Image Source: DepositPhotos
 

Aged. Unhealthy and deeply unsound. Worryingly unstable. Many voice serious concerns in private, with only a few willing to publicly broach the subject. But it’s way past time to have an open and candid debate on such critical subject matter and how to move forward. And I’m not referring to Nancy Pelosi and Barack Obama venturing to the West Wing for a heart-to-heart with President Biden.

Bubbles have been momentous market and economic phenomena for centuries. The Dutch “tulip-mania” (1634-1637) is often cited as the first well-documented Bubble. Inflating after John Law’s introduction of paper money to France, the Mississippi Bubble (1719-1720) was a spectacular Credit, speculation and economic Bubble fiasco. Inflating during the same period in the UK, the South Sea Bubble had similar disastrous consequences. There were great U.S. (1866-1873) and UK railway Bubbles and busts.

“Roaring Twenties” Credit and speculative Bubbles laid the groundwork for the 1929 crash and Great Depression. Castigating the “Bubble poppers” (who at the time recognized the unfolding peril), the revisionist Ben Bernanke shifted blame for the depression to the Fed’s negligent failure to print sufficient money.

But we don’t have to resort to history books to appreciate the critical importance of Bubble analysis. Japan still suffers the consequences of its eighties Bubble period more than three decades later. The 1995/98 collapses of the Mexican, Asian Tiger and Russian Bubbles were catastrophic. Then there was the so-called “dot.com” Bubble. More recent yet, the “great financial crisis” was the fateful consequence of bursting Bubbles. The commonly labeled “housing Bubble” was more accurately a phenomenal mortgage finance Bubble. That historic Bubble encompassed massive expansions of mortgage Credit, GSE balance sheets, MBS, derivatives, hedge fund leverage, and a plethora of “shadow bank” mortgage lenders, not to mention traditional bank lending.

It was as if obvious lessons from that terrible experience were all simply washed away in a sea of reflationary monetary policymaking. I didn’t hear the word “Bubble” in two days of Powell’s back and forth testimony with members of Congress. “Bubble” was not uttered once during Powell’s May 1st or March 20th press conferences.

It’s arguably today’s most important and pressing issue for the markets and economy, yet the subject of Bubbles has curiously reached the point of complete radio silence. As much as I’ve been a longtime admirer, I find myself increasingly annoyed with Mohamed El-Erian. From his FT piece this week, “What the Federal Reserve Should Put on the Jackson Hole Agenda.”

“Remember the Asian financial crisis, the shock from the LTCM hedge fund blow-up, the Russian debt default and the Lehman collapse? They all came to a boil during summer. Yet when there are fewer financial fires to be put out, central banks have found the season to be a good time to take stock of where their policies stand and where they would like them to go… It is my strong hope… that the Fed’s cadre of capable PhD economists and other policy wonks will be deliberating on a set of issues that are key to America’s economic wellbeing and global financial stability…”

“What are these issues? Here is my list: First, why did Fed forecasts get it so wrong, be it on inflation or unemployment… Second, ongoing structural and secular changes in how the US and global economies function are more consequential for policy design than ‘noisy’ short-term data… Third, given that the 2020 revisions to the Fed’s monetary policy framework were out of date almost on publication and potentially harmful, is there not an urgent need for an acceleration of the review of it? Fourth… what is the appropriate inflation target, and what is the level of the neutral interest rates where monetary conditions are not too tight or loose? Fifth, is it not now time for the Fed to put much greater emphasis on the risk of unduly damaging the real economy and employment… Six… is it not time to consider moving to the Bank of England’s practice of appointing outside experts to the Federal Open Market Committee…”

All major equities indices have surged to uncharted territory. The Nasdaq100 has returned 36% in nine months – having doubled from 2022 lows. The Semiconductors (SOX) have a nine-month return of 66.6% (184% off ’22 low), with Nvidia up 179% in three quarters (up more than 10-fold from ’22 lows). The S&P500 has returned 31.4% in nine months and is up 62% from September 2022 lows. The federal government continues with a string of historic fiscal deficits, sustaining highly elevated system Credit growth.

Despite the Fed boosting rates to 5%, myriad indicators point to ongoing loose financial conditions. Ten-year Treasury yields dropped 10 bps (to 4.18%) this week to lows since March, with MBS yields sinking 21 bps (5.52%) to within a basis point of lows back to early-February. Corporate yields and CDS prices also traded this week back to March levels. I expect booming markets and this week’s looser conditions to underpin the economy.

It has been a rather conspicuous Credit Bubble and speculative melt-up, with AI an historic global mania, arms race, and multifaceted Bubble. The appropriate course of monetary management in such an extraordinary backdrop is a critical issue, certainly worthy of Jackson Hole Economic Symposium consideration. Revisiting the August 2008 “Maintaining Stability in a Changing Financial System” theme would be opportune.

While the economic community in August 2008 had no idea what was coming, they at least recognized that the subprime crisis had Bubble ramifications. Indeed, the introductory paper for the conference, “Maintaining Stability in a Changing Financial System – An Introduction to the Bank’s 2008 Economic Symposium,” by Gordon H. Sellon, Jr. and Brent Bundick, included three Bubble references.

First, “Should central banks respond more symmetrically to asset-price or credit bubbles?” Second, “In noting the similarities of the current crisis to the recent Japanese experience, [Bank of Japan’s Yutaka] Yamaguchi also suggested it was time to reconsider whether central banks should move away from the conventional wisdom that they should only clean up after a financial crisis but not actively resist the buildup of credit bubbles.” And third, “Several symposium participants also noted that ‘macro-prudential’ supervision and regulation, which has been advocated by the Bank for International Settlements (BIS) for many years, may be an alternative to using monetary policy to prevent the formation of credit and asset-price bubbles.”

Fourteen years later, these three issues are more critical than ever. The evolution of the Fed’s asymmetrical approach (dating back to Greenspan) lurched to previously unimaginable extremes with the Fed’s $5 TN pandemic monetary inflation. “Whatever it takes” regressed to completely open-ended Treasury and MBS (and ETF) purchases, creating a unique ironclad liquidity backstop to be exploited by the leveraged speculating community. Little wonder Treasury “basis trade” leverage is said to now exceed $1 TN.

The current Bubble dwarfs mortgage finance Bubble excess. For starters, home prices have inflated about 50% since the pandemic. But even greater excess has pushed equities prices to historic extremes. System Credit growth significantly exceeds previous cycle peak levels. “Private Credit” has doubled since the pandemic to surpass $2.0 TN. Buy now, pay later “phantom debt” has also expanded rapidly. The market capitalization of cryptocurrencies inflated to over $2.5 TN.

Safeguarding financial stability in an environment of ubiquitous Bubble excess presents major challenges for central bankers. The steep cost of cleaning up after burst Bubbles was at least partially revealed post-2008. With reflationary policies then inflating the ongoing global government finance Bubble, the tab on post-Bubble cleanup continues its exponential rise.

The Fed (and other central banks) adopted a doctrine of distancing monetary policy from Bubble containment, choosing instead to apply “macro-prudential” measures to thwart asset inflation and speculative Bubbles. This cop-out approach was destined for failure, of which the March 2023 banking crises offered an early “progress” report.

Ironically, with everything Bubbles now inflating everywhere, the Fed no longer bothers with the pretense of a functioning macro-prudential framework. If you’re going to succumb to printing $5 TN and holding rates at zero for years, at least double-up on macro-prudential regulatory oversight. Essentially, the Fed, economic community, Wall Street, Washington, and the financial media today simply disregard all things Bubble. To be sure, ignoring Bubble dynamics and analysis creates a major analytical handicap.

How could the Fed have been so wrong on inflation? They failed to recognize the nature of the Bubble they had unleashed. Why have Credit, financial conditions, economic growth, and pricing pressures all proved so resilient in the face of a sharply higher policy rate? Bubble Dynamics. Why has it been such a struggle for economists to pin down the so-called “neutral rate”? Because the impacts of a particular policy rate will vary profoundly, depending on the prevailing status of the Bubble. This is especially the case late in the Bubble cycle, where the thinnest line separates parabolic “Terminal Phase Excess” from Bubble deflation.

Mr. El-Erian and others have issues with the Fed’s meeting-by-meeting data dependency. Having left Bubbles to run wild, the Federal Reserve is now on the tiger’s back. They surely have come to appreciate the persistence of loose conditions, asset inflation and economic demand. Moreover, the Fed certainly wants to avoid popping Bubbles. So, they have no alternative other than attentive observation and to pray things don’t go off the rails.

The more entrenched a Bubble, the more impervious it will be to well-telegraphed increases in the policy rate. The Fed made a major policy blunder in signaling the end of its “tightening cycle” despite ongoing powerful Credit growth, speculative excess, and asset inflation. Powell and Fed officials kept talking restrictive monetary tightening in the face of a major Bubble-bolstering loosening of financial conditions.

I can hear it already: A big “I told you so!” from the likes of El-Erian and others. Bubbles inevitably burst. When today’s historic Bubble finally begins to succumb, the Wall Street crowd will insist the Fed raised rates too aggressively and stuck with excessive tightening for far too long. And I’m sure this deeply flawed analysis will resonate, just as Bernanke’s revisionist attack on the late-twenties “Bubble poppers” and a bumbling Federal Reserve did following the bursting of the tech/dot.com Bubble.

The Fed desperately needs an analytical framework and explainable policy approach for dealing with Bubbles. Bubbles pose potentially monumental risk to financial and economic system stability - and certainly shouldn’t be ignored. Simply waiting patiently for them to flame out is a recipe for disaster. After all, tremendous systemic damage can be inflicted in relative short-order during “Terminal Phase Excess” – particularly throughout a historic multi-decade super-cycle “blow off” topping process.

July 11 – Wall Street Journal (Katherine Blunt, Jennifer Hiller and Benoît Morenne): “Across this city’s famous suburban sprawl, drivers for the fourth straight day are inching through intersections without working traffic signals. With a brutal heat wave settling over the region, residents are piling into ‘cooling centers’ to charge their phones and soak up air conditioning they no longer have at home. And just about everyone is wondering why—in the country’s fourth-largest city, which calls itself the energy capital of the world—widespread power outages like this keep happening. Most of the questions are pointed at CenterPoint Energy, which has spent nearly $1.5 billion in recent years to make Houston’s power grid more resilient… Hurricane Beryl… was the latest event to show how the combination of continued population growth and increasingly extreme weather is proving difficult to overcome.”

July 10 – Associated Press (Juan A. Lozano and Jim Vertuno): “Houston’s biggest utility came under mounting pressure Wednesday over its response to Hurricane Beryl, as nearly 1.4 million area homes and businesses remained without power and residents searched for places to cool off, fuel up and find something to eat. City Council member Abbie Kamin called the extended lack of power a ‘life safety concern.’ ‘We say ‘everything we can do’ to get the lights back on. In my opinion, respectfully, they should be on,’ Kamin told a CenterPoint Energy executive during a council meeting. ‘This was a Category 1 (storm),’ Kamin said, referring to the weakest type of hurricane. ‘We know that this severe weather, the extreme weather due to climate change, is real and we’ve known for some time.’”

July 9 – Bloomberg (David R. Baker and Kevin Crowley): “Houston is struggling through Hurricane Beryl’s chaotic aftermath, with blackouts, blocked roads, internet disruptions and spotty access to gas expected to linger well after the storm’s floodwaters recede… The outages, which at their peak cut power to more than 2.5 million customers across the region, disrupted service at cell phone towers, traffic lights and a major data center, while leaving residents to swelter through a heat wave. Many sought the shelter of air-conditioned hotel rooms only to find the properties either blacked out or booked solid.”

One of the great ironies of Bubbles was on subtle display this week, offering an opportunity to turn analytical concepts into tangible reality. The perception is one of an era of incredible wealth creation. The reality of Bubbles is something different: pernicious resource misallocation, deep structural maladjustment, and true wealth destruction. For the most part, malign Bubble effects remain concealed awaiting the inevitable bursting. There are, however, occasions that offer an inkling of the future.

As I write on Friday evening, there are still a million customers (residential and business) still without power in Southeast Texas. Houston utility Centerpoint has warned that “roughly 500,000” will be out of power into next week. A frightening number suffered this week through a heat index exceeding 100 degrees without electricity. Houstonians have every reason to be outraged.

It’s easy to pin blame largely on Centerpoint. But Houston’s crisis this week is a microcosm of a greater calamity in planning, prioritization, and resource allocation. Houston was hit by Hurricane Ike in 2008 and the devastating Hurricane Harvey in 2017. This past May, the city was slammed by a powerful derecho. That the fourth largest city in the U.S. was brought to its knees this week by a Cat 1 hurricane should be a wake-up call.

As a nation, we are woefully unprepared for increasingly extreme and erratic weather. Unlimited resources have been available for bitcoin mining infrastructure, data centers, all things AI, tech, and the like. Meanwhile, our desperately deficient power grid puts lives and economic well-being at increasing risk.

The Texas power grid has been under notable stress, with over four million homes and businesses losing power during the 2021 ice storm (with hundreds of deaths). Huge investment to strengthen system resilience against cold weather neglected vulnerability to wind and flooding. Houston, at heightened risk of hurricanes and floods, faces a particular challenge with its energy infrastructure.

The deteriorating climate backdrop will require massive investment for Houston, Texas and basically the entire country. The AI/data center mania and arms race are particularly ill-timed. On the one hand, they gobbles up investment dollars, while placing further demands on already stretched energy infrastructure.

Under the Friday headline, “Hurricanes, Extreme Heat Form Insidious Combo,” Axios’ Andrew Freedman writes: “The lack of power to hundreds of thousands of Houston residents for the fourth straight hot and humid day since Hurricane Beryl struck the city is creating dangerous — and in some cases deadly — conditions… With global average temperatures on the increase, along with the likelihood and severity of heat waves, society is increasingly vulnerable to this type of one-two punch of an extreme weather disaster… The heat wave and hurricane relationship is no accident. Hurricanes are often followed by hot and humid air masses… In addition, climate change is not only supercharging hurricanes in certain ways, but it is also altering heat wave characteristics. ‘This hurricane season is already forcing us to face some difficult realities,’ says Steve Bowen, chief science officer for Gallagher Re. ‘Our aging infrastructure has largely been built to meet the demands of a 20th century climate that no longer exists… As more people migrate into known high-risk communities, it puts further strain on grids that need to be modernized.’”

Bubbles are incredibly engrossing. We’ll just buy Nvidia, get rich, and live happily ever after. When this Bubble bursts, we’ll face the reality of what a fiasco this has all become. Epic delusion and denial. I was thinking of using “ironic,” considered “really bad luck,” and settled on “only fitting.” True to the nature of end-of-cycle craziness, it’s only fitting that an energy guzzling AI Bubble would emerge as heat and climate extremes become a pressing global issue.
 

For the Week:

The S&P500 added 0.9% (up 17.7% y-t-d), and the Dow jumped 1.6% (up 6.1%). The Utilities rose 4.0% (up 13.3%). The Banks jumped 4.3% (up 13.3%), and the Broker/Dealers gained 2.5% (up 17.1%). The Transports advanced 1.6% (down 2.4%). The S&P 400 Midcaps jumped 4.3% (up 8.6%), and the small cap Russell 2000 surged 6.0% (up 6.0%). The Nasdaq100 slipped 0.3% (up 20.8%). The Semiconductors gained 2.1% (up 38.3%). The Biotechs jumped 5.0% (up 1.9%). With bullion adding $19, the HUI gold index rose 5.9% (up 23.7%).

Three-month Treasury bill rates ended the week at 5.1925%. Two-year government yields dropped 15 bps this week to 4.45% (up 20bps y-t-d). Five-year T-note yields fell 12 bps to 4.10% (up 25bps). Ten-year Treasury yields dropped 10 bps to 4.18% (up 30bps). Long bond yields declined eight bps to 4.40% (up 37bps). Benchmark Fannie Mae MBS yields sank 21 bps to 5.52% (up 24bps).

Italian yields dropped 14bps to 3.79% (up 9bps y-t-d). Greek 10-year yields fell 14 bps to 3.47% (up 42bps). Spain's 10-year yields declined eight bps to 3.26% (up 27bps). German bund yields fell six bps to 2.50% (up 47bps). French yields declined eight bps to 3.15% (up 59bps). The French to German 10-year bond spread was unchanged at 65 bps. U.K. 10-year gilt yields slipped two bps to 4.11% (up 57bps). U.K.'s FTSE equities index added 0.6% (up 6.7% y-t-d).

Japan's Nikkei Equities Index increased 0.7% (up 23.1% y-t-d). Japanese 10-year "JGB" yields declined a basis point to 1.07% (up 45bps y-t-d). France's CAC40 gained 0.6% (up 2.4%). The German DAX equities index rose 1.5% (up 11.9%). Spain's IBEX 35 equities index jumped 2.1% (up 11.4%). Italy's FTSE MIB index advanced 1.7% (up 13.9%). EM equities were mostly higher. Brazil's Bovespa index jumped 2.1% (down 3.9%), and Mexico's Bolsa index jumped 5.0% (down 4.2%). South Korea's Kospi index slipped 0.2% (up 7.6%). India's Sensex equities index added 0.7% (up 11.5%). China's Shanghai Exchange Index gained 0.7% (down 0.1%). Turkey's Borsa Istanbul National 100 index rose 2.0% (up 48.1%).

Federal Reserve Credit declined $7.6 billion last week to $7.182 TN. Fed Credit was down $1.707 TN from the June 22, 2022, peak. Over the past 252 weeks, Fed Credit expanded $3.454 TN, or 92%. Fed Credit inflated $4.371 TN, or 156%, over the past 609 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $6.5bn last week to $3.312 TN. "Custody holdings" were down $124.8 billion y-o-y, or 3.6%.

Total money market fund assets rose another $40.9 billion to a record $6.144 TN. Money funds were up $258 billion, or 8.1%, y-t-d and $713 billion, or 13.1%, y-o-y.

Total Commercial Paper added $1.1 billion to $1.290 TN. CP was up $123bn, or 10.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell six bps to 6.89% (down 13bps y-o-y). Fifteen-year rates dropped eight bps to 6.17% (down 27bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 14 bps to 7.25% (up 11bps).


Currency Watch:

July 6 – Wall Street Journal: “China’s foreign-exchange reserves edged down in June, as the yuan faced continued downward pressure... The country’s foreign-exchange reserves fell $9.68 billion to $3.222 trillion at the end of June, declining 0.3%... The combined effect of factors such as exchange-rate conversion and asset price changes contributed to the fall…”

For the week, the U.S. Dollar Index declined 0.7% to 104.093 (up 2.7% y-t-d). For the week on the upside, the Mexican peso increased 2.8%, the Japanese yen 1.9%, the British pound 1.4%, the South African rand 1.3%, the euro 0.6%, the Singapore dollar 0.6%, the Brazilian real 0.6%, the Australian dollar 0.5%, the South Korean won 0.4%, and the Swiss franc 0.2%. On the downside, the Norwegian krone declined 1.3%, the New Zealand dollar 0.4%, and the Swedish krona 0.3%. The Chinese (onshore) renminbi gained 0.25% versus the dollar (down 2.07% y-t-d).

 

Commodities Watch:

The Bloomberg Commodities Index slumped 1.7% (up 2.1% y-t-d). Spot Gold added 0.8% to $2,411 (up 16.9%). Silver declined 1.4% to $30.789 (up 29.4%). WTI crude retreated 95 cents, or 1.1%, to $82.21 (up 15%). Gasoline fell 1.7% (up 19%), while Natural Gas increased 0.4% to $2.329 (down 7%). Copper declined 1.3% (up 18%). Wheat sank 6.0% (down 14%), and Corn fell 2.7% (down 15%). Bitcoin rallied $1,122, or 2.0%, to $57,811 (up 36%).


Middle East War Watch:

July 8 – Reuters: “President-elect Masoud Pezeshkian reaffirmed Iran's anti-Israel stance on Monday, saying resistance movements across the region will not allow Israel’s ‘criminal policies’ towards the Palestinians to continue. ‘The Islamic Republic has always supported the resistance of the people of the region against the illegitimate Zionist regime,’ Pezeshkian said in a message to Hassan Nasrallah, leader of the Iran-backed Lebanese Hezbollah group. The comments signaled no change in the regional policies of the incoming government under the relatively moderate Pezeshkian who defeated his hardline rival in last week’s runoff election.”


Ukraine War Watch:

July 9 – Reuters (Olena Harmash and Max Hunder): “Russia blasted the main children's hospital in Kyiv with a missile in broad daylight on Monday and rained missiles down on other cities across Ukraine, killing at least 41 civilians in the deadliest wave of air strikes for months. Parents holding babies walked in the street outside the hospital, dazed and sobbing after the rare daylight aerial attack. Windows had been smashed and panels ripped off, and hundreds of Kyiv residents were helping to clear debris.”

July 9 – Reuters (Steve Holland and Kanishka Singh): “The United States and its allies will deliver to Ukraine five additional air defense systems, including Patriot missile batteries and Patriot components, the leaders of those countries said in a joint statement during the NATO summit. They added that in the coming months, they intend to provide Ukraine with dozens of tactical air defense systems.”

July 11 – Financial Times (Arjun Neil Alim, Henry Foy and Max Seddon): “Russia is believed to be behind a foiled plot to assassinate the head of Europe’s largest arms manufacturer over his company’s support for Ukraine, according to Nato diplomats. Two senior alliance diplomats said the alleged conspiracy against Armin Papperger, chief executive of Düsseldorf-based Rheinmetall, was being treated as part of Russia’s wider sabotage and hybrid attack campaign against European Nato states… A personal familiar with Papperger’s security said that the measures around the defence boss were ‘at the highest level’ — similar to the protection of German Chancellor Olaf Scholz.”


France Instability Watch:

July 10 – Financial Times (Leila Abboud, Adrienne Klasa, Sarah White and Ian Johnston): “President Emmanuel Macron’s centrists got off to a rocky start in their attempt to forge a governing coalition in the French parliament, as potential allies rebuffed them and cracks emerged within his own camp. Macron and party chiefs in his Ensemble alliance argue that no single party or bloc won enough seats in Sunday’s snap election to form a government alone. They are casting themselves as a crucial part of any future government despite losing a third of their MPs. ‘We’re blocked for now, but that’s because we’re the only adults in the room,’ said one official close to Ensemble. ‘The left is behaving like children and thinks they can go it alone. We have more luck talking to those on our right, but they are divided among themselves so it’s a flurry of confusion.’”

July 8 – Reuters (Marc Jones): “A hung parliament in France is likely to complicate policymaking there, credit rating agency S&P Global said…, warning that more debt or a sustained slump in economic growth could trigger another rating cut. S&P downgraded France at the end of May but the country now faces a hung parliament and difficult negotiations to form a government… ‘Our 'AA-/A-1+' sovereign credit ratings on France would come under pressure if economic growth is materially below our projections for a protracted period,’ S&P said... ‘Or if France cannot reduce its large budget deficit and if general government interest payments, as a share of government revenue, increase beyond our current expectations.’”

July 10 – Bloomberg (Alan Katz and Francois de Beaupuy): “French President Emmanuel Macron jetted off to meet other NATO leaders at the military alliance’s summit in Washington on Wednesday, leaving behind a cacophonous group of self-appointed candidates to become prime minister, but no clarity on when he might actually name one. Sunday’s election left a complex split in the French National Assembly that sets the stage for a very un-French kind of deal-making to try to form a lasting governing coalition. Given how such negotiations work in countries where it’s a regular occurrence, it could take weeks before the next French government is in place.”

July 10 – Reuters (Elizabeth Pineau and Dominique Vidalon): “French President Emmanuel Macron… called on mainstream parties to join forces to form a solid majority in the National Assembly, in his first public comments since Sunday's snap election… The vote, which Macron unexpectedly called after losing to the far-right National Rally (RN) in European elections, has plunged France into uncharted waters, with three politically divergent blocs and no obvious path to forming a government. In a letter to regional newspapers, the deeply unpopular Macron urged mainstream parties with ‘republican values’ to form a governing coalition and said he hoped to pick a prime minister from such a grouping. ‘Let us place our hope in the ability of our political leaders to demonstrate sense, harmony and calm in your interest, and that of the country,’ he wrote. ‘It is in the light of these principles that I will decide on the appointment of the prime minister.’”

July 9 – Bloomberg (James Hirai and William Horobin): “France’s sovereign rating is at risk if political wrangling sees its fiscal and debt metrics materially worsen, according to Moody’s… The rating company warned… that the nation’s outlook may be lowered to negative from stable if it observes a larger deterioration in the affordability of debt-servicing costs compared to peers… The election results put France in ‘an unprecedented situation,’ Moody’s analysts… wrote… ‘A weakening commitment to fiscal consolidation would increase downward credit pressures.’ France’s elevated debt burden heightens its exposure to higher funding costs, and could lead to a faster-than-expected rise in interest payments on the nation’s bonds, Moody’s warned.”

July 11 – Bloomberg (Alan Katz and James Regan): “Emmanuel Macron’s efforts to defuse the political crisis he created with a snap parliamentary election have elicited brusque pushback, underscoring the French president’s waning authority and highlighting deep divisions. Parties across the political spectrum rejected Macron’s appeal for ‘republican forces’ to rally together to form a governing coalition. The left-wing alliance, known as the New Popular Front, insisted it had the mandate to nominate a prime minister, while the center-right Republicans vowed to bring down a left-led government. The positions show that there’s little clear way through the impasse that emerged after the shock results of Sunday’s parliamentary elections.”

July 9 – Reuters (Marc Jones): “The outcome of France's parliamentary election is negative for the country's credit rating, Moody's has warned, as a grand coalition would make decision-making and the task of bringing its debt under control more difficult. France is facing complex negotiations to form a government… Possibilities include the left forming a minority government - which would be at the mercy of a no confidence vote from rivals unless they reach deals - and the cobbling together of an unwieldy coalition of parties with almost no common ground. ‘In light of the constraints that any future government faces, we are unlikely to see expenditure-based fiscal consolidation in 2025,’ Moody's said…”

July 11 – Bloomberg (William Horobin): “France cannot afford to keep increasing its deficit or burden its companies with more taxes and costs, Bank of France Governor François Villeroy de Galhau warned as political parties jostle to form the country’s next government… Villeroy cautioned that there is ‘no hidden treasure’ in France and that the euro area’s second-biggest economy must rely on work and innovation. ‘That’s the first golden rule: don’t weigh down our businesses in economic competition,’ he told Franceinfo radio... ‘There is a second golden rule: we can’t dig deeper deficits as they cost more and more to finance and weigh on our sovereignty.’”

July 11 – Bloomberg (Jorge Valero): “France’s next government will need to find more than €15 billion ($16.2bn) in extra revenue or savings a year to meet European Union demands, according to people with knowledge of the assessment. With current Finance Minister Bruno Le Maire vowing to leave the public finances on a steady course when he leaves office, the tally provides a glimpse of the challenge faced by President Emmanuel Macron in getting a coalition government together whose likely constituent parties all want higher spending. The total was included in a proposal that the European Commission sent to Paris last month… The adjustment equates to around 0.55% of annual gross domestic product over seven years.”

July 11 – Reuters (Jean-Stéphane Brosse and Kate Entringer): “A top French trade union leader… urged President Emmanuel Macron to let a left-wing alliance govern after it came first in a legislative election, hinting that any alternative could be met with protests during the Paris Olympics. In his first public comments since the New Popular Front (NFP) beat his own centrist camp into second place in Sunday's election, Macron said… that ‘no one had won’ and asked ‘republican forces’ to form a ‘solid majority’ to govern… Sophie Binet, leader of the CGT union, said Macron was in denial about the result of the election and should appoint as prime minister whoever the NFP picks.”

July 9 – Bloomberg (Alice Gledhill and William Horobin): “A political shock in France has forced bond investors to confront the reality that the nation’s fiscal deficit is an issue for here and now, not years down the road. The country has long benefited from investors dismissing the threat posed by its poor public finances given its core position within the euro area. That calm is now at risk.”

July 10 – Financial Times (Anne-Sylvaine Chassany, Guy Chazan and Andy Bounds): “European governments are struggling to adjust to France’s new political reality, with a diminished presidency and a parliament more consumed by domestic concerns than the bold pro-EU initiatives Emmanuel Macron once excelled in. Sunday’s snap vote plunged the Eurozone’s second-largest economy into political turmoil, with Macron facing a hung parliament and likely ‘cohabitation’ with a prime minister from a rival party. ‘He’s no longer in the boxing ring,’ said Enrico Letta, former Italian prime minister.”

July 9 – Financial Times (Anne-Sylvaine Chassany, Adrienne Klasa, Leila Abboud and Sarah White): “France’s corporate leaders are preparing to say au revoir to a decade-long business-friendly climate after President Emmanuel Macron’s snap legislative elections resulted in a hung parliament. Many executives breathed a sigh of relief on Sunday after seeing the far-right party neutralized... But the feeling was quickly replaced by unease that the victory of the left, which has radical tax and spend plans, or political gridlock would derail market-oriented reforms made under Macron. ‘We need to wait, but we are all worried,’ said a business lobbyist. ‘We were on the right path.’”


Taiwan Watch:

July 11 – Bloomberg (Yian Lee): “China sent a record number of warplanes across a US-drawn boundary in the Taiwan Strait — a move that comes as the new president of the archipelago mulls a trip that may include a stop in America. Some 56 aircraft crossed the so-called median line as of early Thursday… Taiwanese aircraft, naval vessels and missile systems were used ‘in response’ to the flights by the People’s Liberation Army, the military added, without providing details… The archipelago’s armed forces have ‘a close grasp of the dynamics of the sea and airspace surrounding the Taiwan Strait, including the actions of the PLA aircraft and ships,’ ministry spokesperson Sun Li-fang told reporters…”


Market Instability Watch:

July 11 – Bloomberg (Norah Mulinda): “The stock market’s worst group notched its best day of the year as a cooler-than-expected inflation report stoked bets that the Federal Reserve will start cutting interest rates in September. Shares of real estate companies jumped 2.7% Thursday for their biggest gain of 2024, climbing to their highest level since March as investors snapped up homebuilder, digital and commercial real estate stocks alike.”

July 10 – Bloomberg (Michael Mackenzie): “Investors are being insufficiently compensated for the risks of lending in the credit market as more capital chasing too few opportunities curbs returns, according to Pacific Investment Management Co. The excess premium for less-liquid investments has dropped below 100 basis points, less than half the return it should offer, Mohit Mittal, chief investment officer of core strategies at Pimco, wrote… Covenants that traditionally protected lenders in private credit markets have also deteriorated.”

July 11 – Financial Times (Mary McDougall and Nikou Asgari): “Central bank reserve managers are growing increasingly concerned about ‘unsustainable’ levels of government debt, which they believe could drive up borrowing costs in a bumper year for elections. A global survey by UBS found that 37% of central bank managers said that the risks from global sovereign debt levels were among their main concerns for the global economy this year, an increase from 14% who worried about this last year. The heightened concern comes as government debt globally hits a record $91.4tn this year… Global debt as a proportion of GDP is soon poised to tip back over 100% for the first time since the depths of the coronavirus pandemic.”

July 11 – Bloomberg (Hidenori Yamanaka): “Japan’s 40-year government bond yield touched 3% for the first time since this maturity was first issued in 2007… Adding to the market’s bearishness, foreign investors sold Japanese medium- to long-term bonds on a net basis last week for the fourth consecutive week, matching the longest streak in about a year…”

July 8 – Wall Street Journal (Peter Landers and Megumi Fujikawa): “Japan would love to strengthen the yen, with the currency’s value at a nearly 38-year low. And it owns one of the world’s biggest dollar stashes. Many analysts say Tokyo is getting ready to redirect some of those government-controlled dollars back into yen assets, a decision that could ripple through global financial markets... The Government Pension Investment Fund is an investing whale, with ¥246 trillion, equivalent to $1.53 trillion, in assets as of March 31. Half of the total is held in foreign stocks and bonds, mostly in dollars, and the fund is about to start a once-every-five-years review of its strategy.”


Global Credit Bubble Watch:

July 12 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Global debt funds attracted inflows for a 29th straight week in the seven days to July 10 on expectations of a Federal Reserve rate cut amid weakening labour market conditions and easing inflation levels. According to LSEG data, global bond funds drew a net $9.75 billion worth of inflows during the week after about $12.28 billion worth of net purchase in the prior week.”

July 11 – Reuters (Saeed Azhar and Paritosh Bansal): “A Goldman Sachs bet put in place in 2021 on lending to private funds has helped drive record revenues in fixed-income financing. Now, the Wall Street bank is pushing even deeper into the growing but risky market. The fund finance unit… lends money secured by different types of assets to private equity and other funds. Such assets, however, can be hard to value and trade, and some loan products are yet to be tested in a downturn, making lending against them risky. Goldman has revealed few details about the business… The business has grown rapidly in three years, with one source familiar with the matter saying it has gone from contributing very little to becoming ‘a very meaningful part of the firm's profitability.’”

July 11 – Wall Street Journal (Vicky Ge Huang): “A corner of Wall Street long shunned by investors is suddenly in demand. Higher rates over the past two years were expected to slam risky corporate borrowers that rely heavily on floating-rate debt. That hasn’t happened. Instead, low-rated corporate loans have steadily outperformed investment-grade bonds and are drawing inflows for the first time since 2021. So far this year, everyday investors have poured $12.2 billion into mutual and exchange-traded funds focused on such loans. That is after a combined $27 billion in outflows for 2022 and 2023… ‘With the Goldilocks economy narrative coming to the forefront, investors are feeling a little bit more safe in the loan market,’ said John Lloyd, a portfolio manager at Janus Henderson Investors.”

July 6 – Bloomberg (Neil Callanan): “Watchdogs are concerned about the ‘substantial’ risk to investors in the private credit market after it emerged that almost 40% of funds don’t have skin in the game. The decision by so many managers to avoid putting their own capital into the vehicles creates an ‘incentive misalignment,’ the Bank of International Settlements said... The risk is that industry players could prioritize their profit over investors’ returns. Private credit has grown rapidly into a $2.1 trillion industry, according to BIS estimates…”


AI Bubble Watch:

July 11 – Bloomberg (Sagarika Jaisinghani): “Investors are growing increasingly concerned that US technology megacaps are spending too much on artificial intelligence, according to Goldman Sachs… strategists. Companies that the strategists refer to as ‘hyperscalers’ — including Amazon.com Inc., Meta Platforms Inc., Microsoft Corp. and Alphabet Inc. — have utilized about $357 billion for capital expenditure as well as research and development in the past year, the team led by Ryan Hammond said. A ‘significant portion’ of this spending was on AI and represents nearly a quarter of the S&P 500’s total for capex and R&D... ‘Today’s hyperscalers will eventually be required to prove that revenues and earnings will be generated from their investments,’ Hammond wrote... ‘Early signs that may not be generated, could lead to valuation de-rating.’”

July 9 – Reuters (Yuvraj Malik): “Investments in artificial intelligence (AI) startups surged to $24 billion from April to June, more than doubling from the previous quarter, according to… Crunchbase… Overall startup funding grew 16% sequentially to touch $79 billion in the last quarter, primarily driven by investments in AI, which became the largest sector for the first time, followed by healthcare and biotech. The runway success of OpenAI's ChatGPT has unleashed a race to adopt the latest AI technology in areas such as business productivity, healthcare, and manufacturing. Investors and Big Tech firms, however, say that meaningful gains from their massive investments in AI will only materialize over the next few years.”


Bubble and Mania Watch:

July 12 – Bloomberg (Alexandra Semenova): “It’s been about 25 years since Wall Street had a serious bear hunt. And it appears another one is starting up now. Early on Aug. 27, 1999, the finance world was rocked by the resignation of one of its most committed pessimists, Charles Clough, Merrill Lynch & Co.’s chief investment strategist. Clough’s opinion was highly regarded, but he’d committed the stock market’s cardinal sin, remaining bearish in the face of a relentless rally — in this case, the dot-com frenzy that sent the S&P 500 Index soaring 220% from the start of 1995 to the end of the century. That may feel like a long time ago, but on Wall Street, as in Shakespeare, the past is often prologue. And so, the abrupt exit of Marko Kolanovic last week after 19 years at JPMorgan… is reminding many traders, bankers and analysts of Clough’s adieu.”

July 9 – Reuters (Sinead Cruise, Tommy Reggiori Wilkes and Huw Jones): “Regulators seeking to map out risks from the booming non-bank financial industry face information ‘black holes’ which might only be fixed by mandatory disclosure, the chairman of Europe's banking watchdog told Reuters… Non-bank financial institutions, including hedge funds, private credit providers and insurers accounted for $218 trillion, or just under half, of the world's financial assets in 2022, according to the G20's Financial Stability Board (FSB). The so-called ‘shadow banking’ sector’s rapid expansion is a growing priority for regulators, who worry about its lack of transparency and the degree to which its problems could threaten the resilience of broader financial markets.”

July 8 – Wall Street Journal (Konrad Putzier): “U.S. prosecutors are cracking down on commercial mortgage fraud, a growing push that is sending shudders through the $4.7 trillion industry by raising questions about the numbers underpinning major property loans. Regulators and federal prosecutors say that property loans based on doctored building financials and valuations have been rising. This type of fraud became more widespread between the mid-2010s and 2021…, when commercial property prices surged to new highs and landlords had much to gain from such maneuvers. Now, the drop in property values caused by higher interest rates and a rise in defaults are exposing more of these schemes… ‘It’s a general trend throughout history that fraud occurs during boom times and is revealed during bust times,’ said John Griffin, a professor of finance at the University of Texas’ McCombs School of Business.”

July 10 – Bloomberg (Neil Callanan): “Distressed investors see one of the best opportunities in a generation to buy troubled US real estate assets as the commercial property crash continues to roil the market. Private equity firms are already positioning to take advantage. About 64% of the $400 billion of dry powder that the industry has set aside for property investment is targeted at North America, the highest share in two decades, according to… Preqin. The fear elsewhere is that a strong US bias will mean other parts of the world won’t draw the same demand, delaying the work out of troubled loans and properties there.”

July 9 – CNBC (Ari Levy and Jordan Novet): “Artificial intelligence has been a big boon for San Francisco real estate. But not enough of one to make up for the broader struggle across the market. The vacancy rate for San Francisco office space reached a fresh record of 34.5% in the second quarter, according to… Cushman & Wakefield. That’s up from 33.9% in the first quarter, 28.1% in the same period a year ago and 5% before the pandemic. Meanwhile, the average asking rent dropped to $68.27 per square foot in the quarter, the lowest since late 2015, down from $72.90 a year earlier and a peak of $84.70 in 2020.”

July 8 – Financial Times (Joshua Franklin and Stephen Gandel): “The early stages of a long-awaited recovery in investment banking fees is set to boost Wall Street lenders when they report second-quarter earnings starting this week, with mergers and debt deals picking back up after a lacklustre two years. Analysts expect investment banking revenues at JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup will on average rise more than 30% from a year earlier during the second quarter… ‘You’re beginning to see a nice rebound in investment banking activity,’ said Oppenheimer analyst Chris Kotowski.”


Global Banking Watch:

July 11 – Reuters (Nupur Anand and Lananh Nguyen): “The biggest U.S. bank wants to get even bigger. JPMorgan Chase has set an ambitious goal of attracting 15% of the country's consumer deposits, Marianne Lake, its CEO of consumer and community banking, told Reuters… The bank had an 11.3% share of U.S. retail deposits at the end of June 2023… The lender also wants to provide credit cards that account for 20% of the nation's spending, expanding from a current 17%.”

July 9 – Reuters (Saeed Azhar and Niket Nishant): “Some of the largest U.S. banks will probably report weaker profits for the second quarter as they earn less from interest payments and set aside more money to cover deteriorating loans, analysts said. As banks kick off earnings season on Friday, analysts predict provisions could rise for potential losses on commercial and industrial (C&I) loans, as well as those on commercial real estate. ‘There is a credit cycle during every economic expansion,’ said Betsy Graseck, a banking analyst at Morgan Stanley. ‘We're conservatively baking in normalization of the credit cycle,’ she said…”


U.S./Russia/China/Europe Watch:

July 9 – Politico (Stewart Lau and Phelim Kine): “As NATO leaders begin a summit in Washington today to showcase Western unity, China flexes its muscles. First, it’s teamed up with Belarus — a key ally of Russia that’s sanctioned by the West — for a joint military exercise over the next few days. Then, it also reached out to two of NATO’s best-known firebrand leaders: Hungary’s Prime Minister Viktor Orbán and Turkey’s President Recep Tayyip Erdoğan... Let’s begin with Belarus. Right on the border: The location for the joint military exercise will be in Brest, the Belarusian town right on the border with Poland — a NATO ally. Chinese state media Xinhua said Sunday the mixed-team training exercises will carry out hostage rescue operations and counter-terrorism missions.”

July 10 – Associated Press (Didi Tang): “In their most serious rebuke against Beijing, NATO allies… called China a ‘decisive enabler’ of Russia’s war against Ukraine and expressed concerns over Beijing’s nuclear arsenal and its capabilities in space. The sternly worded final communiqué, approved by the 32 NATO members at their summit in Washington, makes clear that China is becoming a focus of the military alliance. The European and North American members and their partners in the Indo-Pacific increasingly see shared security concerns coming from Russia and its Asian supporters, especially China… In the communiqué, NATO member countries said China has become a war enabler through its ‘no-limits partnership’ with Russia and its large-scale support for Russia’s defense industrial base.”


De-globalization and Iron Curtain Watch:

July 10 – Reuters (Julie Zhu and Xie Yu): “China's Ministry of Finance is conducting more rigorous checks of work done by the Big Four auditing firms for local companies…, amid concerns auditors are not doing enough to uncover corporate wrongdoing. The tighter scrutiny… is mainly focused on Deloitte, EY, PwC, KPMG and their audits of some financial firms as well as highly leveraged companies...”


Inflation Watch:

July 11 – CNBC (Jeff Cox): “The monthly inflation rate dipped in June for the first time in more than four years, providing further cover for the Federal Reserve to start lowering interest rates later this year. The consumer price index… declined 0.1% from May, putting the 12-month rate at 3%, around its lowest level in more than three years… The all-items index rate fell from 3.3% in May, when it was flat on a monthly basis… Excluding volatile food and energy costs, so-called core CPI increased 0.1% monthly and 3.3% from a year ago, compared with respective forecasts for 0.2% and 3.4%...”

July 8 – Reuters (Michael S. Derby): “The path U.S. inflation is expected to follow over coming years generally softened in June, amid retreating projections of price increases for a wide array of consumer goods and services, a Federal Reserve Bank of New York report… said. Inflation a year from now was seen at 3% as of June, from the expected rise of 3.2% in May, while three years from now inflation was seen at 2.9% from May’s 2.8%, according to the bank’s latest Survey of Consumer Expectations. Inflation five years from now was seen at 2.8% from May’s 3%.”

July 11 – Wall Street Journal (Jean Eaglesham): “Home insurers are pushing for big rate increases and weakened consumer protections—and increasingly getting what they ask for. State regulators across the U.S. appear to be buckling to industry demands for fear that insurers will pack up and exit their regions… In the last 12 months alone, one state has decided its regulator can no longer veto rate requests and another has made it easier for insurers to reduce storm coverage… States are also giving home insurers almost everything they ask for on rates… Ten states where regulators can reject requests upfront have all greenlighted double-digit increases since the start of last year, with half those increases close to or above the 20% national average… California, which for decades kept a tight lid on home-insurance rates, has approved an average 21% rate increase over the period…”

July 9 – Associated Press (Mae Anderson): “Cost pressures continue to hurt small businesses. In particular, rent inflation is a pressure point for small businesses, according to new data from the Bank of America Institute. The average monthly share of rent in total payments through May is 9.1%, up significantly from the 2019 average of 5.9%. Some parts of the country have higher rents. In Las Vegas, for example, the average share of rent in May was more than double the national average.”

July 12 – CNBC (Yun Li): “JPMorgan… CEO Jamie Dimon… issued another warning about inflation despite recent signs of easing in price pressures. ‘There has been some progress bringing inflation down, but there are still multiple inflationary forces in front of us: large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world,’ Dimon said… ‘Therefore, inflation and interest rates may stay higher than the market expects.’”

July 10 – Reuters (Makailah Gause): “Gen Z adults in the U.S. face increasing financial challenges because of inflation and rising living costs, with 46% relying on financial assistance from their parents and families, according to a report by Bank of America… The survey showed 46% of young people were unprepared to save for retirement and 40% were not ready to start investing in the next five years.”

July 9 – Bloomberg (Mumbi Gitau and Dayanne Sousa): “Cocoa processing likely slowed a bit last quarter, but a steeper slump is looming as chocolatiers start to really feel the pinch of pricey beans. Despite an historic shortage sending cocoa prices to a record this year, that has yet to fully filter through to chocolate makers. That’s because many of the beans that they’ve been grinding into the butter and powder used in confectionery were secured before the worst of the crunch took hold. But as those inventories run low, processors will have to replenish supplies at higher prices…”

July 10 – Bloomberg (Brendan Case and Jaewon Kang): “Costco… is boosting its basic membership fee for the first time since 2017, raising the charge for most memberships to $65 a year from $60. The 8% price increase will take effect Sept. 1… The price of the retailer’s premium membership will rise to $130 from $120 now.”


Biden Administration Watch:

July 12 – Politico (Liz Crampton, Sarah Ferris, Ally Mutnick, Jeff Coltin and Jeremy B. White): “As President Joe Biden’s support continues to crumble, his party is reckoning with the possibility of a punishing defeat in November — a potential GOP wave that would not only elect former President Donald Trump but also sweep away Democrats from power in Congress. Their angst about Biden prompted one vulnerable member of Congress, Rep. Mike Levin (D-Calif.), to ask the president directly on Friday to consider dropping out — a stunning confrontation that has deeply rattled Democrats who were already anxious about the high stakes of the moment. Biden’s response, according to a member on the call: I’m running.”


Federal Reserve Watch:

July 9 – Bloomberg (Anna Wong): “The key takeaway from Fed Chair Jerome Powell’s July 9 appearance before the Senate Banking Committee was his acknowledgment that recent prints have shown ‘modest further progress’ on inflation, while labor-market conditions have cooled ‘considerably.’ The latter theme was so significant that Powell mentioned it at least five times in response to lawmakers’ questions. These are the clearest signals to date that the FOMC is close to cutting rates. With three more inflation reports due before the September FOMC meeting, we think the Fed will have enough confidence by then to cut.”

July 9 – Reuters (Howard Schneider and Ann Saphir): “The U.S. is ‘no longer an overheated economy’ with a job market that has cooled from its pandemic-era extremes and in many ways is back where it was before the health crisis, Fed Chair Jerome Powell said in remarks to Congress that suggested the case for interest rate cuts is becoming stronger. ‘We are well aware that we now face two-sided risks,’ and can no longer focus solely on inflation, Powell told the Senate Banking Committee… ‘The labor market appears to be fully back in balance.’”

July 9 – CNBC (Jeff Cox): “Federal Reserve Chair Jerome Powell… expressed concern that holding interest rates too high for too long could jeopardize economic growth. Setting the stage for a two-day appearance on Capitol Hill this week, the central bank leader said the economy remains strong as does the labor market, despite some recent cooling. Powell cited some easing in inflation, which he said policymakers stay resolute in bringing down to their 2% goal. ‘At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,’ he said… ‘Reducing policy restraint too late or too little could unduly weaken economic activity and employment.’”

July 10 – Yahoo Finance (Jennifer Schonberger): “Fed Chair Jay Powell… again emphasized that he is paying closer attention to a cooling job market, another sign to market watchers that the central bank is inching closer to cutting interest rates. ‘I think for a long time, we've had to focus heavily on the inflation mandate,’ Powell told House lawmakers… ‘But I think now we're getting to the place where the labor market is getting pretty much in balance to where it needs to be, and so we're looking at both sides.’”

July 9 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chair Jerome Powell made a subtle but important shift that moved the central bank closer to lowering interest rates when he suggested Tuesday that a further cooling in the labor market could be undesirable. ‘Elevated inflation is not the only risk we face,’ Powell told the Senate Banking Committee… ‘We’ve seen that the labor market has cooled really significantly across so many measures.…It’s not a source of broad inflationary pressures for the economy now.’ That assessment is notable because Fed officials have long cited an overheated labor market as a primary risk to bringing inflation back down.”


U.S. Economic Bubble Watch:

July 11 – Reuters (Norah Mulinda): “The U.S. government recorded a $66 billion budget deficit for June that was reduced sharply by a shift of benefit payments into May that ballooned that month's deficit to $347 billion… The Treasury said that the $66 billion June deficit nominally fell 71% from the $228 billion deficit recorded in June 2023. Without the June calendar adjustments in both years, the Treasury said the June 2024 deficit would have been $159 billion, up 3% or $5 billion from the year-ago gap.”

July 8 – Wall Street Journal (Nicholas Hatcher): “More than three million people passed through U.S. airport security checkpoints on Sunday for the first time ever, setting another daily record amid a surge in summer travel. The Transportation Security Administration said 3,013,413 people were screened Sunday, surpassing the previous mark of 2.99 million set on June 23. Some of the busiest air-travel days on record have happened in recent weeks… But Sunday’s record stands out because it marked the first time the number of daily travelers topped three million.”

July 11 – Associated Press (Matt Ott): “Fewer Americans filed for unemployment benefits last week as the labor market remains sturdy despite high interest rates… Jobless claims for the week ending July 6 fell by 17,000 to 222,000 from 239,000 the previous week. The total number of Americans collecting unemployment benefits declined for the first time in 10 weeks. About 1.85 million Americans were collecting jobless benefits for the week of June 29, around 4,000 fewer than the previous week.”

July 10 – CNBC (Diana Olick): “Anyone out shopping for a home today knows there is still precious little for sale. The housing market is just beginning to come out of its leanest few years in history. Inventory of both new and existing homes is finally rising, but there is something suddenly strange in the numbers: The supply of newly built homes appears to be way too high… There is currently a 4.4-month supply of both new and existing homes for sale… A six-month supply is considered a balanced market between a buyer and a seller… Now supply is finally beginning to climb back, but the gains are mostly in the new home market, not on the existing side. In fact, there is now a nine-month supply of newly built homes for sale, nearly three times that of existing homes.”

July 9 – Reuters (Lucia Mutikani): “U.S. small-business confidence increased to a six-month high in June, but inflation worries lingered amid a rise in the share of owners planning to raise compensation for workers over the next three months. The National Federation of Independent Business (NFIB) said… its Small Business Optimism Index climbed 1 point to 91.5 last month, the highest level since last December… A net 22% of businesses planned to increase compensation in the next three months, up 4 points from May. That was despite 37% of owners reporting job openings they could not fill, down 5 points from May. The NIFB, however, noted that the labor market remained tight in the construction, transportation, and retail sectors. About 16% of businesses reported unfilled positions for unskilled labor, an increase of 2 points from the prior month.”

July 8 – Bloomberg (Vince Golle): “US consumer borrowing increased in May by the most in three months, reflecting a jump in credit-card balances. Total credit outstanding rose $11.4 billion after a revised $6.5 billion gain in April… The median forecast… called for an $8.9 billion increase for May… Revolving credit, which includes credit cards, advanced $7 billion, also the most in three months. Non-revolving credit, such as loans for vehicle purchases and school tuition, increased $4.3 billion.”

 

Fixed Income Watch:

July 11 – Financial Times (Harriet Clarfelt): “Investors are selling out of the riskiest US junk bonds in favour of higher-quality debt, amid a surge in bankruptcy filings and concerns over how the weakest corners of corporate America will survive a prolonged period of high interest rates. The gap in borrowing costs between companies rated triple-C and lower — the lowest rungs of the $1.3tn US junk bond market — and double-B — the highest rung — has surged to almost its widest level since May last year, according to Ice BofA data…”

July 10 – Bloomberg (Shruti Singh): “Credit quality in the $4 trillion municipal bond market is showing early signs of pressure as federal pandemic aid winds down, spurring expectations that the rapid pace of rating upgrades over downgrades in recent years will ease. Revenue growth is slowing, and in states such as California tax and fee collections are dropping. Rainy day funds are forecast to show declines after reaching record levels from strong economies and US stimulus money. ‘Going into fiscal 2024, we were coming into all-time highs of reserve funds, and the economy had proven to be resilient,’ Lisa Washburn, a managing director of Municipal Market Analytics, said… ‘If you look into fiscal 2025, you have draw down of reserves and softening of revenue growth.’”


China Watch:

July 8 – Bloomberg: “The People’s Bank of China tightened its grip on interest rates, introducing a new mechanism to influence short-term borrowing costs as policymakers expand their toolkit to guide markets. The central bank’s move to conduct new bond repurchase or reverse repo operations effectively narrows the corridor within which short-term rates can fluctuate. That will strengthen market expectations for the seven-day repurchase rate to become the new benchmark. Pan Gongsheng, governor of the PBOC, has been taking greater control of market liquidity and borrowing costs across the yield curve this year.”

July 11 – Bloomberg (Rebecca Choong Wilkins): “Chinese people are blaming inequality in the economic system for diminishing their chances at amassing wealth, as urgency builds for Beijing to revive confidence at a key policy meeting. Connections and growing up in a rich family were now seen as the top predictors of wealth in a survey of thousands of Chinese citizens published Tuesday by the Center for Strategic and International Studies. That’s a dramatic shift from the decade prior to 2015 when ability and talent was the most popular response. Unequal opportunity replaced lack of ability in the survey as the primary reason why people in China were poor. That marked the first time it had topped responses in the two decades researchers have conducted the nationwide polls…”

July 9 – Reuters (Qiaoyi Li and Ryan Woo): “China’s consumer prices grew for a fifth month in June but missed expectations, while producer price deflation persisted, with domestic demand mired on a slow recovery track despite support measures for the world's second-largest economy… The consumer price index (CPI) in June rose 0.2% from a year earlier, against a 0.3% uptick in May, the slowest in three months…, below a 0.4% increase forecast in a Reuters poll.”

July 11 – Financial Times (William Langley and William Sandlund): “China’s exports grew at the fastest pace in more than a year last month, as trade remained a rare bright spot for the world’s second-largest economy despite growing tensions with Europe and the US. Exports jumped 8.6% year on year… in June…, accelerating from 7.6% in May and marking the strongest expansion since March 2023. The figure beat expectations… Imports declined 2.3% year on year in June… The figures put China’s trade surplus at $99.05bn, ahead of forecasts for $85bn and marking a single-month record, according to Goldman Sachs analysts. For the first six months of the year, exports were up 3.6% and imports up 2% over the same period in 2023.”

July 9 – Bloomberg: “China Vanke Co. warned of hefty losses in the first half, as the country’s property downturn took a toll on the closely watched developer that’s trying to secure cash to pay off debts. State-backed Vanke expects to post a first-half loss of 7 billion yuan to 9 billion yuan ($962 million to $1.2bn)… The projected loss signals a sharp downturn from the first quarter, when it lost 362 million yuan. The homebuilder resorted to price discounts to reduce inventory and boost cash flow, squeezing profit margins. Investment in some projects has been ‘over-optimistic’ and resulted in high land acquisition costs, it said.”

July 8 – Bloomberg: “China’s local government financing vehicles are chipping away at their $1.6 trillion pile of debt, as regulators aim to curb the sector’s credit risk. LGFVs saw their largest quarterly financing outflow in the second quarter since Fitch Ratings Inc. began to track the data in 2018. Net financing — new yuan bond issuance minus maturities — for the period came in at negative 179 billion yuan ($24.6bn), marking the third consecutive quarter of net outflows. This trend stands in contrast to earlier years, when the LGFV bond market continued to expand despite authorities’ efforts to keep it in check.”

July 10 – Reuters: “China's securities regulator… announced more curbs on short-selling and pledged tighter scrutiny of computer-driven programme trading in its latest effort to bolster a flagging stock market. Short-selling… is often blamed in China by regulators and investors for exacerbating market declines. The China Securities Regulatory Commission (CSRC) said securities re-lending - in which brokers borrow shares for clients to short sell - would be suspended. In addition, margin requirements would be raised for short-sellers.”

July 10 – Bloomberg: “China took some of its most extreme steps yet to restrict short selling and quantitative trading strategies, seeking to support the nation’s sliding stock market as a closely-watched economic policy meeting approaches. The China Securities Regulatory Commission approved an increase in margin requirements for short selling starting July 22… Meanwhile, China Securities Finance Corp., the country’s biggest stocks lending provider, will suspend its business of lending securities to brokerages starting July 11.”

July 8 – Bloomberg: “Bearish signals are mounting for Chinese stocks ahead of one of the country’s biggest annual policy meetings. The Hang Seng China Enterprises Index fell 1.5% on Monday, taking its decline from a May 20 high to over 9% and putting it near a technical correction. On the mainland, the CSI 300 Index slid for a fifth session. That followed a seventh week of losses on Friday, its longest losing run since early 2012.”

July 6 – Financial Times (Joe Leahy and Wenjie Ding): “In the wake of a deadly knife attack on a school bus full of Japanese children near Shanghai last month, Japan’s consulate in the city issued a stern warning to its citizens. ‘Recently, there have been stabbing incidents in various places across China where people gather (such as parks, schools, and subways). Please be very mindful of your surroundings when you go out,’ it said. The assault by a 52-year-old man in the city of Suzhou in eastern Jiangsu province, in which the Chinese bus attendant died and a Japanese woman and child were wounded, followed a series of incidents targeting Japanese citizens amid escalating anti-Japanese rhetoric on Chinese state media.”


Central Banking Watch:

July 10 – Financial Times (Martin Arnold): “Eurozone wage growth picked up last month, prompting speculation from economists that the European Central Bank could struggle to cut interest rates as much as investors expect. A wage tracker by recruitment website Indeed showed salaries for jobs advertised rose 4.2% in the year to June, accelerating to the fastest pace for a year… ‘These data may well turn out to challenge the ECB’s inflation forecast,’ said Tomasz Wieladek, an economist at investor T Rowe Price.”

July 6 – Bloomberg (Ott Tammik): “European Central Bank Governing Council member Madis Muller said officials must be cautious on further monetary loosening as wage gains and service-price growth remain elevated. ‘For that reason, we can’t rush with lowering interest rates,’ the Estonian official said…”

July 10 – Financial Times (Sam Fleming): “The Bank of England’s chief economist said… that key drivers of UK inflation were showing ‘uncomfortable strength’, underscoring the continued uncertainty over the outlook for interest rates. Huw Pill said the central bank had made ‘substantial progress’ in its efforts to bring down inflation, which finally hit the official target of 2% in May. He added it was a question of when, rather than if, the BoE Monetary Policy Committee decided to reduce rates. But he pointed out in a speech that annual rates of services inflation and wage growth were still running at close to 6%. Recent indicators have hinted towards ‘some upside risk to my assessment of inflation persistence’, said Pill.”

July 10 – Reuters (Andy Bruce): “Bank of England interest rate-setter Catherine Mann… emphasised the strength of price pressures in Britain's economy, giving a clear signal she is unlikely to vote for an interest rate cut in August. Asked how inflation falling to the BoE's 2% target affected her thinking on policy, Mann said the drop was merely ‘touch and go’ and that inflation would likely rise above that rate for the rest of the year. Mann… added that growth in wages and services prices were still inconsistent with the BoE's target. ‘Until I see some you know, deceleration, sustained deceleration in services, I really I’m not in a position,’ Mann said…”


Global Bubble Watch:

July 9 – Reuters (Mark John and Sumanta Sen): “Elections are taking place this year in countries home to almost half of the world's population, from Taiwan's general election in January to the U.S. presidential race in November. The votes come amid growing economic and geopolitical strife, with the Ukraine war, conflicts in the Middle East and rising trade tensions between the United States and China, the world's two largest economies. In some countries, there are concerns about the resilience of democracy itself as political discourse has polarized or been warped by disinformation. Many of this year's elections will not be free and fair - or their results will be disputed.”


Europe Watch:

July 7 – Wall Street Journal (Tom Fairless): “New governments in Europe are being handed a poisoned chalice. They are being elected with mandates for change, but only limited means at their disposal to enact it. Public debt is close to multidecade highs on both sides of the English Channel, where voters this week were electing new parliaments. In both France and the U.K., government spending and budget deficits as a share of gross domestic product are significantly above prepandemic levels. Economic growth remains lackluster, borrowing costs have surged, and demands on the public purse are rising, from defense to old-age pensions. All that means fiscal restraint… will be necessary... But politicians haven’t prepared electorates for that. On the contrary, they have signaled bold new spending plans.”

July 8 – Associated Press (Sylvia Hui): “Britain’s new Labour government will make stimulating economic growth its mission, the Treasury chief said… In her first major speech, Rachel Reeves said there was no time to waste to reverse what she called ‘14 years of chaos and economic instability’ under Conservative governments. ‘Where governments have been unwilling to take the difficult decisions to deliver growth — or have waited too long to act — I will deliver,’ she told business leaders and reporters.”


Japan Watch:

July 11 – Bloomberg (Toru Fujioka): “Japan’s households see inflation at record levels over the coming years, an uptick that will support the case for the Bank of Japan to raise interest rates in the near-term as the yen’s rapid depreciation ramps up pressure on the cost of living. Households expect price levels to rise at an annual clip of 8.7% over the next five years, the highest in comparable data back to 2006, according to a quarterly survey by the BOJ… Over the 12 months from now, they expect price growth of 11.5%, also the highest on record. Some 87.5%, the largest figure since 2008, said prices will go up significantly or slightly over the period.”

July 9 – Reuters (Leika Kihara): “Japan's wholesale inflation accelerated in June as the yen's declines pushed up the cost of raw material imports…, keeping alive market expectations for a near-term interest rate hike by the central bank. Rising global commodity costs and a phase-out of gasoline and fuel subsidies also pushed up wholesale prices…, a sign of heightening inflationary pressure… The corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, rose 2.9% in June from a year earlier…”

July 8 – Bloomberg (Toru Fujioka): “The Bank of Japan’s branch managers see wage growth filtering across the nation’s regions, giving Governor Kazuo Ueda additional evidence in support of a near-term interest rate hike. Many regions reported that ‘wage growth is broadening to surpass or is in line with last year’s elevated levels’ for small and medium-sized businesses, according to a quarterly BOJ report… The report summarizing the views of the managers cited the ripple effect of big wage gains negotiated by big companies and unions, in addition to the need to secure staff amid worker shortages and rising prices.”

July 9 – Bloomberg (Takahiko Hyuga, Saburo Funabiki and Toru Fujioka): “Japan’s largest banks called on the Bank of Japan to make deep cuts to its monthly bond purchases during hearings of market participants at the central bank… One megabank said the BOJ should move early to make sharp cuts to its bond buying, while another major bank recommended an eventual reduction to monthly purchases of ¥1 trillion ($6.2bn), the people said. A third megabank said the buying should be halved from the current monthly level to ¥3 trillion yen…”


Emerging Market Watch:

July 9 – Bloomberg (Andrew Rosati and Maya Averbuch): “Mexico’s inflation accelerated more than expected in June, complicating central bank’s efforts to cut interest rates that remain near an all-time high. Consumer prices rose 4.98% from a year earlier, above the 4.87% median estimate… Core inflation… slowed to 4.13%...”


Leveraged Speculation Watch:

July 11 – Bloomberg (Katherine Burton): “Anthony Scaramucci effectively barred clients from exiting SkyBridge Capital’s crypto-focused hedge fund, even though returns have jumped. Investors who own about 70% of the fund’s shares asked for their money back in the latest redemption period that ended in March... The fund — which returns money through a tender offer — bought back roughly 7% of those shares.”


Social, Political, Environmental, Cybersecurity Instability Watch:

July 12 – Axios (Ivana Saric): “AT&T experienced a massive hack of user data for nearly all of its mobile phone customers in 2022… The hack is one of the biggest private communications data breaches in recent history… The stolen data includes ‘records of calls and texts of nearly all of AT&T's cellular customers,’ other customers using AT&T's wireless network, and ‘At&T's landline customers who interacted with those cellular numbers between May 1, 2022 - October 31, 2022,’ AT&T said…”

July 9 – Financial Times (Attracta Mooney): “Scientists said that this year was on track to become the warmest on record as the global surface air temperatures breached the threshold of 1.5C for each of the past 12 months and seas had reached their warmest for 15 months in a row. June was the 13th consecutive month to be the hottest on the books, the Copernicus Climate Change Service said. At a surface air temperature of 16.66C, this was 0.14C above the previous June high set last year. This was despite the early signs of the naturally occurring La Niña cooling weather phenomenon in the Pacific Ocean, which takes over from the El Niño warming effect.”

July 7 – Associated Press (Seth Borenstein): “Earth’s more than year-long streak of record-shattering hot months kept on simmering through June, according to the European climate service Copernicus. There’s hope that the planet will soon see an end to the record-setting part of the heat streak, but not the climate chaos that has come with it, scientists said. The global temperature in June was record warm for the 13th straight month and it marked the 12th straight month that the world was 1.5 degrees Celsius (2.7 degrees F.) warmer than pre-industrial times… ‘It’s a stark warning that we are getting closer to this very important limit set by the Paris Agreement,’ Copernicus senior climate scientist Nicolas Julien said... ‘The global temperature continues to increase. It has at a rapid pace.’”

July 10 – Bloomberg: “Temperatures in Europe are getting close to levels at which some oil refineries would have to start making less fuel. Greece is battling wildfires and the nation’s capital could see temperatures above 40C (104F) in the coming weeks. In Poland, heat may soon exceed the point at which the country’s top fuel supplier can run its refineries normally. Macquarie Group estimates that heat-related disruption at European plants reached about 1 million barrels-a-day last year — almost 10% of what they normally handle. Temperatures in Europe have been well above seasonal norms and there’s little sign of that changing anytime soon. Looking further into the future, Sweden’s largest refiner says climate change is making fuel production harder.”


Geopolitical Watch:

July 9 – Reuters (Kirsty Needham): “The Philippines Air Force arrived in northern Australia on Wednesday on its first overseas deployment in six decades for combat practice alongside U.S. and Australian fighter jets, amid a rise in tensions with China in the South China Sea. Four Philippine FA-50 fighter jets and 162 personnel are taking part in the Pitch Black war games over Australia's largely unpopulated Northern Territory, involving 20 countries and 140 aircraft.”

July 6 – Reuters (Neil Jerome Morales and Ryan Woo): “The Philippine Coast Guard (PCG) said… that China's largest coastguard vessel has anchored in Manila's exclusive economic zone (EEZ) in the South China Sea, and is meant to intimidate its smaller Asian neighbour. The China coastguard's 165-meter 'monster ship' entered Manila's 200-nautical mile EEZ on July 2, spokesperson for the PCG Jay Tarriela told a news forum.”

July 8 – Financial Times (Kana Inagaki and Kathrin Hille): “Japan and the Philippines have signed a landmark defence agreement to deepen military co-operation and enhance their regional deterrence against China. The reciprocal access agreement allows their armed forces to train and conduct exercises in each other’s countries at a time of rising concern about China’s activity around Taiwan and in the South China Sea. It follows warnings from senior Philippine officials that escalating tensions with Beijing over the Second Thomas Shoal, a disputed reef, could trigger a war. The two-way agreement… comes after the US hosted a historic trilateral summit with Japan and the Philippines, its two closest Asian allies, in April.”

July 11 – Reuters (Kantaro Komiya and Mei Mei Chu): “A Japanese navy destroyer made a rare entry into China's territorial waters near Taiwan earlier this month without notifying China, prompting Beijing to lodge an official complaint. The Japan Maritime Self-Defense Force's destroyer Suzutsuki sailed into China's waters off Zhejiang province on July 4, where China had said it would conduct naval drills…”

July 9 – Wall Street Journal (Mike Cherney): “Australia, the U.S. and six other allies warned that a Chinese state-sponsored hacking group poses a threat to their networks, in an unusual coordinated move by Western governments to call out a global hacking operation they say is directed by Beijing’s intelligence services. Tuesday’s advisory was a rare instance of Washington’s major allies in the Pacific and elsewhere joining to sound the alarm on China’s cyber activity. Australia led and… was joined by the U.S., U.K., Canada and New Zealand… Germany, Japan and South Korea also signed on. The warning marked the first time South Korea and Japan joined with Australia in attributing malicious cyber activity to China.”

July 7 – Bloomberg (Andreas Kluth): “The cognoscenti in Washington are mentally preparing for war. Not so much in Ukraine or the Middle East, where they’re trying to keep the United States out of the fighting that’s raging already; but in the Taiwan Strait, where the shooting hasn’t started yet. If and when it does, everyone agrees, the resulting Sino-American clash would be hell. The question is, exactly what kind of hell? Some ‘war games’… suggest that the US and its Taiwanese and Japanese allies could repel a full-bore invasion attempt by mainland China, but at a horrendous cost: The US would lose tens of thousands of service members, dozens of ships, hundreds of aircraft, and lots of other kit. The American and global economies would smolder in ruins for years. All the more reason for the US to stock up, massively and fast, on ammo, and especially the kinds of missiles that can traverse the huge distances of the western Pacific. That’s the gist of The Boiling Moat, a new book co-authored and edited by Matt Pottinger, formerly a deputy national-security advisor in the administration of Donald Trump and nowadays a scholar at Stanford University’s Hoover Institution.”

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