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September 27 – Bloomberg:“Chinese equities capped their biggest weekly rally since 2008 with a burst of trading that overwhelmed the Shanghai stock exchange, underscoring a dramatic shift in investor sentiment after Xi Jinping’s government ramped up economic stimulus. In an echo of the rally that followed China’s massive stimulus during the global financial crisis, the CSI 300 Index of large-cap shares soared 4.5% on Friday — bringing this week’s gain to 16%. Trading activity was so intense that it led to glitches and delays in processing orders…” Federal Reserve Bank of Chicago President Austan Goolsbee (September 23, 2024): “My view has been for some time, we set the rates extremely high – highest in decades. And the way I think of what the rate is – we set a rate and then subtract off inflation. That tells you the real fed funds rate – that’s the thing that matters. That’s the highest in a very long time, as inflation has come down. Before this cut, we set the rate high and held it there for more than a year as inflation came down. So, we’re tightening in real fed funds terms every single meeting. By not cutting and going along with inflation, we’re tightening. When inflation is coming in at the target and unemployment is where you want it, do you want to be the tightest in decades? If you’re restrictive for too long, you’re not going to be at that sweet spot on the dual mandate for much longer. So that’s why I think the cut of 50 bps to start makes sense. It’s the kind of thing where it is a demarcation that we’re shifting back to a normal dual mandate mode where we’re thinking about unemployment and inflation – and out of what we have been for a year and a half which is singularly and prioritizing the fight against inflation – which we had to. But make no doubt about it, we’re hundreds of basis points above the neutral rate. And if you look at the statement of economic projections – which comes out once a quarter – and everybody on the FOMC says what in their personal opinion – what do they think will be appropriate over the next year or two years and three years. It’s not just one cut. The important thing… if conditions continue like this, there are a lot of cuts to come over the next 12 months. There’s virtual unanimity about that. So, whether the next one is 25 or 50 or zero or whatever, my view is over the next 12 months we have a long way to come down to get the interest rate to something like neutral to try to hold the conditions where they are.”
Following Goolsbee’s line of reasoning, how many years did the Fed run extremely loose rates – loosest in decades? After all, the Fed held rates at zero (to 25bps) during the period 2010 through December 2015, as y-o-y CPI averaged 1.7%. Rates didn’t reach 2.0% for almost another three years, averaging 0.9%, while average inflation rose to 1.9%. When inflation had jumped to 2.9% in July 2018, the fed funds rate was still 1.75% (to 2.0%). Rates were back to zero during the pandemic and stayed at zero through 2021, despite inflation averaging 4.7% during that year. Inflation had spiked to 8.5% by March 2022, yet the fed funds rate was still down at 0.25% (to 0.5%). And even at the June 2022 peak inflation rate of 9.1%, the policy rate had only reached 3.0%.
It’s curious that the real fed funds rate – “that’s the thing that matters” – seems to matter a lot more to the Fed these days. During periods of relative monetary stability, there’s a case that the real funds rate has some use as a policy indicator. But it has negative value during periods of monetary disorder, the backdrop that has dominated over recent decades.
There are myriad price levels that impact financial and economic stability, with asset prices topping the list for importance. The Fed’s singular fixation on consumer prices is dangerously misguided. Importantly, the real fed funds rate failed as a policy indicator during the mortgage finance bubble period, and only somewhat less so during late-nineties financial excess. Ignore the critical role that low consumer price inflation (and a resulting “high” “real” fed funds rate) plays in Credit, asset Bubbles, and system stability at everyone’s peril.
Goolsbee:
“But make no doubt about it, we’re hundreds of basis points above the neutral rate.”
Okay wise guy, Gold has jumped $89, or 3.5%, since the Fed meeting. Silver has risen 2.8%. The Bloomberg Commodities Index is up 3.3%. Gold and Silver enjoy y-t-d gains of 28.9% and 32.7%. The S&P500 sports a 2024 return of 21.6%, with the Semiconductors returning 25.8%, the Philadelphia Utilities Index 31.0%, and the Nasdaq Composite 21.4%. S&P CoreLogic had July y-o-y home price inflation at 5.0%. Q2 GDP was confirmed at 3.0% this week, as the Atlanta Fed GDPNow forecast has Q3 increasing to 3.1%. Following the Fed’s big cut, Money Market Fund Assets surged $121 billion this week to a record $6.424 TN – surely corresponding to boosts in “repo” borrowings and “basis trade” levered speculation.
Central bankers shoulder tremendous responsibility. Their role demands caution and conservatism. As we’ve witnessed, experimentation comes with monumental risks. One would think a series of historic blunders, including the mortgage finance Bubble boom and bust, the more recent inflationary spike, and now omnipresent speculative excess, would have ingrained humility into the contemporary central banker psyche. Do they somehow fail to recognize the role prolonged monetary disorder has played in our fraught times – with deeply divided societies and perilous geopolitical animus?
Austan Goolsbee has no idea where the so-called “neutral rate” is. Nobody does. It’s a flawed concept in a world where Credit, liquidity, and perceived wealth are dominated by highly speculative financial markets. Anyone today positing that there’s an equilibrium policy rate doesn’t appreciate the precedence held by Bubble Dynamics, and current Credit and market backdrops.
From the global government finance Bubble perspective, the past nine days have been pivotal. First, the Fed aggressively slashes interest rates despite loose conditions, ongoing strong Credit growth, intensely speculative markets, and uninterrupted economic expansion. And this week, the U.S.’s chief geopolitical adversary hit the panic button.
September 24 – Bloomberg: “China’s central bank unveiled a broad package of monetary stimulus measures to revive the world’s second-largest economy, underscoring mounting alarm within Xi Jinping’s government over slowing growth and depressed investor confidence. People’s Bank of China governor Pan Gongsheng cut a key short-term interest rate and announced plans to reduce the amount of money banks must hold in reserve to the lowest level since at least 2018… Those moves were followed by a slew of other announcements that fueled gains in China’s beleaguered equity market. The central bank chief also unveiled a package to shore up the nation’s troubled property sector, including lowering borrowing costs on as much as $5.3 trillion in mortgages and easing rules for second-home purchases.” September 25 – Bloomberg: “China’s pledge of up to $340 billion to boost its ailing equities is invoking parallels with past efforts at home and in Japan that largely faltered in lifting the economy after an initial burst of enthusiasm. The massive support is part of a broader stimulus package unveiled by People’s Bank of China Governor Pan Gongsheng and other top officials Tuesday. The goal is to reverse a drain on household wealth and prime an economy suffering a years-long housing crisis and mired in deflation and weak demand. Going by the experience in Japan… that will be a tall order. ‘China’s easing steps may have some short-term impact, but they’ll only help buy time,’ said Shigeto Nagai, head of Japan research at Oxford Economics and former chief of the Bank of Japan’s international department.” September 26 – Bloomberg: “Promoters of the theory that China faces a ‘Japanification’ of its economy look set to enjoy a symbolic milestone in the bond market. The yield on China’s 30-year government bonds is on track to fall below its Japanese equivalent for the first time in about two decades.” There have been parallels between China’s Bubble and Japan’s eighties Bubble inflation. Recognizing the damage being inflicted on their country’s social fabric, Japanese policymakers deflated the Bubble. Chinese officials, in contrast, appear determined to thwart Bubble deflation. Cementing global superpower status (countering the U.S. and its allies) takes precedence.
Borrowing a page from the Western policy playbook, this week was “shock and awe” and “whatever it takes.” Xi Jinping must monitor booming U.S. and Western financial markets with a mix of envy and jealousy. The communists were aggressively out this week with policies specifically to jumpstart Chinese stocks, including a lending facility for institutions to lever equities positions and another to finance corporate stock buybacks.
In the “best week since 2008”, the Shanghai Composite surged 12.8%, with the CSI300 up 15.7%, and the growth oriented ChiNext Index spiking 22.7%.
I wonder how closely Austan Goolsbee followed Chinese developments. Despite myriad stimulus measures, China has been losing the battle against Bubble deflation. Bazookas now a-blazing. There was money aplenty for the stock market, bank recapitalization, housing, and for the poor. Rates were lowered across the spectrum.
September 26 – AFP: “China’s leadership, including President Xi Jinping, admitted Thursday that the country’s economy was facing new ‘problems’, according to state media. ‘Some new situations and problems have emerged in the current running of the economy,’ Xinhua reported after a meeting of the Politburo of the ruling Chinese Communist Party.” From the FT:“A hastily convened, joint press conference with several Chinese economic officials on Tuesday unveiled a raft of stimulus measures designed to inject confidence back into China’s deflating economy.” There were reports of staff working through the night. While a formidable list of stimulus measures was announced, I was most intrigued by a Reuters (Ellen Zhang and Marius Zaharia) report: “Chinese leaders pledged on Thursday to deploy ‘necessary fiscal spending’ to meet this year’s economic growth target…”
China’s metric of system Credit (Aggregate Financing) expanded about $5.0 TN last year. While government bonds have increased $750 billion, or 18%, over the past year, Beijing has hesitated to open the fiscal floodgates. To resuscitate China’s economic boom, it has instead leaned heavily on its banking system to lend freely. But with apartment Bubble deflation accelerating, Beijing’s gambit to spur a self-reinforcing recovery was flopping.
Chinese officials were compelled to make an important change in tack this week. We can assume Xi dictated “whatever it takes” – and I’ll presume there’s now no turning back. Too much at stake, both domestically and with China’s grandiose global ambitions. If this analysis is on the right track, Beijing’s fiscal stimulus – to meet this year’s growth target and targets going forward – will necessitate massive deficit spending. Too many years of aggressive growth mandates promoted a Bubble economy without precedent, where massive unending Credit expansion is now required to hold collapse at bay.
China’s deflating Bubble has been a key dynamic supporting the forces of disinflation globally. Beijing’s “whatever it takes” could shake things up. Iron Ore prices surged 12% this week. Copper jumped 5.9%, Aluminum 6.5%, Nickel 3.0%, Zinc 7.5%, and Platinum 2.5%. Gold and Silver added another 1.4% and 1.3%. The Bloomberg Commodities Index gained 2.1% to an 11-week high.
Commodities markets corroborate heightened inflation risk. But this is three-dimensional chess. Global bond markets took China news in stride, with most yields flat to lower on the week. Treasuries just don’t seem concerned with loose conditions, economic resilience, or heightened inflation risk. That Treasury yields didn’t respond to Beijing’s “whatever it takes” moment is additional evidence that bonds are focused on storm clouds on the horizon.
Friday trading saw the return of yen strength (up 1.8%) and tech weakness correlations. Bonds could certainly be anticipating faltering yen “carry trade” and “A.I./tech” Bubbles – or a market accident more generally. Or perhaps bonds are not as oblivious as stocks to the dire geopolitical backdrop. There was more Putin nuclear saber-rattling this week, while Russia’s “no limits partner” fired an ICBM in the Pacific. And it’s not lunatic fringe these days to worry that the WWIII fuse might be lit in the Middle East.
As I wrap up this week’s CBB, there’s no evidence Hassan Nasrallah survived Israel’s bunker busting bombing attack. “Israel’s Attempt to Kill Nasrallah is a Huge Challenge to Iran.” “Iran’s Supreme Leader Holds Emergency Meeting After Israel Attacks Lebanon.” “It’s Mayhem: Can All-Out War in Lebanon be Prevented?” More ominous talk of “red lines” crossed. This week’s escalation could easily spiral out of control.
For the Week:
The S&P500 added 0.6% (up 20.3% y-t-d), and the Dow increased 0.6% (up 12.3%). The Utilities gained 0.8% (up 27.6%). The Banks declined 0.9% (up 18.6%), while the Broker/Dealers added 0.2% (up 24.1%). The Transports jumped 2.7% (up 1.8%). The S&P 400 Midcaps gained 0.5% (up 12.1%), while the small cap Russell 2000 was little changed (up 9.7%). The Nasdaq100 advanced 1.1% (up 18.9%). The Semiconductors surged 4.3% (up 24.9%). The Biotechs declined 0.6% (up 8.4%). While bullion rose $36, the HUI gold index slipped 0.7% (up 34.2%).
Three-month Treasury bill rates ended the week at 4.47%. Two-year government yields declined three bps to 3.56% (down 69bps y-t-d). Five-year T-note yields added a basis point to 3.51% (down 34bps). Ten-year Treasury yields increased one basis point to 3.75% (down 13bps). Long bond yields increased two bps to 4.11% (up 8bps). Benchmark Fannie Mae MBS yields added two bps to 4.88% (down 39bps).
Italian yields dropped 10 bps to 3.45% (down 25bps y-t-d). Greek 10-year yields slumped nine bps to 3.10% (up 4bps). Spain’s 10-year yields declined seven bps to 2.93% (down 7bps). German bund yields fell eight bps to 2.13% (up 11bps). French yields declined five bps to 2.92% (up 36bps). The French to German 10-year bond spread widened three to 79 bps. U.K. 10-year gilt yields rose seven bps to 3.98% (up 44bps). U.K.’s FTSE equities index gained 1.1% (up 7.6% y-t-d).
Japan’s Nikkei Equities Index surged 5.6% (up 19.0% y-t-d). Japanese 10-year “JGB” yields were unchanged at 0.85% (up 24bps y-t-d). France’s CAC40 rose 3.9% (up 3.3%). The German DAX equities index jumped 4.0% (up 16.2%). Spain’s IBEX 35 equities index added 1.8% (up 18.5%). Italy’s FTSE MIB index rose 2.9% (up 14.4%). EM equities mostly higher. Brazil’s Bovespa index rallied 1.3% (down 1.1%), and Mexico’s Bolsa index increased 1.1% (down 8.0%). South Korea’s Kospi index gained 2.2% (down 0.2%). India’s Sensex equities index increased 1.2% (up 18.5%). China’s Shanghai Exchange Index surged 12.8% (up 3.8%). Turkey’s Borsa Istanbul National 100 index declined 1.2% (up 30.9%).
Federal Reserve Credit declined $15.5 billion last week to $7.056 TN. Fed Credit was down $1.834 TN from the June 22, 2022, peak. Over the past 263 weeks, Fed Credit expanded $3.329 TN, or 89%. Fed Credit inflated $4.245 TN, or 151%, over the past 620 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.8 billion last week to $3.317 TN. “Custody holdings” were down $119 billion y-o-y, or 3.5%.
Total money market fund assets surged $121billion to $6.424 TN. Money funds were up $538 billion y-t-d, or 12.2% annualized, and $787 billion, or 14.0%, y-o-y.
Total Commercial Paper recovered $41.3 billion to $1.232 TN. CP was up $37 billion, or 3.1%, over the past year.
Freddie Mac 30-year fixed mortgage rates slipped a basis point to a new two-year low 6.08% (down 127bps y-o-y). Fifteen-year rates added one basis point to 5.16% (down 163bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 13 bps to 6.79% (down 99bps).
Currency Watch:
For the week, the U.S. Dollar Index declined 0.3% to 100.381 (down 0.9% y-t-d). For the week on the upside, the South Korean won increased 1.9%, the South African rand 1.8%, the New Zealand dollar 1.7%, the Australian dollar 1.4%, the Brazilian real 1.4%, the Japanese yen 1.2%, the Swiss franc 1.1%, the Swedish krona 0.8%, the Singapore dollar 0.7%, the British pound 0.4%, and the Canadian dollar 0.4%. On the downside, the Mexican peso declined 1.4% and the Norwegian krone slipped 0.2%. The Chinese (onshore) renminbi increased 0.51% versus the dollar (up 1.27% y-t-d).
Commodities Watch:
September 26 – Bloomberg (Mark Burton and William Clowes): “Silver hit the highest level since 2012, while gold reached a new record as expectations for additional Federal Reserve interest-rate cuts boosted precious metals. The white metal climbed as much as 2.8% to $32.71 an ounce on Thursday, extending this year’s gain to 37%. Its advance came during a broad rally for precious metals, with gold hitting another all-time high.”
September 24 – Bloomberg (Sana Pashankar): “Copper and other industrial metals rallied strongly after China unveiled a series of measures to boost growth and resurrect its beleaguered property market. Copper on the London Metal Exchange rose 2.6% to $9,796.50…, the highest since mid-July. All other major base metals rose in London, with zinc surging 4.1% and aluminum climbing 2.1% higher. China, the biggest consumer of metals and the main driver of the fortunes of those who produce them, has been a constant source of bad news for commodity markets this year.”
The Bloomberg Commodities Index rose 2.1% (up 1.6% y-t-d). Spot Gold added 1.4% to $2,658 (up 28.9%). Silver gained 1.3% to $31.5675 (up 32.7%). WTI crude sank $2.82, or 4.0%, to $68.18 (down 5%). Gasoline dropped 4.1% (down 7%), while Natural Gas surged 19.2% to $2.90 (up 15%). Copper surged 5.9% (up 18%). Wheat gained 2.0% (down 8%), and Corn rallied 4.0% (down 11%). Bitcoin jumped $2,670, or 4.2%, to $63,115 (up 54.8%).
Middle East War Watch:
September 27 – Reuters (Maya Gebeily, Timour Azhari and James Mackenzie):“A wave of air raids hit Beirut’s southern suburbs early on Saturday as Israel stepped up attacks on Hezbollah, after a massive strike on the Iran-backed movement’s command centre that apparently targeted leader Hassan Nasrallah. Reuters witnesses heard more than 20 airstrikes before dawn on Saturday. Abandoning their homes in the southern suburbs, thousands of Lebanese congregated in squares, parks and sidewalks in downtown Beirut and seaside areas.”
September 24 – New York Times (Christina Goldbaum and Hwaida Saad):“It began with messages sent by Israel to radio stations and some cellphones in Beirut on Monday morning, warning of imminent military action. ‘The I.D.F. will be moving against military bases,’ an automated voice said… ‘The I.D.F. don’t want to hurt you. If you are present in a building used by Hezbollah, you should leave.’ The alerts stoked alarm across the capital, the southern suburbs of which are dominated by Hezbollah, the Lebanese militant group. Parents rushed to schools to pick up their children. By early afternoon, lines of cars and motorbikes snaked out from fuel stations and down streets in the city as many residents fled, hoping to find refuge in Lebanon’s northern mountains. Others wandered the mostly empty aisles of grocery stores, their carts stacked with water bottles, bags of rice and jugs of oil, uncertainty hanging in the air.”September 26 – Reuters (Timour Azhari and James Mackenzie):“Israel rejected global calls on Thursday for a ceasefire with the Hezbollah movement, defying its biggest ally the U.S. and pressing ahead with strikes that have killed hundreds in Lebanon and heightened fears of an all-out regional war. An Israeli warplane struck the edges of the capital Beirut, killing two people and wounding 15… That took deaths from hits overnight and during Thursday to 28… Israel’s air force is planning to assist troops in the event of a ground operation and will stop any arms transfers from Iran, Air Force Commander Major General Tomer Bar said… ‘We are preparing shoulder to shoulder with Northern Command for a ground maneuver. Prepared, if activated. This is a decision to be made above us,’ he told soldiers, in a video distributed by the Israeli military.”
September 25 – Reuters (Laila Bassam and James Mackenzie):“Hezbollah’s flexible chain of command, together with its extensive tunnel network and a vast arsenal of missiles and weapons it has bolstered over the past year, is helping it weather unprecedented Israeli strikes, three sources familiar… said. Israel’s assault on Hezbollah over the past week, including the targeting of senior commanders and the detonation of booby-trapped pagers and walkie-talkies, has left the powerful Lebanese Shiite militant group and political party reeling. But two of the sources… said the group swiftly appointed replacements… Hezbollah leader Sayyed Hassan Nasrallah said in an Aug. 1 speech that the group quickly fills gaps whenever a leader is killed.”
September 23 – Reuters (Phil Stewart):“The United States is sending a small number of additional troops to the Middle East given escalating tensions between Israel and Lebanon’s Hezbollah, the Pentagon said… ‘Out of an abundance of caution, we are sending a small number of additional U.S. military personnel forward to augment our forces that are already in the region,’ Air Force Major General Patrick Ryder… told reporters.”
September 24 – Axios (Barak Ravid):“Hezbollah urged Iran in recent days to launch an attack against Israel as fighting between the Lebanese militant group and the Israeli military dramatically escalated, but Iran has so far refrained, two Israeli officials and one Western diplomat told Axios… A direct Iranian attack against Israel would dramatically destabilize the region even further and likely draw the U.S. into more active fighting. Two Israeli officials said Iranian officials told their Hezbollah counterparts that ‘the timing isn’t right’ for launching an attack against Israel because the Iranian president Masoud Pezeshkian is currently in New York for the UN General Assembly.”
September 24 – AFP: “Iran’s President Masoud Pezeshkian said Tuesday that its ally Hezbollah ‘cannot stand alone’ against Israel which carried out its deadliest day of air strikes on Lebanon since 2006. ‘Hebzollah cannot stand alone against a country that is being defended and supported and supplied by Western countries, by European countries and the United States,’ Pezeshkian said… He called on the international community to ‘not allow Lebanon to become another Gaza,’ in response to a question if Iran would use its influence with Hezbollah to urge restraint.”
September 26 – Financial Times (Najmeh Bozorgmehr, Raya Jalabi and Andrew England):“Iran has raced to reassure Hizbollah of its commitment to the militant group after unease within its ranks over Tehran’s restraint in the face of increasingly aggressive Israeli operations in Lebanon. Masoud Pezeshkian, Iran’s reformist president who took office in July, has said his country wants to usher in a ‘new era’ of foreign policy and re-engage with the west to ease sanctions on the Islamic republic and repair the economy. Iran believes avoiding direct conflict with Israel is crucial to this goal… But Israel’s decision to ramp up its offensive against Hizbollah, Iran’s most important regional proxy, has become the biggest test so far of whether the regime can follow through on this new tactic. Tehran has had to dispatch envoys to Beirut to scotch fears that it had deserted Hizbollah…”
September 26 – Wall Street Journal (Sune Engel Rasmussen and Summer Said):“Hezbollah is dealing with disagreement among its ranks over how to respond to a series of devastating attacks on the Lebanese militant group… With no good options available, the group faces one of the most consequential decisions in its four-decade history. Hezbollah… fired its first missile at the commercial capital of Tel Aviv on Wednesday, its boldest response yet to a wave of strikes by Israel. It must now choose whether to unleash more of its advanced weapons, striking deeper into Israel and potentially triggering a full-scale war, or hold back and risk diminishing its reputation as one of the fiercest fighting forces in the Middle East. ‘This is the single most crucial moment for Hezbollah since it was created,’ said Rym Momtaz, a security analyst at the Carnegie Endowment for International Peace with expertise in Hezbollah. ‘Hezbollah has no good options.’”
September 25 – Reuters (John Irish, Parisa Hafezi and Jonathan Landay):“Iran has brokered ongoing secret talks between Russia and Yemen’s Houthi rebels to transfer anti-ship missiles to the militant group, three Western and regional sources said, a development that highlights Tehran’s deepening ties to Moscow. Seven sources said that Russia has yet to decide to transfer the Yakhont missiles… which experts said would allow the militant group to more accurately strike commercial vessels in the Red Sea and increase the threat to the U.S. and European warships defending them.”
September 21 – Bloomberg (Arsalan Shahla):“Iran’s army and the Islamic Revolutionary Guard Corps conducted their largest joint naval exercises to date in the country’s southern waters… Saturday’s drills featured a fleet of 580 vessels, including ocean-going warships and destroyers, navigating the Persian Gulf and the Strait of Hormuz. The display was part of a week-long series of events commemorating the anniversary of the Iran-Iraq war in the 1980s.”
September 26 – Reuters (John Irish and Michele Kambas):“Western nations were weighing their options on Thursday on how to safely get nationals out of Lebanon if a full-scale war breaks out, diplomats said, with Cyprus and possibly Turkey seen as offering sanctuary to tens of thousands of people. Cyprus is the closest European Union member state, some 264 km (164 miles) from Lebanon.”
Ukraine War Watch:
September 26 – Wall Street Journal (Lindsay Wise and Gordon Lubold):“Ukraine President Volodymyr Zelensky told lawmakers his priority is securing U.S. permission to fire long-range missiles to hit military targets in Russia… The Capitol was the first stop on what was expected to be a pivotal day for Zelensky, with meetings scheduled with President Biden and Vice President Kamala Harris later in the day. Ahead of their White House sit-down, Biden directed billions of dollars in new weapons and equipment be sent to Ukraine, getting it out the door before his term ends. About 20 senators from both parties met for more than an hour with Zelensky…”
Taiwan Watch:
September 26 – Reuters (Ben Blanchard and Yimou Lee):“Taiwan’s defence ministry raised the alarm on Thursday about a renewed surge of Chinese military activity around the island and live fire drills, accusing Beijing of policy instability that presented a serious challenge to its neighbours. Democratically governed Taiwan… has complained of stepped-up Chinese military activity over the past five years… The effort ‘highlights the hegemonic nature of an authoritarian regime that lacks policy stability, posing a serious challenge to neighbouring countries’, it added.”
September 21 – Financial Times (Katharine Jackson):“U.S. President Joe Biden and Japanese Prime Minister Fumio Kishida discussed diplomacy with China and their shared concerns over ‘coercive and destabilizing activities’ in the South China Sea during a meeting on Saturday at the Quad Leaders Summit in Wilmington… Biden and Kishida also reiterated their resolve to maintain peace across the Taiwan strait and commitment to developing and protecting technologies like AI and semiconductors, the White House said.”
Market Instability Watch:
September 27 – Bloomberg:“A number of quantitative hedge funds in China were hit severely on Friday as the nation’s equities staged their biggest rally in years… Some firms suffered heavy losses because they shorted index futures for their so-called Direct Market Access strategies… Some saw their losses exacerbated by a Shanghai Stock Exchange glitch that left them unable to sell holdings to meet margin requirements… The losses come as many quants are still recovering from record drawdowns suffered during China’s stock market meltdown in February, when their favored small-cap stocks crashed, prompting regulators to push for the DMA products to be phased out.”
September 25 – Reuters (Davide Barbuscia):“The Federal Reserve’s aggressive start of the easing cycle has rekindled inflation worries in the U.S. bond market, as some investors fear looser financial conditions could re-ignite price pressures. Yields on longer-dated Treasuries that are most sensitive to the inflation outlook have risen to the highest since early September, with some investors worried that the Fed’s shift in focus from beating back inflation to protecting the job market could allow for a rebound in price pressures. ‘I think there are questions around how quickly inflation will be able to get to the Fed’s target if we’re in a cutting environment, and if we’re in an environment where the Fed is saying we want to support the labor market before the labor market gets weak,’ said Cayla Seder, macro multi-asset strategist at State Street Global Markets. She expects long-term yields… to climb further as the market bets on stronger growth and inflation.”
September 24 – Bloomberg (Michael Mackenzie): “The next US administration ‘must grapple with widening budget deficits,’ warned Moody’s Ratings in a report…, nearly a year after it announced a negative outlook for the country’s sovereign credit profile. ‘The administration’s tax and spending policies will affect the size of future budget deficits and the expected decline in US fiscal strength, which could have a significant effect on the US sovereign credit profile,’ analysts led by Claire Li and William Foster wrote… ‘These debt dynamics would be increasingly unsustainable and inconsistent with a Aaa rating if no policy actions are taken to course correct.’”
September 23 – Reuters (Davide Barbuscia):“Liquidity in the $27 trillion U.S. Treasury market, the largest government bond market in the world, is back to levels seen before the Federal Reserve started hiking interest rates in 2022, according to a New York Fed report. Liquidity – or the ability to trade an asset without significantly moving its price – worsened over the past few years as U.S. government bond prices swung sharply since the U.S. central bank started hiking rates to tame inflation. But common measures to assess trading conditions ‘point to an improvement in Treasury market liquidity in 2024 to levels last seen before the start of the current monetary policy tightening cycle,’ Michael Fleming, head of Capital Markets Studies in the Federal Reserve Bank of New York’s Research and Statistics Group, said….”
September 24 – Reuters (Harry Robertson):“France’s borrowing costs briefly rose above Spain’s for the first time since 2008 on Tuesday…, in a sign of investor concerns about the new French government’s ability to tackle the high budget deficit… Spanish bonds have traded with higher yields than French bonds since the financial crisis as the country is traditionally seen as a riskier investment.”
September 25 – Reuters:“The House has passed a temporary measure that would keep federal agencies funded when the new fiscal year begins next Tuesday while punting final spending decisions for the next budget year until after the Nov. 5 election. The stopgap measure… generally funds agencies at current levels through Dec. 20. But an additional $231 million was included to bolster the Secret Service after the two assassination attempts against Republican presidential nominee Donald Trump. Money was also added to aid with the presidential transition, among other things. The bill will next move to the Senate for final approval.”
Global Credit Bubble Watch:
September 26 – Financial Times (Eric Platt and Stephen Gandel):“Citigroup… announced it had partnered with Apollo in a $25bn push to lend to private equity groups and low-rated US companies, as the fourth-largest US bank by assets looks to establish itself in the rapidly growing private credit industry. The decision to partner with Apollo will give Citi one tool to help win back business from asset managers, which over the past five years have targeted many of its and its rivals’ most lucrative clients as traditional banks pulled away from riskier corners of the market. The two groups have agreed to finance at least $25bn of private equity and corporate loans over the coming years, hoping to hit $5bn in the first year. The loans will be sourced by Citi’s investment banking workforce and funded by Apollo…”
September 26 – Bloomberg (Eleanor Duncan, Silas Brown, Ellen Schneider and Paula Seligson):“At a finance conference in London this summer, four senior investment bankers set about persuading the room that the $1.7-trillion private credit market isn’t a threat to Wall Street. Barely three months later, two of them have jumped ship to seek their fortunes in the upstart asset class. Goldman Sachs Group Inc.’s Luke Gillam and Bank of America Corp.’s Murad Khaled, set to join AlbaCore Capital and Apollo Global Management, are the latest in a growing list of top bankers to make the leap. The brain drain is yet more evidence of private capital firms’ emergence as an enduring threat to banking’s traditional dominance of the lucrative corporate loan market.”
September 24 – Bloomberg (David Ramli):“The private credit market is set to face a ‘reckoning moment’ and a period of difficulty it hasn’t seen since 2008 amid risks of inflation and recession, according to Jae Yoon, chief investment officer of New York Life Investment Management. Yoon… made the comments on a panel at the SuperReturn Asia conference… While fiscal stimulus and booming markets had protected players who would’ve been otherwise wiped out, Yoon warned time was potentially running out. ‘The last time you had a major dispersion between well-managed versus unnecessary risk-takers was 2008,’ he said. ‘We’re about to come to a reckoning moment.’”
AI Bubble Watch:
September 23 – New York Times (Tripp Mickle):“As Jim Covello’s car barreled up Highway 101 from San Jose to San Francisco this month, he counted the billboards about artificial intelligence. The nearly 40 signs he passed… were fresh evidence, he thought, of an economic bubble. ‘Not that long ago, they were all crypto,’ Mr. Covello said… ‘And now they’re all A.I.’ Mr. Covello, the head of stock research at Goldman Sachs, has become Wall Street’s leading A.I. skeptic. Three months ago, he jolted markets with a research paper that challenged whether businesses would see a sufficient return on what by some estimates could be $1 trillion in A.I. spending in the coming years. He said generative artificial intelligence, which can summarize text and write software code, made so many mistakes that it was questionable whether it would ever reliably solve complex problems.”
Bubble and Mania Watch:
September 25 – Bloomberg (Ruth Carson and Matthew Burgess):“China’s latest policy blitz is fueling a rally in everything from iron ore and copper to Asian stocks, and traders are betting on more aid to drive further gains. In the wake of Tuesday’s announcement, emerging-market equities climbed to the highest in over two years while iron ore headed back toward $100 a ton. The Thai baht jumped to levels last seen in March 2022, and Malaysia’s ringgit appreciated to the strongest since mid-2021. Confidence is building that China’s markets may finally be on the cusp of a sustainable rebound after years of decline fueled by slowing growth and a prolonged property crisis. But the optimism is tempered by caution, with market watchers noting that similar rallies in the past were shortlived as focus quickly shifted back to the nation’s economic troubles.”
September 23 – Bloomberg (Olivia Raimonde and Michael Tobin):“US companies stormed debt markets on Monday following the Federal Reserve’s decision last week to begin lowering its benchmark interest rate, pushing borrowing costs down. Ten high-grade issuers — including T-Mobile — raised a total of $12.2 billion… There are 10 companies borrowing in the junk-bond market, marking its busiest day this year in terms of the number of issuers. Also in the US, 18 leveraged loan deals launched.”
September 20 – Bloomberg (Lu Wang and Isabelle Lee):“For Wall Street traders whose taste for speculation only seems to get bolder by the week, Jerome Powell’s half-point rate cut was a moment of vindication. Now, with a newly accommodative Federal Reserve buttressing the economic outlook, another variable — valuation — is emerging as the larger challenge in determining how far the celebratory spirit can be pushed… A model that adjusts S&P 500 earnings yields and 10-year Treasury rates for inflation shows cross-asset pricing is higher now than at the start of all previous 14 Fed easing cycles — periods that were usually associated with recessions.”
U.S./Russia/China/Europe Watch:
September 25 – Reuters (Vladimir Soldatkin and Guy Faulconbridge):“President Vladimir Putin warned the West… that Russia could use nuclear weapons if it was struck with conventional missiles, and that Moscow would consider any assault on it supported by a nuclear power to be a joint attack. The decision to change Russia’s official nuclear doctrine is the Kremlin’s answer to deliberations in the United States and Britain about whether or not to give Ukraine permission to fire conventional Western missiles into Russia. The 71-year-old Kremlin chief… said he wanted to underscore one key change in particular. ‘It is proposed that aggression against Russia by any non-nuclear state, but with the participation or support of a nuclear state, be considered as their joint attack on the Russian Federation,’ Putin said.”
September 25 – Reuters (Dmitry Antonov):“The Kremlin said… that changes to Russia’s nuclear weapons doctrine outlined by President Vladimir Putin should be considered a signal to Western countries that there will be consequences if they participate in attacks on Russia. Putin said on Wednesday that Russia could use nuclear weapons if it was struck with conventional missiles, and that Moscow would consider any assault on it supported by a nuclear power to be a joint attack. The decision to change Russia’s official nuclear doctrine is the Kremlin’s answer to deliberations in the United States and Britain about whether or not to give Ukraine permission to fire conventional Western missiles into Russia.”
September 25 – Financial Times (Kathrin Hille):“China fired an intercontinental ballistic missile into the Pacific Ocean for the first time in 44 years on Wednesday, a show of force set to fuel concerns in the US and among its neighbours. The test, Beijing’s first major missile launch since twin hypersonic weapons tests in the summer of 2021, comes as the People’s Liberation Army is conducting intensive air and naval drills around the region…”
September 23 – Reuters (Farah Master):“China’s Foreign Minister Wang Yi told Lebanese Foreign Minister Abdallah Bou Habib on Monday that China firmly supported Lebanon in safeguarding its sovereignty and security and strongly condemned violations after Israel’s large scale airstrike. Wang and Habib met in New York where they exchanged views on the situation in the Middle East, according to a statement from China’s Foreign Ministry.”
September 25 – Reuters (Ryan Woo, Tom Balmforth, Max Hunder, Andrew Gray, Jonathan Landay, Daphne Psaledakis and Steve Holland):“Russia has established a weapons programme in China to develop and produce long-range attack drones for use in the war against Ukraine, according to two sources from a European intelligence agency… IEMZ Kupol, a subsidiary of Russian state-owned arms company Almaz-Antey, has developed and flight-tested a new drone model called Garpiya-3 (G3) in China with the help of local specialists… Kupol told the defence ministry in a subsequent update that it was able to produce drones including the G3 at scale at a factory in China so the weapons could be deployed in the ‘special military operation’ in Ukraine…”
De-globalization and Iron Curtain Watch:
September 22 – Financial Times (Jamie Smyth, Myles McCormick and Harry Dempsey):“Western nations are directing their development finance and export credit agencies to work with private industry to support critical minerals projects, in a drive to break China’s chokehold over a sector that is essential for high-tech industries. The Minerals Security Partnership, a coalition of 14 nations and the European Commission, will unveil a new financing network at an event in New York… as they try to ramp up international collaboration and pledge financial support for a huge nickel project in Tanzania, backed by mining company BHP.”
September 24 – Financial Times (Joe Leahy):“China has accused the parent company of Calvin Klein of boycotting cotton from its western Xinjiang region, threatening for the first time to put a US company with significant interests in the country on a national security blacklist. Beijing’s threat to include PVH, a clothing maker whose brands include Calvin Klein and Tommy Hilfiger, on its ‘unreliables list’ is likely to alarm international companies at a moment when China is struggling to attract foreign investors. The Chinese commerce ministry said… PVH had 30 days to explain to authorities whether it had discriminated against Xinjiang-related products over the past three years.”
Inflation Watch:
September 27 – CNBC (Jeff Cox):“Inflation moved closer to the Federal Reserve’s target in August… The personal consumption expenditures price index, a measure the Fed focuses on to measure the cost of goods and services in the U.S. economy, rose 0.1% for the month, putting the 12-month inflation rate at 2.2%, down from 2.5% in July and the lowest since February 2021. Excluding food and energy, core PCE rose 0.1% in August and was up 2.7% from a year ago…”
September 22 – Financial Times (Taylor Nicole Rogers):“Businesses are bracing for a strike at three dozen US ports that could upend supply chains and raise prices just weeks before election day. The International Longshoremen’s Association says its 25,000 members will walk off the job if the union does not come to a new agreement with the US Maritime Alliance, which represents carriers and marine terminal operators, before their contract expires on September 30. The contract covers all ports between Maine and Texas, including New York, Savannah, Houston, Miami and New Orleans. They receive 41% of the country’s containerised port volume and their closure would have a ‘devastating impact’ on the US economy, a coalition of 177 trade groups warned last week.”
September 25 – Axios (Emily Peck):“It’s increasingly likely that thousands of dockworkers at major ports along the East and Gulf coasts will strike on Oct. 1… A strike would snarl the economy and presidential politics only weeks before the election. If it lasts longer than just a few days, a strike raises the prospect of product shortages and higher prices along the lines of the supply chain crisis of 2021 — just in time for the holiday shopping season. A strike could cost the economy $5 billion a day, per a JPMorgan analysis… The parties have not sat down at the negotiating table since early summer. Their current agreement expires on Sept. 30. The two sides are far apart on pay raises and rules around automation… ‘This is very different from most of the other negotiations that I was involved with over the last three years,’ says John Drake, vice president for transportation, infrastructure, supply chain policy at the U.S. Chamber of Commerce. ‘At this point in time [a strike] will happen.’”
September 25 – Reuters (Lisa Baertlein and Timothy Aeppel):“U.S. companies that rely on East and Gulf Coast seaports have been importing early, shifting goods to the West Coast, and even putting cargo on pricey flights to hedge against a threatened Oct. 1 strike… ‘This is just another headache after everything else we’ve been dealing with,’ said Kenneth Sanchez, CEO of Chesapeake Specialty Products, which sends goods like metallic abrasives and foundry sand additives… to customers around the world… Ronnie Robinson, chief supply chain officer at DSW parent company Designer Brands, normally routes about 20% of the company’s shoe imports through the East Coast. He shifted about half of those goods to the West Coast. And, he paid ten times more than a typical ocean transit to fly in a small shipment of leather boots and dress shoes from Brazil. ‘People are paying whatever they can to make sure they’re in the front of the queue,’ said Robinson, who added his company cannot risk late deliveries to clients…”
September 24 – Bloomberg (Julie Johnsson and Danny Lee):“Striking Boeing Co. workers ‘aren’t interested’ in the company’s sweetened 30% contract offer, their union said, elevating a stand-off between the parties. The International Association of Machinists and Aerospace Workers, which represents the 33,000 striking Boeing employees, said… a survey of members was ‘overwhelmingly clear’ in not being interested in the new offer, calling it ‘inadequate’ and ‘disrespectful.’”
September 27 – Wall Street Journal (Allison Pohle):“Sky-high hotel room rates are no longer just a New York or California problem. In 2019, 13% of reporting hotels in the top 25 U.S. markets charged an average daily rate of at least $200, according to… CoStar Group… In 2024, that figure is just over 20%. Price-conscious travelers feel the pinch. Hotels in Boston and Miami charged average nightly rates of $227 thus far this year, with rates in San Diego averaging $217, according to CoStar data. Hoteliers in New York City ask $276. Welcome to the new normal.”
Federal Reserve Watch:
September 24 – CNBC (Jeff Cox):“Federal Reserve Governor Michelle Bowman said… she thought her colleagues should have taken a more measured approach to last week’s half percentage point interest rate cut as she worries that inflation could reignite… In explaining her rationale, Bowman said the half percentage point, or 50 bps, reduction posed a number of risks to the Fed’s twin goals of achieving low inflation and full employment. The jumbo cut ‘could be interpreted as a premature declaration of victory on our price-stability mandate. Accomplishing our mission of returning to low and stable inflation at our 2% goal is necessary to foster a strong labor market and an economy that works for everyone in the longer term,’ she said…”
September 27 – Associated Press (Christopher Rugaber):“The president of the Federal Reserve’s Richmond branch says he supports reducing the central bank’s key interest rate ‘somewhat’ from its current level but isn’t yet ready for the Fed to fully take its foot off the economy’s brakes… Tom Barkin also said the economy is showing ‘impressive strength,’ highlighting recent solid reports on retail sales, unemployment claims, and growth in the April-June quarter, which reached a healthy 3%. ‘With inflation and unemployment being so close to normal levels, it’s okay to dial back the level of restraint, somewhat… I’m not yet ready to declare victory on inflation. And so I wouldn’t dial it back all the way.’”
September 23 – Bloomberg (Catarina Saraiva, Jonnelle Marte and Miranda Davis):“A handful of Federal Reserve officials on Monday left open the door to additional large interest-rate cuts, noting that current rates still weigh heavily on the US economy. ‘Over the next 12 months, we have a long way to come down to get the interest rate to something like neutral to try to hold the conditions where they are,’ Chicago Fed President Austan Goolsbee said…”
September 26 – Bloomberg (Alexandra Harris):“The US central bank is exploring adjustments to its liquidity framework, including requirements that would aim to protect uninsured depositors. The potential rule would seek to guard those deposits without having the government directly guarantee them, according to the Federal Reserve’s chief banking watchdog… Regulators are exploring a requirement that larger banks maintain a minimum amount of readily available liquidity with a ‘pool of reserves and pre-positioned collateral’ at the discount window, based on a fraction of their uninsured deposits, Michael Barr, the Fed’s vice chair for supervision, said…”
September 26 – Reuters (Michael S. Derby):“Michael Barr, the Federal Reserve’s point man on bank oversight, said… that banks should put aside worries about the stigma of using the U.S. central bank’s discount window liquidity facility and tap it when it makes sense for them. ‘We view using the discount window as a fully acceptable, normal part of any bank’s funding needs if it makes sense for them to use it from a financial perspective,’ Barr, the Fed’s vice chair for supervision, said… His comments indicated that usage of the discount window would not be seen as a sign that a bank had liquidity problems.”
September 22 – Financial Times (Stephen Gandel and Joshua Franklin):“US banks made a $1tn windfall from the Federal Reserve’s two-and-a-half-year era of high interest rates, an analysis of official data by the Financial Times has found. Lenders got higher yields for their deposits at the Fed but kept rates lower for many savers… The boost to the US’s more than 4,000 banks has helped pad out profit margins. While rates on some savings accounts were raised in line with the Fed’s target of more than 5%, the vast majority of depositors, especially those at the largest banks, such as JPMorgan Chase and Bank of America, got far less.”
U.S. Economic Bubble Watch:
September 26 – Associated Press (Paul Wiseman):“The American economy expanded at a healthy 3% annual pace from April through June, boosted by strong consumer spending and business investment…, leaving its previous estimate unchanged. The Commerce Department reported that the nation’s gross domestic product… picked up sharply in the second quarter from the tepid 1.6% annual rate in the first three months of the year.”
September 26 – Reuters (Lucia Mutikani):“The number of Americans filing new applications for unemployment benefits dropped to a four-month low last week… The upbeat outlook on the economy was underscored by other data on Thursday showing corporate profits increased at a more robust pace than initially thought in the second quarter… Initial claims for state unemployment benefits dropped 4,000 last week to a seasonally adjusted 218,000 for the week ended Sept. 21, the lowest level since mid-May…”
September 25 – Bloomberg (Spencer Soper):“Steep discounts and easing inflation will compel US shoppers to spend $240.8 billion online in November and December, up 8.4% from last year’s holiday shopping season and the biggest increase since 2021, according to Adobe Inc. The forecast signals a continued shift from physical stores to websites and mobile apps…”
September 25 – Reuters (Arriana McLymore):“U.S. shoppers are expected to spend a record $18.5 billion using third-party buy now, pay later (BNPL) services for holiday purchases in the last quarter of the year, according to projections by… Adobe Analytics… With many Americans recently carrying more debt, spending on buy now, pay later services is set to increase by 11.4% over the holiday season a year ago, Adobe said. BNPL services let shoppers expand their purchasing power by paying for merchandise in monthly installments spread out over as many as 36 months; however, the most common payments are four-installment plans. The expected jump in spending using BNPL exceeds the projected 8.4% increase in overall spending in the upcoming holiday shopping period…”
September 27 – Reuters (Lucia Mutikani):“U.S. consumer spending increased moderately in August, suggesting the economy retained some of its solid momentum in the third quarter… Consumer spending… 0.2% last month after an unrevised 0.5% gain in July… Consumer spending continues to be supported by still-solid wage gains even as the labor market has slowed considerably. Annual revisions to national accounts data… showed stronger wages and salaries growth in the second quarter than had been previously estimated.”
September 26 – Reuters:“U.S. mortgage rates edged down to a two-year low this week, which could provide a further boost to refinancing activity, though many potential home buyers remain on the sidelines. The average rate on the popular 30-year fixed-rate mortgage dipped to 6.08% from 6.09% last week, the lowest level since September 2022… It averaged 7.31% during the same period a year ago.”
September 25 – CNBC (Diana Olick):“A steady decline in mortgage rates to two-year lows has current homeowners rushing to take advantage of potential savings. Applications to refinance a home loan surged 20% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Demand was a stunning 175% higher than the same week one year ago… Mortgage applications to purchase a home rose just 1% for the week and were 2% higher than the same week one year ago.”
September 25 – Reuters (Lucia Mutikani):“Sales of new U.S. single-family homes fell less than expected in August and could regain momentum in the months ahead as declining mortgage rates and house prices stimulate demand… New home sales were higher than previously estimated in the prior three months. New home sales decreased 4.7% to a seasonally adjusted annual rate of 716,000 units last month… The sales pace for July was revised higher to 751,000 units… The inventory of new homes increased in August to 467,000, rising back to levels last seen in early 2008, from 459,000 units in July. About 55.7% of the inventory was made up of houses under construction.”
September 24 – Reuters (Lucia Mutikani):“U.S. single-family home prices edged up in July, but the overall trend is slowing amid improving supply, which together with easing mortgage rates could make buying a house more affordable. House prices gained 0.1% on a month-on-month basis after being unchanged in June, the Federal Housing Finance Agency said… They increased 4.5% in the 12 months through July…”
September 26 – Bloomberg (Lucia Mutikani):“New orders for key U.S.-manufactured capital goods unexpectedly rose in August, though business spending on equipment appears to have lost momentum in the third quarter. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 0.2% last month after a downwardly revised 0.2% drop in July…”
September 24 – CNBC (Jeff Cox):“Consumers’ view on the economy tumbled in September, falling by the largest level in more than three years as fears grew about jobs and business conditions, the Conference Board reported… The board’s consumer confidence index slid to 98.7, down from 105.6 in August, the biggest one-month decline since August 2021… ‘Consumers’ assessments of current business conditions turned negative while views of the current labor market situation softened further. Consumers were also more pessimistic about future labor market conditions and less positive about future business conditions and future income,’ said Dana Peterson, chief economist at The Conference Board.”
China Watch:
September 26 – Reuters (Ellen Zhang and Marius Zaharia):“Chinese leaders pledged on Thursday to deploy ‘necessary fiscal spending’ to meet this year’s economic growth target of roughly 5%, acknowledging new problems and raising market expectations for fresh stimulus on top of measures announced this week. The remarks, which included guidance to the government to support household consumption and stabilise the troubled real estate market, came in an official readout of a monthly meeting of top Communist Party officials… The September meeting is not usually a forum for macroeconomic discussions, which suggests growing anxiety over slowing growth momentum.”
September 24 – Financial Times (Arjun Neil Alim and Joe Leahy):“Chinese markets have given a short-term welcome to an ‘unprecedented’ toolbox promised by Beijing to stabilise capital markets and revive animal spirits, but the bigger concern is whether the measures will be enough to stimulate the faltering real economy. The People’s Bank of China… unveiled an Rmb800bn ($114bn) war chest to boost the stock market by lending to asset managers, insurers and brokers to buy equities, and to listed companies to buy back their stock. This was the first time the PBoC had ‘innovated’ and used these types of monetary policy tools to support capital markets, central bank governor Pan Gongsheng said…”
September 24 – Bloomberg:“China’s central bank unveiled a broad package of monetary stimulus measures to revive the world’s second-largest economy, underscoring mounting alarm within Xi Jinping’s government over slowing growth and depressed investor confidence. People’s Bank of China governor Pan Gongsheng cut a key short-term interest rate and announced plans to reduce the amount of money banks must hold in reserve to the lowest level since at least 2018… Those moves were followed by a slew of other announcements that fueled gains in China’s beleaguered equity market. The central bank chief also unveiled a package to shore up the nation’s troubled property sector, including lowering borrowing costs on as much as $5.3 trillion in mortgages and easing rules for second-home purchases.”
September 25 – Bloomberg:“China’s pledge of up to $340 billion to boost its ailing equities is invoking parallels with past efforts at home and in Japan that largely faltered in lifting the economy after an initial burst of enthusiasm. The massive support is part of a broader stimulus package unveiled by People’s Bank of China Governor Pan Gongsheng and other top officials Tuesday. The goal is to reverse a drain on household wealth and prime an economy suffering a years-long housing crisis and mired in deflation and weak demand. Going by the experience in Japan… that will be a tall order. ‘China’s easing steps may have some short-term impact, but they’ll only help buy time,’ said Shigeto Nagai, head of Japan research at Oxford Economics and former chief of the Bank of Japan’s international department.”
September 23 – Bloomberg:“China is planning to recapitalize its biggest commercial lenders for the first time in more than a decade, in a bid to strengthen the industry battling with record low margins, sinking profits and rising bad debt. At a rare press conference…, authorities flagged they will increase the core tier 1 capital at its six major commercial banks… ‘Capital will be injected to different banks in turns and with different policies,’ said Li Yunze, minister of the National Financial Regulatory Administration… The regulator will urge big banks to enhance capital management capabilities and strengthen operations to better serve as a driving force for the real economy, he said.”
September 25 – Bloomberg:“China is considering injecting up to 1 trillion yuan ($142bn) of capital into its biggest state banks to increase their capacity to support the struggling economy, according to people familiar… The funding will mainly come from the issuance of new special sovereign bonds… The details have yet to be finalized and are subject to change, the people added. Such a move would be the first time since the global financial crisis in 2008 that Beijing has injected capital into its big banks.”
September 24 – Bloomberg:“China said it will allow institutional investors to tap central bank financing for stock purchases and is weighing plans for a market stabilization fund, sparking the biggest rally since 2020 for the nation’s beaten-down equities. The People’s Bank of China will set up a swap facility allowing securities firms, funds and insurance companies to tap liquidity from the central bank to purchase equities, Governor Pan Gongsheng said… There are also plans to set up a specialized re-lending facility for listed companies and major shareholders to buy back shares and raise holdings. The moves will unleash at least 800 billion yuan ($113bn) of initial liquidity support…”
September 26 – Reuters:“China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43bn) this year as part of a fresh fiscal stimulus, said two sources…, adding to a string of measures to battle strong deflationary pressures and faltering economic growth. As part of the package, the Ministry of Finance (MOF) plans to issue 1 trillion yuan of special sovereign debt primarily to stimulate consumption amid growing concerns about a stuttering post-COVID economic recovery, said the sources.”
September 25 – Bloomberg:“China said it will give one-off cash handouts to people in extreme poverty before Tuesday, in a rare announcement of direct aid just a day after unveiling a sweeping program to stimulate the world’s second-largest economy. The Ministry of Finance and Ministry of Civil Affairs will issue living subsidies to disadvantaged groups… While the amount is unknown, the deployment of one-time handouts within such a short period of time appears to be a departure for a government that has long eschewed what President Xi Jinping calls welfarism.”
September 24 – Reuters:“China’s central bank lowered the cost of its medium-term loans to banks on Wednesday in a move consistent with broad policy easing measures announced a day earlier to shore up a flailing economy. The People’s Bank of China (PBOC) said it cut the rate on 300 billion yuan ($42.66bn) worth of one-year medium-term lending facility (MLF) loans to some financial institutions to 2.00% from 2.30%.”
September 24 – Bloomberg (Hallie Gu):“China’s policymakers may be doing their utmost to shake off deflationary pressures weighing on much of Asia’s largest economy, but there’s one category of products that stands out as a contrast: vegetables. The prices of fresh produce from cabbages to cucumbers — items integral to the diets of millions across the country — have surged on a combination of disruptive weather and roiled logistics… While rising vegetable costs may buoy an otherwise pressured consumer price index, they run the risk of restraining household spending on other items, and acting as a brake on China’s recovery.”
September 23 – CNBC (Lee Ying Shan):“China’s youth unemployment rate in August rose to the highest level since the new system of record-keeping began in December… The jobless rate for people in China ages 16 to 24, and not in school, rose to 18.8% last month… That’s up from 17.1% in July, and 13.2% in June. China’s urban unemployment rate across all age categories rose 5.3% in August, compared to a 5.2% rise in July.”
September 23 – Financial Times (Kai Waluszewski):“In the classroom of a mandatory four-hour propaganda class at a Chinese university, morale is low. A quarter of the students are sleeping and around half are busy with other coursework. The rest look bored. The reality on campus contradicts President Xi Jinping’s view of the importance of sizheng or ‘political education courses’. Taught in Chinese schools and universities since the early 1990s, sizheng classes aim to reinforce student loyalty to the Communist party. Under Xi, they have increasingly emphasised national security and the president’s own philosophy.”
September 22 – Bloomberg:“China’s steel crisis is setting the stage for a wave of bankruptcies and speeding a much-needed consolidation of the industry, according to Bloomberg Intelligence. Almost three-quarters of the country’s steelmakers suffered losses in the first half and bankruptcy is likely for many of them, Michelle Leung, a senior analyst at BI, said… China’s persistent property crisis and flagging economic growth are reshaping the country’s massive steel industry, with the head of its biggest producer, China Baowu Steel Group Corp., warning last month of a crisis worse than in 2008 and 2015.”
September 23 – Bloomberg (Danny Lee):“Car dealerships across China are facing losses of almost $20 billion as consumers hold off on making major purchases and vehicles pile up in sales lots. The country’s car retailers are experiencing ‘extremely intense liquidity’ and looking at losses of about 138 billion yuan ($19.6bn) for the first eight months of 2024 alone, the China Automobile Dealers Association said… It called on the government to more closely monitor the financial risks faced by dealerships given the widespread problems in the sector and offer more financial support.”
September 26 – Reuters (Qiaoyi Li and Ryan Woo):“China’s industrial profits swung back to a sharp contraction in August for their biggest decline this year…, adding to a recent spate of bleak business readings that point to mounting pressure on the economy. Profits plunged 17.8% in August from a year earlier following a 4.1% increase in July…”
September 24 – Telegraph (Pui-Guan Man and Tim Wallace):“A leading economist in China has vanished from public view after allegedly criticising Xi Jinping’s handling of the country’s economy on a mobile messaging app.Questions over Zhu Hengpeng’s whereabouts have arisen after he was detained by officials in spring and stripped of his role as deputy director at a prominent Chinese think tank.”
September 25 – Bloomberg (Suvashree Ghosh):“China’s over-the-counter cryptocurrency brokers are attracting unprecedented inflows, a study shows, reflecting a hunger for alternative investments amid weak equity and property markets in a struggling economy. The inflows topped $20 billion in each of the three quarters through June… for a cumulative total of $75.4 billion over the nine-month span, according to… Chainalysis Inc. The figures add to evidence of ongoing Chinese crypto demand despite Beijing’s three-year-old ban on digital-asset trading over risks such as currency outflows and money laundering.”
Europe Watch:
September 24 – Reuters (Jan Strupczewski):“Concerns are growing among France’s European Union partners and on financial markets that the fragility of its minority government could weaken efforts to shore up its public finances and so risk undermining the EU’s new fiscal rules. France unveiled a new government on Saturday, led by Prime Minister Michel Barnier, which will have to rely on the far-right National Rally in key votes like the 2025 budget or the seven-year debt reduction plan required by EU rules. Both the far-right and the far-left – each with around one third of the seats in parliament – oppose spending cuts, even as France’s budget deficit is set to rise to around 6% of GDP this year, twice the EU limit.”
September 23 – Reuters (Jonathan Cable):“Euro zone business activity contracted sharply and unexpectedly this month as the bloc’s dominant services industry flatlined while a downturn in manufacturing accelerated, a survey showed… The downturn appeared broadbased with Germany, Europe’s largest economy, seeing its decline deepen while France… returned to contraction following August’s Olympics boost… HCOB’s preliminary composite euro zone Purchasing Managers’ Index (PMI)… sank to 48.9 this month from August’s 51.0…”
Japan Watch:
September 26 – Bloomberg (Alastair Gale and Yuki Hagiwara):“Japan’s ruling party picked Shigeru Ishiba as its next leader, positioning an advocate of an ‘Asian NATO’ to become prime minister in a surprise result that jolted the yen. Ishiba, a 67-year-old party veteran who has served in several senior roles including defense minister, favors ramping up security arrangements in the region, an idea that risks further inflaming tensions with China. ‘What do we mean by an Asian NATO? The essence of collective security becomes obligatory,’ he said during a post-victory press conference. ‘The right of collective self-defense is, as the word indicates, a right.’”
September 24 – Bloomberg (Toru Fujioka):“Governor Kazuo Ueda reinforced his message that while the Bank of Japan will raise its key interest rate again if data allow, authorities won’t be in a hurry to do so, in remarks that indicate little chance of a move at next month’s meeting. ‘In making policy decisions, the bank will need to carefully assess factors such as developments in financial and capital markets at home and abroad, and the situation in overseas economies underlying these developments,’ Ueda said… ‘We have enough time to do so.’”
September 25 – Reuters (Leika Kihara):“Bank of Japan policymakers were divided on how quickly the central bank should raise interest rates further, minutes of the bank’s July meeting showed, highlighting uncertainty on the timing of the next increase in borrowing costs. At the July meeting, the BOJ unexpectedly raised short-term interest rates to 0.25% by a 7-2 vote, taking another step towards phasing out a decade of huge stimulus.”
September 24 – Reuters (Leika Kihara):“A leading indicator of Japan’s service-sector inflation held steady at 2.7% in August…, underscoring the central bank’s view that rising wages are prodding more firms to pass on higher labour costs through price hikes. Service-sector inflation is being closely watched by the Bank of Japan for clues on whether demand-driven price gains are broadening enough to justify raising interest rates further.”
Emerging Market Watch:
September 26 – Reuters (Hernan Nessi and Sarah Morland):“Argentina’s poverty rate rocketed to 52.9% in the first half of 2024, the government’s INDEC statistics agency said…, surging from 40.1% a year earlier. For the second half of last year, INDEC had reported a rate of 41.7%.”
Leveraged Speculation Watch:
September 24 – Reuters (Nell Mackenzie):“The largest players now make up about three-quarters of the hedge fund industry, as the likes of multi-strategy firms have taken up the lion’s share of the business, said a Bank of America report… Hedge funds that manage more than $5 billion in assets grew their industry share to 73% by the end of the second quarter of 2024, up from 65% in 2018…”
September 24 – Financial Times (Cheng Leng and Arjun Neil Alim):“Foreign investors including hedge funds, banks and wealthy families have piled into a $130bn carry trade that takes the other side of China’s attempt to support its currency. It works like this. First, foreign investors lend US dollars to Chinese counterparties via currency swaps, receiving the equivalent in renminbi. They can usually earn a positive carry from the difference between the current exchange rate and the one year forward exchange rate, when the swap is unwound. Then they use the RMB to buy interbank negotiable certificates of deposit – a type of short-dated government note. The combined yield from loaning the dollars and investing in bonds in a one year tenor can be up to 6%, easily beating the sub-4% yield available on a US treasury bond.”
Social, Political, Environmental, Cybersecurity Instability Watch:
September 25 – Wall Street Journal (Sarah Krouse, Robert McMillan and Dustin Volz):“Hackers linked to the Chinese government have broken into a handful of U.S. internet-service providers in recent months in pursuit of sensitive information… The hacking campaign, called Salt Typhoon by investigators… is the latest in a series of incursions that U.S. investigators have linked to China in recent years. The intrusion is a sign of the stealthy success Beijing’s massive digital army of cyberspies has had breaking into valuable computer networks in the U.S. and around the globe… In this type of intrusion, bad actors aim to establish a foothold within the infrastructure of cable and broadband providers that would allow them to access data stored by telecommunications companies or launch a damaging cyberattack.”
September 26 – Wall Street Journal (Heather Gillers):“Extreme weather is pressuring local budgets, sticking Americans with the bill and putting the $4 trillion market for state and local bonds at the center of the climate-change fight. Clyde, Texas, will likely face increased borrowing costs after the city defaulted on debt last month during a drought. Higher parking fees at the beach in Naples, Fla., are helping repay bonds sold to rebuild the city’s hurricane-damaged pier. Residents of Texas, Louisiana and Oklahoma will spend the next two decades chipping away at the multibillion-dollar cost of maintaining power during a 2021 winter storm…. The market for municipal bonds has become a testing ground for the increasing demands that heat, water and wind are putting on local communities. Investors fret that volatile, damaging weather patterns in coming years will punish critical infrastructure and imperil the nation’s roads and bridges, sewers and energy grids, coasts and forestlands.”
Geopolitical Watch:
September 22 – Associated Press (Edith M. Lederer):“Facing a swirl of conflicts and crises across a fragmented world, leaders attending this week’s annual U.N. gathering are being challenged: Work together — not only on front-burner issues but on modernizing the international institutions born after World War II so they can tackle the threats and problems of the future. U.N. Secretary-General Antonio Guterres issued the challenge a year ago after sounding a global alarm about the survival of humanity and the planet: Come to a ‘Summit of the Future’ and make a new commitment to multilateralism… and start fixing the aging global architecture to meet the rapidly changing world. The U.N. chief told reporters… that the summit ‘was born out of a cold, hard fact: international challenges are moving faster than our ability to solve them.’ He pointed to ‘out-of-control geopolitical divisions’ and ‘runaway’ conflicts, climate change, inequalities, debt and new technologies like artificial intelligence which have no guardrails.”
September 23 – Wall Street Journal (Chieko Tsuneoka):“Japanese jet fighters fired warning flares at a Russian military reconnaissance plane that violated Japan’s airspace on Monday, the first time Tokyo has taken such an aggressive stance against incursions of its airspace mostly carried out by Moscow. A Russian IL-38 patrol plane entered Japanese airspace three times between 1 p.m. and 4 p.m. local time… Tokyo has lodged an ‘extremely stern protest’ with Moscow for the violation, Hayashi added.”
September 24 – Yahoo Finance (David Hollerith):“JPMorgan… CEO Jamie Dimon once again cited global instability as his chief concern and named it as one of the reasons why inflation may not yet be under control, saying that ‘geopolitics is getting worse.’ ‘My caution is all geopolitics, which may determine the state of the economy,’ Dimon said… Geopolitics are ‘getting worse, they are not getting better,’ he added, pointing to recent attacks by Yemen’s Houthi rebels in the Red Sea. ‘There’s chance for accidents in the energy supply chain. God knows if other countries get involved. You have a lot of war taking place right now.’”More By This Author:Weekly Commentary: Fed Goes Big
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