Weekly Commentary: Guard Down, Towel Tossed

FreepikHistory will be the judge. This period will be examined, analyzed, discussed, and debated for at least the next century. My task after a week like this is to provide some facts and contemporaneous analysis to help future analysts and historians foil the revisionists.

Bloomberg: “Powell Pivots on Rates Toward a Happy New Year.”

WSJ: “Wall Street Traders Go All-In on Great Monetary Pivot of 2024.”

WSJ: “Fed Starts the Pivot Toward Lowering Rates.”

Bloomberg: “Nasdaq 100 Caps Pivotal Week at a Record High.”

CNN: “Dow Reaches Record High as Fed Pivots Toward Rate Cuts.”

Reuters: “‘Melt-Up’ as Fed Accelerates Pivot.”

Axios: “What the Fed’s Rate Policy Pivot Means for the Economy.”

FT: “Fed Pivot Piles Pressure on Europe’s Central Banks to Shift”

NYT: “The Debate on Wall Street: Did the Fed Pivot Too Soon?”

What a difference 12 days makes. Chair Powell on December 1st: “Premature to speculate on when policy may ease” and “Fed prepared to tighten more if it becomes appropriate.”

To be sure, the Powell Pivot doused nitro on the Everything Squeeze, the Everything Rally, and the Everything “Melt-Up.” And everyone is absolutely overjoyed – a holiday gift pack beyond imaginations. As such, there is today sparse insightful market debate or pushback. I’ll say it: the emperor is buck naked.

Did Powell even mean to signal “the great monetary pivot of 2024”? If not, we witnessed Wednesday afternoon a communications cluster-snafu of historic significance. If all went as planned, a line needs to be inserted in the top section of the list of major Fed policy blunders.

Parallels to the late twenties only get more unnerving. Milton Friedman, Ben Bernanke, and other history revisionists point to Fed monetary tightening (all the way into the summer of 1929) as a primary explanation of the stock market crash and subsequent Great Depression. The relative neophyte Federal Reserve was belatedly “leaning against the wind” of a conspicuously out of control speculative Bubble. Exuberant market players, however, remained more focused on the inevitability of the Fed again coming to the market’s defense. We now better appreciate the dynamics of markets turning hopelessly oblivious to risk.

Note to future historians: don’t pin blame on Fed tightening for an eventual financial crash. Years of loose finance, Federal Reserve (central banks) accommodation, and resulting speculative Bubbles (and economic maladjustment) were the culprits.

For the record, the dovish pivot message was received with markets in the throes of a major speculative run, along with rapidly loosening conditions. This week’s 3.2% gain pushed Nasdaq100 y-t-d returns to 52%. Adding another 9.1%, the Semiconductors sport a 2023 return of 62.6%. The S&P500 ended the week with a y-t-d return of 24.9%. The Goldman Sachs most short index surged 14.4% Wednesday and Thursday, trading Friday morning up almost 40% from November 13th lows. The KBW Regional Bank Index (KRX) posted a two-day melt-up of 10.2%, boosting the rally from October 25th lows to 40%. The Wednesday/Thursday “pivot rally” saw the small cap Russell 2000 jump 6.3%, extending the rally off October 27th lows to 22%.

The loosening of conditions was already remarkable. Then came the “pivot.” Investment-grade CDS prices dropped another four this week to 57.5 bps, the low since January 2022. High yield CDS sank 35 to 367 bps, the lowest level since April 2022. Investment-grade corporate spreads to Treasuries traded Friday below 100 bps for the first time since January 2022. High yield spreads narrowed to April 8, 2022, levels. The iShares High Yield Corporate Bond ETF (HYG) has now returned 5.6% since the Fed’s first hike on March 16, 2022.

JPMorgan CDS fell this week to 44.65, the low back to November 2021. Goldman Sachs CDS traded to lows since January 2022.

Let’s get to Powell. From his prepared comments: “Our actions have moved our policy rate well into restrictive territory, meaning that tight policy is putting downward pressure on economic activity and inflation, and the full effects of our tightening likely have not yet been felt.”

I take exception with the fundamental premise of the policy rate being “well into restrictive territory” and “putting downward pressure on economic activity.” Q3 GDP was reported at an exceptional 5.2% rate, with the Atlanta Fed GDPNow forecast placing Q4 at a still robust 2.6%.

Powell’s own comments are contradictory. “GDP is on track to expand around 2-1/2 percent for the year as a whole, bolstered by strong consumer demand as well as improving supply conditions.” “Committee participants revised up their assessments of GDP growth this year…” “The labor market remains tight… labor demand still exceeds the supply of available workers.” “…A very high proportion of forecasters predicted very weak growth or a recession. Not only did that not happen, we actually had a very strong year…” “So we’ve seen… strong growth, still a tight labor market…”

Bloomberg’s Michael McKee: “Mr. Chairman, you were, by your own admission, behind the curve in starting to raise rates to fight inflation, and you said earlier, again, the full effects of our tightening cycle have not yet been felt. How will you decide when to cut rates, and how will you ensure you’re not behind the curve there?”

Powell: “So we’re aware of the risk that we would hang on too long. We know that that’s a risk, and we’re very focused on not making that mistake.”

Markets salivate. Back to Greenspan’s asymmetrical – slash rates aggressively, raise them timidly – market-accommodating approach, the Federal Reserve has maintained an err on the side of looseness institutional bias. This policy framework has been instrumental in promoting asset inflation, leveraged speculation, Bubbles, and resulting incessant boom and bust dynamics.

The critical issue is whether the Fed, after having again fallen so far behind the curve in normalizing monetary policy, will now compound this latest major policy mistake by pivoting prematurely back to accommodation. Whether he meant to be clear or not, markets heard loudly and clearly what they have always expected: Heck yeah, we prefer to be accommodative.

The Wall Street Journal’s Nick Timiraos: “The market is now easing policy on your behalf by anticipating a funds rate by next September that’s a full point below the current level with cuts beginning around March. Is this something that you are broadly comfortable with?”

Powell: “…What I would just say is that we focus on what we have to do and how we need to use our tools to achieve our goals, and that’s what we really focus on. And people are going to have different forecasts about the economy, and they’re going to — those are going to show up in market conditions, or they won’t, but in any case, we have to do what we think is right… I’m just focused on what’s the right thing for us to do, and my colleagues are focused on that too.”

More saliva. The Fed Chair just doesn’t possess the will to confront the markets – to even lean against a conspicuously speculative marketplace and loose conditions. White Towel Tossed into the ring. And please spare us ever again invoking the legacy of Paul Volcker.

It was all rather shocking. Everyone was anxiously waiting for the answer to the obvious question: “How hard will Powell push back against frothy markets?” Yet no one even had the right question: “Will he even bother?” He certainly did not. Highly speculative markets, braced to absorb Powell’s push back, erupted into melt-up after the Fed Chair’s unforeseen forward thrust.

December 14 – Bloomberg (Lu Wang): “Wednesday’s sweeping rally across financial assets was something unseen in almost 15 years for a Federal Reserve policy decision day. From stocks to Treasuries, credit to commodities, everything was up after the Fed projected more interest-rate cuts in 2024. The scope and intensity can be illustrated by a measure that tracks the lowest return of the five major exchange-traded funds following these assets. With gains of at least 1%, the pan-asset advance beat all other Fed days since March 2009. The everything rally extends a trend from November, when economic data fueled optimism that the central bank has managed to cool inflation without dealing a blow to the economy.”

Surely Powell has been closely monitoring recent market dynamics. He must have known his abrupt “premature to talk” to “now discussing rate cuts” pivot would generate a spirited market reaction. And it seems impossible that he would be unaware of the impact such commentary would have two trading sessions ahead of “triple witch” quarterly derivatives expiration, a record one at that.

December 12 – Reuters (Saqib Iqbal Ahmed): “Dealers squaring their books ahead of an options expiration that is set to be the largest on record for S&P 500-linked derivatives may be helping to tamp down swings in U.S. stocks… Some $5 trillion in U.S. stock options are set to expire on Friday, 80% in S&P 500-linked contracts – the largest such expiration in at least 20 years – according to Asym500 MRA Institutional… Options trading volume is on pace for a record year with average daily volume of 44 million contracts… That volume has been boosted in part by the popularity of exchange-traded funds (ETFs) that sell options to generate income that have doubled in size in 2023 and now control about $60 billion, according to a Nomura analysis. Robust options selling activity by these ETFs has left dealers loaded with options contracts going into the last expiration of the year.”

The contrast was striking between Powell’s Wednesday performance and the following day from the ECB’s Christine Lagarde. Even under the weather (bronchitis), Lagarde made the presentation from our top central banker seem amateurish. Central bankers around the world must be scratching their heads. What was Powell thinking? American central bankers doing what they do best.

Speculative excess and the dramatic loosening of conditions are global phenomena. European bank (subordinated) CDS plunged 14 this week to 123 bps, the low since February 2022. European High yield CDS sank 36 to 332 bps, the lowest daily close since February 2022. EM CDS fell 13 to the lowest daily close since September 2021. Italian and Greek yields have collapsed more than 120 bps from October highs (to 16-month lows). “European Stocks Track Longest Weekly Winning Streak Since April.” Germany’s “DAX Hits New Record After Fed Signals Rate Cuts Ahead.” Up 12% from October 27th lows, France’s CAC40 closed the week at an all-time high.

It was fascinating to watch ECB President Christine Lagarde field questions related to the Fed’s dovish pivot.

Lagarde: “Should we lower our guard? We ask ourselves that question. No, we should absolutely not lower our guard… When we look at all the measurements of underlying inflation, there is one particular measurement which is hardly budging – it’s declining a little bit but not much. And that is domestic inflation. Domestic inflation is largely predicated by wage. We need more data to better understand what happens there, and why is domestic inflation resisting.”

“We did not discuss rate cuts at all. No discussion. No debate on this issue. I think everyone in the room takes the view that between hike and cut there’s a whole plateau – a whole beach – of hold. It’s like solid, liquid and gas. You don’t go from solid to gas without going through the liquid phase. This was just not discussed. I think going forward we are going to continue to be data dependent. We are going to continue to determine meeting by meeting what we see on a totality of data. But, obviously, given the certain resistance of domestic inflation and the risk of second round effects – that we absolutely want to avoid – we are going to be very attentive to that category of data…”

Even more intriguing were Friday comments from the President of the powerful New York Federal Reserve Bank, John Williams, in a CNBC interview – the first substantive comments from a major Fed official post-Powell pivot (included at length for posterity).

CNBC’s Steve Liesman: “What changed between, say, the end of November when it sounded like you and the Chair were both saying, “Hey, it wasn’t the time to talk about rate cuts” and then what happened at the meeting, where it sounded like the Committee was talking about rate cuts and now projecting more of them for next year?”

Williams: “First of all, we aren’t really talking about rate cuts right now. We’re very focused on the question in front of us, which as Chair Powell said: the question is have we gotten monetary policy to a sufficiently restrictive stance in order to ensure that inflation comes back down to 2%. That’s the question in front of us. That’s what we’ve really been thinking about for the past five months. And I think we’ll be continuing to think about it for some time. So that’s the topic of discussion for the committee. That’s the decision we made to hold the Fed funds target where it is. Now, clearly, we all put in projections for interest rates and inflation and growth and unemployment, as well. Those are individuals thinking about what may happen over the next three years on a baseline path. But the discussion, really, at the FOMC right now is about ‘do we have monetary policy today in the right place’ – and not speculating on what will happen at some point in the future.”

Liesman: “But the Chair said you had a discussion about rate cuts.”

Williams: “Well, we have the projections that we all submit. The summary of those projections are shared with Committee participants. Some Committee participants talk about their projections. But this is not the topic of discussion about ‘what are we going to do?’ or plans around this. Again, the Committee doesn’t have plans around that. This is really each Committee participant thinking, ‘Okay, over the next three years, if the economy evolves in a certain way, what do you think the appropriate path for interest rates are.’”

Liesman: “So what was the answer to the question, ‘are you sufficiently restrictive?’”

Williams: “Well, I think this gets to the uncertainties that we face. It’s still a highly uncertain situation – both in terms of inflation, in terms of the progress of the economy. So right now, I think the base case – I’ll speak for my own view – the base case is looking pretty good. Inflation is coming down, the economy remains strong, unemployment is low. And, so, when you think about ‘have we gotten policy to the kind of appropriate place?’, it’s looking like we are at or near that in terms of sufficiently restrictive. But things can change. One thing we’ve learned, even over the past year, is that the data can move in surprising ways. We need to be ready to move to tighten policy further if the progress on inflation were to stall or reverse. The Committee is clearly focused on making sure that we bring inflation back down 2% on a sustained basis. We need to be data dependent and respond and take the right policy decisions depending on what transpires.”

Liesman: “So the market sure thought you were talking about rate cuts and projecting rate cuts. What do you make of how the market reacted both in a huge downdraft in bond yields and an updraft in stock prices?”

Williams: “One thing that’s been really interesting over the past year. We track this obviously very closely here at the New York Fed. The market reactions to all kinds of news, economic data – all types of events – has been much bigger in magnitude – much larger than is historically normal. I think that reflects in large part the uncertainty, the unusual nature of the situation we face. The fact we’re seeing big market reactions to pretty much everything has been a pattern that we’ve seen over the year. In terms of what we’re seeing about the market saying, ‘well, the FOMC is going to do this – or so many rate cuts this year’ – I would just point people back to the economic projections that we put out. If you look at the median projection, over the next three years, the median shows, basically, gradually over the next three years the policy restraint that we put in place dialing back gradually over three years. That’s the view of the Committee. I think that’s consistent with our view of how the economy is going to evolve. I think the market in a way is reacting very strongly – maybe more strongly than what we are showing in terms of our projections.”

Liesman: “Do you believe the Federal Reserve can cut interest rates next year?”

Williams: “Again, we of course can do whatever is appropriate for achieving our goals. The way I think about this is, if we get the progress I’m hoping to see on inflation, on the economy, of course it will be kind of natural for us to move monetary policy over an extended period of time – over a few years – back to more normal levels. That has to be in the context of us being confident that inflation is moving sustainably toward our 2% goal. It’s absolutely essential to see that. But, under those conditions – which is my baseline forecast – of course we need to move policy back to normal levels over a period of time. We got to be data dependent and able to adjust according to what we’re seeing.”

Liesman: “I have to ask this question more directly. The market sees rates coming down as soon as March. How would you respond to that?”

Williams: “It’s just premature to be even thinking about that question. Right now, the question that we’re thinking about at the FOMC is, ‘Do we have the level of rates, right?’ As Chair Powell said, there are these phases of how we’ve thought about monetary policy. Have we got the stance of monetary policy sufficiently restrictive? And, of course, we’ll be watching the data to make sure we’re getting that appropriate policy. To me, the debate is – it is premature to really think about what we will be doing sometime well into the future. That’s not the question in front of us.”

If Williams’ objective was to clarify things – some post-Powell pivot clean-up duty – his comments created more questions than answers. For starters, did the Committee discuss rate cuts or not? Did the Powell pivot convey a stronger dovish message than the Committee intended?

At this point, the damage is done; the horse bolted from the barn. Pushback from Williams, Bostic and others will be swimming up a raging stream of market speculative fervor. And I doubt it would make much difference if Powell tries to walk back his dovish pivot. After all, the marketplace has received all the confirmation it needs to be convinced that the Fed doesn’t want to actually tighten conditions; that it’s comfortable with booming markets and loose conditions; and that it will, as always, err on the side of market accommodation.

It’s hard to believe the Fed has tied rate policy so tightly to current inflation. Inflation will ebb and flow – and right now it’s ebbing after the biggest spike in decades. Evidence is already mounting that recent loosened conditions are supporting demand. We should assume that economic resilience at this point will sustain tight labor markets and strong wage gains.

Beyond heightened prospects for elevated inflation, the Fed seemingly abandoned its overarching responsibility for maintaining financial stability. To pivot when markets are in such an intensely speculative state is reckless. It’s just unsound central banking to dismiss today’s upward wage pressures and second-round inflationary impacts. And it’s unacceptable to disregard critical lessons from the late nineties “tech Bubble” and mortgage finance Bubble experiences: system stability risks associated with asset inflation and speculative Bubbles far overshadow those of consumer price inflation.

And I see the root of the Fed’s predicament in its narrow focus on “financial conditions”. When Powell and Fed officials discuss “restrictive” policy rates, it’s as if we’ve time warped back to the eighties when bank lending provided the marginal source of finance for the economy. To assert “restrictive” today – in the face of $2 TN federal deficits and elevated system Credit growth, booming securities markets, record options trading, Trillions of speculative leverage (including a record-sized “basis trade”), a Bubble in private Credit, record flows into junk bond funds, and ongoing enormous ($500bn plus) EFT flows – is nonsensical.

New York Fed President John Williams surely appreciates that “market reactions… much bigger in magnitude… than is historically normal” is the direct consequence of highly speculative markets with glaring structural abnormalities. Unprecedented options trading, derivatives hedging-related instability, and massive momentum-chasing flows are fueling a “melt-up” overreaction to Powell’s pivot. One of these days, these same dynamics will haunt on the downside. And the longer the current Bubble blowoff inflates, the greater the likelihood of a destabilizing reversal and financial accident.

December 10 – Wall Street Journal (Gunjan Banerji): “Oodles of risk. Bold bets on artificial intelligence. Round-the-clock activity. The options market is booming like never before. About 44 million options contracts have changed hands on an average day in 2023, on track for an annual record based on Options Clearing Corp. data going back to 1973 and more than double the figure from five years ago. Activity in contracts expiring the same day… has helped turbocharge a mania that began in 2020 during the depths of the Covid-19 pandemic. Volume has soared, hitting fresh highs in each of the following three years. The explosion in activity suggests many traders are hungry to take big risks in markets, eager for fatter payouts than they think traditional buy-and-hold investments will offer. The flourishing trades also show how the lines between trading and gambling have further blurred. Some of the most popular trades this year resembled scratch-off lottery tickets.”

Especially considering the remarkable loosening of conditions and market melt-up dynamics, there is increasing likelihood the economy surprises to the upside. From a growth surprise or any number of potential shocks, inflation could easily regain momentum. And then we’ll learn how badly Federal Reserve credibility has been damaged. It will not be easy to talk markets into tighter conditions. Analysts and participants will scoff at any Fed stabs at tough talk or some half-baked “hawkish pivot”. Powell Wednesday essentially passed off policymaking to feverish markets. Efforts to regain control won’t go smoothly.

 For the Week:

The S&P500 rose 2.5% (up 22.9% y-t-d), and the Dow jumped 2.9% (up 12.5%). The Utilities increased 0.7% (down 12.5%). The Banks surged 8.1% (down 5.0%), and the Broker/Dealers jumped 3.4% (up 19.6%). The Transports advanced 5.3% (up 19.6%). The S&P 400 Midcaps jumped 4.3% (up 13.0%), and the small cap Russell 2000 surged 5.5% (up 12.7%). The Nasdaq100 added 3.3% (up 52.0%). The Semiconductors spiked 9.1% higher (up 62.6%). The Biotechs surged 6.4% (down 0.1%). With bullion adding $15, the HUI gold index rose 4.0% (up 3.9%).

Three-month Treasury bill rates ended the week at 5.225%. Two-year government yields sank 28 bps this week to 4.44% (up 1bp y-t-d). Five-year T-note yields fell 33 bps to 3.91% (down 10bps). Ten-year Treasury yields dropped 31 bps to 3.91% (up 3bps). Long bond yields dove 30 bps lower to 4.01% (up 4bps). Benchmark Fannie Mae MBS yields sank 34 bps to 5.37% (down 2bps).

Italian yields sank 35 bps to 3.72% (down 98bps). Greek 10-year yields dropped 28 bps to 3.16% (down 140bps y-t-d). Spain’s 10-year yields fell 31 bps to 3.00% (down 52bps). German bund yields dropped 26 bps to 2.02% (down 43bps). French yields sank 28 bps to 2.55% (down 43bps). The French to German 10-year bond spread narrowed two to 53 bps. U.K. 10-year gilt yields collapsed 35 bps to 3.69% (up 1bp). U.K.’s FTSE equities index added 0.3% (up 1.7% y-t-d).

Japan’s Nikkei Equities Index rallied 2.1% (up 26.4% y-t-d). Japanese 10-year “JGB” yields fell seven bps to 0.70% (up 27bps y-t-d). France’s CAC40 added 0.9% (up 17.3%). The German DAX equities index was little changed (up 20.3%). Spain’s IBEX 35 equities index declined 1.3% (up 22.7%). Italy’s FTSE MIB index was about unchanged (up 28.1%). EM equities were mostly higher. Brazil’s Bovespa index jumped 2.4% (up 18.6%), and Mexico’s Bolsa index surged 5.0% (up 17.9%). South Korea’s Kospi index rose 1.8% (up 14.6%). India’s Sensex equities index gained 2.4% (up 17.5%). China’s Shanghai Exchange Index fell 0.9% (down 4.7%). Turkey’s Borsa Istanbul National 100 index increased 1.0% (up 45.1%). Russia’s MICEX equities index dropped 1.5% (up 40.8%).

Federal Reserve Credit increased $4.5bn last week to $7.702 TN. Fed Credit was down $1.999 TN from the June 22nd, 2022, peak. Over the past 222 weeks, Fed Credit expanded $3.975 TN, or 107%. Fed Credit inflated $4.891 TN, or 174%, over the past 579 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.5bn last week to $3.389 TN. “Custody holdings” were up $80.1bn, or 2.4%, y-o-y.

Total money market fund assets declined $11.6bn to $5.886 TN, with a 40-week gain of $992bn (26% annualized). Money funds were up $1.168 TN, or 24.8%, y-o-y.

Total Commercial Paper declined $8.3bn to $1.243 TN. CP was down $59bn, or 4.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates increased two bps to 6.82% (up 65bps y-o-y). Fifteen-year rates were unchanged at 6.27% (up 75bps). Five-year hybrid ARM rates slipped two bps to 6.62% (up 126bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 23 bps to a five-month low 7.25% (up 64bps).

Currency Watch:

For the week, the U.S. Dollar Index dropped 1.4% to 102.55 (down 0.9% y-t-d). For the week on the upside, the Norwegian krone increased 4.3%, the South African rand 3.5%, the Japanese yen 2.0%, the Swedish krona 1.9%, the Australian dollar 1.8%, the Canadian dollar 1.5%, the New Zealand dollar 1.4%, the euro 1.2%, the Swiss franc 1.1%, the British pound 1.1%, the Mexican peso 0.8%, the South Korean won 0.8%, and the Singapore dollar 0.7%. On the downside, the Brazilian real declined 0.3%. The Chinese (onshore) renminbi increased 0.68% versus the dollar (down 3.13%).

Commodities Watch:

The Bloomberg Commodities Index recovered 1.1% (down 12.3% y-t-d). Spot Gold added 0.7% to $2,020 (up 10.7%). Silver rallied 3.7% to $23.86 (down 0.4%). WTI crude increased 20 cents, or 0.3%, to $71.43 (down 11%). Gasoline recovered 4.3% (down 13%), while Natural Gas dropped 3.5% to $2.49 (down 44%). Copper rallied 1.6% (up 2%). Wheat jumped 2.3% (down 21%), and Corn surged 3.7% (down 29%). Bitcoin dropped $2,030, or 4.6%, to $42,120 (up 154%).

Middle East War Watch:

December 9 – Financial Times (James Shotter): “Israel’s national security adviser has warned that Israel ‘can no longer accept’ the presence of Hizbollah forces on its northern border, and said it will have to ‘act’ if they continue to pose a threat… Despite the frequent exchanges which have led to casualties on both sides, Israel and Hizbollah have so far avoided being drawn into a full-blown conflict amid intense diplomatic efforts by the US and other countries to prevent an escalation. However, Tzachi Hanegbi said… Israel could not accept a situation in which residents of Israel’s north, who were evacuated in the early weeks of the war, were afraid to return to their homes because they feared Hizbollah’s elite Radwan force could launch a cross-border attack… ‘We can no longer accept the Radwan force sitting on the border… The Israeli public…?understand that the situation in the north needs to change. And it will change,’ Hanegbi said… ‘If Hizbollah agrees to change it diplomatically, that’s good, if not — we will have to act. We will have to ensure that the situation in the north is different.’”

December 11 – Wall Street Journal (Carrie Keller-Lynn and Dion Nissenbaum): “Israeli officials are warning Hezbollah to pull back its forces on the Lebanese border and stop firing missiles at Israel to avert another war as fighting also rages in the Gaza Strip. The Israeli military Monday said it shelled Lebanese territory after its air-defense system intercepted six projectiles launched from across the border. Israel’s air force later struck a Hezbollah site, from which the military said the group fired projectiles into Israel… Israel has evacuated tens of thousands of civilians from northern Israel and transformed border communities into de facto military bases amid fears of an expansion of its war with Hamas militants who carried out the deadly Oct. 7 attacks… ‘I think we are a mistake away from escalation,’ said one Israeli military official. ‘I don’t think Hezbollah really appreciates how the Israeli psyche has changed since Oct. 7.’”

December 12 – Wall Street Journal (Benoit Faucon, Costas Paris and Gordon Lubold): “Yemen’s Houthi forces have attacked several commercial ships crossing through the Bab el-Mandeb strait in recent days, creating a new front in the battle between Israel and Hamas and complicating efforts by the U.S. and its allies to secure the critical shipping lane. Houthi rebels claimed responsibility… for a strike on the Norwegian tanker Strinda a day earlier off Yemen’s coast… The elevated risk of moving cargoes through the region has resulted in higher costs for shippers and also prompted some countries to rethink security measures to allow safe passage. The Monday attack… came after the Houthis on Saturday said they would prevent the passage of all ships heading to Israel if more food and medicine aren’t allowed into Gaza.”

Ukraine War Watch:

December 12 – Wall Street Journal (Warren P. Strobel and Matthew Luxmoore): “The war in Ukraine has devastated Russia’s preinvasion military machine, with nearly 90% of its prewar army lost to death or injury, and thousands of battle tanks destroyed, according to a newly declassified U.S. intelligence assessment shared with Congress. The intelligence assessment… says that 315,000 Russian personnel have been killed or injured since the February 2022 invasion, or about 87% of Moscow’s prewar force of 360,000. Russia also has lost nearly two-thirds of its tank force, or 2,200 out of its 3,500 preinvasion stock…”

Market Instability Watch:

December 14 – Bloomberg (Edward Bolingbroke): “Across futures, options and cash Treasury markets, volumes surged on Wednesday to leave the session as the most active since the March regional banking crisis… According to Citi strategists Bill O’Donnell and Ed Acton, the Treasury volume ‘exploded higher’ on Wednesday with the overnight desk seeing the ‘highest volume day since banking problems this spring’ — the strategists highlighted overnight Treasury volumes at 225% of average, with most activity seen in the 5-year, where volumes were at 310% vs usual… In SOFR derivatives, the combined volumes across both futures and options amounted to almost 10 million on Wednesday, also the highest since March this year.”

December 14 – Reuters (Douglas Gillison, Laura Matthews and Carolina Mandl): “Wall Street’s top regulator… adopted new rules aimed at reducing systemic risk in the $26 trillion U.S. Treasury market by forcing more trades through clearing houses, while offering some concessions following industry pushback. The five-member U.S. Securities and Exchange Commission voted 4-1… to finalize the new rules, proposed over a year ago, marking the most significant overhaul in decades of the world’s largest bond market, a global benchmark for assets. The reforms, which require some cash Treasury and repurchase or ‘repo’ agreements to be centrally cleared, are part of a broader government effort to fix structural issues regulators believe are causing market volatility and liquidity problems. They will become effective in phases by June 2026. ‘Today is the most significant day for U.S. Treasury market structure in decades. The SEC’s final rule will reassemble the way that the Treasury market functions,’ said Nathaniel Wuerffel, head of market structure at BNY Mellon…”

December 13 – Financial Times (Kate Duguid and Stefania Palma): “US regulators… voted to require more Treasury bond trades to be cleared centrally, a landmark reform aimed at bolstering the resilience of one of the world’s most important financial markets. The Securities and Exchange Commission in Washington voted four to one in favour of a proposal that could require an additional $1tn of daily trades to be handled by an independent clearing house. That would mean market participants have to stump up collateral to back those positions or cap the amount they can borrow in so-called repo trades. ‘[The new rules] will reduce risk across a vital part of our capital markets in normal times and stress times,’ said Gary Gensler, chair of the SEC. ‘That benefits investors, issuers and the markets connecting them.’”

December 14 – Bloomberg (Garfield Reynolds): “Some of the biggest names in the bond world are at odds about just how far Treasuries can rally now the Federal Reserve has signaled a pivot toward interest-rate cuts. Jeffrey Gundlach at DoubleLine Capital says US 10-year yields will fall toward the low 3% range as the central bank is likely to slash its cash-rate target by a full two percentage points next year. Former Pimco bond king Bill Gross dismissed such euphoria, saying the yield is already about where it should be at just on 4%. ‘We’ve broken down the trend lines and there’s a lot of Room’ below the current 10-year yield level, Gundlach said… ‘The economy is going to undershoot the downside and that is going to create a response. We will have to have a lot of money printing.’”

Bubble and Mania Watch:

December 11 – Wall Street Journal (Charley Grant): “Investors spent most of 2023 fretting about inflation and interest rates. Now they are snapping up everything from stocks and bonds to crypto and even gold. The simultaneous surge across assets has sparked debate about whether the ‘everything rally’ marks the arrival of a lasting bull market—or just a fleeting sugar high at the end of the Federal Reserve’s tightening cycle…”

December 14 – Bloomberg (Eliyahu Kamisher and Maxwell Adler): “California Governor Gavin Newsom ordered a spending freeze as the state’s projected budget deficit ballooned to $68 billion for the next fiscal year — almost five times higher than the initial forecast. State agencies should cut spending on everything from office supplies to computer equipment and halt all non-essential travel… The freeze also restricts purchases of new vehicles and other equipment. Government entities ‘must take immediate action to reduce expenditures and identify all operational savings achieved,’ budget director Joe Stephenshaw said in the letter. The deficit for the fiscal year that begins in July is tied to the waning fortunes of California’s wealthiest taxpayers, who pay the bulk of personal income levies…”

December 11 – Financial Times (Will Schmitt): “Investors on the hunt for regular income have this year poured almost $26bn into exchange traded funds that sell options tied to stocks, inspiring a wave of copycats and raising questions about their effects on market volatility. The funds, known as covered call ETFs, have surged in popularity to contain roughly $59bn in combined assets, up from only $3bn three years ago… The number of ETFs in the category has nearly tripled in that time to about 60 in the US. ‘The zeitgeist of the retail ETF investor has moved on to income-based products and options-based products,’ said Dave Mazza, chief strategy officer at Roundhill Investments, which plans to launch three covered call ETFs in the near future after dropping a strategy focused on meme stocks.”

December 11 – Bloomberg (Kat Hidalgo): “Almost half of private markets investors plan to increase their target allocations to the $1.6 trillion private credit market, according to a survey from alternative asset manager Coller Capital. The… firm’s Global Private Equity Barometer found that 44% of investors planned to boost their stakes in private credit, comfortably surpassing the percentage intending to ratchet up their involvement in other asset classes, such as infrastructure, real estate and private equity. Investors have flocked to the private credit market this year, with a host of banks and asset managers pouring capital and resources into the fast-growing industry.”

December 11 – Bloomberg (Lisa Lee and Silas Brown): “Goldman Sachs… is reshuffling senior executives in its $110 billion private credit unit as it seeks to double the size of the business in the medium term, according to its global head of asset and wealth management. ‘We think it’s the biggest opportunity set across the alternative space,’ said Marc Nachmann.”

December 11 – Bloomberg (Ayai Tomisawa): “A record number of Japanese investors are putting their money into domestic private credit deals in search of higher returns in the world’s last major holdout for negative interest rates. An unprecedented 236 limited partners — including pension funds, insurers and regional banks — have provided money to private capital managers this year through September, more than triple the level of 2017, data compiled by Preqin show. The surge in the number of investors reflects potential returns of around 10%, compared with benchmark Japanese debt yielding less than 1%…”

December 11 – Financial Times (Will Schmitt): “Investors poured record sums into high-yield bond exchange traded funds in November as investors rediscovered their appetite for risk. High-yield bond ETFs gathered $11.6bn globally, including $10.8bn in US-listed ETFs, according to BlackRock. The global tally for high-yield ETFs totally eclipsed the previous record of $8.6bn set in April 2020… November’s outsized inflows more than reversed the cumulative $8.7bn of outflows from high-yield fixed income ETFs that occurred between August and October. Investment grade corporate bond ETFs also enjoyed a stellar month with $10bn of net buying marking the highest inflows since January and more than making up for the $7.9bn of outflows that hit the category in September and October.”

December 13 – Bloomberg (Giulia Morpurgo and Irene García Pérez): “When Spanish bridewear designer Pronovias needed a bailout to make up for the sudden drop in demand during the pandemic, its private equity owner BC Partners was willing to oblige. In 2022, with the aftereffects of lockdowns still hurting the business, the sponsor stepped in with another equity boost. But by the end of last year, BC decided to call it quits, and handed over the keys to creditors in a debt-for-equity swap. It’s a story that’s becoming increasingly common as higher interest rates raise the bar on which companies private equity firms are willing to keep supporting. While funds were prepared to keep injecting capital during the pandemic, believing that profits would stabilize again once normal operations resumed, now they are looking more selectively at the long-term viability of the companies they own. ‘Sponsors have to pick which businesses to keep supporting,’ said David Morris, a senior managing director and head of the UK restructuring practice at FTI Consulting.”

Banking Watch:

December 12 – Financial Times (Demetri Sevastopulo): “The Federal Reserve should be required to stress test US banks’ ability to ‘withstand a potential sudden loss of market access to China’, according to a congressional committee. The proposed legislative change was among dozens of recommendations in a report… from the US House of Representatives’ China committee about enhancing US economic competitiveness to counter the rise of China.”

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

December 12 – Washington Post (Ellen Nakashima and Joseph Menn): “The Chinese military is ramping up its ability to disrupt key American infrastructure, including power and water utilities as well as communications and transportation systems, according to U.S. officials and industry security officials. Hackers affiliated with China’s People’s Liberation Army have burrowed into the computer systems of about two dozen critical entities over the past year, these experts said. The intrusions are part of a broader effort to develop ways to sow panic and chaos or snarl logistics in the event of a U.S.-China conflict in the Pacific, they said.”

December 11 – Reuters (Mark Trevelyan): “The prospect of six more years in power for Russian President Vladimir Putin is likely to mean no let-up in nuclear tensions with the United States… Putin has boasted since launching his 2022 invasion of Ukraine that Russia has the world’s most advanced nuclear arms and said it could wipe out any aggressor. On Monday, three days after announcing he would stand for re-election in March, he presided at a flag-raising ceremony for two new submarines including the Emperor Alexander III, which last month tested a nuclear-capable Bulava intercontinental ballistic missile. While denying that Moscow is ‘brandishing’ nuclear weapons and resisting calls to adopt a more aggressive doctrine on their possible use, he has placed his nuclear forces on raised alert and announced the deployment of tactical nuclear missiles in Belarus, his neighbour and ally.”

De-globalization and Iron Curtain Watch:

December 11 – Reuters (Joe Cash): “Sixty percent of British firms feel that a slowing Chinese economy presents a bigger challenge to their operations in the Asian giant than strict COVID curbs in place until late last year, according to the British Chamber of Commerce in China. While the ‘peak pessimism’ recorded during the pandemic is easing, British businesses are delaying making new investment in China amid a stuttering economic recovery and are downgrading the importance of the world’s No. 2 economy to their global operations, the chamber’s annual sentiment survey… showed…‘In previous years, 80% (of firms) were investing more because of market potential, but it feels like we’re now entering a phase of real clarity,’ Julian Fisher, the chamber’s chair said.”

Inflation Watch:

December 12 – Associated Press (Christopher Rugaber): “Held down by sinking gas prices, U.S. inflation was mostly unchanged last month. But underlying price pressures — from apartment rents, restaurant meals, auto insurance and many other services — remained stubbornly high… In November, much cheaper gas held down overall prices, which rose just 0.1% from October… Compared with a year ago, inflation dipped to 3.1%, down from a 3.2% year-over-year rise in October. Prices in the vast service sector, though, still surged uncomfortably fast. Core prices — which exclude volatile food and energy costs and are considered a better guide to the path of inflation — rose 0.3% from October to November, slightly faster than the 0.2% increase the previous month. Measured from a year ago, core prices were up 4%, the same as in October.”

December 12 – Financial Times (Claire Jones and Colby Smith): “US core inflation rose last month… Figures… showed US core prices rose 0.3% during November, while the year-on-year core rate remained flat at 4%. The annual core measure, seen as a bellwether for longer-term inflation, strips out changes in the prices of energy and food… ‘The Fed keeps telling us they don’t have confidence that they can say with certainty that inflation is going to [its target of] 2% anytime soon,’ said Omair Sharif, president of forecasting group Inflation Insights. ‘I don’t think that confidence can be there after today’s numbers.’”

December 13 – Reuters (Lucia Mutikani): “U.S. producer prices were unexpectedly unchanged in November amid cheaper energy goods, and underlying inflation pressures at the factory gate were muted… Economists… had forecast the PPI gaining 0.1% last month. Goods prices were unchanged in November as a 1.2% decline in the cost of energy products was offset by a 0.6% rebound in food prices. Goods prices dropped 1.4% in October.”

December 11 – Bloomberg (Alex Tanzi): “US consumers’ near-term inflation expectations dropped in November to the lowest level since April 2021, according to a Federal Reserve Bank of New York survey… Median year-ahead inflation expectations declined for a second month to 3.4%, down from 3.6% in October. Expectations for what inflation will be at the three-year and five-year horizon held steady at 3% and 2.7%…”

December 11 – Wall Street Journal (Gina Heeb): “Homeownership has become a pipe dream for more Americans, even those who could afford to buy just a few years ago. Many would-be buyers were already feeling stretched thin by home prices that shot quickly higher in the pandemic, but at least mortgage rates were low. Now that they are high, many people are just giving up. It is now less affordable than any time in recent history to buy a home, and the math isn’t changing any time soon. Home prices aren’t expected to go back to prepandemic levels… Mortgage rates slipped to about 7% last week, the lowest in several months, but they are still more than double what they were two years ago.”

December 13 – Bloomberg (Michael Hirtzer): “Egg prices are likely to start rising again after the top US producer had its first-ever outbreak of deadly avian influenza. Cal-Maine Foods… said one of its facilities in Kansas tested positive for highly pathogenic bird flu, affecting 684,000 egg-laying hens, or about 1.6% of its flock… The latest outbreak adds to worries that a resurgence could start boosting prices for eggs, which have fallen 69% since hitting a record of $5.35 a dozen in the Midwest about a year ago.”

December 11 – Reuters (Karl Plume): “Bulk grain shippers hauling crops from the U.S. Gulf Coast export hub to Asia are sailing longer routes and paying higher freight costs to avoid vessel congestion and record-high transit fees in the drought-hit Panama Canal, traders and analysts said. The shipping snarl through one of the world’s main maritime trade routes comes at the peak season for U.S. crop exports, and the higher costs are threatening to dent demand for U.S. corn and soy suppliers that have already ceded market share to Brazil in recent years. Ships moving crops have faced wait times of up to three weeks… The restrictions could continue to impede grain shipments well into 2024 when the region’s wet season may begin to recharge reservoirs… ‘It’s causing quite a disruption both in expense and delay,’ said Jay O’Neil, proprietor of HJ O’Neil Commodity Consulting, adding that the disruption is unlike any he’s seen in his 50 years of monitoring global shipping.”

Federal Reserve Watch:

December 14 – Associated Press (Christopher Rugaber): “The Federal Reserve kept its key interest rate unchanged Wednesday for a third straight time, and its officials signaled that they expect to make three quarter-point cuts to their benchmark rate next year. The Fed’s message Wednesday strongly suggested that it is finished with rate hikes — after the fastest increases in four decades — and is edging closer to cutting rates as early as next summer. Speaking at a news conference, Chair Jerome Powell said that Fed officials are likely done raising rates because of how steadily inflation has cooled. ‘Inflation keeps coming down, the labor market keeps getting back into balance and, it’s so far, so good,’ Powell said…”

U.S. Bubble Watch:

December 12 – Reuters (Ann Saffir): “The U.S. federal budget deficit jumped 26% in November from a year earlier to $314 billion, a record for the month and the highest since March…, driven by sharply higher interest costs and other outlays. Economists… had estimated the deficit… would come in at $301.05 billion. Federal revenues in November rose $23 billion to $275 billion, a 9% increase from a year earlier. Outlays jumped $88 billion to $589 billion, 18% higher than a year earlier. Interest payments on U.S. government debt accounted for $25 billion of the increase. Debt service costs have surged since… the Federal Reserve began raising borrowing costs… The outlay for interest on the debt in November, at $80 billion, surpassed the $66 billion outlay for national defense, which was up $8 billion from a year earlier. The outlay for the government-run Medicare health insurance program also rose by $8 billion, to $93 billion, while the outlay for the government-run Medicaid program for the poor and disabled climbed $2 billion to $50 billion.”

December 14 – CNBC (Jeff Cox): “Consumers showed unexpected strength in November, giving a solid start to the holiday season as inflation showed signs of continued easing. Retail sales rose 0.3% in November, stronger than the 0.2% decline in October and better than the… estimate for a decrease of 0.1%… Excluding autos, sales rose 0.2%, also better than the forecast for no change. Stripping out autos and gas, sales rose 0.6%… On a year-over-year basis, sales accelerated 4.1%…”

December 11 – Associated Press (David Koenig): “More Americans are expected to fly or drive far from home over Christmas than did last year, putting a cap on a busy year for travel. Auto club AAA forecast Monday that 115.2 million people will go 50 miles or more from home during the 10 days between Dec. 23 and New Year’s Day. That’s 2.2% more than AAA predicted during the comparable stretch last year. ‘That desire to get away is stronger than we have seen in a very long time,’ said AAA spokeswoman Aixa Diaz. ‘People are willing to adjust their budgets in other areas of their life, but they want to keep traveling.’”

December 13 – CNBC (Diana Olick): “Homeowners looking to refinance are finding savings after mortgage rates dropped again last week… As a result, applications to refinance a home loan increased 19% last week from the previous week, according to the Mortgage Bankers Association’s… index. Refinance demand was 27% higher than the same week one year ago… Applications for a mortgage to purchase a home rose 4% for the week but were still 18% lower than the same week one year ago. Homebuyers today may be getting a break from lower mortgage rates, but there is still tough competition in a market with high prices and few homes for sale.”

December 13 – Wall Street Journal (Ryan Dezember): “Cardboard prices are pointing to better times ahead. Producers are lifting prices for the thick paper used to make delivery boxes for the first time since the Federal Reserve began raising interest rates early last year. It is a sign that the inventory hoarding that characterized the postpandemic recovery is ending. If history is a guide, more expensive cardboard also suggests the economy is revving up. Some analysts warn, however, that it is too soon to tell if the price increases will stick and be repeated, or if they are a one-time adjustment in a market whipsawed by the unique circumstances of the pandemic.”

December 12 – Reuters (Amina Niasse): “U.S. small business sentiment edged down in November to the lowest level in six months, stoked by continued difficulties in hiring skilled labor and concerns about inflation. The National Federation of Independent Business (NFIB) said its small business optimism index fell to 90.6 last month from 90.7 in October. The index remained below its 50-year average of 98 for a 23rd straight month. Optimism has fallen since peaking this year in July as businesses report difficulties finding labor and battling inflation. A net negative 32% of businesses reported higher profits in November, unchanged from October.”

December 13 – Reuters (Bansari Mayur Kamdar): “The retail sector could continue to lead U.S. bankruptcies next year due to sticky inflation and high interest rates, but analysts expect easing monetary policy to offer some respite in the second half of 2024. There have been 591 U.S. corporate bankruptcy filings so far this year, the highest since 2020, according to… S&P Global Market Intelligence. ‘The end of ultra-low interest rates that started in 2008, ushered in a resurgence of bankruptcy filings’ but the trend could normalize going forward, Art Hogan, chief market strategist at B. Riley Wealth, said.”

December 13 – Wall Street Journal (Dylan Burzinski): “The Covid-19 pandemic may be largely in the rearview mirror, but there is at least one area of the economy that remains ill: the office sector of the U.S. commercial real-estate market. What began as a two-week work-from-home experiment in March 2020 evolved into an entrenched hybrid/remote work environment. Despite return-to-office mandates, office-utilization rates… have failed to pick up meaningfully this year and are still 30% to 40% below 2019 levels for most office markets across the country… The so-called availability rates are hovering at 25% on average compared with slightly above 15% before Covid—and things could get worse before they get better.”

China Watch:

December 12 – Reuters (Kevin Yao and Ella Cao): “China will step up policy adjustments to support an economic recovery in 2024, state media said…, following an agenda-setting meeting of the country’s top leaders. Investors are closely watching for clues on next year’s policy and reform agenda as Beijing has been struggling to spur a post-pandemic economic recovery amid a deepening housing crisis and mounting local government debt. China will focus on boosting effective demand next year, and make concerted efforts to spur domestic demand, state media said, citing the annual Central Economic Work Conference held from Dec. 11-12, during which top leaders set economic targets for 2024.”

December 14 – Associated Press (Elaine Kurtenbach): “China’s economy will slow next year, with annual growth falling to 4.5% from 5.2% this year despite a recent recovery spurred by investments in factories and construction and in demand for services, the World Bank said… The report said the recovery of the world’s second-largest economy… remains ‘fragile,’ dogged by weakness in the property sector and in global demand for China’s exports, high debt levels and wavering consumer confidence… ‘The outlook is subject to considerable downside risks,’ the report said, adding that a prolonged downturn in the real estate sector would have wider ramifications and would further squeeze already strained local government finances, as meanwhile softer global demand is a risk for manufacturers.”

December 13 – Bloomberg: “A top Chinese housing official pledged to avoid a cascade of debt defaults by property developers, among the strongest commitments yet to cushion an escalating real estate liquidity crisis. China will ‘forcefully prevent developers from defaulting on their debts all at once,’ Dong Jianguo, Vice Minister of Housing and Urban-Rural Development, said… Dong is among several officials speaking at the event, held… immediately after the ruling Communist Party’s annual economic work conference.”

December 12 – Bloomberg: “China’s top leaders including President Xi Jinping vowed to make industrial policy their top economic priority next year, a letdown for investors hoping to see more forceful stimulus to boost growth. The ruling Communist Party’s annual economic work conference made building a ‘modern industrial system’ its No. 1 goal, up a place from last year. The priority for 2023 was boosting domestic demand… The language on housing was little changed from previous statements, with an emphasis on social housing, while no new remedies in offer for the faltering property sector. ‘The measures sound rather traditional and nothing much was very creative,’ said Jacqueline Rong, chief China economist at BNP Paribas SA.”

December 13 – Bloomberg: “An alleged fraud in China that ensnared financial firms including a major hedge fund has set off alarms across the industry, with investment managers, regulators and brokerages racing to improve risk monitoring. The matter concerns the investment of about 1 billion yuan ($139 million) in products that were issued by Chinasoft New Momentum Asset Management Co. but managed by other hedge funds. In response to local reports of the suspected scam, the company said last month that some of the products faced ‘repayment difficulties’ due to a breach of contract by the underlying manager, Shenzhen Huisheng.”

Central Banker Watch:

December 14 – Bloomberg (Alexander Weber and Jana Randow): “European Central Bank President Christine Lagarde said policymakers mustn’t get complacent following the recent slump in inflation toward 2% — signaling that investor bets on imminent interest-rate reductions may be premature. ‘We should absolutely not lower our guard,’ she told reporters… after the ECB left borrowing costs unchanged for a second meeting. ‘We did not discuss rate cuts at all.’ Lagarde cited enduring upside risks to consumer prices that include corporate profitability and ongoing negotiations over wages. On the pressure around salaries, she said that ‘when we look at the data that we have now, it is not declining.’”

December 14 – Reuters (David Milliken, Andy Bruce and Suban Abdulla): “The Bank of England stuck to its guns… and said British interest rates needed to stay high for ‘an extended period’, a day after the U.S. Federal Reserve signalled it would cut U.S. interest rates in 2024. The Monetary Policy Committee voted 6-3 to keep rates at a 15-year high of 5.25% and Governor Andrew Bailey said there was ‘still some way to go’ in the fight against inflation, challenging investors who have bet increasingly on rate cuts. The three dissenting votes were in favour of raising borrowing costs and there was no talk of cutting them as the BoE remained concerned that inflation in Britain will prove stickier than in the United States and the euro zone. The central bank also largely shrugged off data showing a slowdown in wage growth and a 0.3% fall in gross domestic product in October…”

December 14 – Financial Times (Sam Fleming and Mary McDougall): “The Bank of England kept rates steady at 5.25%… as governor Andrew Bailey warned there was ‘still some way to go’ before inflation hit its target. The BoE’s Monetary Policy Committee said interest rates would need to be kept high for an ‘extended period of time’ and left open the option of further rate rises if necessary. ‘There is still some way to go. We’ll continue to watch the data closely, and take the decisions necessary to get inflation all the way back to 2%,’ Bailey said.”

December 14 – Bloomberg (Jana Randow and Alessandra Migliaccio): “European Central Bank policymakers are largely united in expecting to cut interest rates later than financial markets currently anticipate, according to officials familiar with their thinking. The Governing Council discussions this week featured some irritation about aggressive bets on lower borrowing costs and some members were confounded by the extent of easing priced in by investors, said the people…”

December 14 – Bloomberg (Craig Stirling, Anchalee Worrachate and Philip Aldrick): “Europe’s central bankers are in no hurry to join the US pivot toward interest-rate cuts — even as investors keep insisting that they’ll need to embrace easier monetary policy soon enough. In the wake of Federal Reserve chief Jerome Powell’s signal… that officials are turning to focus on reducing borrowing costs, peers from Frankfurt to London declared that further slowing in inflation can’t be taken for granted. Whatever financial markets may be betting, they signaled that easing isn’t on the agenda for now.”

December 14 – Bloomberg (Bastian Benrath and Naomi Tajitsu): “The Swiss National Bank called an end to its tightening cycle and signaled a shift in currency policy as officials kept borrowing costs unchanged after inflation slowed emphatically. ‘Monetary conditions are adequate and we do not have to hint at any change of monetary policy in the future,’ President Thomas Jordan told Bloomberg TV. ‘Price stability is already ensured given our newest inflation forecast.’”

Global Bubble Watch:

December 13 – Reuters (William Schomberg and Andy Bruce): “Britain’s economy shrank in October…, raising the risk of a recession and testing the Bank of England’s resolve to stick to its tough anti-inflation line against cutting interest rates from their 15-year high. Gross domestic product (GDP) fell by 0.3% from September… Economists… had expected no change in GDP in October. It was the first time since July that GDP had shrunk on a month-by-month basis.”

Europe Watch:

December 10 – Financial Times (Owen Walker): “The European mortgage market is on course to grow at its slowest rate for a decade this year, as lower economic growth and higher borrowing costs weigh on demand for loans. Falling house prices across the eurozone are also a factor in EY’s forecasts that the mortgage market will grow by only 1.5% this year and 2.4% in 2024, compared with 4.9% last year. The consultancy said rising interest rates… and persistently high inflation had suppressed demand for mortgages.”

Japan Watch:

December 11 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan officials see little need to rush into scrapping the world’s last negative interest rate this month as they have yet to see enough evidence of wage growth that would support sustainable inflation, according to people familiar… That’s an indication the central bank is likely to keep its monetary stimulus settings unchanged at a two-day policy meeting ending Dec. 19, despite recent market speculation that the negative rate may be scrapped as soon as the December meeting. BOJ officials view the potential cost of waiting for more information to confirm solid wage growth as not very high, the people said.”

December 12 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Business confidence at big Japanese manufacturers hit a near two-year high in the three months to December, a closely watched central bank survey showed, suggesting the economic conditions needed to unwind massive stimulus were falling into place. Big non-manufacturers’ sentiment also improved to levels not seen since 1991, the quarterly ‘tankan’ survey showed…, dispelling analysts’ concerns… ‘The Tankan presents a strong case for the Bank of Japan to withdraw ultra-loose monetary policy,’ said Marcel Thieliant, head of Asia-Pacific at Capital Economics, pointing to signs of tightening labour market conditions. The headline index for big manufacturers’ mood rose to +12 from +9 three months ago…, improving for the third straight quarter.”

EM Watch:

December 13 – Bloomberg (Manuela Tobias and Ignacio Olivera Doll): “Economy chief Luis Caputo spent the better part of his first televised address explaining how Argentina got into such a dire economic situation: An ‘addiction’ to debt, for which the only medicine is a shock treatment. ‘There is no more money,’ Caputo said repeatedly in the recorded video published Tuesday night, echoing President Javier Milei’s words during his inaugural speech on Sunday. The Wall Street veteran then outlined 10 initial measures designed to jolt the stagnant economy, starting with a massive 54% devaluation of the peso’s official exchange rate and austerity measures including halving the number of ministries, cutting transfers to provinces, suspending public works and reducing subsidies.”

December 13 – Bloomberg (Kevin Simauchi and Vinícius Andrade): “Argentine bonds climbed to the highest in two years after President Javier Milei’s government unveiled the first batch of shock-therapy measures intended to quell skyrocketing inflation and stabilize the economy. Benchmark overseas notes due in 2035 added as much as 1.4 cents to trade at 35 cents on the dollar, the strongest level since September 2021… Yields fell, though they still remain near 18% — signaling lingering concern over a sovereign default.”

December 13 – Financial Times (Mary McDougall): “Debt servicing costs in a clutch of the world’s poorest countries are set to soar to ‘crisis’ levels as high interest rates damage already fragile economies, according to the World Bank. Twenty-four of the world’s lowest income economies are set to spend a total of $21.5bn on financing their external public debt across this year and next, as bond repayments become due and the impact of higher interest rates feeds through… That represents a rise of almost 40% over the previous two years. ‘Record debt levels and high interest rates have set many countries on a path to crisis,’ said Indermit Gill, the World Bank Group’s chief economist.”

Levered Speculation Watch:

December 13 – Bloomberg (Lydia Beyoud and Liz Capo McCormick): “Hedge funds and brokerages have new requirements from the Securities and Exchange Commission to centrally clear far more of their US Treasuries trades in a structural overhaul for the $26 trillion market. The SEC voted… to require that all transactions involving repurchase agreements use clearinghouses… In a partial win for hedge funds, they would be exempt from having to centrally clear their cash Treasuries trades, according to the agency. Still, the new rules could bolster oversight of highly leveraged strategies such as the so-called basis trade — which use the repo market and that US officials say can pose broad dangers.”

December 11 – Bloomberg (Paula Seligson and Katherine Doherty): “Citadel Securities third-quarter revenue rose more than 8% as the privately held market-making firm seeks to grab more of Wall Street’s trading business. The firm run by Chief Executive Officer Peng Zhao generated $1.8 billion in the period, up from $1.66 billion a year earlier… The figure has exceeded $1 billion for 15 straight quarters, the people said…”

Social, Political, Environmental, Cybersecurity Instability Watch:

December 12 – Reuters (Valerie Volcovici, Gloria Dickie and William James): “Representatives from nearly 200 countries agreed at the COP28 climate summit on Wednesday to begin reducing global consumption of fossil fuels to avert the worst of climate change, signalling the eventual end of the oil age. The deal struck in Dubai after two weeks of hard-fought negotiations was meant to send a powerful message to investors and policy-makers that the world is united in its desire to break with fossil fuels, something scientists say is the last best hope to stave off climate catastrophe. COP28 President Sultan al-Jaber called the deal ‘historic’ but added that its true success would be in its implementation. ‘We are what we do, not what we say,’ he told the crowded plenary at the summit. ‘We must take the steps necessary to turn this agreement into tangible actions.’”

December 13 – Reuters (Emma Farge): “About a quarter of all freshwater fish species are at risk of extinction due to threats from climate change and pollution, the latest Red List of Threatened Species showed… One of the main threats is the havoc climate change is wreaking on water cycles, such as falling water levels and rising sea levels causing seawater to move up rivers, according to the International Union for Conservation of Nature (IUCN)… In its first exhaustive analysis of freshwater fish, IUCN said that over 3,000 species out of nearly 15,000 were at risk. Also at risk is Atlantic Salmon, which swims in both freshwater and saltwater.”

December 13 – Bloomberg (Todd Woody): “Extreme heat from California’s climate-driven wildfires is transforming a metal common in soil into an airborne carcinogen that can be inhaled by firefighters and people living downwind of conflagrations, according to first-of-its-kind research. In a study… in the journal Nature Communications, Stanford University scientists discovered what they described as widespread and dangerous levels of toxic chromium in areas of Northern California severely burned by wildfires in 2019 and 2020. ‘There are vast areas of these metal-rich geologies around the world with landscapes that are ready to burn, such as in Africa, Australia and Canada,’ said Scott Fendorf, a professor of earth system science at Stanford University and an author of the paper.”

Geopolitical Watch:

December 12 – Reuters (Yimou Lee): “Taiwan’s military drove away four attempts by Chinese forces to approach the island’s sensitive contiguous zone last month, Taiwan security officials said, in what they see as a ramped-up Chinese campaign to ‘intimidate’ voters before key elections. Taiwan officials have repeatedly warned that China is trying to sway voters toward candidates seeking closer ties with Beijing, whose government has framed the Jan. 13 presidential and parliamentary elections as a choice between ‘peace and war’ and urged Taiwanese to make the ‘right choice’.”

December 11 – Reuters (Mikhail Flores and Karen Lema): “The Philippines… called the actions of Chinese vessels against its boats carrying out South China Sea resupply missions over the weekend – including one with a senior Philippine military official aboard – a ‘serious escalation’. Manila accused the Chinese coastguard and maritime militia of repeatedly firing water cannons at its resupply boats, causing ‘serious engine damage’ to one, and ‘deliberately’ ramming another. Philippine Chief of Staff of the Armed Forces Romeo Brawner said he was on board a vessel that was both sprayed with a water cannon and rammed. ‘This is a serious escalation on the part of the agents of the People’s Republic of China,’ Jonathan Malaya, spokesperson of the National Security Council, said…”More By This Author:Weekly Commentary: Rule of ThumbWeekly Commentary: Really BigWeekly Commentary: A Wolf In Panda’s Clothing