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Friday from Bloomberg: “US Stocks Rise After ‘Major Overreaction” to Fed.” There was certainly more to Wednesday’s steep market selloff than a meaningfully more hawkish Fed statement and Powell press conference. Welcome to Washington dysfunction on steroids meets global market dysfunction.
The Musk/Trump memes are entertaining, leaving some of us curious how they’re playing in Mar-a-Lago. Musk’s antics are less amusing. Are we okay with the world’s richest person torpedoing last-minute bipartisan legislation to keep the government operating, using the threat of his well-funded PAC and being “primaried” against Republican (and Democrat) lawmakers that refuse to fall in line?
Not even enduring to next month’s inauguration, the election honeymoon period was abruptly cut short by a few tweets. Many cheer on Musk and the disruption agenda. Euphoric markets have reveled in the notion of disruption. But the actual variety comes with major uncertainties – uncertainty that only compounds already highly elevated risks in today’s extraordinary economic, political, geopolitical and market environments.
Elon and President Trump will not appreciate that the Powell Fed has now embarked on a “new phase,” only weeks ahead of disruption city.
December 17 – New York Times (Jeanna Smialek and Ana Swanson): “If you ask many a Wall Street investor, tax cuts are poised for extension, deregulation is all but guaranteed, immigration reform for high-skill workers has real potential and President-elect Donald J. Trump’s Department of Government Efficiency (DOGE) might just cut the deficit. Tariffs, by contrast, are a mere bargaining chip. Immigrant expulsions will probably be limited, and there is no way on earth that the incoming White House would meddle with the independent Federal Reserve. Hope has been riding high in financial markets and corporate boardrooms in the month-and-change since the presidential election. But it is often predicated on a bet: Many of the optimists are choosing to believe that the Trump promises they want to see fulfilled are going to become reality, while dismissing those they think would be bad for the economy as mere posturing.”
As we’ve witnessed for a while, exuberant markets are all too happy to ignore myriad risks. “‘The Fed Made A Concession To Reality’ – Goldman Top Trader Frames The Chaos This Week” – read a captivating headline. Markets were a lot happier with the pre-concession Fed, with officials determined to ignore extraordinarily loose financial conditions, economic resilience, and booming markets – while arguing “significantly restrictive.”
With Fed credibility hanging in the balance, Powell had to come clean: “Downside risks to the labor market do appear to have diminished.” “12-month inflation has actually been moving sideways.” “Inflation has once again underperformed relative to expectations.” “We are at or near a point at which it will be appropriate to slow the pace of further adjustments.” “As for additional cuts, we’re going to be looking for further progress on inflation.” “And as long as the economy and the labor market are solid, we can be cautious about, as we consider further cuts.” “It’s a new phase and we’re going to be cautious about further cuts.”
Two weeks after Fed Governor Christopher Waller’s “I believe the evidence is strong that policy continues to be significantly restrictive,” Powell made a significant change in the use of “significantly.” “Now significantly less restrictive.” “We’re significantly closer to neutral.” To emphasize the point, he repeated “meaningfully restrictive” three times. “We are though in a new phase in the process.”
It went beyond a crafty pivot back to “balanced Powell.” The Fed Chair was compelled to reflect the significant shift in committee thinking – that was evident in upgrades to inflation, growth, and policy rate forecasts in the Fed’s Summary of Economic Projections (SEP).
But what might be behind such an abrupt deviation? A few disappointing inflation reports? Some stronger economic data, including a post-election boost in confidence? Have bubbling markets – stocks and crypto for starters – finally become a Fed worry? Have Federal Reserve officials come to appreciate risks associated with excessively loose financial conditions? Is it becoming clearer to the Committee that the Trump agenda seeks to aggressively stimulate market and economic booms?
A few hours before the Fed’s policy statement, the Bureau of Economic Analysis released data that was deemed quite important early in my career – that these days barely generates a headline.
December 18 – Reuters (Lucia Mutikani): “The U.S. current account deficit widened to a record high in the third quarter on strong growth in imports and lower income receipts, with some economists warning of a potential threat to a country already saddled with a large government budget deficit. The… current account deficit, which measures the flow of goods, services and investments into and out of the country, increased $35.9 billion, or 13.1%, to an all-time high of $310.9 billion last quarter. Economists… had forecast the current account deficit would be $284.0 billion. The current account gap represented 4.2% of gross domestic product…”
When the Current Account Deficit surged to an annual record $161 billion in 1987, it was generally recognized that the “twin deficits” (fiscal and trade) contributed to financial, market, and economic instability. By the time it had ballooned to $817 billion in 2006 – while the system was in the throes of mortgage finance Bubble excess – the Fed and Wall Street could not have cared less.
For generations, adept economic thinkers recognized that a nation’s Current Account was an invaluable indicator of financial conditions and the appropriateness of monetary policy. A large deficit reflected loose conditions and resulting spending excesses. What’s more, expanding trade and Current Account deficits were viewed as portending policy tightening measures, in this way providing somewhat of an automatic system stabilizer function. The travesty of scuttling the Current Account from important Fed (hence Wall Street) considerations came with the embrace of the radical doctrine of Ben Bernanke inflationism. Dollar Bubble liquidity has since inundated the world.
When I contemplate the degradation of Current Account analysis, my thoughts gravitate to Hyman Minsky’s “stability is de-stabilizing.” Current Account Deficit ballooning was not coincidental with the 1987 stock market crash or the 2008 crisis. Moreover, serial nineties EM crises (i.e., Mexico ’95, SE Asia ’97, Russia/LTCM ’98) were the consequence of U.S. Current Account Deficit-induced global liquidity and speculation boom and bust dynamics.
Like much within finance over this super-cycle, invariably the wrong lessons were learned. Rather than the battered EM universe recognizing the critical role loose U.S. conditions and Current Account Deficits had played in their Bubble collapses, they doubled down on the dysfunctional global financial structure. Countries believed that larger holdings of international dollar reserves would buttress their currencies and safeguard their systems from devastating “hot money” exodus – and resulting currency and bond market collapses. Accommodating massive U.S. deficits has for years now seemingly promoted “stability.”
December 20 – Bloomberg (Giovanna Bellotti Azevedo, Leda Alvim and Maria Elena Vizcaino): “Brazilian markets bounced at the end of the week amid extraordinary central bank moves to curb a selloff in the currency that was spreading across the nation’s markets. The real gained as much as 1.4% on Friday, briefly erasing weekly losses, after policymakers stepped in again with both a spot sale and a credit line auction totaling a combined $7 billion… The reprieve comes after the central bank stepped in almost every day for the past week to try to meet a surge in demand for US dollars. It sold $8 billion in back-to-back spot auctions on Thursday alone in the biggest daily sale of greenbacks since at least 1999. They’ve spent about $17 billion in spot sales so far.”
While Wall Street was fixated Wednesday on the Fed statement, Powell presser, and Elon tweets – crisis dynamics were engulfing Brazilian markets. Brazil’s real (currency) was hammered 3% in Wednesday trading, as the country’s bonds came under heavy selling pressure. Brazil’s 10-year local currency yields spiked to 15.62% in chaotic Wednesday trading, up 113 bps from Tuesday’s close and 138 bps from the previous week. Dollar-denominated yields jumped as high as 7.15% – up 36 bps on the session and 65 bps from the previous Friday close. Brazil sovereign CDS spiked 31 Wednesday to a 19-month high 221 bps.
Things had settled down somewhat by the end of the week, with Friday’s 0.9% gain reducing the real’s weekly decline to 0.5%. Local currency yields sank 76 bps Thursday and Friday to end the week little changed, with dollar yields dropping 14 bps Friday to end the week 52 bps higher.
The good news: Brazil reports international reserves of $347 billion, up significantly from the $200 billion back during the 2008 crisis and the $50 billion during the country’s 2000 currency and financial crisis. The bad news: the surge in currency reserves corresponded with a huge increase in speculative “hot money” inflows – likely much of it of the levered “carry trade” variety. Moreover, Brazil’s central bank – like many of its EM brethren – has become a big player in currency derivatives, preferring to bolster its currency through derivatives trading rather than burning through currency reserves. Works until it doesn’t. As the above Bloomberg article noted, a quick $17 billion was burned through to stabilize the real.
The VIX spiked to 28.32 in late Wednesday trading, the high since the now long-forgotten August 5th bout of global market (fledgling de-leveraging) instability. Wednesday’s currency trading was the most chaotic since August 5th. Curiously, disorderly yen strength was behind August 5th instability, while the yen declined 1.7% this week to the weakest level versus the dollar since July. August 5th instability was quickly quelled by dovish comments from a key Bank of Japan official, soon followed by a dovish Powell in Jackson Hole. I don’t expect this week’s instability to prove so transitory.
December 20 – Bloomberg (Marcus Wong and Prima Wirayani): “From Brazil to South Korea, emerging-market central banks are forming a line of defense as a rising dollar pushes their currencies to multi-year lows. Bangko Sentral ng Pilipinas is watching the peso’s drop closely and has stepped up intervention in the currency market, Governor Eli Remolona said Friday. Brazil’s central bank has spent almost $14 billion in the past week to support the real while Bank Indonesia vowed to guard the rupiah ‘boldly’ to build market confidence. In Europe, Hungary’s central bank joined the trend, raising the interest rate on its foreign-currency swap tender to calm markets. Authorities in developing economies are on the defensive as the greenback’s strength wreaks havoc across global markets…”
I still view August 5th as the initial ruction of unavoidable global de-risking/deleveraging. Policymakers quickly reversed “risk off” and triggered a major cross-market short squeeze and reversal of hedges. Aggressive Fed easing exacerbated already excessively loose financial conditions, stoking a speculative melt-up that was then given a further shot of adrenaline on November 5th.
Wednesday was telling. Even in the face of “risk off” Brazil/EM currency instability and spiking EM/global yields, typical safe haven Treasury demand was MIA. Ten-year Treasury yields jumped 12 bps points to the highest level (4.52%) since the late-May spike. It appeared the dreadful de-leveraging “doom loop” was taking hold – disorderly currency weakness forcing EM central banks into international reserve (chiefly Treasuries) liquidations to fund currency market intervention.
The specter of aggressive central bank liquidations then pressures various leveraged trades in Treasuries, MBS, corporate bonds, Munis, and such – triggering Treasury deleveraging and hedging-related selling. Interestingly, the 2-year/10-year Treasury spread widened a notable nine bps Wednesday to the widest level since June 2022. Levered yield-curve trades were under pressure, along with most levered strategies. With equities slammed and Treasuries and commodities under pressure, levered “risk parity” strategies must have suffered a rotten session and week.
From my perspective, this week likely concludes the post-August 5th “risk on” recovery and speculative melt-up. Year-end trading dynamics add a layer of complexity, raising the possibility of a rally and year-end markup – or intense hedge fund selling to protect fading 2024 gains (and payouts). Especially in this highly speculative environment, market squeezes can erupt at any time. But it appears that there is elevated risk that de-risking/deleveraging gains momentum from here. And with inflation and growth elevated even before Team Trump takes the world by storm, euphoric markets, all dressed up for a fun Fed easing cycle party, now face the reality of a divided and more hawkish Federal Reserve.
For the Week:
The S&P500 dropped 2.0% (up 24.3% y-t-d), and the Dow lost 2.3% (up 13.7%). The Utilities declined 1.6% (up 17.2%). The Banks slumped 3.4% (up 32.5%), and the Broker/Dealers dropped 3.6% (up 43.5%). The Transports sank 4.9% (unchanged). The S&P 400 Midcaps slumped 4.7% (up 12.3%), and the small cap Russell 2000 dropped 4.5% (up 10.6%). The Nasdaq100 lost 2.3% (up 26.5%). The Semiconductors sank 3.6% (up 18.9%). The Biotechs fell 2.5% (up 5.7%). With bullion down $25, the HUI gold index sank 6.0% (up 15.1%).
Three-month Treasury bill rates ended the week at 4.215%. Two-year government yields gained seven bps to 4.31% (up 6bps y-t-d). Five-year T-note yields rose 13 bps to 4.38% (up 53bps). Ten-year Treasury yields jumped 13 bps to 4.52% (up 64bps). Long bond yields gained 12 bps to 4.72% (up 69bps). Benchmark Fannie Mae MBS yields rose 12 bps to 5.82% (up 54bps).
Italian 10-year yields increased five bps to 3.45% (up 26bps y-t-d). Greek 10-year yields rose six bps to 3.13% (up 8bps). Spain’s 10-year yields increased five bps to 2.98% (down 2bps). German bund yields increased three bps to 2.29% (up 26bps). French yields added four bps to 3.08% (up 52bps). The French to German 10-year bond spread widened one to 79 bps. U.K. 10-year gilt yields jumped 10 bps to 4.51% (up 97bps). U.K.’s FTSE equities index dropped 2.6% (up 4.5% y-t-d).
Japan’s Nikkei 225 Equities Index fell 1.9% (up 15.7% y-t-d). Japanese 10-year “JGB” yields added two bps to 1.06% (up 45bps y-t-d). France’s CAC40 lost 1.8% (down 3.6%). The German DAX equities index slumped 2.6% (up 18.7%). Spain’s IBEX 35 equities index fell 2.4% (up 13.5%). Italy’s FTSE MIB index sank 3.2% (up 11.3%). EM equities were under pressure. Brazil’s Bovespa index dropped 2.0% (down 9.0%), and Mexico’s Bolsa index was hit 3.9% (down 13.6%). South Korea’s Kospi slumped 3.6% (down 9.5%). India’s Sensex equities index sank 5.0% (up 8.0%). China’s Shanghai Exchange Index declined 0.7% (up 13.2%). Turkey’s Borsa Istanbul National 100 index fell 4.0% (up 30.2%).
Federal Reserve Credit declined $2.8 billion last week to $6.853 TN. Fed Credit was down $2.037 TN from the June 22, 2022, peak. Over the past 275 weeks, Fed Credit expanded $3.126 TN, or 84%. Fed Credit inflated $4.042 TN, or 144%, over the past 632 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $6.6 billion last week to $3.303 TN. “Custody holdings” were down $84 billion y-o-y, or 2.5%.
Total money market fund assets declined $19.6 billion to $6.751 TN. Money funds were up $617 billion over 20 weeks (26% annualized) and $865 billion y-t-d (15.0% ann.).
Total Commercial Paper was little changed at $1.157 TN. CP was down $106 billion, or 8.4%, over the past year.
Freddie Mac 30-year fixed mortgage rates jumped 12 bps this week to 6.72% (down 23bps y-o-y). Fifteen-year rates rose eight bps to 5.92% (up 1bp). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 11 bps to 7.26% (up 11bps).
Currency Watch:
December 19 – Bloomberg (Martha Beck, Vinícius Andrade, Maria Eloisa Capurro and Leda Alvim): “As the currency craters in Brazil, thrusting the country’s markets into the international spotlight for the first time in years, a grim reality is setting in for top economic aides to President Luiz Inacio Lula da Silva. They are, they fear, powerless to do much to stop the panic… The central bank has ramped up intervention in currency markets to try to stem the losses amid what Governor Roberto Campos Neto called an ‘atypical’ outflow. It has stepped in either directly or through swaps almost every day for the past week, spending close to $14 billion to give some support to the real… On Thursday alone it sold $8 billion in back-to-back spot auctions — that’s the biggest daily sale of dollars since at least 1999, when Brazil adopted a floating exchange rate regime…”
December 18 – Bloomberg (Neha D’silva and Iris Ouyang): “China ramped up support for its currency via the daily reference rate after the Federal Reserve’s caution over future interest rate cuts boosted the dollar and sent the offshore yuan to a one-year low. The People’s Bank of China set the so-called fixing at the strongest bias since July versus the average estimate in a Bloomberg survey on Thursday. That sent the offshore yuan 0.2% higher.”
December 18 – Reuters (Jihoon Lee and Yena Park): “The South Korean won dropped to its weakest level in 15 years on Thursday, weighed down by risk-averse sentiment after the U.S. Federal Reserve’s cautious stance on more interest rate cuts, as well as domestic political uncertainty.”
For the week, the U.S. Dollar Index added 0.6% to 107.621 (up 6.2% y-t-d). For the week on the upside, the Mexican peso increased 0.3%. On the downside, the South African rand declined 2.4%, the New Zealand dollar 1.9%, the Australian dollar 1.7%, the Japanese yen 1.7%, the Norwegian krone 1.6%, the Canadian dollar 0.9%, the South Korean won 0.8%, the euro 0.7%, the Singapore dollar 0.5%, the Brazilian real 0.5%, the Swedish krona 0.5%, the British pound 0.4%, and the Swiss franc 0.1%. The Chinese (onshore) renminbi declined 0.30% versus the dollar (down 2.68% y-t-d).
Commodities Watch:
December 18 – Bloomberg (Mumbi Gitau and Ilena Peng): “Cocoa futures climbed above $12,000 a ton in New York, reaching a fresh record amid mounting worries over reduced output in top grower Ivory Coast. The most-active contract rose as much as 7.4% to $12,636 a ton… The surge in prices — New York futures have tripled this year — has also pushed companies out of the market…”
The Bloomberg Commodities Index declined 1.1% (down 1.1% y-t-d). Spot Gold slipped 1.0% to $2,623 (up 27.1%). Silver dropped 3.4% to $29.5195 (up 24.1%). WTI crude slumped $1.83, or 2.6%, to $69.46 (down 3%). Gasoline lost 3.0% (down 8%), while Natural Gas surged 14.3% to $3.748 (up 49%). Copper fell 2.3% (up 5%). Wheat sank 3.5% (down 15%), while Corn gained 1.0% (down 5%). Bitcoin sank $4,150, or 4.1%, to $97,635 (up 130%).
Trump Administration Watch:
December 19 – Wall Street Journal (Ken Thomas): “With a 4:15 a.m… post on Wednesday, Elon Musk declared that a must-do spending bill ‘should not pass.’ By early evening, the bill was dead, leaving the government barreling toward a weekend shutdown just before Christmas. Lawmakers who might have underestimated Musk’s ability to shake up Washington were suddenly having second thoughts. Over the course of Wednesday, Musk pressed for Congress to kill the bill. He encouraged his more than 200 million followers on X… to call their representatives to vote against it, and he warned that Republicans who voted for it should lose their congressional seats in two years. He also said Congress shouldn’t pass any more legislation until President-elect Donald Trump takes office, which would ensure a partial government shutdown until Jan. 20.”
December 19 – Axios (Mike Allen and Jim VandeHei): “Elon Musk is arguably the most powerful person in business, the most powerful man in media and, at least at this moment, the most powerful man in politics. This much power, across this many pillars of society, is without precedent. Musk yesterday single-handedly… sank a 1,547-page, bipartisan House spending bill aimed at preventing a government shutdown at 12:01 a.m. Saturday. It’s a breathtaking preview of the new power centers that will rewire Washington… A Trump source told us this is the new playbook: Republican lawmakers got ‘instant and overwhelming feedback. Before, it had to be slowly funneled through conservative press… [N]ow there is a megaphone.’ Former House Speaker Kevin McCarthy (R-Calif.), who’s friends with Trump and Musk, told us: ‘Both men never give up, and follow through even if it seems impossible. You should never bet against Trump or Elon.’”
December 20 – Bloomberg (Davey Alba, Kurt Wagner and Julia Love): “The most powerful leaders in the tech industry are trying out a new playbook to engage Donald Trump, who has been historically opposed to their dominance: in-person dining. A steady stream of some of the biggest names in technology — Meta Platforms Inc.’s Mark Zuckerberg, Google co-founder Sergey Brin and Amazon.com Inc.’s Jeff Bezos — have all made pilgrimages to Trump’s Mar-a-Lago club in Florida to personally meet with the president-elect, a stark reversal from his 2016 victory, when many business leaders kept their distance, instead currying favor by hiring well-connected lobbyists. ‘EVERYBODY WANTS TO BE MY FRIEND!!!,’ Trump posted to Truth Social…”
December 19 – Bloomberg (Ellen Milligan): “Prime Minister Keir Starmer’s government is talking to Britain’s election watchdog about tougher rules on political donations, amid fears that Reform UK leader Nigel Farage may secure funding from Elon Musk on a scale that could upend the country’s politics in favor of his right-wing party. The Electoral Commission wants to apply a limit to company donations that is linked to the profit they make in the UK, the watchdog’s head Vijay Rangarajan said…”
Trade War Watch:
December 17 – Yahoo Finance (Akiko Fujita): “The last time President-elect Donald Trump used tariffs to wage the US-China trade war, it upended US ports. Suppliers rushed to frontload inventory ahead of implementation dates, straining infrastructure ill-equipped to handle the volume surge. The COVID pandemic only accelerated the untangling of global supply chains. Logistics firms say the lessons from those experiences and the changes implemented since may help cushion the blow if Trump makes good on promises to hike tariffs…”
Middle East War Watch:
December 13 – Wall Street Journal (Yaroslav Trofimov): “As Syrian rebels approached Damascus last weekend, Russian foreign minister Sergei Lavrov dismissed the fall of Bashar al-Assad, Moscow’s main Arab ally, as a minor episode in a planet-wide struggle. The West, Lavrov said, clings to America’s decaying hegemony but is inexorably losing ground to the ‘free world’—his Orwellian term for the axis of autocracies led by Russia, China, North Korea and Iran. ‘The fight of these two worlds, one phasing out and another emerging, is not going without clashes,’ he remarked… Though leaders in the West may scoff at Lavrov’s attempt to downplay Moscow’s geopolitical setback in Syria, they broadly agree with his view that the world is increasingly split into two rival camps. With Russia’s war on Ukraine nearly three years old, the Middle East ablaze on multiple fronts and tensions building up in East Asia, conflicts once thought to be disconnected have merged into what could be the opening shots of a third world war.”
December 16 – Financial Times (Gideon Rachman): “‘There are only two of us left among the leaders. Right now, it’s me and Vladimir Putin.’ That was the immodest verdict of Recep Tayyip Erdoğan last week. Xi Jinping and Donald Trump might dispute the Turkish president’s global rankings. At a regional level, however, Erdoğan has a good claim to be one of two strongman leaders that are reshaping the Middle East. His hated rival, Benjamin Netanyahu of Israel, is the other. Erdogan’s current arrogance flows from his role in Syria. Turkey was the only regional power to put its full weight behind Hayat Tahrir al-Sham… Ibrahim Kalin, the head of Turkey’s intelligence services, visited Damascus days after HTS took power. Erdoğan has long aspired to rebuild Turkish power across the territories of the old Ottoman Empire. For him, toppling Assad opens a new path to regional influence.”
December 18 – Bloomberg (Selcan Hacaoglu): “Turkey-backed forces are aiming to capture more territory in northern Syria from Kurdish groups, according to Turkish officials familiar with the matter, a move that could stir tensions with the US. Turkey and the Syrian National Army, which is funded and advised by Ankara, are taking advantage of the collapse of the Assad regime… The SNA will likely try to capture areas to the west of Ayn al-Arab, also known as Kobani by its mostly Kurdish inhabitants, said the people…”
December 16 – Wall Street Journal (Lara Seligman and Alexander Ward): “Senior U.S. officials say Turkey and its militia allies are building up forces along the border with Syria, raising alarm that Ankara is preparing for a large-scale incursion into territory held by American-backed Syrian Kurds. The forces include militia fighters, Turkish uniformed commandos and artillery in large numbers that are concentrated near Kobani, a Kurdish-majority city in Syria on the northern border with Turkey… A Turkish cross-border operation could be imminent, one of the U.S. officials said. The buildup, which began after Bashar al-Assad’s regime fell in early December, appears similar to Turkish military moves ahead of its 2019 invasion of northeast Syria.”
December 16 – New York Times (Lara Jakes): “The 13-year civil war between Syria’s government and rebel fighters has ended. But the peril is not over for Syria’s Kurdish minority. A number of armed factions are still jostling for control after the collapse of the Assad regime. They include the Kurdish-led Syrian Democratic Forces, which have allied with the United States to combat the extremist Islamic State, and the Syrian National Army, a militia backed by Turkey, which is hostile to the Kurdish forces. For more than a decade, the Kurdish-led soldiers have been America’s most reliable partner in Syria… But Turkey… has long considered the Kurdish group to be its enemy.”
Ukraine War Watch:
December 18 – Wall Street Journal (James Marson and Georgi Kantchev): “Just after 6 a.m. Tuesday, an explosion shattered the morning quiet on a residential street in Russia’s capital. A bomb hidden in a scooter detonated, killing a senior military officer… It was a message from Ukraine: You aren’t safe—even at home. The attack on Lt. Gen. Igor Kirillov was part of an escalating campaign by Ukraine’s security and intelligence services to kill high-profile figures in Russia’s war effort. Its aim is to bring the fight to Russia… Increasingly, the focus has been on important military targets including a senior naval officer and a missile scientist. Coupled with long-range strikes on installations such as strategic bomber bases, it is part of a drive to use asymmetric measures to disrupt and demoralize the Russian war machine.”
Taiwan Watch:
December 14 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “A week ago, Taiwan was bracing for a Chinese military exercise to ‘punish’ its president, Lai Ching-te, for a trip abroad that included two short visits to the US. It would have been another show of force from Beijing in retaliation for Taiwanese leaders asserting their country’s independence. But what happened next took Taipei by surprise. Its military and national security officials observed what they called the largest Chinese naval deployment in nearly 30 years. At the same time, Beijing announced partial restrictions on air traffic in seven zones hugging its coastline from Shanghai to Hong Kong for two days. There was not a word from the People’s Liberation Army… Taiwan’s defence ministry… set up an emergency response centre and held snap readiness drills. ‘No matter if they have announced drills, the level of the threat to us is severe,’ it said.”
Market Instability Watch:
December 20 – Bloomberg (Giovanna Bellotti Azevedo, Leda Alvim and Maria Elena Vizcaino): “Brazilian markets bounced at the end of the week amid extraordinary central bank moves to curb a selloff in the currency that was spreading across the nation’s markets. The real gained as much as 1.4% on Friday, briefly erasing weekly losses, after policymakers stepped in again with both a spot sale and a credit line auction totaling a combined $7 billion… The reprieve comes after the central bank stepped in almost every day for the past week to try to meet a surge in demand for US dollars. It sold $8 billion in back-to-back spot auctions on Thursday alone in the biggest daily sale of greenbacks since at least 1999. They’ve spent about $17 billion in spot sales so far.”
December 19 – Bloomberg (Michael Mackenzie): “Longer-dated US Treasuries weakened Thursday, propelling the yield curve to steepen to a level last seen about 30 months… The two-year yield was lower by 6 bps to 4.295%, while the 10-year rose 4 bps to 4.56%, and was trading around the highest level since late May. That divergence in yields left the two-year trading around 0.26 percentage points below the 10-year — a level previously seen in June 2022 and the curve was steeper by some 10 bps on the session.”
December 20 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Investors pulled a net $50.2 billion from U.S. equity funds in the week ending Dec. 18, according to LSEG Lipper data, the biggest net outflow since Sept. 2009, as they cashed in profits from a market rally ahead of the Fed policy decision.”
December 20 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Investors liquidated equity funds at the fastest rate in 15 years in the week to Dec. 18, driven by caution and profit-taking in anticipation of a hawkish outcome from the U.S. Federal Reserve’s policy meeting after a recent market rally. According to LSEG Lipper data, investors divested a net $37.22 billion worth of global equity funds in the week, the largest amount for a single week since September 2009.”
December 20 – Bloomberg (Greg Ritchie and James Hirai): “Long-term UK government borrowing costs are approaching the highest level since 1998 as investors struggle to work out how much the Bank of England will cut interest rates next year. The yield on 30-year bonds climbed as high as 5.16% on Friday after rising for seven consecutive sessions, on course for the highest close in 26 years. In just one week, the market has gone from wagering on the possibility of four interest rate cuts next year to fewer than two, and then back to entertaining the chance of three. At the heart of the debate is the question of how policymakers will respond to the UK’s difficult mix of persistent inflationary pressures and lackluster growth.”
December 20 – Bloomberg: “China’s one-year bond yields broke below levels last seen in the global financial crisis to the lowest in more than two decades, driven by bets on aggressive policy easing and demand for haven assets. The yield on one-year government debt plunged 17 basis points Friday to 0.85%, the lowest since 2003, just a few hours after sliding below the psychological barrier of 1%.”
Global Credit Bubble Watch:
December 17 – Reuters (Harry Robertson): “Investors have poured a record $600 billion into global bond funds this year… Dwindling inflation has finally allowed central banks to lower interest rates, pushing investors to lock in the relatively high yields available and finally delivering the ‘year of the bond’ after $250 billion left fixed-income funds in 2022… As of mid-December, $617 billion had flowed into developed and emerging market bond funds, according to… EPFR, topping 2021’s $500 billion and putting 2024 on track to be a record year. Stocks, meanwhile, have drawn $670 billion of inflows… Cash equivalent money market funds, which boast high yields and little risk, have fared the best, pulling in more than $1 trillion.”
December 19 – Bloomberg (Anousha Sakoui): “Bankers expect global deal volumes to surpass $4 trillion next year, the highest in four years, buoyed by U.S. President-elect Donald Trump’s promise of less regulation, lower corporate taxes and a broadly pro-business stance. The total value of mergers and acquisitions (M&A) rose 15% from last year to total $3.45 trillion as of Dec. 19 this year, according to Dealogic…, recovering from a decade-low of about $3 trillion during the same period last year.”
December 19 – Bloomberg (Paula Seligson): “Private credit firms want more than corporate lending. The largest are laying the groundwork to finance everything from auto loans and residential mortgages to chip manufacturing and data centers in an effort to swell the size of the market by the trillions. It’s part of a race to grab a bigger share of a universe of potential investments that Apollo Global Management Inc. has said could be as large as $40 trillion… ‘There is a shift in the world’s understanding that there’s a lot more beyond direct lending,’ said Michael Zawadzki, the global chief investment officer at Blackstone Inc.’s credit and insurance unit. ‘This ecosystem of private investment-grade is a massive market with a huge tailwind.’”
December 19 – Wall Street Journal (Anne Tergesen): “The highest interest rate on your cash right now might be coming from an insurance company, not a bank. Insurers create fixed-rate deferred annuities, which resemble certificates of deposit, but offer higher yields on average thanks to the broad portfolio of investments insurance companies hold… Brokerages, banks and annuity agents sell them. At Fidelity Investments, the average interest rate on a three-year fixed-rate deferred annuity is 4.67%… That compares with 4.05% for the average three-year CD at Fidelity. Business in these annuities is booming… Fixed-rate deferred annuities have been the top-selling category of annuities this year, totaling $124 billion in the first nine months, up 17% over the same period last year…”
December 16 – Bloomberg (Denitsa Tsekova): “All it took for Jess Dato Paliogiannis to become an investor in the esoteric world of private credit was a few taps on her mobile phone. The 30-year-old New Yorker… used the Titan app to put $2,000 into a fund managed by the global investing giant Carlyle Group Inc. ‘It was exciting to invest in something that traditionally was not available to retail investors,’ says Dato Paliogiannis… Paliogiannis is just the kind of person the industry is trying to woo. Private lenders have spent the past dozen years minting billionaires by usurping traditional Wall Street banks and packaging their risky corporate loans into products that have become staples of insurers and pension funds. But with interest from large institutions tapering off, they’re going after Main Street. ‘We are probably in the second or the third inning in the expansion of these private credit products in the broader, mass-affluent market,’ says Shane Clifford, head of global wealth at Carlyle.”
AI Bubble Watch:
December 17 – Financial Times (Myles McCormick): “North America’s electricity grid faces ‘critical reliability challenges’ as power generation fails to keep pace with surging demand from artificial intelligence… Soaring electricity consumption in the next decade, coupled with the closure of coal-fired plants, will place huge strain on US and Canadian grids, the North American Electric Reliability Corporation has found. The shortfall could cause blackouts during peak demand periods in both countries, and will be worsened by delays in adding solar generation capacity, batteries and hybrid resources to the grid, according to NERC. Some areas of the US could face shortfalls as soon as next year… ‘We are experiencing a period of profound change,’ said John Moura, director of reliability assessment at NERC. ‘We are seeing demand growth like we haven’t seen in decades… and what we see is the pace only accelerating.’”
December 17 – Bloomberg (Mark Chediak and Naureen S Malik): “The risk of blackouts will increase for most of North America over the coming decade due to surging electricity demand and the closing of fossil-fuel power plants, according to a report by a grid reliability regulator. Solar and battery projects aren’t connecting to the grid fast enough to replace retiring coal and natural gas generators, according to an annual assessment released by the North American Electric Reliability Corporation. In addition, the new power resources are more variable and weather-dependent than the ones they are replacing… The report underscores the challenges utilities and grid operators face as demand is forecast to rise the most in decades, driven by artificial intelligence and the electrification of the economy.”
December 17 – Wall Street Journal (Peter Rudegeair): “Hedge-fund firms such as Coatue Management that are known for investing in next-generation technology companies have lately been piling into a sleepier sector. Old-school power companies such as Vistra, Constellation Energy and Talen Energy have become darlings among hedge-fund firms thanks to their starring role in the artificial-intelligence boom. Such companies command the scarcest resource in the generative-AI supply chain: the extra electricity that fuels the data centers needed to train large language models and answer prompts from users of AI chatbots such as ChatGPT.”
Bubble and Mania Watch:
December 20 – Bloomberg (Gunjan Banerji): “A new type of addict is showing up at Gamblers Anonymous meetings across the country: investors hooked on the market’s riskiest trades. At Gamblers Anonymous in the Murray Hill neighborhood of Manhattan, one man called options “the crack cocaine” of the stock market. Another said he faced hundreds of thousands of dollars in trading losses after borrowing from a loan shark to double down on stocks. And one young man brought his mom and girlfriend to celebrate one year since his last bet. They were among a group of about 60 people, almost all men, who sat in rows of metal folding chairs in a crowded church basement that evening. Some shared their struggle with addiction—not on sports apps or at Las Vegas casinos—but using brokerage apps like Robinhood.”
December 17 – Bloomberg (Pamela Barbaglia, Michelle F. Davis, David Carnevali and Crystal Tse): “Mergers and acquisitions bankers got back on their feet in 2024 and are now waiting to see whether a second Donald Trump presidency will turbocharge or temper their nascent recovery. Global transaction values have risen 16% this year to hit $3.1 trillion…, as central banks have wrangled inflation and started to cut interest rates.”
December 20 – Bloomberg (Bailey Lipschultz): “There are many well-established symbols of the froth building, yet again, in financial markets. There’s Bitcoin hovering around $100,000 or the Nasdaq hitting record high after record high or, for that matter, the wild bidding war that broke out in Manhattan the other day for the banana-and-duct tape ‘art.’ But there’s also this: the SPAC, and its band of patrons and peddlers, is back. Howard Lutnick, the CEO of brokerage Cantor Fitzgerald LP and Donald Trump’s nominee for commerce secretary, raised a $100 million blank check in August and then, days before the elections, filed for what would be a 10th SPAC; Michael Klein pooled $287.5 million in May; and Harry Sloan and Eli Baker’s Eagle Equity Partners debuted its ninth SPAC in late October. In total, 50 special-purpose acquisition companies have raised $8.7 billion since April, more than double the amount raised in all of 2023, according to data from SPAC Research.”
December 18 – Bloomberg (Katie Greifeld and Monique Mulima): “MicroStrategy Inc. co-founder and Chairman Michael Saylor says the dot-com-era software maker turned leveraged Bitcoin proxy plans to focus more on fixed-income securities for raising capital to buy the cryptocurrency… ‘We have $7.2 billion dollars of converts, but $4 billion of them are essentially equity, they’re through the strike price, the call price, and they are trading with a delta of approximately 100%, they are looking like equity,’ Saylor said… ‘We would like to go back and build more intelligent leverage for the benefit of our common stock shareholders.’ MicroStrategy has become a major investment story this year as it accelerated an unconventional plan launched in late October to raise $42 billion solely to purchase and hold the cryptocurrency over the next three years.”
December 16 – Bloomberg (Neil Callanan and Patrick Clark): “Slumping office property values are rippling through US banks, with smaller lenders in particular ramping up the use of loan modifications in their commercial real estate books. The typical bank with less than $100 billion of of assets modified 0.32% of its CRE loans in the first nine months of the year, a Moody’s Ratings report found. That’s a big increase from the first half of 2024, when it was just about 0.1%.”
December 18 – Bloomberg (Patrick Clark, Neil Callanan and Jack Sidders): “In the dark days of 2022, when rising interest rates turned commercial real estate into a credit desert, the industry’s perpetual optimists found a rallying cry. Just survive until ’25, they told themselves. By then, inflation would be whipped, money would be cheaper, and demand would again tilt in their favor. But the wished-for salvation was wishful thinking. Borrowing costs remain stubbornly high, and lenders are running low on patience. As the new year approaches, the industry is bracing for the losses it’s been putting off. ‘I look at 2025 as a year of reckoning,’ says Tim Mooney, head of real estate at Värde Partners… ‘Lenders and borrowers will acknowledge that lower interest rates aren’t going to save them.’”
December 17 – Wall Street Journal (James Mackintosh): “The market feels toppy. There is no science to this and readers will have to judge for themselves. But here are a bunch of things that make me think trouble might be imminent for stocks—perhaps a correction, perhaps the start of something bigger, but at least a bump in the road. Bulls are everywhere. Bears are hard to find. This shows up in sentiment, in surveys and in the capitulation of the permabears. Sentiment is euphoric, according to Citigroup’s Levkovich indicator. This index combines lots of measures and suggests investors have only been more positive twice, in the postpandemic SPAC/cannabis/green bubble and in the dot-com bubble of 1999-2000.”
December 18 – Bloomberg (Sarah McBride): “Secondary transactions involving venture-backed startups are on track to hit a new high this year, as companies like OpenAI, SpaceX and Stripe Inc. organize tender offers to get employees paid, and investors look for ways to offload stakes outside of initial public offerings. Tender offers give staffers, former employees and certain investors a way to sell their shares directly to other investors… NewView Capital, a firm that specializes in secondary markets, expects startup transactions on those markets to hit $21 billion in 2024, more than double the previous high in 2023.”
December 17 – Axios (Sagarika Jaisinghani and Michael Msika): “Fund managers have been reducing cash holdings to a record low and pouring money into US stocks, triggering a metric that Bank of America Corp. says could be a signal to sell global equities. Cash as a percentage of total assets under management dropped to 3.9% in December, a move that in the past has been followed by losses on the MSCI All-Country World Index, strategist Michael Hartnett said. Allocation to US equities surged to a record high of net 36% overweight, according to the BofA survey.”
U.S./Russia/China/Europe Watch:
December 16 – Financial Times (Max Seddon): “Vladimir Putin has said Russia may lift its self-imposed restrictions on developing short- and medium-range missiles and would keep its non-strategic nuclear forces on constant combat alert, as he warned that the west was pushing Moscow to ‘a red line we can’t step back from’. The Russian president said in a speech to the defence ministry… that he was concerned about the US deploying short- and medium-range missiles abroad and warned that Nato was threatening Russia in Europe and ‘beyond its historical zone of responsibility’ in Asia. He added that Russia would step up production of hypersonic weapons… in response to any US deployments of short- and medium-range missiles in Europe and Asia.”
December 17 – Reuters (Lidia Kelly): “Russia is boosting its ballistic arsenal with new strategic missile systems, plans maximum-range launches and may increase testing in response to growing external threats, a senior Russian military commander said… In a clear warning that Russia will respond if it deems its security is threatened, Sergei Karakayev, the commander of Russia’s Strategic Missile Forces, said the country plans maximum-range test launches as part of testing new systems.”
December 18 – Financial Times (Demetri Sevastopulo): “China has increased its arsenal of operational nuclear warheads to 600 from 500 in just a year, as the People’s Liberation Army continues a rapid expansion of its forces, according to the US defence department. In its annual ‘China Military Power Report’, the Pentagon said the PLA had expanded its arsenal by 20% in the 12 months from mid-2023 and was on track to have 1,000 operational warheads by 2030. The Pentagon has in recent years warned that the US will soon face two nuclear peers as China’s arsenal grows closer in size to the US and Russia.”
De-globalization Watch:
December 18 – Axios (Dave Lawler and Alison Snyder): “The Biden administration is readying dramatic last-minute steps to preserve a crucial advantage in its AI arms race with China: supply of the world’s most advanced chips. The chips needed to develop cutting-edge AI are the most valuable pieces of hardware on Earth, and the best chips Chinese firms can produce lag about five years behind the top end of the market. A pending executive order could cap sales of AI chips to countries all over the world, not just China… Biden has already imposed limitations on the advanced chips that companies like Nvidia can export to China, but there are concerns that Chinese firms are able to buy or access them in other countries or from smugglers. There’s a thriving black market for Nvidia chips in China. The new order would attempt to close that back door. It could also further divide the world along technological lines, with some countries likely getting unfettered access to U.S. tech and others facing limitations.”
Inflation Watch:
December 20 – Associated Press (Christopher Rugaber): “An inflation gauge that is closely watched by the Federal Reserve barely rose last month in a sign that price pressures cooled after two months of sharp gains. Friday’s report from the government showed that prices rose just 0.1% from October to November. Excluding the volatile food and energy categories, prices also ticked up just 0.1%, after two months of outsize 0.3% gains… Yearly inflation was 2.4% in November, up from 2.3% in October and above the Fed’s 2% inflation target. Year-over-year ‘core’ prices, which exclude volatile food and energy costs, were unchanged at 2.8%.”
Federal Reserve Watch:
December 18 – Bloomberg (Amara Omeokwe): “Federal Reserve officials lowered their benchmark interest rate for a third consecutive time, but reined in the number of cuts they expect in 2025, signaling greater caution over how quickly they can continue reducing borrowing costs. The Federal Open Market Committee voted 11-1 on Wednesday to cut the federal funds rate to a range of 4.25%-4.5%. Cleveland Fed President Beth Hammack voted against the action… ‘With today’s action, we have lowered our policy rate by a full percentage point from its peak and our policy stance is now significantly less restrictive,’ Fed Chair Jerome Powell told reporters… ‘We can therefore be more cautious as we consider further adjustments to our policy rate.’”
December 18 – New York Times (Jeanna Smialek): “Federal Reserve officials made their third and final rate cut of 2024 at their meeting on Wednesday. They also forecast two fewer rate reductions in 2025 than they had previously expected, as inflation lingers and the economy holds up… Policymakers do not want to cut rates so much that they reignite the economy, though — and they have now arrived at a point where it is uncertain how much further rates should fall. ‘Our policy stance is now significantly less restrictive,’ Jerome H. Powell, the Fed chair, said… ‘We can therefore be more cautious as we consider further adjustments to our policy rate.’ ‘From here, it’s a new phase,’ Mr. Powell later added.”
December 18 – Wall Street Journal (Nick Timiraos): “The Federal Reserve signaled greater doubt over how much it would continue to cut interest rates after agreeing to a reduction on Wednesday that Chair Jerome Powell conceded had been a close call… ‘Today was a closer call, but we decided it was the right call,’ Powell said… ‘From here, it’s a new phase, and we’re going to be cautious about further cuts.’”
December 18 – Associated Press (Christopher Rugaber): “The Federal Reserve cut its key interest rate… by a quarter-point — its third cut this year — but also signaled that it expects to reduce rates more slowly next year than it previously envisioned, mostly because of still-elevated inflation. The Fed’s 19 policymakers projected that they will cut their benchmark rate by a quarter-point just twice in 2025, down from their estimate in September of four rate cuts. Their new projections suggest that consumers may not enjoy much lower rates next year for mortgages, auto loans, credit cards and other forms of borrowing. The central bank’s expectation of just two rate cuts in 2025 rattled Wall Street, sending stock prices plummeting in the worst day for the market in four months.”
U.S. Economic Bubble Watch:
December 17 – Axios (Sareen Habeshian): “A record number of holiday travelers are expected to close out an already busy year at airports and on roads across the U.S. More than 119 million Americans are projected to travel during the Christmas and New Year’s holiday period, narrowly surpassing the previous record set pre-pandemic in 2019, per AAA. The TSA expects to screen nearly 40 million people moving through airports over the holidays — a more than 6% increase from last year. The projections round off a year that set holiday travel records for Memorial Day, July Fourth and Thanksgiving.”
December 17 – Associated Press (Christopher Rugaber and Anne D’Innocenzio): “Consumers stepped up their spending at retail stores last month… Retail sales rose 0.7% in November…, a solid increase and higher than October’s 0.5% gain. Sales jumped 2.6% at auto dealers, driving most of the gain… Sales rose modestly at stores selling furniture, electronics, and home and garden supplies. Since the retail sales report isn’t adjusted for inflation, some of the increase reflects higher prices. Sporting goods stores reported a 0.9% gain. Sales at online retailers jumped 1.8%.”
December 18 – Wall Street Journal (Telis Demos): “It may be no surprise that people are eager to put off paying in full for their holiday shopping. But who would want to fund that? Increasingly, there is an answer: private credit. Buy now, pay later provider Affirm last week announced a $4 billion commitment for lending from investment firm Sixth Street. Because loans used to pay for individual purchases are relatively short term, and thus turn over quickly, that sum can fund more than $20 billion worth of Affirm volume over the next three years. So while the structure of the deal might be complex, it is a straightforward illustration of how both of these businesses are evolving, and are likely to continue to move ahead in 2025.”
December 19 – Associated Press (Matt Ott): “The number of Americans applying for unemployment benefits fell markedly last week following a big increase the week before. Jobless claim applications declined by 22,000 to 220,000 for the week of Dec. 14… That’s fewer than the 229,000 analysts were forecasting. Continuing claims… fell by 5,000 to 1.87 million for the week of Dec. 7. That was also fewer than analysts had projected.”
December 19 – Associated Press (Paul Wiseman): “The American economy grew at a healthy 3.1% annual clip from July through September, propelled by vigorous consumer spending and an uptick in exports… Third-quarter growth in U.S. gross domestic product… accelerated from the April-July rate of 3% and continued to look sturdy despite high interest rates… GDP growth has now topped 2% in eight of the last nine quarters. Consumer spending, which accounts for about two-thirds of U.S. economic activity, expanded at a 3.7% pace, fastest since the first quarter of 2023 and an uptick from Commerce’s previous third-quarter estimate of 3.5%.”
December 16 – Bloomberg (Vince Golle): “Activity at US service providers is expanding at the fastest pace since October 2021, providing momentum for the economy even as the downturn in manufacturing worsens. The S&P Global flash December index for service providers increased to 58.5 from 56.1… The group’s composite index for future output jumped 3.3 points to 71.1, the highest since May 2022… ‘Encouragingly, confidence in the 12-month outlook has lifted to a 2 1/2-year high, suggesting the robust economic upturn will persist into the new year and could also become more broad-based by sector,’ Chris Williamson, chief business economist at S&P Global Market Intelligence, said…”
December 16 – Bloomberg (Lucia Mutikani): “U.S. manufacturing activity contracted further in December, with a measure of factory output dropping to the lowest level in more than 4-1/2 years amid worries that higher tariffs would raise prices of imported raw materials next year. S&P Global said… that its flash manufacturing PMI dropped to 48.3 this month from 49.7 in November.”
December 19 – Bloomberg (Michael Sasso): “Existing-home sales in the US topped a rate of 4 million in November for the first time in six months as house hunters begrudgingly accept mortgage rates above 6%. Contract closings increased 4.8% to an annualized rate of 4.15 million in November, the most since March… ‘Home sales momentum is building,’ NAR Chief Economist Lawrence Yun said… Affordability remains a major hangup. The median sale price of a previously owned home increased 4.7% from a year earlier to $406,100 last month…”
December 18 – Bloomberg (Michael Sasso): “US new-home construction unexpectedly fell in November as a drop in multifamily projects mitigated a rebound in starts of single-family houses, solely in the storm-ravaged South. Housing starts decreased 1.8% to an annualized rate of 1.29 million, the slowest since July… The median forecast was for a 1.35 million pace. Starts of single-family homes rose 6.4% to an annualized rate of 1.01 million while new construction of multifamily projects decreased more than 23%. The pickup in one-family home construction was due to a 18.3% advance in the South… as parts of the area that includes Florida rebounded from hurricane-related delays in late September and October. All other regions declined.”
December 18 – CNBC (Diana Olick): “Mortgage rates moved markedly higher last week, causing overall mortgage demand to drop… Applications for a mortgage to purchase a home increased 1% for the week and were 6% higher than the same week one year ago.”
December 17 – Bloomberg (Michael Sasso): “Home builders’ outlook for the next six months rose to the highest in more than 2 1/2 years on optimism that the upcoming Trump administration will help remove construction regulatory hurdles and boost sales. A gauge of sales in the next six months increased to 66 this month, the highest since April 2022… The overall confidence index and a measure of present sales were both unchanged compared with November, and traffic from prospective buyers dipped slightly.”
December 19 – Bloomberg (Alex Veiga): “The average rate on a 30-year mortgage in the U.S. rose this week to its highest level since late November… The rate rose to 6.72% from 6.6% last week, mortgage buyer Freddie Mac said Thursday. The rate is now higher than it was a year ago, when it averaged 6.67%.”
China Watch:
December 16 – Reuters: “China’s capital markets outflow reached a record high of $45.7 billion in November, according to official data tracking cross-border payments, as Donald Trump’s U.S. presidential election win roiled global portfolio flows. Cross-border receipts from portfolio investments were $188.9 billion, while payments totalled $234.6 billion, resulting in the biggest monthly deficit on record…”
December 16 – Wall Street Journal (Chun Han Wong and Brian Spegele): “Faced with rising social frustrations and public unrest, China’s leaders are ramping up security measures and squelching discordant views on the country’s economic health. A spate of deadly attacks in China in recent weeks… has unnerved officials and ordinary people alike, raising concerns that stagnating growth has played a role in fueling unrest and even outbursts of violence, amid an increase in public protests over economic grievances. In response, the Communist Party’s security czar last month ordered nationwide efforts to ‘resolve conflicts at the grassroots and nip them in the bud.’”
December 17 – Reuters: “Chinese leaders agreed last week to raise the budget deficit to 4% of gross domestic product (GDP) next year, its highest on record, while maintaining an economic growth target of around 5%… The new deficit plan compares with an initial target of 3% of GDP for 2024, and is in line with a ‘more proactive’ fiscal policy outlined by leading officials after December’s Politburo meeting and last week’s Central Economic Work Conference (CEWC)…”
December 16 – Bloomberg: “Chinese Premier Li Qiang urged government officials to swiftly carry out key economic tasks for the coming year, after top leaders signaled stronger stimulus for 2025. Li said ministries must be proactive and act ‘as early as possible’ in executing plans set out at the central economic work conference…, following a cabinet meeting he chaired…”
December 15 – CNBC (Anniek Bao): “China’s retail sales disappointed in November as sentiment in the real estate market weakened further, in another sign that Beijing’s efforts to boost the economy have failed to revive sluggish demand. Retail sales rose by 3% in November from a year ago…, missing the forecast of 4.6%… That marked a sharp slowdown from 4.8% growth in the previous month.”
December 15 – Bloomberg: “China’s home-price declines eased for a third month in November, suggesting values are beginning to stabilize as policymakers step up efforts to end the property slump. New-home prices in 70 cities… dropped 0.2% from October, the smallest decrease in 17 months… Values of used homes fell 0.35%, the least since May 2023.”
December 16 – Reuters (Yukun Zhang and Ryan Woo): “Revenue from land sales by Chinese local governments dropped 22.4% year-on-year in the first eleven months of the year… The decline was 22.9% in the period from January to October. Such revenue, once a major contributor to local governments’ financial resources, has fallen sharply as developers downsize land purchases amid a years-long property market slump. The decline in income from sales of land use rights strained local authorities’ coffers, hitting their ability to service debt, especially that borrowed off the books.”
December 18 – Bloomberg: “Chinese local government financing vehicles are selling an unprecedented amount of offshore yuan bonds, skirting attempts made by Beijing to reduce their debt sales. LGFVs have raised 163.6 billion yuan ($22.5bn) via so-called dim sum notes this year, the most since Bloomberg began compiling relevant data in 1993. The average coupon has risen to a four-year high of 5.82%, more than double that of bonds they sell in mainland China.”
December 19 – Bloomberg (Qianwei Zhang): “Chinese market regulators have told securities firms to step up their management of chief economists, analysts and fund managers when it comes to what they say in public… Some securities firms have sent out internal memos to emphasize that research reports are the ‘only standard’ for opinions…”
Central Bank Watch:
December 19 – Bloomberg (Jonas Ekblom): “Sweden’s Riksbank lowered its benchmark interest rate by 25 bps and signaled its easing campaign is likely to be wrapping up with one cut left to deploy. The central bank in Stockholm cut the key rate to a two-year low of 2.5%…”
Europe Watch:
December 16 – Financial Times (Anne-Sylvaine Chassany and Laura Pitel): “Germany is heading for early elections after Chancellor Olaf Scholz lost a vote of confidence, ending his fractious coalition government at a time of strain for the Eurozone’s largest economy. Scholz’s defeat by 207 to 394 votes… paves the way for the dissolution of parliament ahead of the early elections pencilled in for February 23. In pre-election polling, the chancellor and his centre-left Social Democrats are behind both the opposition CDU and the far-right Alternative for Germany (AfD). ‘It is a project that has failed,’ said Andrea Römmele, professor… in politics at the Hertie School in Berlin, referring to the collapse of what she described as Scholz’s ‘courageous’ three-party coalition, the first in Germany’s post-war history.”
December 17 – Bloomberg (Jana Randow): “German business expectations sank in December, highlighting the challenges for Europe’s top economy… An expectations gauge by the Ifo institute slumped to 84.4 from 87, the Ifo institute said… ‘This weakness in the German economy is becoming chronic,’ Ifo President Clemens Fuest said… ‘It’s been stagnating for a long time,’ so ‘the next government needs to prioritize economic growth.’”
December 13 – Financial Times (Ian Johnston): “Moody’s downgraded France’s credit rating…, saying that it expects the country’s incoming government to struggle to tackle its deficit… The rating agency lowered France’s long-term issuer rating from Aa2 to Aa3, blaming political instability that will make it difficult to tackle the national deficit. France’s finances will be ‘substantially weakened’ in the coming years, it said. The move underlines the economic challenges facing new prime minister François Bayrou.”
December 19 – Bloomberg (William Horobin and Alice Gledhill): “France’s debt agency kept its issuance plans for 2025 unchanged from an initial target as it awaits a new budget following the ouster of the government earlier this month. Agence France Tresor, or AFT, said it will sell €300 billion ($312bn) in government bonds next year, net of buybacks. That’s in line with the forecast…, following €285 billion of sales this year.”
December 16 – Bloomberg (Zoe Schneeweiss): “Private-sector business activity in France shrank for a fourth month as the fall of the government over a budget dispute sapped confidence. S&P Global’s Composite Purchasing Managers Index came in at 46.7 in December, staying below the 50 threshold separating expansion from contraction.”
December 15 – Financial Times (Amy Kazmin): “Prime Minister Giorgia Meloni’s government is racing to push through a budget that fulfils tax-cutting pledges while trimming its deficit, as Rome seeks to maintain the market’s confidence in Italy’s fiscal rectitude… Italy, which was put under the EU’s excessive deficit proceedings this year, has set out a fiscal consolidation road map for curbing its budget deficit from 7.2% of GDP last year to less than 3% by 2026, bringing it in line with Brussels’ stability and growth pact.”
Japan Watch:
December 19 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan Governor Kazuo Ueda opened up the possibility of waiting longer for his next interest rate hike in comments that lowered expectations of a January move and hammered the yen. Ueda said more information on Japan’s wages and the policies of US President-elect Donald Trump is needed before the BOJ can decide on a rate hike. His comments, made at a briefing after the central bank stood pat on rates, extended the yen’s losses…”
Emerging Markets Watch:
December 17 – Bloomberg (Maria Eloisa Capurro): “Brazil’s central bank said inflation risks are materializing due to factors including a weaker currency and resilient demand, forcing the board to signal unanimously that borrowing costs will rise past 14% by March. ‘Upside inflation risks, such as the resilience of services inflation, the de-anchoring of expectations, and exchange rate depreciation, have materialized,’ central bankers wrote in minutes to their Dec. 10-11 meeting, when they raised the benchmark Selic by a full percentage point to 12.25%.”
December 18 – Bloomberg (Giovanna Bellotti Azevedo, Rachel Gamarski and Barbara Nascimento): “The turmoil that’s sinking the Brazilian real has exposed a glaring vulnerability at some of the country’s biggest companies. The 21% slump in the currency, which has gained steam this week and begun to engulf other parts of the local market, has made it significantly more expensive for companies to service their debt and cover costs. Rising local interest rates… are adding to the pressure. About half of Brazilian firms in a sample that owe dollar-denominated debt — 33 in total — have average leverage levels above five times gross debt to Ebitda, according to… FTI Consulting… Out of these, 12 have more than half of the their debt in dollars, FTI said.”
December 16 – Bloomberg (Vinícius Andrade and Ezra Fieser): “Developing nations, already set for a turbulent 2025, are having to cope with ballooning interest payments on $29 trillion of debt that built up over the last decade. A record 54 countries are spending more than 10% of their revenues on interest payments… Some, including Pakistan and Nigeria, are using more than 30% of revenue just to pay coupons. The sum — around $850 billion in total last year for both foreign and local debt — is forcing countries to divert money from domestic spending on hospitals, roads and schools while raising risks for emerging-market investors. ‘Interest burdens are massive,’ Roberto Sifon-Arevalo, global head of sovereign ratings at S&P Global Ratings, said… ‘There’s a lot of muddle through, but there’s a tremendous amount of risk.’”
December 20 – Bloomberg (Daniel Carvalho): “After three days of late night votes, Brazil’s congress inched closer to delivering weakened key provisions of a spending cut package meant to ease investor fears about the country’s deteriorating fiscal situation. Lawmakers of both chambers of congress Thursday voted in favor of a proposed constitutional amendment that forms part of the package, but made changes that could dent its impact on public accounts.”
Social, Political, Environmental, Cybersecurity Instability Watch:
December 18 – Bloomberg (Clive Crook): “The habits of liberal democracy are self-sustaining only up to a point. The norms of orderly government have to be practiced to retain wide support. Once questioned, they’re at risk of breaking. For the past few years, the US has been finding out just how fragile these norms can be. The latest source of revelation was the reaction to the murder of Brian Thompson, CEO of UnitedHealthcare. We don’t yet know what kind of derangement – ethical, cognitive or both – plagued his killer, but even in a country too familiar with lethal violence, you might have expected a universal and unqualified condemnation of this heinous act. Far from it.”
December 18 – The Hill (Lauren Irwin): “Americans under the age of 40 now have more money than ever but have a sense of ‘economic fragility,’ a Treasury Department report found. Research… found the median wealth for Americans 25-29 grew to more than $80,000 in 2022. It’s a more than $50,000 increase from 2010. The report found that household balance sheets for younger Americans was stagnated for years and didn’t recover after the 2008 recession. After the COVID-19 pandemic, however, the median wealth for this age group surged by more than 140%, ‘reaching higher levels than ever seen before.’ ‘The sharp increase in wealth between 2019 and 2022 was broadly based across education, income and racial groups’… While wealth has increased, so has debt. Since 1989, student loan debt grew ‘nine-fold’ due to more people attending college and tuition rates skyrocketing.”
December 16 – Axios (Andrew Freedman): “The year is closing out with more global temperature records that, in aggregate, largely defy what many climate scientists expected for 2024. Among the potential factors driving this year’s — as well as 2023’s — record warmth is the unsettling possibility that global warming is accelerating and the planet’s climate behaving differently than expected. If so, the climate scenarios that form the basis for countries’ decarbonization goals could be faulty, with higher warming levels and greater societal consequences likely to arrive sooner than expected.”
December 17 – Bloomberg (Lauren Rosenthal): “Drought. Wildfires. Floods and tornadoes. California is being hit by a swirl of wild weather that’s forecast to continue this week as dry, seasonal winds return to southern areas, while the densely-populated Bay Area braces for the potential of more severe storms. A rare tornado touched down Saturday, injuring three people and overturning cars in a Santa Cruz suburb. Last week, an explosive brush fire broke out in the hills surrounding Malibu, a wealthy enclave outside Los Angeles. The blaze destroyed 20 homes and structures and damaged dozens more.”
December 18 – Bloomberg (Javier Blas): “The UK celebrated Oct. 1 as the first day in nearly 150 years when its power plants didn’t burn a single lump of coal to generate electricity. The moment was hailed by politicians as a sign of the progress against fossil fuels. It was also completely irrelevant. The very same day the UK went without coal-fired electricity, the world burned roughly 24 million metric tons of coal… Coal demand set a record high in 2024, according to the International Energy Agency’s annual report…”
Geopolitical Watch:
December 15 – Associated Press (Hyung-Jin Kim and Kim Tong-Hyung): “South Korea’s parliament… impeached President Yoon Suk Yeol over his stunning and short-lived martial law decree, a move that ended days of political paralysis but set up an intense debate over Yoon’s fate… The National Assembly passed the motion 204-85. Yoon’s presidential powers and duties were subsequently suspended and Prime Minister Han Duck-soo… took over presidential powers later Saturday.”
December 16 – Bloomberg (Brian Platt): “Canadian Finance Minister Chrystia Freeland resigned from Prime Minister Justin Trudeau’s cabinet because of differences over how to prepare for the Trump administration, a stunning move that shakes the government. Freeland has been the most powerful person in Trudeau’s cabinet for years — she was also deputy prime minister. She was the point person in developing a strategy on how to counter US President-elect Donald Trump’s threat to impose 25% tariffs. She announced her resignation… Monday morning, just hours before she was due to deliver a fiscal and economic update in parliament.”
December 18 – Bloomberg (Randy Thanthong-Knight, Thomas Seal, and Brian Platt): “Chrystia Freeland’s decision to resign as Canada’s finance minister isn’t merely a political earthquake that’s shaken Prime Minister Justin Trudeau. It’s set to change the coming trade fight between the US, Canada and Mexico. Freeland was sometimes called the Minister of Everything in the Canadian capital. The former deputy prime minister had her hands on many important files, including the decision to hit China with tariffs on electric vehicles. Two days after Donald Trump won the US election, Trudeau restarted a dormant cabinet committee on Canada-US relations — and put Freeland in charge. There was a reason for that. It was Freeland who led the Canadian side during the bruising, but ultimately successful, renegotiation of the North American Free Trade Agreement in 2018 — which became the US-Mexico-Canada Agreement.”More By This Author:Weekly Commentary: Monitoring for Peak Bubble Excess – Q3 2024 Z.1 Weekly Commentary: Historic NovemberWeekly Commentary: The Rave
