eccles Federal Reserve Board Building, there’s more to the inflation story to contemplate. The proverbial elephant in the room: asset inflation, Bubbles, and deficits – ignore them at everyone’s peril.
Powell: “How did inflation fall without a sharp rise in unemployment above its estimated natural rate?”
Powell highlighted the forces of post-pandemic supply-side normalization that worked to curb price inflation. There were several references to “labor markets” and one to “commodity markets.” The Chair’s presentation avoided any mention of the stock market, as if it had no impact.
Since Powell’s 2022 Jackson Hole presentation, the S&P500 has returned 43.3%, the Nasdaq100 (NDX) 59%, and the Semiconductor Index (SOX) 91%. Nvidia surged almost 700%. “Mania” somehow didn’t make it into Powell’s speech.
Financial conditions have loosened dramatically since August 2022. For example, investment grade spreads to Treasuries narrowed from 140 bps to this week’s 94 bps close, with high yield spreads narrowing from 450 to 312 bps. Investment-grade Credit default swap (CDS) prices closed the week at 49 bps, down from the 86 bps on August 26, 2022. High yield CDS dropped to 320 bps from 500 bps. It’s also worth noting that a September 2022 jump saw investment-grade CDS rise to 108 bps and high yield to 610 bps. While a far cry from equities, corporate debt has generated solid returns. The iShares Investment Grade Corporate Bond ETF (LQD) returned 8.8% in two years, with the iShares High Yield Bond ETF (HYG) returning 15.9%.
It would be a different policy discussion today, had the dramatic loosening of financial conditions not fueled such stellar market gains. Booming financial markets were undoubtedly instrumental in supporting the economy and job growth.
Powell: “Disinflation while preserving labor market strength is only possible with anchored inflation expectations, which reflect the public’s confidence that the central bank will bring about 2% inflation over time.”
I would give more credit to well-anchored confidence that the central bank will ensure asset inflation (i.e., higher stock prices and portfolio returns) over time.
It was no surprise Powell ignored this year’s theme, “Reassessing the Effectiveness and Transmission of Monetary Policy.” I look forward to reading papers addressing such an important topic. While not a focus of Powell's, it would behoove the Fed to delve deeply into the critical issue of why general financial conditions remained largely immune to its monetary “tightening”.
Powell: “Four and a half years after COVID-19's arrival, the worst of the pandemic-related economic distortions are fading.”
True enough with respect to economic distortions. But what about distortions within the financial sphere? The Fed orchestrated an unprecedented $5 TN QE program. At $7.14 TN, the Fed’s balance sheet still remains almost double the size from (pre-QE) September 2019. The Federal Reserve in March 2020 bailed out the levered players, “basis trades” and “carry trades” in particular, and financial markets in general. This open-ended “whatever it takes” fundamentally altered market risk perceptions, including the perceived risk vs. reward calculus for risk-taking and levered speculation. Lingering concerns that policy “tightening” might suppress the Fed’s propensity for timely market bailouts was allayed with the $740 billion Fed/FHLB March 2023 bank crisis liquidity response.
This “tightening” cycle accompanied a headline CPI (y-o-y) spike to 9.1%. Yet 10-year Treasury yields didn’t exceed 5% - and were somewhat above 4.5% for only a few weeks. By comparison, 10-year yields jumped to 6.75% (CPI 3%) in January 2000 and reached 8% (CPI 3.8%) during the 1994 tightening cycle.
The Fed’s massive Treasury and MBS purchases monetized much of the federal government’s prolific pandemic borrowing and spending. Moreover, open-ended QE and bailouts incentivized leveraged speculation – the highly levered Treasury “basis trade” in particular. Speculative demand was integral to financing enormous deficits at depressed yields.
We can’t overstate the significance of Fed-induced market distortions. The Fed accommodated leveraged speculation, emboldening only greater risk-taking and leverage. Our central bank and the leveraged speculating community accommodated unprecedented federal borrowing, emboldening Washington’s profligate spenders. All the “soft landing” talk disregards critical festering issues.
Powell: “The limits of our knowledge—so clearly evident during the pandemic—demand humility and a questioning spirit focused on learning lessons from the past and applying them flexibly to our current challenges.”
Caution is in order. Asset inflation and speculative Bubbles were fundamental to the painless nature of the Fed’s “tightening” cycle. In the process, the monetary policy transmission mechanism has been precariously compromised. Truth be told, the Fed relinquished command over monetary management to highly speculative markets. These days, “risk on” and associated leveraged speculation equate to looser financial conditions, while highly destabilizing de-risking/deleveraging lurks in the shadows.
Meanwhile, the CBO forecasts a $2.0 TN 2024 federal deficit, or about 7% of GDP. Ten-year Treasury yields are down 90 bps in four months to 3.80%, a yield that will certainly not discipline an undisciplined Washington.
Mohamed El-Erian and other Wall Street economists were hoping Powell would address the so-called “neutral rate” or R-star (the long-run equilibrium interest rate). They would like the Powell Fed to deemphasize “data dependent,” while providing a semblance of clarity for the expected policy rate destination. Too late for any of this.
At intraday August 5th panic lows, the rates market was pricing 148 bps of rate cuts by the completion of the Fed’s December 18th meeting. The market ended this week at 103 bps.
The week’s data offered little to indicate economic weakness. The preliminary August Services PMI was reported at a stronger-than-expected 55.2 (near 15-month high). At a 739,000 annualized rate, New Home Sales blew away estimates to about the highest level since February 2022. The homebuilders (XHB EFT) surged 8.2% this week, boosting y-t-d gains to almost 25%.
There are still the August non-farm payrolls and CPI reports to hit before the September 18th FOMC meeting. Other data seem to matter little. The Fed has pre-committed to cut, though the totality of economic data doesn’t argue for 50 bps. Market expectations for 100 bps of rate reduction by year-end appear excessive, but there’s complexity here. Especially after August 5th, markets will factor in the probabilities of a destabilizing deleveraging episode that would trigger aggressive Fed rate cuts. From this perspective, 100 bps by year-end is reasonable.
Outside of the small caps and the heavily shorted stock universe, the yen showed about the most sensitivity to Powell’s dovishness. The yen gained 1.33% for the session to close the week 2.26% higher at 144.37 to the dollar. “Risk on” has hardly missed a beat since the August 5th reversal. Yet the yen ended the week near the August 5th close (144.18) and not far off the intraday yen “carry trade” unwind panic level (141.70). Ten-year Treasury yields closed the week at 3.80%, one basis point higher than the August 5th close (3.68% intraday low).
“Risk on” holds court for now, but I doubt we’ve heard the last of yen “carry trade” instability. The Dollar Index closed the week at a one-year low. Between June 2021 and October 2022, the Dollar Index surged almost 26%. It appears the days of the strong dollar working to restrain inflationary pressures are now in the rear-view mirror.
Bloomberg Intelligence’s Brian Meehan was out Friday with timely research:
“Can Historic $1.1 Trillion Net Short Basis Trade Hold or Crack? Leveraged net shorts of Treasury futures have surged to a historic $1.1 trillion in notional value, accelerating 38% in the past four months. While the record short position alone doesn’t suggest the basis trade will blow up, it’s more than double when massive leveraged funding trades cracked in 2019 and 2020 -- and could require the Fed to bail out traders again if the repo market gets overly stressed… The net short position in US Treasury futures held by leveraged accounts per the CFTC Commitment of Traders has increased by $300 billion in notional the past four months… The size of the position alone doesn’t mean a blowup is pending, as funding markets have been quiet ahead of expected Fed easing. But given that the trade has blown out several times in the past 20 years, it's likely more a question of when, not if.”
Three hundred billion, or 38%, inflation in four months. “Terminal phase excess”, and further evidence that the Fed erred in signaling an easing cycle with markets in the throes of a speculative Bubble. And that a faltering Bubble will indeed require “the Fed to bail out traders again” reinforces lower market yields, looser conditions, speculative leverage, and only greater underlying fragility. With yen “carry trade” instability, a volatile U.S. election, a Middle East at the precipice, and dangerous Ukraine/Russia war escalation, it’s an especially precarious time to stoke speculation. One Hell of a Bubble.
For the Week:
The S&P500 gained 1.4% (up 18.1% y-t-d), and the Dow rose 1.3% (up 9.2%). The Utilities added 1.0% (up 19.7%). The Banks jumped 2.7% (up 18.4%), and the Broker/Dealers gained 2.0% (up 21.5%). The Transports advanced 1.9% (up 0.5%). The S&P 400 Midcaps jumped 2.8% (up 11.3%), and the small cap Russell 2000 surged 3.6% (up 9.5%). The Nasdaq100 increased 1.1% (up 17.2%). The Semiconductors added 1.1% (up 25.2%). The Biotechs rose 1.7% (down 8.2%). With bullion up another $5, the HUI gold index gained 2.3% (up 31.3%).
Three-month Treasury bill rates ended the week at 4.9975%. Two-year government yields dropped 13 bps this week to 3.92% (down 33bps y-t-d). Five-year T-note yields fell 11 bps to 3.65% (down 20bps). Ten-year Treasury yields declined eight bps to 3.80% (8bps). Long bond yields slipped five bps to 4.09% (up 19bps). Benchmark Fannie Mae MBS yields sank 17 bps to 5.05% (down 103bps).
Italian yields declined seven bps to 3.57% (down 13bps y-t-d). Greek 10-year yields declined six bps to 3.26% (up 21bps). Spain's 10-year yields fell seven bps to 3.02% (up 3bps). German bund yields slipped two bps to 2.23% (up 20bps). French yields declined five bps to 2.93% (up 37bps). The French to German 10-year bond spread narrowed three to 70 bps. U.K. 10-year gilt yields slipped a basis point to 3.91% (up 38bps). U.K.'s FTSE equities index increased 0.2% (up 7.7% y-t-d).
Japan's Nikkei Equities Index gained 0.8% (up 14.6% y-t-d). Japanese 10-year "JGB" yields gained two bps to 0.90% (up 29bps y-t-d). France's CAC40 rose 1.7% (up 0.4%). The German DAX equities index gained 1.7% (up 11.2%). Spain's IBEX 35 equities index jumped 3.0% (up 11.6%). Italy's FTSE MIB index advanced 1.7% (up 10.9%). EM equities were mixed. Brazil's Bovespa index increased 1.2% (up 1.1%), while Mexico's Bolsa index declined 1.2% (down 6.7%). South Korea's Kospi index added 0.2% (up 1.7%). India's Sensex equities index increased 0.8% (up 12.2%). China's Shanghai Exchange Index declined 0.9% (down 4.1%). Turkey's Borsa Istanbul National 100 index fell 1.6% (up 29.4%).
Federal Reserve Credit declined $34.1 billion last week to $7.101 TN. Fed Credit was down $1.789 TN from the June 22, 2022, peak. Over the past 258 weeks, Fed Credit expanded $3.374 TN, or 91%. Fed Credit inflated $4.290 TN, or 153%, over the past 615 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.5 billion last week to $3.298 TN - just off the low back to March 2023. "Custody holdings" were down $142 billion y-o-y, or 4.1%.
Total money market fund assets rose $24.9 billion to a record $6.242 TN. Money funds were up $355 billion y-t-d and $672 billion, or 12.1%, y-o-y.
Total Commercial Paper declined $6.5 billion to $1.236 TN. CP was up $73 billion, or 6.3%, over the past year.
Freddie Mac 30-year fixed mortgage rates declined three bps to a 15-month low to 6.46% (down 84bps y-o-y). Fifteen-year rates fell four bps to 5.62% (down 111bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 13 bps to 6.93% (down 65bps).
Currency Watch:
For the week, the U.S. Dollar Index dropped 1.7% to 100.718 (down 0.6% y-t-d). For the week on the upside, the New Zealand dollar increased 3.0%, the Swedish krona 2.6%, the Japanese yen 2.3%, the Swiss franc 2.2%, the British pound 2.1%, the Norwegian krone 2.1%, the Australian dollar 1.9%, the South Korean won 1.6%, the euro 1.5%, the Canadian dollar 1.3%, the Singapore dollar 1.1%, and the South African rand 1.0%. On the downside, the Mexican peso declined 2.5%, and the Brazilian real slipped 0.3%. The Chinese (onshore) renminbi increased 0.54% versus the dollar (down 0.29% y-t-d).
Commodities Watch:
August 19 – Bloomberg (Jack Wittels): “For the first time ever, a bar of gold is worth a cool one million dollars. The milestone was reached Friday, when the precious metal’s spot price surpassed $2,500 per troy ounce, an all-time high. With gold bars typically weighing about 400 ounces, that would make each one worth more than $1 million. There are some nuances to the figure. While gold bars in the London market — the global center for trading the precious metal — normally weigh about 400 troy ounces, they can contain 350 to 430 ounces of pure gold, according to the London Bullion Market Association.”
The Bloomberg Commodities Index increased 0.8% (down 2.2% y-t-d). Spot Gold added 0.2% to $2,513 (up 21.8%). Silver surged 2.9% to $29.8158 (up 25.3%). WTI crude retreated $1.82, or 2.4%, to $77.83 (up 4%). Gasoline dipped 1.1% (up 9%), and Natural Gas dropped 4.8% to $2.022 (down 20%). Copper rallied 1.5% (up 9%). Wheat dropped 5.2% (down 20%), and Corn slipped 0.7% (down 22%). Bitcoin rallied $4,900, or 8.3%, to $64,200 (up 51%).
Middle East War Watch:
August 21 – The Hill (Brad Dress): “Secretary of State Antony Blinken is departing the Middle East… after trying to shore up support for a Gaza cease-fire and hostage release deal that now appears to be out of reach. Blinken traveled to Israel, Egypt and Qatar this week to push a deal over the finish line and pressure Hamas to accept the latest negotiations. Israel agreed Monday to the latest proposal that was offered by Egyptian, Qatari and U.S. mediators after the latest round of talks last week. But Hamas has put out public statements saying it would not agree with the latest proposal, raising concerns about one of the major sticking points in the talks, an Israeli withdrawal from Gaza. Hamas wants Israel to fully withdraw from the territory, but Israel is pushing to maintain a presence there, including in the Philadelphi Corridor that borders Egypt.”
August 21 – Reuters (Suleiman Al-Khalidi, Maya Gebeily, James Mackenzie and Maytaal Angel): “The Israeli military said… it had bombed Hezbollah weapons storage facilities in Lebanon's Bekaa Valley overnight, and Hezbollah said it had carried out a drone attack on military posts in a kibbutz in northern Israel in retaliation. The Bekaa Valley is a Hezbollah stronghold and the latest hostilities across the Israel-Lebanon border will fuel concern that the Israel-Hamas war in Gaza could spill out into an all-out Middle East conflict… Israeli Defence Minister Yoav Gallant said: ‘Attacking munitions warehouses in Lebanon is preparation for anything that might happen’.”
August 22 – Financial Times (James Shotter and Raya Jalabi): “Israel’s air force bombed 10 areas of Lebanon overnight in response to a rocket barrage from the Lebanese militant group Hizbollah, as hopes for a US-brokered ceasefire between Israel and Hamas in Gaza continued to fade. The US and Arab nations view a deal to end the fighting in Gaza and free the roughly 100 Israeli hostages still being held there by Hamas as the best way to prevent an all-out regional war erupting in the Middle East. However, despite an intense diplomatic push by US officials, significant gaps remain between Israel and Hamas, and in recent days, as the hopes of a deal have waned, the exchanges of fire between Israel and Iran-backed Hizbollah have intensified.”
August 20 – Reuters (Elwely Elwelly): “There could be a long wait for Iranian retaliation against Israel, Iran's Revolutionary Guards spokesperson Alimohammad Naini said… The Middle East has been bracing for Iran's avowed retaliation over the killing of Hamas leader Ismail Haniyeh in Tehran on July 31. Israel has neither confirmed nor denied that it was behind the killing. ‘Time is in our favour and the waiting period for this response could be long,’ Naini said, referring to potential retaliation against Israel. He said ‘the enemy’ should wait for a calculated and accurate response.”
August 21 – Reuters (Robert Wright): “A Greek-owned oil tanker was ablaze and drifting in the Red Sea after what appeared to be the most successful attack on shipping by Yemen’s Iran-backed Houthis in more than two months. The Sounion, carrying crude oil from the southern Iraqi port of Basra to an undisclosed destination, was hit about 77 nautical miles west of the Yemeni port of Hodeidah… The ‘Suezmax’ vessel, able to carry about 1mn barrels of oil, is the largest type able to use the Suez Canal when laden with cargo.”
Ukraine War Watch:
August 21 – Reuters (Guy Faulconbridge and Lidia Kelly): “Ukraine attacked Moscow on Wednesday with at least 11 drones that were shot down by air defences in what Russian officials called one of the biggest drone strikes on the capital since the war in Ukraine began in February 2022… Russia's defence ministry said its air defences destroyed a total of 45 drones over Russian territory, including 11 over the Moscow region, 23 over the border region of Bryansk, six over the Belgorod region, three over the Kaluga region and two over the Kursk region.”
August 17 – Financial Times (Anastasia Stognei): “Nearly two weeks after Ukrainian troops smashed through thin border defences and stormed into Russia’s Kursk region, Moscow has still not assembled the kind of overwhelming force needed to repel Kyiv’s incursion. It has instead cobbled together units from around the country and from less active parts of the Ukrainian front, while deploying young conscripts performing their obligatory military service. ‘People are horrified. We are overwhelmed with requests and can barely keep up,’ said Ivan Chuvilayev, a representative of Go by the Forest, a Russian NGO helping citizens to avoid conscription.”
August 21 – Wall Street Journal (Matthew Luxmoore, James Marson and Ievgeniia Sivorka): “Ukrainian troops said they are moving to encircle an estimated 3,000 Russian troops that are hemmed against a river in Russia’s Kursk province, seeking a fresh blow against Moscow in the third week of a surprise incursion. Ukraine’s military said it used U.S.-supplied Himars rocket systems and explosive drones to strike pontoon crossings and bridging equipment as Russia scrambled to prevent the encirclement of its forces between the Seym river and the Ukrainian border… Kyiv’s forces are now expanding their control along the border and striking Russian supply routes…”
August 22 – Wall Street Journal (Isabel Coles): “Ukraine used aerial drones to attack an air base in Russia’s Volgograd region early Thursday in an escalating campaign of long-range strikes seeking to damage Moscow’s war machine. Ukraine’s main security and intelligence agency, known as the SBU, said the strike had targeted warehouses containing fuel and glide bombs to degrade Russia’s air power. Russia has made massive glide bombs dropped from warplanes a key weapon in their latest offensives to smash holes in Ukrainian defenses.”
August 20 – Reuters (Lidia Kelly, Olena Harmash and Yuliia Dysa): “Russia hit energy infrastructure in northern Ukraine in an overnight missile and drone attack and caused a huge fire in the west of the country, resulting in an increase in chlorine levels in the air… Ukrainian forces shot down three ballistic missiles and 25 of the 26 drones launched in the attack on nine regions across the country, Ukraine's air force commander said.”
August 20 – Reuters (Dan Peleschuk): “For Kyiv-area resident Olha Pavlovska, who huddles with her neighbours every week to discuss the often grim news from the front, Ukraine's shock incursion into Russia's Kursk region this month offered a rare moment of hope. ‘This was a very brave and important step… for keeping up morale in society,’ said Pavlovska, 51, speaking outside St Michael's Cathedral in the centre of Kyiv.”
August 20 – Bloomberg (Tony Capaccio): “Ukraine and Russia both lack the military assets to mount major offensives against each other, the Pentagon’s intelligence agency said in new assessments that suggests the two sides are headed toward stalemate. The Defense Intelligence Agency assessments conclude that Ukraine still doesn’t have the munitions to match Russia’s ability to fire some 10,000 artillery rounds a day, even after the US Congress unlocked fresh military aid in April.”
Taiwan Watch:
August 22 – Financial Times (Demetri Sevastopulo): “Taiwan’s top foreign policy officials have made a secret trip to the greater Washington area for talks with the US, the first such visit since President Lai Ching-te took office in May. Foreign minister Lin Chia-lung and Joseph Wu, Taiwan’s national security adviser, have been in the Washington area this week for the talks that are known as the ‘special channel’… The US and Taiwan have held the ‘special channel’ talks for years, but their existence was first disclosed by the Financial Times in 2021… The channel is seen as a rare opportunity for a larger group of senior officials from both sides to hold detailed talks.”
August 22 – CNBC (Lee Ying Shan): “Taiwan’s President Lai Ching-te has cautioned that China’s ‘growing authoritarianism’ will not stop with the island, and that it poses a challenge at the ‘global level.’ Lai was speaking at the annual Ketagalan Forum… It was attended by representatives from several countries including the U.S., India, Japan, Australia and Canada. ‘We are all fully aware that China’s growing authoritarianism will not stop with Taiwan, nor is Taiwan the only target of China’s economic pressures,’ Lai said, adding that this authoritarianism is becoming ‘more aggressive.’ ‘It’s now a challenge at the global level,’ Lai emphasized, calling for countries to cooperate and curtail China’s efforts.”
August 22 – Bloomberg (Yian Lee and Cindy Wang): “Taiwan will spend a record amount on defense next year, boosting its expenditure for eight straight years as it tries to deter an increasingly assertive China. The cabinet will increase military spending to NT$647 billion ($20.2bn) next year, an increase of 7.7% from the previous year… That accounts for 2.45% of Taiwan’s estimated GDP in 2025, in line with recent years. Taiwan is beefing up defense spending as it faces growing threats from China…”
Market Instability Watch:
August 22 – Bloomberg (Douglas Lytle): “Rumors of the carry trade’s impending demise may be greatly exaggerated, Bloomberg Intelligence European Rates Strategist Huw Worthington says. That would leave a lot more pain to come unless yields and spreads in Europe and the US rise above their Japanese counterparts. The latest data on Japanese investor holdings of developed markets government bonds in June showed declines not seen since the midst of Covid, but that’s just a drop in the ocean.”
August 20 – Bloomberg (Edward Bolingbroke): “Bond traders are taking on a record amount of risk as they bet big on a Treasury market rally fueled by expectations the Federal Reserve will embark on its first interest-rate cut in more than four years. The number of leveraged positions in Treasury futures has risen to an all-time high ahead of the central bank’s annual economic symposium in Jackson Hole, Wyoming… Open interest in futures, or the amount of risks taken by traders who can be long or short positions, peaked at a record of almost 23 million 10-year note futures equivalent, last week... That’s roughly $1.5 billion of risk per one basis point move in the underlying cash notes.”
August 21 – Bloomberg (Zijia Song, Maria Elena Vizcaino and VinÃcius Andrade): “Traders trying to buy the dip on Mexico’s peso can’t catch a break. Local politics, the dismantling in so-called carry trades and concerns about the US economic and political outlook are disrupting bullish calls on what was until May the best performing emerging-market currency this year. The peso is down almost 4% against the dollar this week and over 14% in the past three months, by far the worst among peers. Its six-month implied volatility has jumped to near the highest in three years… It’s a stark reversal for the currency which until a few months ago was by far the best performer in emerging markets — one whose strength seemed so unshakable investors feared betting against.”
August 20 – Bloomberg: “The Chinese currency risks surging if a scenario similar to the unwinding of the yen carry trade plays out, a prominent economist has warned… As the world’s second-biggest economy ran massive trade surpluses in recent years and local interest rates fell below those in the US, Chinese exporters began to hoard dollars in anticipation that the yuan would weaken. Some investors also borrowed in yuan to invest in higher-yielding assets abroad… But a shift in sentiment in favor of the yuan could prompt exporters and speculators to unload dollars and send the Chinese currency surging, said Guan Tao, global chief economist at Bank of China International Ltd.”
August 20 – Financial Times (Harriet Clarfelt): “Almost $90bn poured into US money market funds in the first half of August as investors sought to lock in attractive yields that could outlast an expected interest rate cut by the Federal Reserve next month. Money market funds… pulled in net inflows of $88.2bn between August 1 and August 15, according to flow tracker EPFR — the highest figures for the first half of a month since November last year. Most of the inflows originated with institutional investors… rather than retail investors…”
August 22 – Bloomberg (Amy Or): “The US stock market’s August whipsaw has convertible bond issuers hiding, and that’s likely to continue into September with the movement of interest rates still up in the air. Only $2 billion worth of new notes have been issued so far this month in the US, a far cry from the $7.6 billion raised during the same period last year…”
August 19 – Bloomberg (Lu Wang): “A leveraged strategy for diversifying investments that crashed spectacularly in the financial crisis is back. This time, the designers say they’ve ironed out the problems. The offering, known as portable alpha since the 1980s but recently rechristened ‘return stacking,’ has caught on in exchange-traded funds sold by Newfound Research and ReSolve Asset Management.”
Global Credit Bubble Watch:
August 18 – Financial Times (Stephen Gandel): “Russell, Kentucky, has survived three floods, a smallpox outbreak, a downtown blaze and a 200-mile oil spill. Its largest employer left in 1999. Now the town is facing another potential calamity: First & Peoples Bank, its sole local lender with roots to 1907, has received notices from three regulators this year warning about its precarious finances. The bank’s troubles do not stem from the region’s declining fortunes. Rather, they are emerging from exposure to the latest evolution of modern finance. First & Peoples is the most troubled of a growing number of small banks across the US facing problems due to ties to so-called shadow banks… Four years ago the bank signed a partnership with a fintech, US Credit, that promised to turn First & Peoples into a financial disrupter. Instead, the relationship has led to tens of millions of dollars in soured loans, and questions about the bank’s ability to survive.”
AI Bubble Watch:
August 17 – Financial Times (Tabby Kinder): “More than half of the US’s biggest companies see artificial intelligence as a potential risk to their businesses, according to a survey of corporate filings that highlights how the emerging technology could bring about sweeping industrial transformation. Overall, 56% of Fortune 500 companies cited AI as a ‘risk factor’ in their most recent annual reports, according to research by Arize AI… The figure is a striking jump from just 9% in 2022. By contrast, only 33 companies of the 108 that specifically discussed generative AI — technology capable of creating humanlike text and realistic imagery — saw it as an opportunity.”
August 17 – Financial Times (Camilla Hodgson): “Water consumption by dozens of facilities in Virginia’s ‘data centre alley’ has jumped by almost two-thirds since 2019, as environmental campaigners warn that demand for computing infrastructure is set to ‘explode’ due to artificial intelligence. The US state of Virginia is home to the world’s largest concentration of data centres, including facilities used by Big Tech groups Amazon, Google and Microsoft. The vast warehouses full of computers and networking gear used at least 1.85bn US gallons of water in 2023… That compares with the 1.13bn gallons used in 2019…”
Bubble and Mania Watch:
August 17 – Wall Street Journal (Stephen Wilmot): “China was a gold mine for global automakers a decade ago. Not anymore. ‘Very few people are making money’ in China, General Motors Chief Executive Mary Barra told investors in July. A jarring new data point came earlier this month when Germany’s Volkswagen reported its first quarterly loss in at least 15 years from joint ventures and associates… For the largest global automakers, profits in China have been hit by falling sales as consumers embrace electric vehicles from homegrown brands such as BYD, which last year supplanted Volkswagen as China’s bestselling carmaker.”
August 21 – Bloomberg (Keith Naughton): “Ford Motor Co. is recalibrating its electrification strategy yet again, canceling plans for a fully electric sport utility vehicle in a shift that may cost the carmaker around $1.9 billion. In addition to scrapping an all-electric three-row SUV that already had been delayed, Ford will further postpone a next-generation electric pickup and reduce spending on EVs to 30% of its annual capital expenditures, from about 40% previously… The actions amount to further pullback by Chief Executive Officer Jim Farley, who initially accelerated Ford’s shift to EVs when he took over the top job almost four years ago.”
August 18 – Financial Times (George Hammond): “Start-up failures in the US have jumped 60% over the past year, as founders run out of cash raised during the technology boom of 2021-22, threatening millions of jobs in venture-backed companies and risking a spillover to the wider economy. According to data from Carta…, start-up shutdowns are rising sharply, even as billions of dollars of venture capital gushes into artificial intelligence outfits. Carta said 254 of its venture-backed clients had gone bust in the first quarter of this year. The rate of bankruptcies today is more than seven times higher than when Carta began tracking failures in 2019.”
U.S./Russia/China/Europe Watch:
August 16 – Reuters (Guy Faulconbridge and Olzhas Auyezov): “Russia's foreign ministry said Ukraine had used Western rockets, likely U.S.-made HIMARS, to destroy a bridge over the Seym river in the Kursk region, killing volunteers trying to evacuate civilians. ‘For the first time, the Kursk region was hit by Western-made rocket launchers, probably American HIMARS,’ Maria Zakharova, spokeswoman for the Russian foreign ministry, said…”
August 21 – Reuters (Tom Balmforth, Yuliia Dysa and Milan Pavicic): “Ukrainian forces are using U.S.-manufactured HIMARS rocket systems to destroy pontoon bridges and engineering equipment in Russia's Kursk region, Ukraine's military said on Wednesday, targeting logistics in its major cross-border incursion. Russian officials have said Ukraine has damaged or destroyed at least three bridges over the Seym River since Kyiv launched a major assault into western Russia on Aug. 6 advancing up to 28-35 kilometres (39.15 miles).
August 22 – Telegraph (Nicola Smith): “Russian President Vladimir Putin and China’s premier Li Qiang have celebrated their deepening political and economic ties in the face of growing friction with the West over the grinding war in Ukraine. Trade relations were ‘developing successfully’ and ‘yielding results,’ Mr Putin told Mr Li, who visited the Kremlin on Wednesday… `Mr Li, in turn, praised the efforts by the Russian leader and Xi Jinping… to ‘inject strong momentum’ into bilateral relations which he said had reached an ‘unprecedentedly high level’”
August 20 – Reuters: “Russian President Vladimir Putin met Chinese premier Li Qiang in Moscow on Wednesday, the Kremlin said… ‘Our countries have large-scale joint plans, projects in the economic and humanitarian areas, we expect them to last for many years,’ the RIA state news agency quoted Putin as saying. Li said earlier… that Beijing was ready to work with Russia to strengthen all-round practical cooperation.”
August 21 – Xinhua: “Chinese Premier Li Qiang said… that China is ready to work with Russia to further strengthen multilateral coordination to firmly promote world multipolarity and economic globalization. Li made the remarks when meeting with Russian President Vladimir Putin after he co-chaired the 29th regular meeting between Chinese and Russian heads of government with Russian Prime Minister Mikhail Mishustin.”
De-globalization and Iron Curtain Watch:
August 20 – Reuters (Josephine Mason): “The European Commission confirmed… it would apply additional duties of up to 36.3% on imported electric vehicles made in China as it issued draft definitive findings of its anti-subsidy investigation…”
August 21 – Wall Street Journal (Clarence Leong and Kim Mackrael): “China said it has opened an antisubsidy probe into dairy products imported from the European Union, the latest in a tit-for-tat round of actions between the two increasingly hostile trading powers. Beijing acted a day after the EU affirmed its plan to impose high tariffs on China-made electric vehicles based on the results of an investigation into Chinese subsidies for the sector. Earlier this year, China had opened antidumping probes into brandy and pork products from the EU. The European Commission, the EU’s executive body, said it would ‘firmly defend the interest of the EU dairy industry’ and intervene if needed to ensure the Chinese probe complies with World Trade Organization rules.”
August 20 – Bloomberg: “For centuries, control of the world’s biggest shipping centers helped expand empires, spark and settle wars, ease poverty and build middle classes while giving international companies access to cheap workers and cash-flush consumers in distant markets. Along the way, maritime ports evolved from trading posts and naval bases into economies within economies that supercharged globalization, becoming vital junctions for energy flows, hubs for infrastructure like rail lines and power stations, and clusters for industrial production, warehousing and distribution. Now, both old and new gateways for seaborne commerce— responsible for handling 80% of the world’s $25 trillion in annual merchandise trade—are economic fortresses in the great-power struggles of a multipolar world.”
August 18 – Financial Times (Michael Peel and Eleanor Olcott): “Rising tensions between the US and China threaten to sever a 45-year-old science and technology pact due for renewal later this month, hindering the superpowers’ collaboration in critical areas. Researchers are attempting to work round the strained inter-governmental relationship, with some focusing on less contentious possible areas of co-operation, such as climate change and diseases related to ageing. The struggle to strike a comprehensive multiyear extension to the science and technology accord is a sign of how political problems can undermine frontier research work.”
Inflation Watch:
August 21 – Wall Street Journal (Tadeo Ruiz Sandoval): “Gen Z is accumulating debt faster than any other generation. From credit cards to student loans, the youngest cohort of borrowers have their hands full. How did they get here? Credit Karma… released a report that found Gen Z is getting hit particularly hard. Over the past decade, consumer prices in the U.S. have risen by about 32%. Born between 1997 and 2012, Gen Zers are entering a more expensive world, where not everything is affordable. And when their paycheck alone isn’t enough, they are turning to credit to pay for food, housing and, in some cases, nonessential expenses.”
Federal Reserve Watch:
August 22 – New York Times (Jeanna Smialek): “Two years ago, Jerome H. Powell took the podium at the Federal Reserve Bank of Kansas City’s annual conference at Jackson Hole in Wyoming and warned America that lowering inflation would require some pain. On Friday, Mr. Powell, the Federal Reserve chair, will again deliver his most important policy speech of the year from that closely watched stage. But this time, he is much more likely to focus on how the Fed is trying to pull off what many onlookers once thought was unlikely, and maybe even impossible: a relatively painless soft landing.”
August 22 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Kansas City President Jeffrey Schmid said he wants to see more economic data before supporting any decision to begin reducing interest rates… ‘It makes sense for me to really look at some of the data that comes in the next few weeks,’ the Kansas City Fed chief, who doesn’t vote on rate decisions this year, said… ‘Before we act — at least before I act, or recommend acting — I think we need to see a little bit more.’”
August 18 – Financial Times (Colby Smith): “The US Federal Reserve needs to take a gradual approach to lowering borrowing costs, one of its top officials has said… Mary Daly, president of the San Francisco Fed, told the Financial Times that recent economic data have given her ‘more confidence’ that inflation is under control. It is time to consider adjusting borrowing costs from their current range of 5.25 per cent to 5.5%, she said. Her call for a ‘prudent’ approach pushed back on economists’ concerns that the world’s largest economy is heading for a sharp slowdown that warrants rapid cuts in interest rates.”
August 21 – Bloomberg (Craig Torres): “Several Federal Reserve officials acknowledged there was a plausible case for cutting interest rates at their July 30-31 meeting before the central bank’s policy committee voted unanimously to keep them steady. ‘Several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 bps at this meeting or that they could have supported such a decision,’ minutes from the meeting… said. ‘The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.’”
U.S. Economic Bubble Watch:
August 22 – Reuters (Lindsay Dunsmuir): “U.S. business activity fell to a 4-month low in August and firms continued to struggle to pass on higher prices to consumers… S&P Global said… its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, edged down to 54.1 this month, a still healthy level among the highest measured over the past two years… The survey's flash manufacturing PMI retreated to an 8-month low, falling to 48.0 this month from 49.6 in July… Its flash services PMI rose to 55.2, from 55.0 in July, confounding economists' expectations for a drop to a reading of 54.0.”
August 22 – Reuters (Lindsay Dunsmuir): “The number of Americans filing new applications for unemployment benefits rose in the latest week… Initial claims for state unemployment benefits rose 4,000 to a seasonally adjusted 232,000 for the week ended Aug. 17… The latest data should continue to allay fears that the labor market is rapidly deteriorating… The number of people receiving benefits after an initial week of aid, a proxy for hiring, rose 4,000 to a seasonally adjusted 1.863 million…”
August 22 – Reuters (Makailah Gause): “The average rate on the popular U.S. 30-year fixed-rate mortgage ticked down this week to the lowest level since May 2023… The 30-year fixed-rate mortgage averaged 6.46% during the week ending Aug. 22, down from 6.49% in the prior week… It averaged 7.23% during the same period a year ago.”
August 22 – Reuters (Lindsay Dunsmuir): “U.S. existing home sales rose more than expected in July, reversing four consecutive monthly declines… Home sales rose 1.3% last month to a seasonally adjusted annual rate of 3.95 million units… The median existing home price jumped 4.2% from a year earlier to $422,600. Home prices increased in all four U.S. regions… Housing inventory increased 0.8% to 1.33 million units last month. Supply jumped 19.8% from one year ago. A surge in insurance premiums across the country as weather-related claims rise is forcing some homeowners to put their properties on the market… At July's sales pace, it would take 4.0 months to exhaust the current inventory of existing homes. That was up from 3.3 months a year ago. A four-to-seven-month supply is viewed as a healthy balance... Properties typically stayed on the market for 24 days in July compared to 20 days a year ago. First-time buyers accounted for 29% of sales versus 30% a year ago… All-cash sales made up 27% of transactions, up from 26% a year ago.”
August 21 – CNBC (Diana Olick): “Applications to refinance a home loan dropped 15% from the previous week… Volume was, however, 90% higher than the same week one year ago… Applications for a mortgage to purchase a home fell 5% for the week and were 8% lower than the same week one year ago. Demand is now at the lowest level since February. Homebuyers are not as influenced by the recent drop in rates because they are still struggling to afford what little is available for sale.”
August 21 – Reuters (Lindsay Dunsmuir): “U.S. employers added far fewer jobs than originally reported in the year through March… The department's estimate for total payroll employment for the period from April 2023 to March 2024 was lowered by 818,000. The revision represented a total downward change of about 0.5% and means that monthly job gains during the period averaged roughly 174,000, compared to the previously reported figure of 242,000. The sharply lower number is the first of two ‘benchmark’ annual revisions undertaken by the department as it collects more accurate data only available in the months after it publishes the monthly payrolls report.”
August 21 – Financial Times (Gregory Meyer): “Shares of US retail chain Target soared after it reversed a sales slump and issued a brighter profit outlook, in results that suggested American consumers were still shopping despite cost pressures on their finances. Target… reported that its comparable sales rose 2% in its second quarter, the company’s first increase in more than a year. Traffic rose 3% to Target’s nearly 2,000 stores and online… ‘Consumers have shown remarkable resilience in the face of multiple challenges over the last several years, and they remain resilient today,’ said Brian Cornell, Target’s chief executive.”
August 22 – Associated Press (Rob Gillies and Josh Funk): “Business and consumers throughout Canada and the U.S. could suffer significant economic harm after Canada’s major freight railroads came to a full stop Thursday because of a contract dispute with their workers. Canadian government officials met urgently to discuss the shutdown. Canadian National and CPKC railroads both locked out their employees after the …deadline Thursday passed without new agreements with the Teamsters Canada Rail Conference, which represents about 10,000 engineers, conductors and dispatchers.”
August 19 – Wall Street Journal (Ryan Dezember): “A glut of natural gas is depressing prices and prompting fresh cutbacks in America’s drilling fields… Big producers such as EQT and Coterra Energy are choking back output, waiting to connect new wells to pipelines and delaying drilling projects. They aim to buoy prices that have rarely been lower during the heat of the summer, when air conditioning creates a lot of power demand. Benchmark natural-gas futures ended Tuesday at $2.198 per million British thermal units, down 14% from a year ago and 30% less than the recent peak in mid-June.”
August 21 – Financial Times (Suzi Ring and James Fontanella-Khan): “Top law firms in the US are offering their junior lawyers as much as $50,000 to refer acquaintances for jobs, as a renewed war for talent in the industry shows no sign of abating. A&O Shearman introduced a $50,000 bonus for US associate referrals in May… Kirkland & Ellis recently renewed its $50,000 payment until January 2025…, extending a global policy introduced in October last year.”
China Watch:
August 20 – Reuters (Ryan Woo and Ethan Wang): “Rising unemployment in China is pushing millions of college graduates into a tough bargain, with some forced to accept low-paying work or even subsist on their parents' pensions, a plight that has created a new working class of ‘rotten-tail kids’. The phrase has become a social media buzzword this year, drawing parallels to the catchword ‘rotten-tail buildings’ for the tens of millions of unfinished homes… A record number of college graduates this year are hunting for jobs in a labour market depressed by COVID-19-induced disruptions as well as regulatory crack-downs on the country's finance, tech and education sectors. The jobless rate for the roughly 100 million Chinese youth aged 16-24 crept above 20% for the first time in April last year. When it hit an all-time high of 21.3% in June 2023…”
August 19 – CNBC (Evelyn Cheng): “China’s youth unemployment rate soared above 17% in July to the highest level since the new system of record-keeping began in December… The unemployment rate for people in China ages 16 to 24, and not in school, rose to 17.1% last month, according to the latest data update Monday. That’s up from 13.2% in June.”
August 20 – Financial Times (Joe Leahy in Beijing and Thomas Hale): “China has disbursed only a fraction of a flagship central bank fund designed to rescue property developers, as authorities struggle to cut a vast stock of unsold homes and end a prolonged real estate slump. Beijing unveiled a plan in May for the People’s Bank of China and state banks to mobilise up to Rmb500bn ($70bn) in lending to support local government enterprises to buy up unsold property. Local governments would then lease the property as social housing. But the latest figures from the PBoC show that banks have lent only Rmb24.7bn under the scheme, prompting the central bank this month to promise to ‘accelerate’ the programme. ‘The implementation has been one of the bottlenecks,’ said Lisheng Wang, China economist at Goldman Sachs, as banks, local governments and others struggle to agree on property pricing.”
August 20 – Bloomberg: “China is considering a new funding option for local governments to buy unsold homes after a series of rescue packages failed to prop up the market, according to people familiar with the matter. The latest proposal would allow local governments to fund their home purchases by issuing so-called special bonds, the proceeds of which are currently restricted to uses including infrastructure and environmental projects… Local governments have already used more than half the 3.9 trillion yuan ($546 billion) quota for special bond issuance this year; it’s unclear what portion of the remainder might be directed toward home purchases if the plan is approved.”
August 20 – Bloomberg: “A price war is spreading across China’s new-home market, as local governments dial back on intervention and developers race to recoup cash. In Beijing, a sudden 18% price cut in May at a mid-sized residential project on the city’s outskirts has forced adjacent new developments to follow suit… Near the southern border, the Shenzhen government approved a 29% cut in unit prices for a complex compared with a year ago…”
August 19 – Bloomberg (Eric Zhu): “China’s latest housing market rescue plan isn’t going so well. The rise in inventory stretched into July, showing state purchases of unsold homes from developers aren’t keeping up with the supply glut. Only 4% of the People’s Bank of China’s 300 billion yuan fund backing the scheme had been utilized as of end-June. That’s concerning, as deepening declines in housing activity in July show speedy execution is urgently needed to lift market sentiment. We estimate the market has added about 1 million unsold homes to the inventory pile since May, bringing the total to 61 million.”
August 21 – Bloomberg: “A growing chorus of Chinese economists called on Beijing to break away from an implicit budget deficit ceiling, opening the door to more central government borrowing as a way to shore up the faltering economy. Officials can consider doubling or tripling this year’s special sovereign bonds to as much as 3 trillion yuan ($420bn), said Zhang Ming, deputy director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences, a top government think tank. This should go toward subsidizing consumers and alleviating local government debt risks, he added.”
August 19 – Financial Times (Arjun Neil Alim): “Chinese authorities have restricted a key source of data on inward investment as global funds continue to pull money out of the country’s stock market, threatening to make 2024 the first year of equity outflows. On Monday, daily data showing net investment flows from foreign funds into stocks in mainland China… was no longer available… The move comes as international investors have pulled more than $12bn out of mainland Chinese equities since the start of June… and taking year-to-date net flows into the red.”
Central Banking Watch:
August 19 – Reuters (Stella Qiu): “Australia’s central bank judged a near-term rate cut was unlikely and policy might need to stay restrictive for an ‘extended period’ to ensure inflation can be tamed… Minutes of its Aug 5-6 board meeting… showed the Reserve Bank of Australia (RBA) considered raising its 4.35% cash rate as underlying inflation remained too high at 3.9% and financial conditions appeared to have eased, with a pickup in credit growth and house prices.”
August 20 – Bloomberg (Niclas Rolander and Ott Ummelas): “Sweden’s Riksbank lowered borrowing costs for a second time since May and sketched out more easing than previously expected as inflation has fallen below its target and the largest Nordic economy is sputtering. The central bank, which cut its benchmark rate to 3.5% from 3.75% in a decision announced on Tuesday, said it could consider as many as three more reductions this year.”
August 22 – Reuters (Cynthia Kim and Jihoon Lee): “South Korea's central bank kept interest rates unchanged… but revived expectations for an imminent policy easing that some economists see happening as soon as October as growth concerns overshadow inflation worries. The Bank of Korea (BOK) held the benchmark interest rate at 3.50%... Governor Rhee Chang-yong, however, said four of the bank's seven voting members were open to a rate cut within the next three months.”
Europe Watch:
August 22 – Reuters (Jonathan Cable): “Euro zone business activity showed surprising strength in August despite firms raising prices… However there were signs the upswing may be temporary, with readings flattered by a sharp rise in French services activity due to the Olympic Games. German business activity contracted for a second consecutive month and by more than expected. HCOB's preliminary composite Purchasing Managers' Index, compiled by S&P Global, bounced to 51.2 this month from July's 50.2…”
August 20 – Bloomberg (Mark Schroers): “Robust German wage growth isn’t abating and will likely keep inflation high, according to the Bundesbank – a worrying signal for the European Central Bank as it battles to return price gains to its 2% target. Collectively agreed earnings increased by 4.2% in the spring… It highlighted that unions’ demands remain high — between 7% and 19% for a period of 12 months. ‘The high level of willingness to strike until recently and the still widespread labor shortage suggest that comparatively high wage increases will continue in the future,’ it said. This will probably keep underlying inflation ‘at an elevated level.’”
Japan Watch:
August 20 – Bloomberg (Toru Fujioka and Erica Yokoyama): “Japan’s exports rose at a faster pace in July, largely reflecting the yen’s drop to a 38-year low last month. Exports gained 10.3% from a year ago led by chip parts and cars, accelerating from 5.4% in the previous month… Imports climbed 16.6%, compared with a 14.6% gain estimated by analysts. With a larger increase in imports, the trade balance turned back to a deficit of ¥621.8 billion ($4.3bn).”
Emerging Markets Watch:
August 19 – Bloomberg (VinÃcius Andrade): “It’s been almost two years now since Luiz Inacio Lula da Silva secured his return to power in Brazil. For investors, they’ve been bleak. The currency is down, government bond yields are up and the stock market has only eked out half the gains posted across the rest of emerging markets… The Lula of 2024 shares little in common, Brazil watchers say, with the Lula of 2003 who was hellbent on proving he wasn’t the profligate spender... He’s balked repeatedly at calls for spending cuts to rein in a budget deficit that has ballooned to the equivalent of about 10% of Brazil’s gross domestic product. It’s a staggering figure, far bigger than any deficit posted in his first go-round and one of the largest in the world.”
Leveraged Speculation Watch:
August 16 – Reuters (Karen Brettell): “Speculators raised their net short bets on five-year Treasuries to the largest on record in the latest week, while bearish bets on 10-year Treasury futures were the largest since January… Net short bets on five-year note futures grew to 1,695,072 contracts in the week ending Aug. 13, up from 1,688,076 the previous week. Short bets on 10-year note futures rose to 860,243 contracts from 776,208…”
August 22 – Financial Times (Robin Wigglesworth): “Hedge fund crowding has been pretty extreme over the past year, but many big players are now paring back their exposure to the Magnificent Seven tech stocks that powered the recently rally. Goldman Sachs has once again tallied the 13F filings of hundreds of US hedge funds — with gross stock market positions of $2.8tn — and one of the big takeaways is a modest but notable rotation away from a lot of hot names. They even seem to be falling out of love with Nvidia. Stanley Druckenmiller is a good example. His family office has now liquidated almost his entire position in Nvidia, and ratcheted back his position in Microsoft in the second quarter. This exemplified a broader tend.”
Social, Political, Environmental, Cybersecurity Instability Watch:
August 20 – NBC (Rob Wile): “A new labor market survey shows Americans have rarely felt more in need of new job opportunities — an indication of a more negative outlook about the economy despite other data that suggests a more stable picture. The New York Federal Reserve's latest poll of consumers found 28.4% of respondents were looking for a job — the highest reading since March 2014 and up from 19.4% a year ago. That includes both individuals already out of a job and ones currently employed but seeking new roles.”
August 20 – Bloomberg (Naureen S. Malik): “Texans set an unofficial record in electricity use Tuesday as soaring temperatures spurred homeowners, schools and businesses to crank up air conditioners. Power demand on the state grid rose to 85,559 megawatts at 6 p.m. local time, topping the August 2023 record of 85,508 megawatts, according to the Electric Reliability Council of Texas.”
Geopolitical Watch:
August 19 – Reuters (Liz Lee, Karen Lema and Eduardo Baptista): “The Philippines and China accused each other on Monday of ramming vessels and performing dangerous manoeuvres in the South China Sea, the latest flare-up after the two nations agreed last month to try to manage disagreements at sea. China's Coast Guard said… a Philippine vessel which had ignored its repeated warnings had ‘deliberately collided’ with a Chinese vessel in an ‘unprofessional and dangerous’ manner in the disputed waterway...”
I’m on board with “over-leveraged positions and excessive risk-taking.” We can only hope Mr. El-Erian is correct (and I’m wrong) in his “only small pockets of technical vulnerability.”
As far as re-establishing the effectiveness of forward guidance and regaining policy and economic narratives, Powell’s presentation fell short. The Fed Chair was more focused on the past than the future. Markets might have fancied a more cultivated essay on enhancements to the Fed’s policy framework, reaction function and transmission mechanism, but they got what they wanted: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Powell: “At this podium two years ago, I discussed the possibility that addressing inflation could bring some pain in the form of higher unemployment and slower growth. Some argued that getting inflation under control would require a recession and a lengthy period of high unemployment. I expressed our unconditional commitment to fully restoring price stability and to keeping at it until the job is done.”
August 23 – Associated Press (Christopher Rugaber): “In what amounted to something of a victory lap, Powell noted… that the Fed had succeeded in conquering high inflation without causing a recession or a sharp rise in unemployment, which many economists had long predicted. He attributed that outcome to the unraveling of the pandemic's disruptions to supply chains and labor markets and a reduction in job vacancies, which allowed wage growth to cool.”
Before our central bankers dangle a “Mission Accomplished” banner outside the Marriner S. Eccles Federal Reserve Board Building, there’s more to the inflation story to contemplate. The proverbial elephant in the room: asset inflation, Bubbles, and deficits – ignore them at everyone’s peril.
Powell: “How did inflation fall without a sharp rise in unemployment above its estimated natural rate?”
Powell highlighted the forces of post-pandemic supply-side normalization that worked to curb price inflation. There were several references to “labor markets” and one to “commodity markets.” The Chair’s presentation avoided any mention of the stock market, as if it had no impact.
Since Powell’s 2022 Jackson Hole presentation, the S&P500 has returned 43.3%, the Nasdaq100 (NDX) 59%, and the Semiconductor Index (SOX) 91%. Nvidia surged almost 700%. “Mania” somehow didn’t make it into Powell’s speech.
Financial conditions have loosened dramatically since August 2022. For example, investment grade spreads to Treasuries narrowed from 140 bps to this week’s 94 bps close, with high yield spreads narrowing from 450 to 312 bps. Investment-grade Credit default swap (CDS) prices closed the week at 49 bps, down from the 86 bps on August 26, 2022. High yield CDS dropped to 320 bps from 500 bps. It’s also worth noting that a September 2022 jump saw investment-grade CDS rise to 108 bps and high yield to 610 bps. While a far cry from equities, corporate debt has generated solid returns. The iShares Investment Grade Corporate Bond ETF (LQD) returned 8.8% in two years, with the iShares High Yield Bond ETF (HYG) returning 15.9%.
It would be a different policy discussion today, had the dramatic loosening of financial conditions not fueled such stellar market gains. Booming financial markets were undoubtedly instrumental in supporting the economy and job growth.
Powell: “Disinflation while preserving labor market strength is only possible with anchored inflation expectations, which reflect the public’s confidence that the central bank will bring about 2% inflation over time.”
I would give more credit to well-anchored confidence that the central bank will ensure asset inflation (i.e., higher stock prices and portfolio returns) over time.
It was no surprise Powell ignored this year’s theme, “Reassessing the Effectiveness and Transmission of Monetary Policy.” I look forward to reading papers addressing such an important topic. While not a focus of Powell's, it would behoove the Fed to delve deeply into the critical issue of why general financial conditions remained largely immune to its monetary “tightening”.
Powell: “Four and a half years after COVID-19's arrival, the worst of the pandemic-related economic distortions are fading.”
True enough with respect to economic distortions. But what about distortions within the financial sphere? The Fed orchestrated an unprecedented $5 TN QE program. At $7.14 TN, the Fed’s balance sheet still remains almost double the size from (pre-QE) September 2019. The Federal Reserve in March 2020 bailed out the levered players, “basis trades” and “carry trades” in particular, and financial markets in general. This open-ended “whatever it takes” fundamentally altered market risk perceptions, including the perceived risk vs. reward calculus for risk-taking and levered speculation. Lingering concerns that policy “tightening” might suppress the Fed’s propensity for timely market bailouts was allayed with the $740 billion Fed/FHLB March 2023 bank crisis liquidity response.
This “tightening” cycle accompanied a headline CPI (y-o-y) spike to 9.1%. Yet 10-year Treasury yields didn’t exceed 5% - and were somewhat above 4.5% for only a few weeks. By comparison, 10-year yields jumped to 6.75% (CPI 3%) in January 2000 and reached 8% (CPI 3.8%) during the 1994 tightening cycle.
The Fed’s massive Treasury and MBS purchases monetized much of the federal government’s prolific pandemic borrowing and spending. Moreover, open-ended QE and bailouts incentivized leveraged speculation – the highly levered Treasury “basis trade” in particular. Speculative demand was integral to financing enormous deficits at depressed yields.
We can’t overstate the significance of Fed-induced market distortions. The Fed accommodated leveraged speculation, emboldening only greater risk-taking and leverage. Our central bank and the leveraged speculating community accommodated unprecedented federal borrowing, emboldening Washington’s profligate spenders. All the “soft landing” talk disregards critical festering issues.
Powell: “The limits of our knowledge—so clearly evident during the pandemic—demand humility and a questioning spirit focused on learning lessons from the past and applying them flexibly to our current challenges.”
Caution is in order. Asset inflation and speculative Bubbles were fundamental to the painless nature of the Fed’s “tightening” cycle. In the process, the monetary policy transmission mechanism has been precariously compromised. Truth be told, the Fed relinquished command over monetary management to highly speculative markets. These days, “risk on” and associated leveraged speculation equate to looser financial conditions, while highly destabilizing de-risking/deleveraging lurks in the shadows.
Meanwhile, the CBO forecasts a $2.0 TN 2024 federal deficit, or about 7% of GDP. Ten-year Treasury yields are down 90 bps in four months to 3.80%, a yield that will certainly not discipline an undisciplined Washington.
Mohamed El-Erian and other Wall Street economists were hoping Powell would address the so-called “neutral rate” or R-star (the long-run equilibrium interest rate). They would like the Powell Fed to deemphasize “data dependent,” while providing a semblance of clarity for the expected policy rate destination. Too late for any of this.
At intraday August 5th panic lows, the rates market was pricing 148 bps of rate cuts by the completion of the Fed’s December 18th meeting. The market ended this week at 103 bps.
The week’s data offered little to indicate economic weakness. The preliminary August Services PMI was reported at a stronger-than-expected 55.2 (near 15-month high). At a 739,000 annualized rate, New Home Sales blew away estimates to about the highest level since February 2022. The homebuilders (XHB EFT) surged 8.2% this week, boosting y-t-d gains to almost 25%.
There are still the August non-farm payrolls and CPI reports to hit before the September 18th FOMC meeting. Other data seem to matter little. The Fed has pre-committed to cut, though the totality of economic data doesn’t argue for 50 bps. Market expectations for 100 bps of rate reduction by year-end appear excessive, but there’s complexity here. Especially after August 5th, markets will factor in the probabilities of a destabilizing deleveraging episode that would trigger aggressive Fed rate cuts. From this perspective, 100 bps by year-end is reasonable.
Outside of the small caps and the heavily shorted stock universe, the yen showed about the most sensitivity to Powell’s dovishness. The yen gained 1.33% for the session to close the week 2.26% higher at 144.37 to the dollar. “Risk on” has hardly missed a beat since the August 5th reversal. Yet the yen ended the week near the August 5th close (144.18) and not far off the intraday yen “carry trade” unwind panic level (141.70). Ten-year Treasury yields closed the week at 3.80%, one basis point higher than the August 5th close (3.68% intraday low).
“Risk on” holds court for now, but I doubt we’ve heard the last of yen “carry trade” instability. The Dollar Index closed the week at a one-year low. Between June 2021 and October 2022, the Dollar Index surged almost 26%. It appears the days of the strong dollar working to restrain inflationary pressures are now in the rear-view mirror.
Bloomberg Intelligence’s Brian Meehan was out Friday with timely research:
“Can Historic $1.1 Trillion Net Short Basis Trade Hold or Crack? Leveraged net shorts of Treasury futures have surged to a historic $1.1 trillion in notional value, accelerating 38% in the past four months. While the record short position alone doesn’t suggest the basis trade will blow up, it’s more than double when massive leveraged funding trades cracked in 2019 and 2020 -- and could require the Fed to bail out traders again if the repo market gets overly stressed… The net short position in US Treasury futures held by leveraged accounts per the CFTC Commitment of Traders has increased by $300 billion in notional the past four months… The size of the position alone doesn’t mean a blowup is pending, as funding markets have been quiet ahead of expected Fed easing. But given that the trade has blown out several times in the past 20 years, it's likely more a question of when, not if.”
Three hundred billion, or 38%, inflation in four months. “Terminal phase excess”, and further evidence that the Fed erred in signaling an easing cycle with markets in the throes of a speculative Bubble. And that a faltering Bubble will indeed require “the Fed to bail out traders again” reinforces lower market yields, looser conditions, speculative leverage, and only greater underlying fragility. With yen “carry trade” instability, a volatile U.S. election, a Middle East at the precipice, and dangerous Ukraine/Russia war escalation, it’s an especially precarious time to stoke speculation. One Hell of a Bubble.
For the Week:
The S&P500 gained 1.4% (up 18.1% y-t-d), and the Dow rose 1.3% (up 9.2%). The Utilities added 1.0% (up 19.7%). The Banks jumped 2.7% (up 18.4%), and the Broker/Dealers gained 2.0% (up 21.5%). The Transports advanced 1.9% (up 0.5%). The S&P 400 Midcaps jumped 2.8% (up 11.3%), and the small cap Russell 2000 surged 3.6% (up 9.5%). The Nasdaq100 increased 1.1% (up 17.2%). The Semiconductors added 1.1% (up 25.2%). The Biotechs rose 1.7% (down 8.2%). With bullion up another $5, the HUI gold index gained 2.3% (up 31.3%).
Three-month Treasury bill rates ended the week at 4.9975%. Two-year government yields dropped 13 bps this week to 3.92% (down 33bps y-t-d). Five-year T-note yields fell 11 bps to 3.65% (down 20bps). Ten-year Treasury yields declined eight bps to 3.80% (8bps). Long bond yields slipped five bps to 4.09% (up 19bps). Benchmark Fannie Mae MBS yields sank 17 bps to 5.05% (down 103bps).
Italian yields declined seven bps to 3.57% (down 13bps y-t-d). Greek 10-year yields declined six bps to 3.26% (up 21bps). Spain's 10-year yields fell seven bps to 3.02% (up 3bps). German bund yields slipped two bps to 2.23% (up 20bps). French yields declined five bps to 2.93% (up 37bps). The French to German 10-year bond spread narrowed three to 70 bps. U.K. 10-year gilt yields slipped a basis point to 3.91% (up 38bps). U.K.'s FTSE equities index increased 0.2% (up 7.7% y-t-d).
Japan's Nikkei Equities Index gained 0.8% (up 14.6% y-t-d). Japanese 10-year "JGB" yields gained two bps to 0.90% (up 29bps y-t-d). France's CAC40 rose 1.7% (up 0.4%). The German DAX equities index gained 1.7% (up 11.2%). Spain's IBEX 35 equities index jumped 3.0% (up 11.6%). Italy's FTSE MIB index advanced 1.7% (up 10.9%). EM equities were mixed. Brazil's Bovespa index increased 1.2% (up 1.1%), while Mexico's Bolsa index declined 1.2% (down 6.7%). South Korea's Kospi index added 0.2% (up 1.7%). India's Sensex equities index increased 0.8% (up 12.2%). China's Shanghai Exchange Index declined 0.9% (down 4.1%). Turkey's Borsa Istanbul National 100 index fell 1.6% (up 29.4%).
Federal Reserve Credit declined $34.1 billion last week to $7.101 TN. Fed Credit was down $1.789 TN from the June 22, 2022, peak. Over the past 258 weeks, Fed Credit expanded $3.374 TN, or 91%. Fed Credit inflated $4.290 TN, or 153%, over the past 615 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.5 billion last week to $3.298 TN - just off the low back to March 2023. "Custody holdings" were down $142 billion y-o-y, or 4.1%.
Total money market fund assets rose $24.9 billion to a record $6.242 TN. Money funds were up $355 billion y-t-d and $672 billion, or 12.1%, y-o-y.
Total Commercial Paper declined $6.5 billion to $1.236 TN. CP was up $73 billion, or 6.3%, over the past year.
Freddie Mac 30-year fixed mortgage rates declined three bps to a 15-month low to 6.46% (down 84bps y-o-y). Fifteen-year rates fell four bps to 5.62% (down 111bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 13 bps to 6.93% (down 65bps).
Currency Watch:
For the week, the U.S. Dollar Index dropped 1.7% to 100.718 (down 0.6% y-t-d). For the week on the upside, the New Zealand dollar increased 3.0%, the Swedish krona 2.6%, the Japanese yen 2.3%, the Swiss franc 2.2%, the British pound 2.1%, the Norwegian krone 2.1%, the Australian dollar 1.9%, the South Korean won 1.6%, the euro 1.5%, the Canadian dollar 1.3%, the Singapore dollar 1.1%, and the South African rand 1.0%. On the downside, the Mexican peso declined 2.5%, and the Brazilian real slipped 0.3%. The Chinese (onshore) renminbi increased 0.54% versus the dollar (down 0.29% y-t-d).
Commodities Watch:
August 19 – Bloomberg (Jack Wittels): “For the first time ever, a bar of gold is worth a cool one million dollars. The milestone was reached Friday, when the precious metal’s spot price surpassed $2,500 per troy ounce, an all-time high. With gold bars typically weighing about 400 ounces, that would make each one worth more than $1 million. There are some nuances to the figure. While gold bars in the London market — the global center for trading the precious metal — normally weigh about 400 troy ounces, they can contain 350 to 430 ounces of pure gold, according to the London Bullion Market Association.”
The Bloomberg Commodities Index increased 0.8% (down 2.2% y-t-d). Spot Gold added 0.2% to $2,513 (up 21.8%). Silver surged 2.9% to $29.8158 (up 25.3%). WTI crude retreated $1.82, or 2.4%, to $77.83 (up 4%). Gasoline dipped 1.1% (up 9%), and Natural Gas dropped 4.8% to $2.022 (down 20%). Copper rallied 1.5% (up 9%). Wheat dropped 5.2% (down 20%), and Corn slipped 0.7% (down 22%). Bitcoin rallied $4,900, or 8.3%, to $64,200 (up 51%).
Middle East War Watch:
August 21 – The Hill (Brad Dress): “Secretary of State Antony Blinken is departing the Middle East… after trying to shore up support for a Gaza cease-fire and hostage release deal that now appears to be out of reach. Blinken traveled to Israel, Egypt and Qatar this week to push a deal over the finish line and pressure Hamas to accept the latest negotiations. Israel agreed Monday to the latest proposal that was offered by Egyptian, Qatari and U.S. mediators after the latest round of talks last week. But Hamas has put out public statements saying it would not agree with the latest proposal, raising concerns about one of the major sticking points in the talks, an Israeli withdrawal from Gaza. Hamas wants Israel to fully withdraw from the territory, but Israel is pushing to maintain a presence there, including in the Philadelphi Corridor that borders Egypt.”
August 21 – Reuters (Suleiman Al-Khalidi, Maya Gebeily, James Mackenzie and Maytaal Angel): “The Israeli military said… it had bombed Hezbollah weapons storage facilities in Lebanon's Bekaa Valley overnight, and Hezbollah said it had carried out a drone attack on military posts in a kibbutz in northern Israel in retaliation. The Bekaa Valley is a Hezbollah stronghold and the latest hostilities across the Israel-Lebanon border will fuel concern that the Israel-Hamas war in Gaza could spill out into an all-out Middle East conflict… Israeli Defence Minister Yoav Gallant said: ‘Attacking munitions warehouses in Lebanon is preparation for anything that might happen’.”
August 22 – Financial Times (James Shotter and Raya Jalabi): “Israel’s air force bombed 10 areas of Lebanon overnight in response to a rocket barrage from the Lebanese militant group Hizbollah, as hopes for a US-brokered ceasefire between Israel and Hamas in Gaza continued to fade. The US and Arab nations view a deal to end the fighting in Gaza and free the roughly 100 Israeli hostages still being held there by Hamas as the best way to prevent an all-out regional war erupting in the Middle East. However, despite an intense diplomatic push by US officials, significant gaps remain between Israel and Hamas, and in recent days, as the hopes of a deal have waned, the exchanges of fire between Israel and Iran-backed Hizbollah have intensified.”
August 20 – Reuters (Elwely Elwelly): “There could be a long wait for Iranian retaliation against Israel, Iran's Revolutionary Guards spokesperson Alimohammad Naini said… The Middle East has been bracing for Iran's avowed retaliation over the killing of Hamas leader Ismail Haniyeh in Tehran on July 31. Israel has neither confirmed nor denied that it was behind the killing. ‘Time is in our favour and the waiting period for this response could be long,’ Naini said, referring to potential retaliation against Israel. He said ‘the enemy’ should wait for a calculated and accurate response.”
August 21 – Reuters (Robert Wright): “A Greek-owned oil tanker was ablaze and drifting in the Red Sea after what appeared to be the most successful attack on shipping by Yemen’s Iran-backed Houthis in more than two months. The Sounion, carrying crude oil from the southern Iraqi port of Basra to an undisclosed destination, was hit about 77 nautical miles west of the Yemeni port of Hodeidah… The ‘Suezmax’ vessel, able to carry about 1mn barrels of oil, is the largest type able to use the Suez Canal when laden with cargo.”
Ukraine War Watch:
August 21 – Reuters (Guy Faulconbridge and Lidia Kelly): “Ukraine attacked Moscow on Wednesday with at least 11 drones that were shot down by air defences in what Russian officials called one of the biggest drone strikes on the capital since the war in Ukraine began in February 2022… Russia's defence ministry said its air defences destroyed a total of 45 drones over Russian territory, including 11 over the Moscow region, 23 over the border region of Bryansk, six over the Belgorod region, three over the Kaluga region and two over the Kursk region.”
August 17 – Financial Times (Anastasia Stognei): “Nearly two weeks after Ukrainian troops smashed through thin border defences and stormed into Russia’s Kursk region, Moscow has still not assembled the kind of overwhelming force needed to repel Kyiv’s incursion. It has instead cobbled together units from around the country and from less active parts of the Ukrainian front, while deploying young conscripts performing their obligatory military service. ‘People are horrified. We are overwhelmed with requests and can barely keep up,’ said Ivan Chuvilayev, a representative of Go by the Forest, a Russian NGO helping citizens to avoid conscription.”
August 21 – Wall Street Journal (Matthew Luxmoore, James Marson and Ievgeniia Sivorka): “Ukrainian troops said they are moving to encircle an estimated 3,000 Russian troops that are hemmed against a river in Russia’s Kursk province, seeking a fresh blow against Moscow in the third week of a surprise incursion. Ukraine’s military said it used U.S.-supplied Himars rocket systems and explosive drones to strike pontoon crossings and bridging equipment as Russia scrambled to prevent the encirclement of its forces between the Seym river and the Ukrainian border… Kyiv’s forces are now expanding their control along the border and striking Russian supply routes…”
August 22 – Wall Street Journal (Isabel Coles): “Ukraine used aerial drones to attack an air base in Russia’s Volgograd region early Thursday in an escalating campaign of long-range strikes seeking to damage Moscow’s war machine. Ukraine’s main security and intelligence agency, known as the SBU, said the strike had targeted warehouses containing fuel and glide bombs to degrade Russia’s air power. Russia has made massive glide bombs dropped from warplanes a key weapon in their latest offensives to smash holes in Ukrainian defenses.”
August 20 – Reuters (Lidia Kelly, Olena Harmash and Yuliia Dysa): “Russia hit energy infrastructure in northern Ukraine in an overnight missile and drone attack and caused a huge fire in the west of the country, resulting in an increase in chlorine levels in the air… Ukrainian forces shot down three ballistic missiles and 25 of the 26 drones launched in the attack on nine regions across the country, Ukraine's air force commander said.”
August 20 – Reuters (Dan Peleschuk): “For Kyiv-area resident Olha Pavlovska, who huddles with her neighbours every week to discuss the often grim news from the front, Ukraine's shock incursion into Russia's Kursk region this month offered a rare moment of hope. ‘This was a very brave and important step… for keeping up morale in society,’ said Pavlovska, 51, speaking outside St Michael's Cathedral in the centre of Kyiv.”
August 20 – Bloomberg (Tony Capaccio): “Ukraine and Russia both lack the military assets to mount major offensives against each other, the Pentagon’s intelligence agency said in new assessments that suggests the two sides are headed toward stalemate. The Defense Intelligence Agency assessments conclude that Ukraine still doesn’t have the munitions to match Russia’s ability to fire some 10,000 artillery rounds a day, even after the US Congress unlocked fresh military aid in April.”
Taiwan Watch:
August 22 – Financial Times (Demetri Sevastopulo): “Taiwan’s top foreign policy officials have made a secret trip to the greater Washington area for talks with the US, the first such visit since President Lai Ching-te took office in May. Foreign minister Lin Chia-lung and Joseph Wu, Taiwan’s national security adviser, have been in the Washington area this week for the talks that are known as the ‘special channel’… The US and Taiwan have held the ‘special channel’ talks for years, but their existence was first disclosed by the Financial Times in 2021… The channel is seen as a rare opportunity for a larger group of senior officials from both sides to hold detailed talks.”
August 22 – CNBC (Lee Ying Shan): “Taiwan’s President Lai Ching-te has cautioned that China’s ‘growing authoritarianism’ will not stop with the island, and that it poses a challenge at the ‘global level.’ Lai was speaking at the annual Ketagalan Forum… It was attended by representatives from several countries including the U.S., India, Japan, Australia and Canada. ‘We are all fully aware that China’s growing authoritarianism will not stop with Taiwan, nor is Taiwan the only target of China’s economic pressures,’ Lai said, adding that this authoritarianism is becoming ‘more aggressive.’ ‘It’s now a challenge at the global level,’ Lai emphasized, calling for countries to cooperate and curtail China’s efforts.”
August 22 – Bloomberg (Yian Lee and Cindy Wang): “Taiwan will spend a record amount on defense next year, boosting its expenditure for eight straight years as it tries to deter an increasingly assertive China. The cabinet will increase military spending to NT$647 billion ($20.2bn) next year, an increase of 7.7% from the previous year… That accounts for 2.45% of Taiwan’s estimated GDP in 2025, in line with recent years. Taiwan is beefing up defense spending as it faces growing threats from China…”
Market Instability Watch:
August 22 – Bloomberg (Douglas Lytle): “Rumors of the carry trade’s impending demise may be greatly exaggerated, Bloomberg Intelligence European Rates Strategist Huw Worthington says. That would leave a lot more pain to come unless yields and spreads in Europe and the US rise above their Japanese counterparts. The latest data on Japanese investor holdings of developed markets government bonds in June showed declines not seen since the midst of Covid, but that’s just a drop in the ocean.”
August 20 – Bloomberg (Edward Bolingbroke): “Bond traders are taking on a record amount of risk as they bet big on a Treasury market rally fueled by expectations the Federal Reserve will embark on its first interest-rate cut in more than four years. The number of leveraged positions in Treasury futures has risen to an all-time high ahead of the central bank’s annual economic symposium in Jackson Hole, Wyoming… Open interest in futures, or the amount of risks taken by traders who can be long or short positions, peaked at a record of almost 23 million 10-year note futures equivalent, last week... That’s roughly $1.5 billion of risk per one basis point move in the underlying cash notes.”
August 21 – Bloomberg (Zijia Song, Maria Elena Vizcaino and VinÃcius Andrade): “Traders trying to buy the dip on Mexico’s peso can’t catch a break. Local politics, the dismantling in so-called carry trades and concerns about the US economic and political outlook are disrupting bullish calls on what was until May the best performing emerging-market currency this year. The peso is down almost 4% against the dollar this week and over 14% in the past three months, by far the worst among peers. Its six-month implied volatility has jumped to near the highest in three years… It’s a stark reversal for the currency which until a few months ago was by far the best performer in emerging markets — one whose strength seemed so unshakable investors feared betting against.”
August 20 – Bloomberg: “The Chinese currency risks surging if a scenario similar to the unwinding of the yen carry trade plays out, a prominent economist has warned… As the world’s second-biggest economy ran massive trade surpluses in recent years and local interest rates fell below those in the US, Chinese exporters began to hoard dollars in anticipation that the yuan would weaken. Some investors also borrowed in yuan to invest in higher-yielding assets abroad… But a shift in sentiment in favor of the yuan could prompt exporters and speculators to unload dollars and send the Chinese currency surging, said Guan Tao, global chief economist at Bank of China International Ltd.”
August 20 – Financial Times (Harriet Clarfelt): “Almost $90bn poured into US money market funds in the first half of August as investors sought to lock in attractive yields that could outlast an expected interest rate cut by the Federal Reserve next month. Money market funds… pulled in net inflows of $88.2bn between August 1 and August 15, according to flow tracker EPFR — the highest figures for the first half of a month since November last year. Most of the inflows originated with institutional investors… rather than retail investors…”
August 22 – Bloomberg (Amy Or): “The US stock market’s August whipsaw has convertible bond issuers hiding, and that’s likely to continue into September with the movement of interest rates still up in the air. Only $2 billion worth of new notes have been issued so far this month in the US, a far cry from the $7.6 billion raised during the same period last year…”
August 19 – Bloomberg (Lu Wang): “A leveraged strategy for diversifying investments that crashed spectacularly in the financial crisis is back. This time, the designers say they’ve ironed out the problems. The offering, known as portable alpha since the 1980s but recently rechristened ‘return stacking,’ has caught on in exchange-traded funds sold by Newfound Research and ReSolve Asset Management.”
Global Credit Bubble Watch:
August 18 – Financial Times (Stephen Gandel): “Russell, Kentucky, has survived three floods, a smallpox outbreak, a downtown blaze and a 200-mile oil spill. Its largest employer left in 1999. Now the town is facing another potential calamity: First & Peoples Bank, its sole local lender with roots to 1907, has received notices from three regulators this year warning about its precarious finances. The bank’s troubles do not stem from the region’s declining fortunes. Rather, they are emerging from exposure to the latest evolution of modern finance. First & Peoples is the most troubled of a growing number of small banks across the US facing problems due to ties to so-called shadow banks… Four years ago the bank signed a partnership with a fintech, US Credit, that promised to turn First & Peoples into a financial disrupter. Instead, the relationship has led to tens of millions of dollars in soured loans, and questions about the bank’s ability to survive.”
AI Bubble Watch:
August 17 – Financial Times (Tabby Kinder): “More than half of the US’s biggest companies see artificial intelligence as a potential risk to their businesses, according to a survey of corporate filings that highlights how the emerging technology could bring about sweeping industrial transformation. Overall, 56% of Fortune 500 companies cited AI as a ‘risk factor’ in their most recent annual reports, according to research by Arize AI… The figure is a striking jump from just 9% in 2022. By contrast, only 33 companies of the 108 that specifically discussed generative AI — technology capable of creating humanlike text and realistic imagery — saw it as an opportunity.”
August 17 – Financial Times (Camilla Hodgson): “Water consumption by dozens of facilities in Virginia’s ‘data centre alley’ has jumped by almost two-thirds since 2019, as environmental campaigners warn that demand for computing infrastructure is set to ‘explode’ due to artificial intelligence. The US state of Virginia is home to the world’s largest concentration of data centres, including facilities used by Big Tech groups Amazon, Google and Microsoft. The vast warehouses full of computers and networking gear used at least 1.85bn US gallons of water in 2023… That compares with the 1.13bn gallons used in 2019…”
Bubble and Mania Watch:
August 17 – Wall Street Journal (Stephen Wilmot): “China was a gold mine for global automakers a decade ago. Not anymore. ‘Very few people are making money’ in China, General Motors Chief Executive Mary Barra told investors in July. A jarring new data point came earlier this month when Germany’s Volkswagen reported its first quarterly loss in at least 15 years from joint ventures and associates… For the largest global automakers, profits in China have been hit by falling sales as consumers embrace electric vehicles from homegrown brands such as BYD, which last year supplanted Volkswagen as China’s bestselling carmaker.”
August 21 – Bloomberg (Keith Naughton): “Ford Motor Co. is recalibrating its electrification strategy yet again, canceling plans for a fully electric sport utility vehicle in a shift that may cost the carmaker around $1.9 billion. In addition to scrapping an all-electric three-row SUV that already had been delayed, Ford will further postpone a next-generation electric pickup and reduce spending on EVs to 30% of its annual capital expenditures, from about 40% previously… The actions amount to further pullback by Chief Executive Officer Jim Farley, who initially accelerated Ford’s shift to EVs when he took over the top job almost four years ago.”
August 18 – Financial Times (George Hammond): “Start-up failures in the US have jumped 60% over the past year, as founders run out of cash raised during the technology boom of 2021-22, threatening millions of jobs in venture-backed companies and risking a spillover to the wider economy. According to data from Carta…, start-up shutdowns are rising sharply, even as billions of dollars of venture capital gushes into artificial intelligence outfits. Carta said 254 of its venture-backed clients had gone bust in the first quarter of this year. The rate of bankruptcies today is more than seven times higher than when Carta began tracking failures in 2019.”
U.S./Russia/China/Europe Watch:
August 16 – Reuters (Guy Faulconbridge and Olzhas Auyezov): “Russia's foreign ministry said Ukraine had used Western rockets, likely U.S.-made HIMARS, to destroy a bridge over the Seym river in the Kursk region, killing volunteers trying to evacuate civilians. ‘For the first time, the Kursk region was hit by Western-made rocket launchers, probably American HIMARS,’ Maria Zakharova, spokeswoman for the Russian foreign ministry, said…”
August 21 – Reuters (Tom Balmforth, Yuliia Dysa and Milan Pavicic): “Ukrainian forces are using U.S.-manufactured HIMARS rocket systems to destroy pontoon bridges and engineering equipment in Russia's Kursk region, Ukraine's military said on Wednesday, targeting logistics in its major cross-border incursion. Russian officials have said Ukraine has damaged or destroyed at least three bridges over the Seym River since Kyiv launched a major assault into western Russia on Aug. 6 advancing up to 28-35 kilometres (39.15 miles).
August 22 – Telegraph (Nicola Smith): “Russian President Vladimir Putin and China’s premier Li Qiang have celebrated their deepening political and economic ties in the face of growing friction with the West over the grinding war in Ukraine. Trade relations were ‘developing successfully’ and ‘yielding results,’ Mr Putin told Mr Li, who visited the Kremlin on Wednesday… `Mr Li, in turn, praised the efforts by the Russian leader and Xi Jinping… to ‘inject strong momentum’ into bilateral relations which he said had reached an ‘unprecedentedly high level’”
August 20 – Reuters: “Russian President Vladimir Putin met Chinese premier Li Qiang in Moscow on Wednesday, the Kremlin said… ‘Our countries have large-scale joint plans, projects in the economic and humanitarian areas, we expect them to last for many years,’ the RIA state news agency quoted Putin as saying. Li said earlier… that Beijing was ready to work with Russia to strengthen all-round practical cooperation.”
August 21 – Xinhua: “Chinese Premier Li Qiang said… that China is ready to work with Russia to further strengthen multilateral coordination to firmly promote world multipolarity and economic globalization. Li made the remarks when meeting with Russian President Vladimir Putin after he co-chaired the 29th regular meeting between Chinese and Russian heads of government with Russian Prime Minister Mikhail Mishustin.”
De-globalization and Iron Curtain Watch:
August 20 – Reuters (Josephine Mason): “The European Commission confirmed… it would apply additional duties of up to 36.3% on imported electric vehicles made in China as it issued draft definitive findings of its anti-subsidy investigation…”
August 21 – Wall Street Journal (Clarence Leong and Kim Mackrael): “China said it has opened an antisubsidy probe into dairy products imported from the European Union, the latest in a tit-for-tat round of actions between the two increasingly hostile trading powers. Beijing acted a day after the EU affirmed its plan to impose high tariffs on China-made electric vehicles based on the results of an investigation into Chinese subsidies for the sector. Earlier this year, China had opened antidumping probes into brandy and pork products from the EU. The European Commission, the EU’s executive body, said it would ‘firmly defend the interest of the EU dairy industry’ and intervene if needed to ensure the Chinese probe complies with World Trade Organization rules.”
August 20 – Bloomberg: “For centuries, control of the world’s biggest shipping centers helped expand empires, spark and settle wars, ease poverty and build middle classes while giving international companies access to cheap workers and cash-flush consumers in distant markets. Along the way, maritime ports evolved from trading posts and naval bases into economies within economies that supercharged globalization, becoming vital junctions for energy flows, hubs for infrastructure like rail lines and power stations, and clusters for industrial production, warehousing and distribution. Now, both old and new gateways for seaborne commerce— responsible for handling 80% of the world’s $25 trillion in annual merchandise trade—are economic fortresses in the great-power struggles of a multipolar world.”
August 18 – Financial Times (Michael Peel and Eleanor Olcott): “Rising tensions between the US and China threaten to sever a 45-year-old science and technology pact due for renewal later this month, hindering the superpowers’ collaboration in critical areas. Researchers are attempting to work round the strained inter-governmental relationship, with some focusing on less contentious possible areas of co-operation, such as climate change and diseases related to ageing. The struggle to strike a comprehensive multiyear extension to the science and technology accord is a sign of how political problems can undermine frontier research work.”
Inflation Watch:
August 21 – Wall Street Journal (Tadeo Ruiz Sandoval): “Gen Z is accumulating debt faster than any other generation. From credit cards to student loans, the youngest cohort of borrowers have their hands full. How did they get here? Credit Karma… released a report that found Gen Z is getting hit particularly hard. Over the past decade, consumer prices in the U.S. have risen by about 32%. Born between 1997 and 2012, Gen Zers are entering a more expensive world, where not everything is affordable. And when their paycheck alone isn’t enough, they are turning to credit to pay for food, housing and, in some cases, nonessential expenses.”
Federal Reserve Watch:
August 22 – New York Times (Jeanna Smialek): “Two years ago, Jerome H. Powell took the podium at the Federal Reserve Bank of Kansas City’s annual conference at Jackson Hole in Wyoming and warned America that lowering inflation would require some pain. On Friday, Mr. Powell, the Federal Reserve chair, will again deliver his most important policy speech of the year from that closely watched stage. But this time, he is much more likely to focus on how the Fed is trying to pull off what many onlookers once thought was unlikely, and maybe even impossible: a relatively painless soft landing.”
August 22 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Kansas City President Jeffrey Schmid said he wants to see more economic data before supporting any decision to begin reducing interest rates… ‘It makes sense for me to really look at some of the data that comes in the next few weeks,’ the Kansas City Fed chief, who doesn’t vote on rate decisions this year, said… ‘Before we act — at least before I act, or recommend acting — I think we need to see a little bit more.’”
August 18 – Financial Times (Colby Smith): “The US Federal Reserve needs to take a gradual approach to lowering borrowing costs, one of its top officials has said… Mary Daly, president of the San Francisco Fed, told the Financial Times that recent economic data have given her ‘more confidence’ that inflation is under control. It is time to consider adjusting borrowing costs from their current range of 5.25 per cent to 5.5%, she said. Her call for a ‘prudent’ approach pushed back on economists’ concerns that the world’s largest economy is heading for a sharp slowdown that warrants rapid cuts in interest rates.”
August 21 – Bloomberg (Craig Torres): “Several Federal Reserve officials acknowledged there was a plausible case for cutting interest rates at their July 30-31 meeting before the central bank’s policy committee voted unanimously to keep them steady. ‘Several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 bps at this meeting or that they could have supported such a decision,’ minutes from the meeting… said. ‘The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.’”
U.S. Economic Bubble Watch:
August 22 – Reuters (Lindsay Dunsmuir): “U.S. business activity fell to a 4-month low in August and firms continued to struggle to pass on higher prices to consumers… S&P Global said… its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, edged down to 54.1 this month, a still healthy level among the highest measured over the past two years… The survey's flash manufacturing PMI retreated to an 8-month low, falling to 48.0 this month from 49.6 in July… Its flash services PMI rose to 55.2, from 55.0 in July, confounding economists' expectations for a drop to a reading of 54.0.”
August 22 – Reuters (Lindsay Dunsmuir): “The number of Americans filing new applications for unemployment benefits rose in the latest week… Initial claims for state unemployment benefits rose 4,000 to a seasonally adjusted 232,000 for the week ended Aug. 17… The latest data should continue to allay fears that the labor market is rapidly deteriorating… The number of people receiving benefits after an initial week of aid, a proxy for hiring, rose 4,000 to a seasonally adjusted 1.863 million…”
August 22 – Reuters (Makailah Gause): “The average rate on the popular U.S. 30-year fixed-rate mortgage ticked down this week to the lowest level since May 2023… The 30-year fixed-rate mortgage averaged 6.46% during the week ending Aug. 22, down from 6.49% in the prior week… It averaged 7.23% during the same period a year ago.”
August 22 – Reuters (Lindsay Dunsmuir): “U.S. existing home sales rose more than expected in July, reversing four consecutive monthly declines… Home sales rose 1.3% last month to a seasonally adjusted annual rate of 3.95 million units… The median existing home price jumped 4.2% from a year earlier to $422,600. Home prices increased in all four U.S. regions… Housing inventory increased 0.8% to 1.33 million units last month. Supply jumped 19.8% from one year ago. A surge in insurance premiums across the country as weather-related claims rise is forcing some homeowners to put their properties on the market… At July's sales pace, it would take 4.0 months to exhaust the current inventory of existing homes. That was up from 3.3 months a year ago. A four-to-seven-month supply is viewed as a healthy balance... Properties typically stayed on the market for 24 days in July compared to 20 days a year ago. First-time buyers accounted for 29% of sales versus 30% a year ago… All-cash sales made up 27% of transactions, up from 26% a year ago.”
August 21 – CNBC (Diana Olick): “Applications to refinance a home loan dropped 15% from the previous week… Volume was, however, 90% higher than the same week one year ago… Applications for a mortgage to purchase a home fell 5% for the week and were 8% lower than the same week one year ago. Demand is now at the lowest level since February. Homebuyers are not as influenced by the recent drop in rates because they are still struggling to afford what little is available for sale.”
August 21 – Reuters (Lindsay Dunsmuir): “U.S. employers added far fewer jobs than originally reported in the year through March… The department's estimate for total payroll employment for the period from April 2023 to March 2024 was lowered by 818,000. The revision represented a total downward change of about 0.5% and means that monthly job gains during the period averaged roughly 174,000, compared to the previously reported figure of 242,000. The sharply lower number is the first of two ‘benchmark’ annual revisions undertaken by the department as it collects more accurate data only available in the months after it publishes the monthly payrolls report.”
August 21 – Financial Times (Gregory Meyer): “Shares of US retail chain Target soared after it reversed a sales slump and issued a brighter profit outlook, in results that suggested American consumers were still shopping despite cost pressures on their finances. Target… reported that its comparable sales rose 2% in its second quarter, the company’s first increase in more than a year. Traffic rose 3% to Target’s nearly 2,000 stores and online… ‘Consumers have shown remarkable resilience in the face of multiple challenges over the last several years, and they remain resilient today,’ said Brian Cornell, Target’s chief executive.”
August 22 – Associated Press (Rob Gillies and Josh Funk): “Business and consumers throughout Canada and the U.S. could suffer significant economic harm after Canada’s major freight railroads came to a full stop Thursday because of a contract dispute with their workers. Canadian government officials met urgently to discuss the shutdown. Canadian National and CPKC railroads both locked out their employees after the …deadline Thursday passed without new agreements with the Teamsters Canada Rail Conference, which represents about 10,000 engineers, conductors and dispatchers.”
August 19 – Wall Street Journal (Ryan Dezember): “A glut of natural gas is depressing prices and prompting fresh cutbacks in America’s drilling fields… Big producers such as EQT and Coterra Energy are choking back output, waiting to connect new wells to pipelines and delaying drilling projects. They aim to buoy prices that have rarely been lower during the heat of the summer, when air conditioning creates a lot of power demand. Benchmark natural-gas futures ended Tuesday at $2.198 per million British thermal units, down 14% from a year ago and 30% less than the recent peak in mid-June.”
August 21 – Financial Times (Suzi Ring and James Fontanella-Khan): “Top law firms in the US are offering their junior lawyers as much as $50,000 to refer acquaintances for jobs, as a renewed war for talent in the industry shows no sign of abating. A&O Shearman introduced a $50,000 bonus for US associate referrals in May… Kirkland & Ellis recently renewed its $50,000 payment until January 2025…, extending a global policy introduced in October last year.”
China Watch:
August 20 – Reuters (Ryan Woo and Ethan Wang): “Rising unemployment in China is pushing millions of college graduates into a tough bargain, with some forced to accept low-paying work or even subsist on their parents' pensions, a plight that has created a new working class of ‘rotten-tail kids’. The phrase has become a social media buzzword this year, drawing parallels to the catchword ‘rotten-tail buildings’ for the tens of millions of unfinished homes… A record number of college graduates this year are hunting for jobs in a labour market depressed by COVID-19-induced disruptions as well as regulatory crack-downs on the country's finance, tech and education sectors. The jobless rate for the roughly 100 million Chinese youth aged 16-24 crept above 20% for the first time in April last year. When it hit an all-time high of 21.3% in June 2023…”
August 19 – CNBC (Evelyn Cheng): “China’s youth unemployment rate soared above 17% in July to the highest level since the new system of record-keeping began in December… The unemployment rate for people in China ages 16 to 24, and not in school, rose to 17.1% last month, according to the latest data update Monday. That’s up from 13.2% in June.”
August 20 – Financial Times (Joe Leahy in Beijing and Thomas Hale): “China has disbursed only a fraction of a flagship central bank fund designed to rescue property developers, as authorities struggle to cut a vast stock of unsold homes and end a prolonged real estate slump. Beijing unveiled a plan in May for the People’s Bank of China and state banks to mobilise up to Rmb500bn ($70bn) in lending to support local government enterprises to buy up unsold property. Local governments would then lease the property as social housing. But the latest figures from the PBoC show that banks have lent only Rmb24.7bn under the scheme, prompting the central bank this month to promise to ‘accelerate’ the programme. ‘The implementation has been one of the bottlenecks,’ said Lisheng Wang, China economist at Goldman Sachs, as banks, local governments and others struggle to agree on property pricing.”
August 20 – Bloomberg: “China is considering a new funding option for local governments to buy unsold homes after a series of rescue packages failed to prop up the market, according to people familiar with the matter. The latest proposal would allow local governments to fund their home purchases by issuing so-called special bonds, the proceeds of which are currently restricted to uses including infrastructure and environmental projects… Local governments have already used more than half the 3.9 trillion yuan ($546 billion) quota for special bond issuance this year; it’s unclear what portion of the remainder might be directed toward home purchases if the plan is approved.”
August 20 – Bloomberg: “A price war is spreading across China’s new-home market, as local governments dial back on intervention and developers race to recoup cash. In Beijing, a sudden 18% price cut in May at a mid-sized residential project on the city’s outskirts has forced adjacent new developments to follow suit… Near the southern border, the Shenzhen government approved a 29% cut in unit prices for a complex compared with a year ago…”
August 19 – Bloomberg (Eric Zhu): “China’s latest housing market rescue plan isn’t going so well. The rise in inventory stretched into July, showing state purchases of unsold homes from developers aren’t keeping up with the supply glut. Only 4% of the People’s Bank of China’s 300 billion yuan fund backing the scheme had been utilized as of end-June. That’s concerning, as deepening declines in housing activity in July show speedy execution is urgently needed to lift market sentiment. We estimate the market has added about 1 million unsold homes to the inventory pile since May, bringing the total to 61 million.”
August 21 – Bloomberg: “A growing chorus of Chinese economists called on Beijing to break away from an implicit budget deficit ceiling, opening the door to more central government borrowing as a way to shore up the faltering economy. Officials can consider doubling or tripling this year’s special sovereign bonds to as much as 3 trillion yuan ($420bn), said Zhang Ming, deputy director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences, a top government think tank. This should go toward subsidizing consumers and alleviating local government debt risks, he added.”
August 19 – Financial Times (Arjun Neil Alim): “Chinese authorities have restricted a key source of data on inward investment as global funds continue to pull money out of the country’s stock market, threatening to make 2024 the first year of equity outflows. On Monday, daily data showing net investment flows from foreign funds into stocks in mainland China… was no longer available… The move comes as international investors have pulled more than $12bn out of mainland Chinese equities since the start of June… and taking year-to-date net flows into the red.”
Central Banking Watch:
August 19 – Reuters (Stella Qiu): “Australia’s central bank judged a near-term rate cut was unlikely and policy might need to stay restrictive for an ‘extended period’ to ensure inflation can be tamed… Minutes of its Aug 5-6 board meeting… showed the Reserve Bank of Australia (RBA) considered raising its 4.35% cash rate as underlying inflation remained too high at 3.9% and financial conditions appeared to have eased, with a pickup in credit growth and house prices.”
August 20 – Bloomberg (Niclas Rolander and Ott Ummelas): “Sweden’s Riksbank lowered borrowing costs for a second time since May and sketched out more easing than previously expected as inflation has fallen below its target and the largest Nordic economy is sputtering. The central bank, which cut its benchmark rate to 3.5% from 3.75% in a decision announced on Tuesday, said it could consider as many as three more reductions this year.”
August 22 – Reuters (Cynthia Kim and Jihoon Lee): “South Korea's central bank kept interest rates unchanged… but revived expectations for an imminent policy easing that some economists see happening as soon as October as growth concerns overshadow inflation worries. The Bank of Korea (BOK) held the benchmark interest rate at 3.50%... Governor Rhee Chang-yong, however, said four of the bank's seven voting members were open to a rate cut within the next three months.”
Europe Watch:
August 22 – Reuters (Jonathan Cable): “Euro zone business activity showed surprising strength in August despite firms raising prices… However there were signs the upswing may be temporary, with readings flattered by a sharp rise in French services activity due to the Olympic Games. German business activity contracted for a second consecutive month and by more than expected. HCOB's preliminary composite Purchasing Managers' Index, compiled by S&P Global, bounced to 51.2 this month from July's 50.2…”
August 20 – Bloomberg (Mark Schroers): “Robust German wage growth isn’t abating and will likely keep inflation high, according to the Bundesbank – a worrying signal for the European Central Bank as it battles to return price gains to its 2% target. Collectively agreed earnings increased by 4.2% in the spring… It highlighted that unions’ demands remain high — between 7% and 19% for a period of 12 months. ‘The high level of willingness to strike until recently and the still widespread labor shortage suggest that comparatively high wage increases will continue in the future,’ it said. This will probably keep underlying inflation ‘at an elevated level.’”
Japan Watch:
August 20 – Bloomberg (Toru Fujioka and Erica Yokoyama): “Japan’s exports rose at a faster pace in July, largely reflecting the yen’s drop to a 38-year low last month. Exports gained 10.3% from a year ago led by chip parts and cars, accelerating from 5.4% in the previous month… Imports climbed 16.6%, compared with a 14.6% gain estimated by analysts. With a larger increase in imports, the trade balance turned back to a deficit of ¥621.8 billion ($4.3bn).”
Emerging Markets Watch:
August 19 – Bloomberg (VinÃcius Andrade): “It’s been almost two years now since Luiz Inacio Lula da Silva secured his return to power in Brazil. For investors, they’ve been bleak. The currency is down, government bond yields are up and the stock market has only eked out half the gains posted across the rest of emerging markets… The Lula of 2024 shares little in common, Brazil watchers say, with the Lula of 2003 who was hellbent on proving he wasn’t the profligate spender... He’s balked repeatedly at calls for spending cuts to rein in a budget deficit that has ballooned to the equivalent of about 10% of Brazil’s gross domestic product. It’s a staggering figure, far bigger than any deficit posted in his first go-round and one of the largest in the world.”
Leveraged Speculation Watch:
August 16 – Reuters (Karen Brettell): “Speculators raised their net short bets on five-year Treasuries to the largest on record in the latest week, while bearish bets on 10-year Treasury futures were the largest since January… Net short bets on five-year note futures grew to 1,695,072 contracts in the week ending Aug. 13, up from 1,688,076 the previous week. Short bets on 10-year note futures rose to 860,243 contracts from 776,208…”
August 22 – Financial Times (Robin Wigglesworth): “Hedge fund crowding has been pretty extreme over the past year, but many big players are now paring back their exposure to the Magnificent Seven tech stocks that powered the recently rally. Goldman Sachs has once again tallied the 13F filings of hundreds of US hedge funds — with gross stock market positions of $2.8tn — and one of the big takeaways is a modest but notable rotation away from a lot of hot names. They even seem to be falling out of love with Nvidia. Stanley Druckenmiller is a good example. His family office has now liquidated almost his entire position in Nvidia, and ratcheted back his position in Microsoft in the second quarter. This exemplified a broader tend.”
Social, Political, Environmental, Cybersecurity Instability Watch:
August 20 – NBC (Rob Wile): “A new labor market survey shows Americans have rarely felt more in need of new job opportunities — an indication of a more negative outlook about the economy despite other data that suggests a more stable picture. The New York Federal Reserve's latest poll of consumers found 28.4% of respondents were looking for a job — the highest reading since March 2014 and up from 19.4% a year ago. That includes both individuals already out of a job and ones currently employed but seeking new roles.”
August 20 – Bloomberg (Naureen S. Malik): “Texans set an unofficial record in electricity use Tuesday as soaring temperatures spurred homeowners, schools and businesses to crank up air conditioners. Power demand on the state grid rose to 85,559 megawatts at 6 p.m. local time, topping the August 2023 record of 85,508 megawatts, according to the Electric Reliability Council of Texas.”
Geopolitical Watch:
August 19 – Reuters (Liz Lee, Karen Lema and Eduardo Baptista): “The Philippines and China accused each other on Monday of ramming vessels and performing dangerous manoeuvres in the South China Sea, the latest flare-up after the two nations agreed last month to try to manage disagreements at sea. China's Coast Guard said… a Philippine vessel which had ignored its repeated warnings had ‘deliberately collided’ with a Chinese vessel in an ‘unprofessional and dangerous’ manner in the disputed waterway...”
