Forty-five basis points. That’s the jump in 10-year yields since September 17th, the day before the FOMC meeting (and 50 bps rate slash). Benchmark MBS yields are up 59 bps.
October 10 – Bloomberg (Catarina Saraiva and Amara Omeokwe): “Three Federal Reserve policymakers on Thursday were unfazed by a higher-than-forecast September inflation report, suggesting the US central bank can continue lowering interest rates… ‘Month to month, there’s wiggles and bumps in the data, but we’ve seen this pretty steady process of inflation moving’ downward, New York Fed President John Williams said… ‘I expect that that will continue.’ Williams added he thought it would be appropriate to ‘continue the process of moving the stance of monetary policy to a more neutral setting over time.’”
Is the Fed feeling lucky? The problematic scenario would have inflation reaccelerating, as it has often done historically following the initial venting of inflationary pressures. And with the amount of debt outstanding coupled with unprecedented bond market speculative leverage, a Fed forced to reverse course and tighten conditions would risk the nightmare scenario.
Critical analysis can be disregarded or completely ignored. But there will be consequences from the Fed aggressively cutting rates despite extraordinarily loose financial conditions and market Bubbles.
Investment-grade spreads (to Treasuries) ended the week at 81 bps, one basis point above the low from June 30, 2021. More to the point, it is also within a basis point of the low all the way back to March 15, 2005, a period notable for being at the heart of mortgage finance Bubble excess.
Looking back to that period of excessively loose financial conditions, Total Mortgage Credit expanded a record $400 billion during Q1 2005 – on its way to 2005’s all-time record annual increase of $1.466 TN, or 13.8%.
For those wondering why I go on and on over the Fed slashing rates despite such loose conditions and Bubble excess, I’ve seen this movie before. The Fed cut rates in late 2002, a year when Total Mortgage Credit expanded a record $909 billion, or 12.2%. The Fed then cut rates down to 1.0% during 2003, as annual mortgage debt growth exceeded $1 TN for the first time.
By March 2005, Total Mortgage Credit had expanded $3.321 TN, or 44%, in three years. Home prices (Case Shiller) inflated 9.6% in 2002, 9.8% in 2003, and 13.6% in 2004. Financial conditions seemingly couldn’t have been easier, with investment-grade corporate spreads in early 2005 the narrowest since the summer of 1998 exuberance (pre-Russia/LTCM collapses). The S&P500 had rallied about 50% off 2002 lows. And where, you might ask, was the policy rate set with such rampant Credit growth and asset Bubble inflation? 2.5%.
I titled the March 21, 2005, CBB: “Booming Broker Finance and Market Tops.” That post delved into the week’s spectacular earnings reports from the major Wall Street firms: “I would argue that there are today no better indicators of broad-based Liquidity Excess and Credit Availability than those provided by the operating success of Wall Street.”
History rhymes. Q3 2024 earnings season for the big “money center banks” got started Friday with the nation’s behemoth. It’s worth noting that JPMorgan’s $67 billion asset growth boosted its y-t-d expansion to $335 billion, or 11.5% annualized, to a record $4.210 TN. The KBW Bank Index jumped 3% Friday to a 30-month high, increasing y-t-d returns to 27.5%. The 1.9% gain of the Broker/Dealers (NYSE Arca) boosted 2024 returns to 31.0%, with the index closing Friday at an all-time high.
The financial boom is certainly not limited to banking.
October 10 – Financial Times (Brooke Masters): “BlackRock’s assets under management topped $11tn for the first time… as the world’s largest money manager benefited from a rally in markets and attracted record new cash from investors. The inflows helped push revenues up 15% to $5.2bn… Improved margins lifted the group’s net income to $1.63bn… BlackRock’s chief executive Larry Fink predicted his firm’s growth would continue. ‘We expect momentum to further build to year’s end and into 2025,’ he told analysts on an earnings call. ‘Investors will have to re-risk to meet their long-term return needs.’ ‘Our strategy is ambitious and our strategy is working… I have never felt more optimistic… Capital markets are becoming a bigger and bigger part of the global economy.’”
More BlackRock details from Reuters (Arasu Kannagi Basil and Davide Barbuscia): “Total net inflows hit a quarterly record of $221.18 billion, up from $2.57 billion a year ago. A majority of the long-term inflows were captured by ETFs, at $97.41 billion.”
I’m still processing the news of a record $500 billion flowing into ETFs during Q3. Signs of manic exuberance and financial excess are everywhere. Money Market Fund Assets (MMFA) expanded another $11 billion last week to a record $6.474 TN. MMFA surged $340 billion over the past 10 weeks, or 29% annualized, and $766 billion, or 13.4%, over the past year. In one historic monetary inflation, MMFA inflated $1.916 TN, or 42%, since the Fed began its “tightening” cycle in March 2022 – and $2.840 TN, or 78%, since the onset of the pandemic (2/21/2020).
I believe the expansion of “repo” borrowings to fund leveraged speculation (i.e., the “basis trade”) is a primary factor underpinning this epic monetary inflation. And similar to 2005, when rapid mortgage Credit growth fueled powerful real estate price inflation with limited effect on CPI, the massive inflation in “repo” Credit and MMFA is today having a greater impact on financial markets than consumer prices. But there are important factors today supporting higher inflation, which were not issues during the mortgage finance Bubble period.
October 8 – New York Times (Alan Rappeport): “America’s federal budget deficit rose to $1.8 trillion in the 2024 fiscal year, reaching the highest level in three years, according to new Congressional Budget Office estimates… The increase from last year’s $1.7 trillion deficit came as tax revenue failed to keep pace with the rising costs of government programs and the mounting interest on the national debt… The federal government spent $6.8 trillion in 2024, a 10% increase from the prior year. A big driver of that was a $240 billion increase in interest costs, which surged 34% from last year because of high interest rates. Spending on Social Security and Medicare benefits also increased substantially.”
It’s wishful thinking by the Fed to expect consumer inflation to steady at the 2% target, while Wall Street is too optimistic that policy rates and bond yields are heading significantly lower. There’s way too much complacency that deficits don’t matter. It’s worth noting that they now matter in the UK, where spiking yields doomed a new Prime Minister and forced belt tightening. UK gilt yields rose another eight bps this week – up 67 bps y-t-d – to a 13-week high of 4.21%. And speaking of “deficits do matter.”
October 11 – Bloomberg (William Horobin): “Fitch Ratings put France on negative outlook a day after the government presented its 2025 budget, delivering a rapid critique of Prime Minister Michel Barnier’s efforts to deal with a sharp deterioration in public finances. The ratings firm’s reproach comes after it already downgraded France to AA- from AA in April last year, a credit assessment it shares with the the UK and Belgium. ‘Fiscal policy risks have increased since our last review,’ Fitch said… ‘This year’s projected fiscal slippage places France in a worse fiscal starting position, and we now expect wider fiscal deficits, leading to a steep rise in government debt towards 118.5% of GDP by 2028.’”
French yields rose five bps this week to a 10-week high 3.04%. French yields have jumped 48 bps y-t-d, with the spread to German bunds closing the week at 78 bps, near the widest level since European bond crisis year 2012. While on the subject of fiscal problems and bond yields, Japanese “JGB” yields jumped seven bps this week to 0.95% – the high since August 1st.
Few countries can these days outdo the U.S. when it comes to egregious deficit spending. And no government has as many of its debt securities held by levered speculators. This ensures latent fragility. We can reasonably assume that “basis trade” leverage ramped up into what the market assumed would be the start of an aggressive Fed easing cycle. After rates were slashed on September 18th, the rates market was pricing a 2.88% December 2025 Fed funds rate – implying 195 bps of additional cuts by the end of next year. This rate rose another 15 bps this week to 3.34% – with rate cut expectations trimmed to 149 bps.
It appears the highly levered bond market is today especially vulnerable to upside inflation surprises. With the Atlanta Fed GDPNow forecast up to 3.22%, it’s increasingly difficult to dismiss the risk of overheating.
“AccuWeather preliminarily estimates the total damage and economic loss from historic Hurricane Milton will be between $160 billion and $180 billion… Hurricane Helene’s estimated total damage and economic loss of $225-250 billion.”
I believe climate change has created unappreciated inflation risks. While these two ferocious hurricanes will create an initial hit to economic activity, spending on clean-up and rebuilding will be massive. And this comes with tight labor markets. Moreover, we can assume millions of households will up their spending on backup power and emergency preparations. “Generac Runs Low on Portable Generators After Storms.” Does a steamy Gulf of Mexico now create perpetual serious hurricane risk for an alarmingly large swath of the country and tens of millions of households?
But perhaps the greatest inflation risks lurk internationally. China’s Shanghai Composite was down 3.6% this week, with the growth oriented ChiNext Index down 3.4%. Wednesday headline: “Chinese Stocks Tumble Most Since 2020 on Stimulus Skepticism.”
Skepticism is understandable, as is sentiment that swings between “things are falling apart” and “major lifesaving stimulus imminent.” Bubble deflation in China has gained significant momentum. Only massive stimulus can hold crisis dynamics at bay. And after a couple years of relatively measured stimulus, frenzied markets crave evidence that Beijing is readying the bazookas.
Beijing is swamped with myriad conflicting Bubble problems, including wild stock market speculation. Officials may initially hesitate to announce the momentous stimulus markets are demanding. But until proven otherwise, I’ll assume Xi will do whatever it takes to reflate the Chinese economy. I just don’t see tolerance in the current fraught geopolitical backdrop for risking the consequences of further Bubble deflation. This could significantly reduce China’s role in fostering global disinflation, while raising the odds of inflationary surprises.
October 12 – Bloomberg: “China promised new measures to support the property sector and hinted at greater government borrowing to shore up the economy, as authorities seek to put a floor under the country’s growth slowdown. Local governments will be allowed to use special bonds to buy unsold homes, Finance Minister Lan Fo’an announced at a briefing Saturday… He hinted at room for issuing more sovereign bonds and vowed to relieve the debt burden of local governments, signaling a possible rare revision to the budget that could come in the next few weeks. ‘The central government still has quite large room to borrow and increase the deficit,’ Lan said… While Lan fell short of putting a price tag on any additional stimulus — potentially disappointing investors — the measures announced were largely in line with economists’ expectations of steps to ease the property sector crisis and debt woes that have forced local governments to tighten their belts.”
October 11 – NBC (Monica Alba, Andrea Mitchell, Mosheh Gains, Carol E. Lee and Courtney Kube): “U.S. officials believe Israel has narrowed down what they will target in their response to Iran’s attack, which these officials describe as Iranian military and energy infrastructure. There is no indication that Israel will target nuclear facilities or carry out assassinations, but U.S. officials stressed that the Israelis have not made a final decision about how and when to act. The U.S. does not know when the response could come but officials said the Israeli military is poised and ready to go at any time once the order is given.”
Israel is seemingly poised for a major attack on Iran, while the U.S. election is only four weeks away. I expect the geopolitical backdrop to be an ongoing source of inflation risk. In the near-term, a strike on Iranian oil infrastructure would spark fears of crude supply shocks and a price spike. Interestingly, the MOVE (bond market volatility) Index traded this week to the high (124) since the first week of January. And rumblings of repo market instability have begun to emerge.
October 11 – Reuters (Gertrude Chavez-Dreyfuss): “A sharp steady rise in overnight repurchase agreements is overwhelming banks that serve as middlemen for such short-term borrowings in U.S. government securities, threatening to fuel major funding pressure at the end of every quarter and year. The market for so-called repos allows banks to borrow money quickly and cheaply when they need cash, and lend with little risk. Hedge funds and Wall Street financial firms rely on the roughly $4 trillion repo market to finance daily trades, and any disruption could force them to cut holdings… Repo rates jump when banks pull away from acting as middlemen at quarter- and year-ends due to higher balance sheet costs required at those times for reporting purposes. That happened at the end of the third quarter on Sept. 30. The secured overnight financing rate (SOFR), the cost of borrowing short-term cash, soared 13 bps over the effective federal funds rate of 4.83%. It was 22 bps higher on Oct. 1.”
October 8 – Bloomberg (Alexandra Harris and Carter Johnson): “The latest heightened liquidity pressures in the US funding market have some on Wall Street nervous about even greater challenges in the final month of the year. Market participants say a spike in interest rates tied to repurchase agreements, which are overnight loans collateralized by US Treasuries, could intensify in December as both regulatory burdens and Treasury auction settlements collide for the second time in three months, siphoning cash out of the funding market. It was those conditions that pushed rates to atypical levels at the end of the third quarter. ‘Year-end is now a bigger issue given the volatility’ at quarter-end, said Peter Nowicki, head of repo trading at Wedbush…”
Gold has gained 3.4% since September 17th, with Silver up 2.7%, Copper 6.6%, and Crude 8.0%. The Bloomberg Commodities Index has risen 3.9% since the day before the Fed meeting. Gold and Silver enjoy y-t-d gains of 28.8% and 32.5%. If I were either a bond or a Fed official, I’d be getting a little jittery. I won’t make too much of one occurrence. But if bond yields continue to rise on Fed rate cuts, key bullish assumptions regarding monetary stimulus, the Fed’s liquidity backstop, and perpetual bull markets will be due for an overhaul.
For the Week:
The S&P500 gained 1.1% (up 21.9% y-t-d), and the Dow rose 1.2% (up 13.7%). The Utilities dropped 2.5% (up 25.3%). The Banks surged 4.0% (up 24.2%), and the Broker/Dealers added 1.9% (up 29.7%). The Transports advanced 2.7% (up 2.1%). The S&P 400 Midcaps gained 1.1% (up 13.4%), and the small cap Russell 2000 added 1.0% (up 10.2%). The Nasdaq100 gained 1.2% (up 20.5%). The Semiconductors jumped 2.5% (up 27.8%). The Biotechs increased 0.3% (up 9.4%). With bullion up another $3, the HUI gold index increased 0.9% (up 31.2%).
Three-month Treasury bill rates ended the week at 4.51%. Two-year government yields increased three bps to 3.96% (down 29bps y-t-d). Five-year T-note yields rose 10 bps to 3.90% (up 5bps). Ten-year Treasury yields jumped 13 bps to 4.10% (up 22bps). Long bond yields surged 16 bps to 4.41% (up 38bps). Benchmark Fannie Mae MBS yields rose 13 bps to 5.35% (up 8bps).
Italian yields added five bps to 3.56% (down 14bps y-t-d). Greek 10-year yields increased four bps to 3.20% (up 15bps). Spain’s 10-year yields gained five bps to 3.01% (up 2bps). German bund yields rose six bps to 2.27% (up 24bps). French yields increased five bps to 3.04% (up 48bps). The French to German 10-year bond spread narrowed one to 77 bps. U.K. 10-year gilt yields jumped eight bps to 4.21% (up 67bps). U.K.’s FTSE equities index slipped 0.3% (up 6.7% y-t-d).
Japan’s Nikkei Equities Index rallied 2.5% (up 18.4% y-t-d). Japanese 10-year “JGB” yields jumped seven bps to 0.95% (up 34bps y-t-d). France’s CAC40 increased 0.5% (up 0.5%). The German DAX equities index gained 1.3% (up 15.7%). Spain’s IBEX 35 equities index added 0.5% (up 16.0%). Italy’s FTSE MIB index rose 2.1% (up 13.0%). EM equities were mixed. Brazil’s Bovespa index declined 1.4% (down 3.1%), and Mexico’s Bolsa index slipped 0.4% (down 8.7%). South Korea’s Kospi index recovered 1.1% (down 2.2%). India’s Sensex equities index declined 0.4% (up 12.7%). China’s Shanghai Exchange Index fell 3.6% (up 8.2%). Turkey’s Borsa Istanbul National 100 index fell 2.6% (up 18.8%).
Federal Reserve Credit declined $17.2 billion last week to $7.004 TN. Fed Credit was down $1.885 TN from the June 22, 2022, peak. Over the past 265 weeks, Fed Credit expanded $3.278 TN, or 88%. Fed Credit inflated $4.194 TN, or 149%, over the past 622 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.1 billion last week to $3.320 TN. “Custody holdings” were down $106 billion y-o-y, or 3.1%.
Total money market fund assets expanded $11.3 billion to a record $6.474 TN. Money funds were up $588 billion y-t-d, or 12.7% annualized, and $766 billion, or 13.4%, y-o-y.
Total Commercial Paper increased $2.5 billion to $1.194 TN. CP was down $16 billion, or 1.3%, over the past year.
Freddie Mac 30-year fixed mortgage rates jumped 20 bps this week to 6.32% (down 131bps y-o-y). Fifteen-year rates rose 16 bps to 5.41% (down 160bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down a basis point to 7.07% (down 74bps).
Currency Watch:
October 8 – Reuters (Qiaoyi Li, Ryan Woo and Casey Hall): “China’s foreign exchange reserves rose more than expected in September… The country’s foreign exchange reserves – the world’s largest – grew by $28.2 billion to $3.316 trillion last month, compared with a median estimate of $3.304 trillion…, and $3.288 trillion in August.”
For the week, the U.S. Dollar Index increased 0.4% to 100.8063 (up 2.2% y-t-d). For the week on the upside, the South African rand increased 0.4% and the Swiss franc added 0.1%. On the downside, the Brazilian real declined 2.8%, the Canadian dollar 1.4%, the New Zealand dollar 0.8%, the Australian dollar 0.7%, the British pound 0.4%, the Norwegian krone 0.4%, the euro 0.3%, the Japanese yen 0.3%, the South Korean won 0.2%, and the Swedish krona 0.1%. The Chinese (onshore) renminbi declined 0.68% versus the dollar (up 0.47% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index retreated 1.2% (up 2.2% y-t-d). Spot Gold was little changed at $2,657 (up 28.8%). Silver fell 2.1% to $31.54 (up 32.5%). WTI crude added $1.18, or 1.6%, to $75.56 (up 6%). Gasoline rallied 2.7% (up 2%), while Natural Gas dropped 7.8% to $2.632 (up 5%). Copper fell 1.8% (up 16%). Wheat gained 1.6% (down 5%), while Corn fell 2.1% (down 12%). Bitcoin increased $440, or 0.7%, to $62,530 (up 47%).
Middle East War Watch:
October 9 – Reuters (Trevor Hunnicutt, Maayan Lubell and Matt Spetalnick): “U.S. President Joe Biden and Israeli Prime Minister Benjamin Netanyahu had a call on Wednesday amid tensions with Iran, while Israeli Defence Minister Yoav Gallant promised an Israeli strike against Iran will be ‘lethal, precise and surprising.’ The 30-minute call was the first known chat for Biden and Netanyahu since August and coincides with a sharp escalation of Israel’s conflict with Iran and the Iran-backed Lebanese Hezbollah, but with no sign of an imminent ceasefire to end the conflict with Iran-backed Hamas in Gaza.”
October 9 – Wall Street Journal (Nancy A. Youssef and Carrie Keller-Lynn): “President Biden and Israeli Prime Minister Benjamin Netanyahu discussed Israel’s expected military retaliation against Iran in their first call in over a month…, as the administration seeks to convince its closest Middle East ally not to hit Tehran’s oil facilities or nuclear sites. Biden reiterated his ‘ironclad commitment to Israel’s security’ and condemned Iran’s ballistic missile attack against Israel last week… An Israeli official said they discussed Israel’s plans to strike back during the half-hour call. But neither the U.S. nor Israel signaled the two leaders reached agreement on the planned attack. ‘They agreed to remain in close contact over the coming days,’ the U.S. statement said.”
October 8 – Axios (Barak Ravid): “Israeli Minister of Defense Yoav Gallant postponed his visit to Washington, DC after it was vetoed at the last minute by Prime Minister Benjamin Netanyahu, Israeli officials said. Why it matters: Gallant’s trip… was supposed to focus on coordination with the U.S. around Israel’s possible retaliatory attack against Iran. Netanyahu’s move to block the trip is another sign of the tension between him and his minister of defense, who he tried to fire twice in the past two years. It’s also another indication of the deep distrust between Netanyahu and the Biden administration.”
October 8 – Wall Street Journal (Laurence Norman and Sune Engel Rasmussen): “Israel has shown Iran’s two most important deterrents against an attack—its ballistic missiles and allied militia Hezbollah—are less powerful than previously thought. Now attention is turning to whether Iran will accelerate its nuclear program to deter its biggest regional foe. For months, Iranian officials have said that Tehran has accumulated most of the knowledge needed to build a weapon and that it might reconsider Supreme Leader Ayatollah Ali Khamenei’s two-decade-old pledge not to procure weapons of mass destruction. In late September, a former head of Iran’s atomic agency, Fereydoun Abbasi, suggested that Tehran could start producing 90% enriched, weapons-grade uranium. U.S. officials have said it would take Iran less than two weeks to convert its current 60% nuclear-fuel stockpile into weapons-grade material.”
October 8 – Reuters (James Mackenzie and Maya Gebeily): “Prime Minister Benjamin Netanyahu said… Israeli airstrikes had killed two successors to Hezbollah’s slain leader, as Israel expanded its ground offensive against the Iran-backed group with a fourth army division deployed into south Lebanon… ‘We’ve degraded Hezbollah’s capabilities. We took out thousands of terrorists, including (Hassan) Nasrallah himself and Nasrallah’s replacement, and the replacement of the replacement,’ Netanyahu said…”
October 9 – Financial Times (James Shotter, Neri Zilber and Andrew England): “Shifting rhetoric from Israel’s political leadership and the scale of its military’s evacuation orders in Lebanon have left officials in the region and in western capitals suspecting that its war will be longer and more grinding than the ‘limited’ operation that was announced. Since soldiers from Israel’s 98th division entered Lebanon in their first invasion of the country for nearly two decades, the scale of Israel’s ground assault on Hizbollah has quickly grown. Three other divisions have joined the fighting, with thousands of Israeli soldiers advancing into Lebanon from locations ranging from Rosh HaNikra in the west to Misgav Am in the east. Military evacuation orders now cover more than 110 areas in Lebanon…”
October 11 – Reuters (Laila Bassam, Tom Perry and Alexander Cornwell): “Hezbollah is preparing for a long war of attrition in south Lebanon, after Israel wiped out its top leadership, with a new military command directing rocket fire and the ground conflict, two sources… said. Hezbollah has been diminished by three weeks of devastating Israeli blows… Friends and foes alike are now watching how effectively it resists Israeli troops that have crossed into Lebanon with the stated aim of driving it away from the border. The Iran-backed group still has a considerable stockpile of weapons, including its most powerful precision missiles which it has yet to use… Hezbollah’s command was disrupted for the first few days after Nasrallah’s Sept. 27 assassination until Shi’ite militants established a new ‘operations room’ 72 hours later, the two sources – a Hezbollah field commander and a source close to the group – told Reuters.”
October 10 – Financial Times (Najmeh Bozorgmehr and Andrew England): “A senior adviser to Iran’s supreme leader has warned Tehran could change its nuclear doctrine if Israel targets the Islamic republic’s atomic facilities. As Iran and the wider Middle East brace for Israeli Prime Minister Benjamin Netanyahu’s response to last week’s Iranian missile attack on Israel, Brigadier General Rasoul Sanaei-Rad said: ‘Striking nuclear sites could certainly have an impact on the calculations during and after the war.’ ‘Some politicians have already raised the possibility of changes in [Iran’s] nuclear strategic policies,’ Sanaei-Rad, a political adviser to Ayatollah Ali Khamenei, told Fars… ‘Moreover, such actions [an Israeli strike on Iran’s nuclear plants] would cross regional and global red lines.’”
October 10 – Wall Street Journal (Summer Said, Nancy A. Youssef and Omar Abdel-Baqui): “Tehran is threatening in secret diplomatic backchannels to target the oil-rich Arab Gulf states and other American allies in the Middle East if their territories or airspace are used for an attack on Iran, said Arab officials. Israel has threatened Tehran with a severe reprisal after Iran fired about 180 ballistic missiles at Israel earlier this month, with some Israeli officials and commentators pushing for damaging strikes on Tehran’s nuclear facilities or oil infrastructure. In that event, Iran has warned it would respond with devastating hits on Israel’s civilian infrastructure, and would retaliate against any Arab state that facilitated the attack, the officials said.”
October 10 – Reuters (Samia Nakhoul, Parisa Hafezi and Pesha Magid): “Gulf states are lobbying Washington to stop Israel from attacking Iran’s oil sites because they are concerned their own oil facilities could come under fire from Tehran’s proxies if the conflict escalates, three Gulf sources told Reuters. As part of their attempts to avoid being caught in the crossfire, Gulf states including Saudi Arabia, the United Arab Emirates and Qatar are also refusing to let Israel fly over their airspace for any attack on Iran and have conveyed this to Washington…”
October 4 – New York Times (Keith Bradsher): “Iran’s oil infrastructure has been pushed to the center of the escalating conflict in the Middle East, but an Israeli strike on Iran’s energy facilities would also affect China directly… China… buys more than 90% of Iran’s oil exports. China relies on imports from around the world for almost three-quarters of its oil consumption. The loss of supply from Iran would have China turning to global markets for even more of its energy needs.”
Ukraine War Watch:
October 10 – Reuters (Andrew Macaskill and Alistair Smout): “President Volodymyr Zelenskiy held talks with NATO chief Mark Rutte and British Prime Minister Keir Starmer on Thursday where they discussed his proposed ‘victory plan’ and whether Ukraine could use Western missiles against targets in Russia. Starmer and Zelenskiy have both said the war with Russia is at a critical point, and the Ukrainian leader is keen for the West to give further support to try to change the balance on the battlefield. Zelenskiy has pushed for the United States and Britain to let it use long-range missiles donated by its allies inside Russian territory, something Rutte said had come up at the meeting. ‘We discussed it today, but in the end it is up to the individual allies,’ Rutte told reporters…”
October 7 – Reuters (Yuliia Dysa): “A Russian missile hit a Palau-flagged vessel in Ukraine’s southern port of Odesa on Monday, killing a Ukrainian national and injuring five crew members in the second such attack in as many days, officials said. Ukrainian Foreign Minister Andrii Sybiha said on X that the two ships were damaged in the Black Sea grain-export hub without giving details on the ships’ conditions. He condemned Russia’s actions.”
October 10 – Bloomberg (Áine Quinn and Alex Longley): “The cost of insuring vessels that transit Ukraine’s shipping corridor in the Black Sea jumped this week after Russia ramped up attacks on key ports. Coverage has now surged to above 1% of the value of a ship… That’s up from around 0.75% last week. For a $50 million ship, that would be an increase of $125,000 per voyage.”
Taiwan Watch:
October 10 – Wall Street Journal (Joyu Wang and Austin Ramzy): “Five months ago, China greeted the inauguration of Taiwan’s president, Lai Ching-te, with combat drills that encircled the island and the threat of more to come. So when Lai gave a major speech Thursday, Beijing and Washington were listening to just how forcefully he would address Taiwan’s relationship with China… Lai reasserted his stance on Taiwan’s sovereignty, and that Beijing had no right to represent it, but his comments directed at China were also a call for calm. ‘Taiwan is determined to maintain peace and stability across the Taiwan Strait and achieve global security and prosperity,’ Lai said in a national address… ‘It is also willing to work with China to respond to climate change, prevent infectious diseases, maintain regional security, pursue peace and common prosperity, and bring benefits to people on both sides of the Taiwan Strait.’”
October 11 – Bloomberg (Yian Lee and Jenny Leonard): “Taiwan President Lai Ching-te indicated in a speech that he would stand up to the challenges posed by China, comments that elicited a sharp response from Beijing. While delivering his first National Day address on an overcast Thursday in Taipei, Lai said he’d work to ‘resist annexation or encroachment upon our sovereignty,’ and added that China had no right to represent Taiwan. He reiterated that neither side of the strait separating the two sides was ‘subordinate to each other.’ Lai used that line in his inaugural address in May, a speech Beijing criticized at the time for sending ‘a dangerous signal of seeking independence.’”
October 7 – CNN (Nectar Gan and Eric Cheung): “It is ‘absolutely impossible’ for Communist China to become Taiwan’s motherland because the island’s government is older, Taiwan’s president has said in a carefully timed speech that underscores the intense historical rivalry between the two. Lai Ching-te, who took office in May, has long faced Beijing’s wrath for championing Taiwan’s sovereignty and rejecting the Chinese Communist Party (CCP)’s claims over the island… On Saturday, in a move likely to further infuriate Beijing, Lai dug into history to make his point, stressing that Taiwan is already a ‘sovereign and independent country’ called the Republic of China (ROC), whose government ruled mainland China for decades before relocating to Taiwan when the CCP came to power.”
Market Instability Watch:
October 10 – Wall Street Journal (Jiahui Huang and Fabiana Negrin Ochoa): “The pressure is on for China’s Finance Ministry to deliver more fiscal stimulus at a press conference on Saturday. Market sentiment has been swinging from hope to dismay as officials roll out a wave of measures to boost the economy and shore up confidence—with mixed results. A briefing from China’s top economic planner this week met with disappointment. Still, expectations are high heading into the ministry event, as it has the power to announce the fiscal stimulus analysts say is missing from the policy package.”
October 11 – Bloomberg: “Investors and analysts are expecting China to deploy as much as 2 trillion yuan ($283bn) in fresh fiscal stimulus as Beijing seeks to shore up the world’s second- biggest economy and boost confidence. That’s what they hope the country’s finance minister will announce at a highly anticipated briefing on Saturday… Most of the respondents expect the funding to come in the form of government bonds.”
October 9 – Financial Times (Jennifer Hughes and Ian Smith): “Volatility in the $27tn US Treasury market has surged to its highest level since the start of the year, as nervy investors quickly readjust their expectations for how quickly the Federal Reserve will cut interest rates. Stellar jobs numbers… sparked one of the biggest daily swings in bond yields this year… The 10-year yield, which had been falling since late April… is now trading above those levels at about 4.02%… ‘The market is still lurching from one narrative to the other on an almost weekly basis,’ said William Vaughan, associate portfolio manager at Brandywine…”
October 10 – Reuters (Lewis Krauskopf and Saqib Iqbal Ahmed): “A tight U.S. presidential race is leading some investors to brace for an unclear or contested election result that could trip up this year’s booming stock market rally. With less than a month before the election, polls and prediction markets show Democrat Kamala Harris and Republican Donald Trump in a virtual dead heat. Harris led Trump by a marginal 46% to 43% in a Reuters/Ipsos poll…, a tighter race than the same poll showed a couple weeks earlier…. The Cboe Volatility Index… has risen about 6 points from its September lows and now stands at 20.9 – a level typically associated with moderate to higher expectation for market turbulence.”
Global Credit Bubble Watch:
October 6 – Financial Times (Patrick Jenkins): “The age-old activity of lending money, and getting it paid back with a bit of interest, feels pretty prosaic at a time of escalating wars and climate disasters on the one hand, and gung-ho hype about artificial intelligence on the other. But in one corner of corporate lending, where private capital groups are expanding aggressively into a space once dominated by banks, all of the above is coming together in an excitable cocktail of risk and opportunity. Precise definitions and growth projections of the so-called private credit market differ. But whether you take the IMF’s view that this is a $2tn-a-year industry, or JPMorgan’s that it tops $3tn, experts seem to agree on one thing: the growth pattern of recent years is only going to accelerate. After expanding by 50% over the past four years, Morgan Stanley believes the sector is set to balloon by 90% over the next four.”
October 10 – Bloomberg (Jill R. Shah): “Companies owned by private equity firms are landing in default more frequently than other speculative-grade borrowers, according to… Moody’s… Private equity-backed companies defaulted at a rate of 17% between January 2022 and August of this year, twice the rate of non-private equity-backed companies, Moody’s said… Among the 12 largest private equity sponsors… the default rate was slightly lower at around 14%. Platinum Equity had the highest number and share of defaults, out of Moody’s ranking of the 12 largest sponsors, followed by Apollo Global Management and Clearlake Capital Group…”
AI Bubble Watch:
October 11 – Yahoo Finance (Yasmin Khorram): “Whether you think artificial intelligence will save the world or end it — there’s no question we’re in a moment of great enthusiasm. AI, as we know, may not have existed without Yoshua Bengio. Called the ‘Godfather of Artificial Intelligence,’ Bengio, 60, is a Canadian computer scientist who has devoted his research to neural networks and deep learning algorithms. His pioneering work has led the way for the AI models we use today… ‘Intelligence gives power and whoever controls that power — if it’s human level or above — is going to be very, very powerful… Technology in general, is used by people who want more power: economic dominance, military dominance, political dominance. So before we create technology that could concentrate power in dangerous ways — we need to be very careful.’”
Bubble and Mania Watch:
October 11 – Reuters (Silla Brush): “BlackRock Inc. pulled in a record $221 billion of total client cash last quarter, pushing the world’s largest money manager to an all-time high of $11.5 trillion of assets as it seeks to become a one-stop shop for stocks, bonds and, increasingly, private assets. Investors added $97 billion to exchange-traded funds and $63 billion to fixed-income overall in the third quarter… BlackRock has pulled in $360 billion of total net inflows so far this year, surpassing the full-year net flows of 2022 and 2023.”
October 6 – Financial Times (Will Schmitt and Robin Wigglesworth): “When Wall Street scrambled to launch bitcoin funds earlier this year, there was just one trading company named in regulatory filings as an anchor market-maker for every single one: Jane Street. The move underscored how a quirky and opaque New York firm has used its dominance in exchange traded funds and embrace of more finicky financial securities as a springboard to become the most profitable of all the trading firms that are now a significant force in markets. Last year was the fourth straight year that Jane Street generated net trading revenues of more than $10bn… Its gross trading revenues of $21.9bn were equivalent to roughly one-seventh of the combined equity, bond, currency and commodity trading revenues of all the dozen major global investment banks last year…”
October 7 – Wall Street Journal (Deborah Acosta): “Anthony Holmes was part of the great Florida migration. In 2021, he moved from Virginia to a gated suburban community in Tampa. Now that he has had to leave, Holmes is another victim of a glutted housing market where buyers are increasingly hard to find. He paid $550,000 for his five-bedroom home and spent another $50,000 on solar panels and interior improvements. When he had to move back to Virginia for work, Holmes expected to sell his house quickly. But since listing it in February, he has had no luck. He dropped the price five times to $583,900 and would be happy simply to break even. ‘I can’t unload the thing,’ Holmes said. ‘In eight months, I’ve had zero offers. No one even showed up to the open houses. Nobody.’ Across much of Florida and especially along the western coast, a surplus of inventory and dwindling buyer interest are slowing sales…”
October 8 – New York Times (Emily Flitter): “Postpandemic vacancies and surging debt payments have eaten away at commercial real estate for more than two years. Even as those threats start to fade, owners of strip malls, apartment buildings and office towers face a problem that could last much longer: soaring insurance costs. The problem is familiar to homeowners across the country. The rise in climate-related natural disasters has insurance companies pushing rates substantially higher, or pulling out of markets. The rate increases have been fastest in coastal cities and towns vulnerable to damage from big storms or coastal floods, but insurers and banks are coming to terms with the notion that no area is truly safe from increasingly extreme and unpredictable weather events.”
October 9 – Reuters (Jody Godoy): “The U.S. said… it may ask a judge to force Alphabet’s Google to divest parts of its business, such as its Chrome browser and Android operating system, that it says are used to maintain an illegal monopoly in online search. In a landmark case, a judge found in August that Google, which processes 90% of U.S. internet searches, had built an illegal monopoly. The Justice Department’s proposed remedies have the potential to reshape how Americans find information on the internet while shrinking Google’s revenues and giving its competitors more room to grow. ‘Fully remedying these harms requires not only ending Google’s control of distribution today, but also ensuring Google cannot control the distribution of tomorrow,’ the Justice Department said…”
October 7 – Bloomberg (Masaki Kondo): “Japanese funds bought a record amount of US sovereign bonds in August amid a rally in Treasuries, the latest balance-of-payments data from the country’s Ministry of Finance showed… Net buying came to ¥5.59 trillion ($37.8bn), bringing total purchases to ¥12.8 trillion for the January-August period. That’s similar to amount for the same period a year earlier.”
October 9 – Reuters (Niket Nishant): “Bonuses for Wall Street dealmakers could expand by 7.4% in 2024 as a rebound in dealmaking boosts fees pocketed by investment banks, according to… New York State Comptroller Thomas DiNapoli… The anticipated surge would mark the first increase in two years as corporations begin to emerge from a subdued dealmaking environment.”
U.S./Russia/China/Europe Watch:
October 11 – Reuters: “Russia’s Vladimir Putin held talks with Iranian President Masoud Pezeshkian on Friday in Turkmenistan, where the two leaders hailed their countries growing economic ties and similar views on world affairs… At odds with Washington and the European Union over Russia’s war in Ukraine, something he casts as part of a wider existential struggle against an arrogant and self-interested West – Putin is keen to deepen ties with what he calls the Global East and Global South.”
October 7 – Reuters (Lidia Kelly): “Russian and Chinese navy warships have practiced anti-submarine missions in the northwestern Pacific Ocean as part of a joint patrol in the Asia-Pacific region… ‘A tactical group of warships manoeuvred and formed a marching order to organise anti-submarine defence,’ Interfax agency cited… the Russian Pacific Fleet as saying. The agency reported that Russian and Chinese Navy ships have begun joint patrols after participating in the Beibu/Interaction 2024 naval exercises in September.”
Inflation Watch:
October 10 – CNBC (Jeff Cox): “The pace of price increases over the past year was higher than forecast in September…The consumer price index… increased a seasonally adjusted 0.2% for the month, putting the annual inflation rate at 2.4%. Both readings were 0.1 percentage point above the Dow Jones consensus. The annual inflation rate was 0.1 percentage point lower than August and is the lowest since February 2021. Excluding food and energy, core prices increased 0.3% on the month, putting the annual rate at 3.3%.”
October 10 – Bloomberg (Chris Anstey): “Here are five key takeaways from the US consumer price index report for September…: Both the headline and the core CPI, which excludes food and energy, came in 0.1 percentage point higher than forecast for the month, with a 0.2% increase in the headline index and a 0.3% rise for the core. Food prices helped propel the headline figure, which came in hot even as gasoline and energy costs more broadly declined. The core figure was driven by services costs. Car insurance, medical care, clothing and airfares climbed in September, and there were record increases in a few specific categories: college textbooks, sports tickets, and jewelry and watches.”
October 7 – Associated Press (Gary D. Roebertson): “With many western North Carolina residents still lacking power and running water from Hurricane Helene, a hearing began Monday on the insurance industry’s request to raise homeowner premium rates statewide by more than 42% on average… In over 2,000 pages of data filed last January, the Rate Bureau sought proposed increases varying widely from just over 4% in parts of the mountains to 99% in some beach areas. Proposed increases in and around big cities like Raleigh, Charlotte and Greensboro are roughly 40%. Across 11 western counties that were hit hard by Helene, including Asheville’s Buncombe County, the requested increase is 20.5%.”
October 11 – CNBC (Jeff Cox): “The producer price index, which measures what producers get for their goods and services, was flat for the month and up 1.8% from a year ago. Economists… had been looking for a monthly gain of 0.1% after August’s increase of 0.2%. Excluding food and energy, the PPI rose 0.2%, meeting expectations…”
October 10 – Associated Press (Fatima Hussein): “Millions of Social Security recipients will get a 2.5% cost-of-living increase to their monthly checks beginning in January, the Social Security Administration announced… The cost-of-living adjustment, or COLA, for retirees translates to an average increase of more than $50 for retirees every month… About 72.5 million people, including retirees, disabled people and children, get Social Security benefit. Commissioner Martin O’Malley said the adjustment will help ‘tens of millions of people keep up with expenses even as inflation has started to cool.’”
Federal Reserve Watch:
October 9 – Bloomberg (Craig Torres): “Federal Reserve Chair Jerome Powell received some pushback on a half-point interest-rate cut in September, as some officials preferred a smaller, quarter-point cut. ‘Some participants observed that they would have preferred a 25-basis-point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision,’ according to the minutes of the Federal Open Market Committee’s Sept. 17-18 meeting… All participants said it was appropriate to reduce borrowing costs… ‘Several participants noted that a 25 bps reduction would be in line with a gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved…’”
October 9 – Reuters (Ann Saphir): “Dallas Federal Reserve Bank President Lorie Logan… said she supported last month’s outsized interest-rate cut but wants smaller reductions ahead, given ‘still real’ upside risks to inflation and ‘meaningful uncertainties’ over the economic outlook. ‘Following last month’s half-percentage-point cut in the fed funds rate, a more gradual path back to a normal policy stance will likely be appropriate from here to best balance the risks to our dual-mandate goals,’ Logan said… The central bank, she said, ‘should not rush to reduce the fed funds target to a ‘normal’ or ‘neutral’ level but rather should proceed gradually while monitoring the behavior of financial conditions, consumption, wages and prices.’”
October 7 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of St. Louis President Alberto Musalem said he supported the US central bank’s decision last month to lower interest rates by a half point, but emphasized he’d prefer further reductions to be gradual. Musalem said he penciled in a rate path that was slightly higher than the median official in the Federal Open Market Committee’s Summary of Economic Projections released last month… ‘Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late,’ Musalem said…”
U.S. Economic Bubble Watch:
October 9 – Bloomberg (Molly Smith): “US mortgage rates jumped last week by the most since July 2023, abruptly halting a monthslong slide that was helping to reinvogorate housing activity. The contract rate on a 30-year mortgage increased 22 bps to 6.36%… The rate now stands at the highest level since August.”
October 9 – CNBC (Diana Olick): “An abrupt turn higher for mortgage interest rates caused weekly demand from both potential homebuyers and current homeowners to drop… Applications to refinance a home loan, which had been surging for several months, fell 9% for the week but were still 159% higher than the same week one year ago… Applications for a mortgage to purchase a home were essentially flat for the week, dropping 0.1% from the previous week. Purchase demand was 8% higher than… one year ago.”
October 10 – Reuters (Hannah Lang): “As Amazon’s Prime Day kicked off the holiday shopping season this week, U.S. consumers are expected to spend a record $18.5 billion using buy now, pay later for purchases in the last quarter of the year, according to… Adobe Analytics. Buy now, pay later (BNPL) exploded in popularity as the COVID-19 pandemic forced more shoppers online, driving $75 billion in online spending in 2023, up 14.3% from 2022… BNPL providers like Affirm and Klarna boost shoppers’ purchasing power by lending them the money for purchases, which they repay in installments spread over as many as 36 months, although the most common products are four-installment payment plans.”
October 8 – Reuters (Lucia Mutikani): “The U.S. trade deficit narrowed sharply in August as exports increased to a record high… The trade gap contracted 10.8% to $70.4 billion, the smallest in five months, from a revised $78.9 billion in July… Exports increased 2.0% to a record $271.8 billion. Goods exports surged 2.5% to $179.4 billion, the highest level since September 2022… Imports decreased 0.9% to $342.2 billion. Goods imports dropped 1.4% to $274.3 billion…”
October 7 – Bloomberg (Mark Niquette): “US consumer borrowing increased in August at a slower pace than a month earlier, restrained by the largest drop in credit-card balances since March 2021. Total credit outstanding rose $8.9 billion after a revised $26.6 billion July increase that was the largest since October 2022…”
October 7 – Wall Street Journal (Angel Au-Yeung): “Americans can’t remember a time when it cost as much to carry a credit-card balance. Banks have been raising interest rates on credit cards for years… That means cardholders struggling to pay their bills might not see much relief, if any, even with the Federal Reserve expected to continue lowering rates. The average credit-card interest rate was 21.5% in May, hovering around its highest level in Fed data going back to 1994. The average balance that people carry was around $6,300 in the second quarter, up 31% from the same period in 2021, according to… TransUnion…”
Fixed Income Watch:
October 8 – Bloomberg (James Crombie): “US high-grade bond spreads are on track to contract to levels not seen in almost 20 years… As Treasury yields shot up, investment-grade bond spreads were crushed to the tightest in three years, at 83 bps on the index. That’s just 3 bps from the lows of summer 2021, after which you’d have to go back to early 2005 for tighter levels.”
October 9 – Reuters (Davide Barbuscia): “Widening U.S. budget deficits and inflationary trade policies after the Nov. 5 presidential election could weigh on U.S. government bonds despite the near-term advantages of a central bank in easing mode, bond giant PIMCO said… The bond-focused U.S. manager… expects a so-called soft landing for the U.S. economy as inflation subsides and economic activity remains on solid footing… ‘High government deficits could push long-term yields higher over time,’ Tiffany Wilding, a managing director and economist, and Andrew Balls, chief investment officer for global fixed income, wrote…”
October 10 – Bloomberg (Caleb Mutua): “If cut to junk status, Boeing Co will be the biggest US corporate borrower to ever be stripped of its investment-grade ratings and join junk bond indexes, flooding the high-yield market with a record volume of new debt to absorb. On Tuesday, S&P Global Ratings said it’s considering downgrading the planemaker to junk as strikes at its manufacturing sites persist… Downgrades to junk… would leave much of its $52 billion of outstanding long-term debt ineligible for inclusion in investment-grade indexes.”
China Watch:
October 9 – Wall Street Journal: “China’s central bank is moving ahead with a 500-billion-yuan swap facility to let securities, fund and insurance firms get liquid assets for their stock purchases. The establishment of the roughly $70.60 billion facility is part of a broader stimulus package introduced late last month by People’s Bank of China Gov. Pan Gongsheng… At a press conference detailing the stimulus package, Pan said the swap facility would ‘significantly enhance these institutions’ ability to raise funds and increase stock holdings…’ The PBOC said that eligible brokers and insurers can now pledge assets such as bonds, stock ETFs, and shares of companies listed on the CSI 300 index to obtain liquid assets like Treasury bonds from the central bank.”
October 10 – Bloomberg: “China’s central bank has set up a swap facility to provide liquidity to institutional investors to buy stocks, part of a broad stimulus package announced earlier that ignited a rally in equities. The People’s Bank of China will accept applications from eligible securities firms, funds and insurers starting Thursday to obtain highly liquid assets such as government bonds and central bank bills if they provide certain collateral. The size of the tool is 500 billion yuan ($70.6bn) and can be expanded in the future… PBOC Governor Pan Gongsheng unveiled the mechanism as part of a stimulus bonanza last month…”
October 8 – Reuters (Liangping Gao and Clare Jim): “China’s average daily home sales during the Golden Week holiday leapt 23% by floor area from the same period last year, boosted by improved market sentiment after the government’s support policies… The market, in a slump since 2021 after a string of cash-strapped developers defaulted on loans, got a lift from stimulus measures announced by the government just days before the week-long National Day holidays began. Sales rose the most in 10 smaller tier-three cities, rising 69%, among the 25 cities surveyed between Oct. 1 and 7. Tier-one cities reported an 18% increase in sales.”
October 7 – Bloomberg (Iris Ouyang): “China has the option of boosting stimulus by raising its fiscal deficit ratio to the highest ever, according to a top economist, a move he said would reflect the government’s commitment to this year’s growth target of around 5%. Jia Kang, a former head of a research institute affiliated with the Ministry of Finance, said… authorities may decide on adjusting the budget this quarter and might cap the shortfall at around 4% of gross domestic product — up from the current 3% for this year. ‘This can be the ‘big action’ in terms of fiscal policy,’ said Jia, who now leads the China Academy of New Supply-Side Economics, a private think tank.”
October 9 – Bloomberg: “China’s onshore high-yield debt market is suffering its worst day of trading in years as investors are on the lookout for more government measures to boost the economy. Yields of some AA rated corporate notes issued by Chinese firms have soared by more than 30 bps as of 4 p.m. Wednesday… They’re poised for the biggest daily jump since December 2014…”
October 8 – Bloomberg: “Leveraged equity positions in China surged at the fastest pace in more than a decade as traders boosted risky wagers upon their return from the Golden Week holiday. The outstanding amount of margin debt in Shanghai and Shenzhen exchanges rose to 1.54 trillion yuan ($218bn) on Tuesday, up 7.4% from the last trading session on Sept. 30…”
October 10 – Bloomberg (Jeanny Yu and Abhishek Vishnoi): “Hedge funds sold a record amount of Chinese shares on Tuesday after a key policy meeting disappointed traders with no major stimulus, according to a Goldman Sachs… trader note. ‘Hedge funds not only unwound their long positions but added shorts to their books as well, with long sells being double the amount of short sells,’ according to the note…”
Central Banker Watch:
October 10 – Bloomberg (Sam Kim): “The Bank of Korea cautiously joined a global wave of central banks cutting rates as it finally saw enough cooling of inflation and property prices to shift its attention to supporting the economy. The central bank lowered its key policy rate by a quarter-percentage-point to 3.25%…”
Global Bubble Watch:
October 8 – Bloomberg (Carol Ryan): “How closely is demand for $3,000 handbags tied to home prices in China? Quite closely, it turns out, which is unfortunate for luxury brands. Europe’s luxury stocks fell in early trading Tuesday after China’s economic planning agency failed to announce additional measures to kickstart growth that some investors had hoped for. The sector is still up 10% on average since Beijing launched its initial stimulus plans late last month.”
Europe Watch:
October 10 – Bloomberg (Jill R. Shah): “The French government unveiled a budget for next year that aims to deliver a $66.2bn remedy for its creaking public finances and rebuild investor confidence even as it risks eviction by a hostile parliament. Spending cuts will account for just over two thirds of what Finance Minister Antoine Armand called an unheard-of fiscal effort, with the rest coming from higher taxes on businesses, the wealthy and energy. ‘Our country is in an unprecedented situation and at a pivotal moment… The French economy is holding up, but our public debt is colossal. It would be both cynical and fatal not to see it, say it and recognize it.’”
October 5 – Financial Times (Valentina Romei and Sam Fleming): “European households are saving at higher rates than in the pre-pandemic era, according to data that highlights a clear and persistent divergence from more buoyant US consumers driving America’s economic recovery. Savings rates spiked on both sides of the Atlantic during the pandemic as consumers were forced to stay at home. But while Americans have since unleashed spending, Europeans have struggled to shake a sense of economic insecurity after Russia’s invasion of Ukraine. The household saving ratio in the Eurozone rose to a three-year high of 15.7% in the three months to June, well above its pre-pandemic average of 12.3%…”
Japan Watch:
October 7 – Reuters (Leika Kihara): “The Bank of Japan said broadening wage hikes were underpinning consumption and prodding more firms in regional areas to pass on rising labour costs, signalling the economy was making progress towards meeting the prerequisite for more interest rate hikes. But the central bank warned that some small and medium-sized firms were struggling to earn enough profits to hike wages, a development that ‘required vigilance.’ ‘This year’s wage increases were helping push up consumption with some firms pointing to the effect of solid spending by the younger generation, which enjoyed fairly big pay hikes,’ the BOJ said…”
October 8 – Wall Street Journal (Megumi Fujikawa): “Japan’s newly appointed economy minister showed tolerance for gradual monetary tightening by the Bank of Japan as long as it doesn’t ruin the nation’s efforts to defeat deflation. ‘The BOJ has said that it needs to carefully assess financial markets and economic conditions at home and abroad in making policy judgments, and that there is enough time to do so,’ Ryosei Akazawa, the minister in charge of economic revitalization, told Dow Jones… ‘We trust the BOJ’s decision,’ he added.”
October 10 – Reuters (Leika Kihara): “Bank of Japan Deputy Governor Ryozo Himino said… the central bank will consider raising interest rates if the board has ‘greater confidence’ that its economic and price forecasts will be realised. Himino said the BOJ’s decision on when to raise interest rates will be made by looking at the ‘totality’ of data presented at each policy meeting. ‘We are not on a pre-set course,’ Himino said, adding the BOJ will ‘carefully assess incoming data, the evolving outlook, and the balance of risks at each meeting.’”
Emerging Market Watch:
October 9 – Bloomberg (Selcuk Gokoluk and Jorgelina Do Rosario): “JPMorgan… expects bond sales from emerging markets in Europe, the Middle East and Africa to close the year at a record, even with potential market turbulence due to US presidential elections in November and escalating tensions in the Middle East. The expected record, which comprises both sovereign and corporate hard currency issuances, comes as the US Federal Reserve recently cut interest rates for the first time in more than four years, while the extra yield on emerging-market dollar bonds has tumbled to the lowest since 2018. The bank expects 2024 debt issuance to break the previous record of $265 billion set in 2020, with $253 billion sold so far this year.”
October 10 – Reuters (Horacio Fernando Soria): “Argentina’s triple-digit inflation, the world’s highest, is starting to slow but this offers little relief for residents whose salaries have stayed the same while costs of basic goods sky-rocketed and the government slashed state subsidies. ‘We’re losing track of what’s expensive and what’s cheap,’ said university professor Daniel Vazquez… ‘Prices keep going up and the only thing that isn’t going up is salaries.’ ‘The gap is very, very big,’ he said. Analysts expect full-year inflation of around 124% in 2024… The 12-month inflation rate remained well into the triple digits at 237% in August.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 5 – Wall Street Journal (Jean Eaglesham): “Homeowners are rushing to file insurance claims after Hurricane Helene left a trail of destruction across six states. Many of them will likely be left empty-handed. Property insurers in recent years have hollowed out coverage and sharply increased rates to make up for steep underwriting losses driven by natural disasters. Owners of homes and businesses slammed by Helene could be in for a nasty shock when they check the small print of their policies. ‘Insurers have become significantly tougher on hurricane claims,’ said Rick Tutwiler, a claims adjuster… in Tampa, Fla. ‘We’ve moved to an era dominated by exclusions, diminishing coverages, and even harsher policy terms.’”
October 8 – Financial Times (Kenza Bryan and Jana Tauschinski): “Rising global temperatures helped drive ‘extreme rainfall events’ around the world in September, with some areas experiencing months’ worth of rain in just a few days, the Copernicus earth observation agency said. Europe was hit by ‘extreme precipitation’ while the south-east US has suffered powerful storms in quick succession, leaving communities scrambling to prepare and evacuate. Hurricane Milton is expected to bring heavy rainfall and storm surges this week to areas of Florida still recovering from hurricanes Helene and Debby. Hurricane Helene caused flooding and mudslides across several southern US states less than two weeks ago…”
October 11 – Associated Press (Mike Corder and Elena Becatoros): “The Nobel Peace Prize was awarded Friday to Nihon Hidankyo, a Japanese organization of survivors of the U.S. atomic bombings of Hiroshima and Nagasaki, for its activism against nuclear weapons. Jørgen Watne Frydnes, chair of the Norwegian Nobel Committee, said the award was made as the ‘taboo against the use of nuclear weapons is under pressure.’ Last month, Russian President Vladimir Putin announced a shift in his country’s nuclear doctrine, in a move aimed at discouraging the West from allowing Ukraine to strike Russia with longer-range weapons. It appeared to significantly lower the threshold for the possible use of Russia’s nuclear arsenal.”
October 11 – Wall Street Journal (Dustin Volz and Drew FitzGerald): “U.S. officials are racing to understand the full scope of a China-linked hack of major U.S. broadband providers, as concerns mount from members of Congress that the breach could amount to a devastating counterintelligence failure. Federal authorities and cybersecurity investigators are probing the breaches of Verizon Communications, AT&T and Lumen Technologies. A stealthy hacking group known as Salt Typhoon tied to Chinese intelligence is believed to be responsible. The compromises may have allowed hackers to access information from systems the federal government uses for court-authorized network wiretapping requests… Among the concerns are that the hackers may have essentially been able to spy on the U.S. government’s efforts to surveil Chinese threats, including the FBI’s investigations.”
October 9 – Bloomberg (Nadia Lopez): “San Francisco proposed eliminating 9% of its public schools as declining enrollment and the expiration of pandemic-era relief funds fuel a yawning budget deficit. Eleven of the district’s 121 schools will be closed or merged with other locations… The district, which has already slashed its payroll and reduced funding for school supplies, said the list would be finalized next month and then go to a vote by the school board.”
Geopolitical Watch:
October 10 – Associated Press (Eileen Ng and Jintamas Saksornchai): “Southeast Asian leaders stepped up pressure on China to respect international law following clashes in the disputed South China Sea, but Chinese Premier Li Qiang was defiant during annual summit talks… as he blamed ‘external forces’ for interfering in regional affairs. The 10-member Association of Southeast Asian Nations’ meeting with Li followed recent violent confrontations at sea between China and ASEAN members Philippines and Vietnam that heightened unease over China’s increasingly assertive actions in the contested waters. Philippine President Ferdinand Marcos Jr. said it was ‘regrettable that the overall situation in the South China Sea remains tense and unchanged’ due to China’s actions, which he said violated international law.”
October 11 – CNBC (Dylan Butts): “Some of the world’s busiest shipping lanes are at risk due to rising tensions in the South China Sea, experts warn. In recent months, skirmishes have escalated in the highly-contested South China Sea – a marginal sea in the Western Pacific ocean that’s a crucial trade route for China, Japan and India, three of the world’s biggest economies. With Beijing claiming virtually all of the sea and a handful of other countries having overlapping claims, a number of clashes have broken out between China, the Philippines and Vietnam that have sparked concerns of an incident that could disrupt global trade.”
October 11 – CNBC (Hugh Son and Kristian Burt): “JPMorgan… CEO Jamie Dimon sees risks climbing around the world amid widening conflicts in the Middle East and with Russia’s invasion of Ukraine showing no signs of abating. ‘We have been closely monitoring the geopolitical situation for some time, and recent events show that conditions are treacherous and getting worse,’ Dimon said… ‘There is significant human suffering, and the outcome of these situations could have far-reaching effects on both short-term economic outcomes and more importantly on the course of history,’ he said.”More By This Author:Weekly Commentary: Reality Check for BondsWeekly Commentary: Neutral Rates And Xi’s Whatever It Takes Weekly Commentary: Fed Goes Big
