Credit Bubble Bulletin
March 18, 2022
by Doug Noland
Following is my edited easy to read version.
Ye Editor
GLOBAL STOCK INDEXES:
S&P500 surged 6.2% (down 6.4% y-t-d)
Dow jumped 5.5% (down 4.4%)
Utilities increased 0.5% (down 2.6%)
Banks rallied 6.0% (down 1.7%)
Transports surged 8.3% (unchanged)
S&P 400 Midcaps jumped 5.3% (down 4.8%)
Small cap Russell 2000 up 5.4% (down 7.1%)
Nasdaq100 surged 8.4% (down 11.6%)
Semiconductors jumped 9.2% (down 13.0%)
Biotechs rose 5.8% (down 7.8%).
With gold bullion dropping $67,
the HUI gold stock index declined 2.7%
(up 17.5%).
U.K.'s FTSE rallied 3.5% (up 0.3% y-t-d).
Japan's Nikkei rallied 6.6% (down 6.8% y-t-d)
France's CAC40 recovered 5.8% (down 7.4%)
German DAX rallied 5.8% (down 9.3%).
Spain's IBEX 35 rose 3.4% (down 3.4%).
Italy's FTSE MIB jumped 5.1% (down 11.4%)
Brazil's Bovespa jumped 3.2% (up 10.0%)
Mexico's Bolsa surged 4.1% (up 4.1%).
South Korea's Kospi rose 1.7% (down 9.1%).
India's Sensex rose 4.2% (down 0.7%).
China's Shanghai fell 1.8% (down 10.7%).
Turkey's Istanbul National 100 up 4.4% (up 15.4%).
Russia's MICEX did not trade (down 34.8%).
US BONDS:
Three-month Treasury bill rates
ended the week at 0.36%.
Two-year government yields
jumped 19 bps to 1.94% (up 121bps y-t-d).
ive-year T-note yields
surged 20 bps to 2.15% (up 88bps).
Ten-year Treasury yields
rose 16 bps to 2.15% (up 64bps).
Long bond yields
increased seven bps to 2.42% (up 52bps).
Benchmark Fannie Mae MBS yields
jumped 16 bps to 3.24% (up 117bps).
Federal Reserve Credit last week
jumped $25.4bn to a record $8.895 TN.
Over the past 131 weeks, Fed Credit
expanded $5.169 TN, or 139%.
US MORTGAGES:
Freddie Mac 30-year fixed mortgage rates
urged 31 bps to a near three-year high 4.16%
(up 107bps y-o-y).
Fifteen-year rates
jumped 30 bps to 3.39% (up 99bps).
Five-year hybrid ARM rates
rose 22 bps to 3.19% (up 40bps).
Jumbo mortgage 30-year fixed rates
up 15 bps to 4.50% (up 122bps)
- highest since December 2018.
COMMODITIES:
Bloomberg Commodities Index
declined 2.4% (up 24.4% y-t-d).
Spot Gold fell 3.4% to $1,922 (up 5.1%).
Silver dropped 3.5% to $24.96 (up 7.1%)
Copper rose 2.5% (up 6%).
WTI crude down $4.63 to $104.70 (up 41%).
Gasoline dipped 2.2% (up 45%)
Natural Gas jumped 2.9% (up 30%).
Wheat sank 3.9% (up 38%)
Corn dropped 2.7% (up 25%).
Bitcoin rallied $2,845,
or 7.3%, this week to $41,785
(down 10%).
March 14
– Bloomberg:
“ Nickel prices usually move a few hundred dollars per ton in a day. For most of the past decade, they’d traded between $10,000 and $20,000. Yet the day before, the market had started to unravel, with prices rising by a stunning 66% to $48,078. Now, the traders watched with a mixture of horror and grim fascination as the price went vertical. Already at an all-time high by 5:42 a.m., it lurched higher in stomach-churning leaps, soaring $30,000 in a matter of minutes. Just after 6 a.m., the price of nickel passed $100,000 a ton.”
DOUG NOLAND'S COMMENTARY:
(highly edited)
Wednesday marked the first Fed rate increase since November 2018. Recall that Powell had assumed the Chairmanship earlier that year (February 5th). Under Powell, rates were raised 25 bps in June and again in September. The chair of the central bank on Wednesday framed the first interest rate rise since 2018 as the start of a series of increases and emphasizing that the Federal Open Market Committee (FOMC) was ‘acutely aware of the need to return the economy to price stability and determined to use our tools to do exactly that’. The Fed’s balance sheet and 7.9% inflation ensure history will not mistake Powell for Paul Volcker. Markets have every reason to question the sustainability of the Fed’s tightening cycle. Powell is no Paul Volcker.
Beijing hit the panic button. China’s real estate developer crisis was spiraling out of control. Country Garden, China’s largest developer, saw bond yields spike Wednesday to 31.6%, having doubled in only seven sessions (yields began 2022 at 6.7%). Yields spiked to 120.6% for Evergrande, 120.5% for Kaisa, 124.6% for Lonfor and 98% for Sunac. Developer bonds were virtually collapsing across the board. An index of Chinese high-yield dollar bonds jumped to a record 27.1% yield (began the year at 16.8%). Chinese bank CDS were spiking higher. Industrial Bank of China CDS surged to 88.5 bps, China Construction Bank 84.6 bps, China Development Bank 83.4 bps, and Bank of China 84.5 bps – all highs since crisis period 2020. Ominously, China sovereign CDS surpassed 70 bps (began 2022 at 40) for the first time since the March 2020 spike.
After collapsing as much as 31% in three sessions, the Nasdaq Golden Dragon China Index rallied as much as 54% and ended the week up 26.4%. Equities were wild, but rather tame compared to the commodities.
For three decades, the bond market enjoyed one of history’s great bull markets. Ten-year Treasury yields traded above 9% in early 1990. In the face of runaway Credit growth, transitory spikes in crude prices and inflation rates, and unprecedented monetary stimulus, bond yields trended lower – all the way down to 0.53% in July 2020.
For thirty years, the Fed operated with minimal concern for bond market instability or inflation. This prolonged and historic cycle is drawing to a close. ... with powerful inflationary forces unleashed – certainly including supply-challenged commodities markets – there is the distinct risk of inflation becoming completely unhinged. This risk places the bond market in peril.
NEWS SUMMARY OF LAST WEEK"
Russia/Ukraine Watch:
March 16
– U.S. News & World Report:
“President Vladimir Putin put forward a comprehensive, if disjointed, defense of Russia’s bloody assault on Ukraine three weeks after it began in an apparent recognition of growing international outrage at the brutality of the campaign… Putin asserted Russia has no interest in occupying the former Soviet state and the seat of Russians’ ethnic history. He claimed that Ukraine could pose a nuclear threat to Russia and that it has been ruled by a neo-Nazi regime. He repeated debunked theories that Pentagon-funded biolabs in Ukraine may unleash pathogens on Russian citizens. And he cited discredited accusations that Kyiv has backed a genocidal campaign against ethnic Russians in the eastern region known as Donbas where Russia has supported an ongoing separatist conflict for eight years. ‘We simply weren’t left with any options to peacefully solve the problems arising through no fault of ours,’ Putin said…”
Economic War / Iron Curtain Watch:
March 14
– Financial Times:
“Just before Russia invaded Ukraine, Vladimir Putin met Xi Jinping in Beijing. Shortly afterwards, the two countries announced a ‘no limits’ partnership. Whether there are truly no limits to the China-Russia partnership may become clear in the coming days, following reports that Moscow has asked Beijing for military aid. If Xi grants that request, China would in effect be entering a proxy war with the US and Nato nations that are backing Ukraine. That decision could spell the end for the globalised economic system that has fuelled China’s extraordinary rise over the past 40 years. Russia and China share a deep hostility to America’s global power. But they have approached their rivalry with the US in very different ways. China can afford to play a ‘long game’, relying on its economic might to change the global balance of power. But Russia, in a weaker economic position, has gambled on brute force in Ukraine.”
March 16
– Bloomberg:
“Russian consumer prices rose 2.09% in the seven days ending March. 11, down from 2.22% a week earlier… Annual inflation accelerated to 12.54%... Russia may be headed for ‘Soviet-like inflation’ that manifests itself not in higher costs but through a deficit of goods, according to Alexander Abramov, a specialist on financial markets at RANEPA, a state-run university in Moscow. ‘The main risk now is the emergence of a shortage of basic imported everyday goods, as well as durable goods,’ he said. ‘Many are no longer available in stores, and prices in online stores have risen sharply.’”
March 15
– Associated Press:
“Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan…, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia. The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said. The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.”
Market Instability Watch:
March 14
– Reuters:
“Russia’s economy is fraying, its currency has collapsed, and its debt is junk. Next up is a potential default that could cost investors billions and shut the country out of most funding markets… The government says that all debt will be serviced, though it will happen in rubles as long as sanctions — imposed because of the war — don’t allow dollar settlements. Failure to pay, or paying in local currency instead of dollars, would start the clock ticking on a potential wave of defaults on about $150 billion in foreign-currency debt owed by both the government and Russian companies including Gazprom, Lukoil and Sberbank.”
Inflation Watch:
March 15
– CNBC:
“Another surge in energy prices pushed US wholesale goods prices to their biggest one-month jump on record in February… Final demand prices for goods jumped 2.4% for the month, the largest move ever in data going back to December 2009… That pushed the headline producer price index up 0.8% on the month… On a year-over-year basis, headline PPI rose 10%, the same as January and tied for the biggest 12-month move ever.”
March 15
– CNBC:
“Demand for single-family rental homes is soaring, pushing prices to record highs… Single-family rents gained a record 12.6% year over year in January, according to… CoreLogic. That compares to an increase of 3.9% in January 2021. Every major market saw increases, but cities in the Sun Belt saw truly stunning numbers. For example, single-family rents soared 38.6% in Miami… Orlando, Fla., and Phoenix were next in line, with gains of 19.9% and 18.9%... The Washington, D.C., area saw the lowest annual growth in rent prices — but they were still up 5.6%. ‘Single-family-rent growth extended its record-breaking price growth streak to 10 consecutive months in January,’ said Molly Boesel, principal economist at CoreLogic.”
Federal Reserve Watch:
March 17
– Wall Street Journal:
“The Fed will raise its benchmark federal-funds rate by a quarter percentage point to a range between 0.25% and 0.5%, the first rate increase since 2018. Officials signaled they expect to lift the rate to nearly 2% by the end of this year… Their median projections show the rate rising to around 2.75% by the end of 2023, which would be the highest since 2008.”
U.S. Bubble Watch:
March 17
– Bloomberg:
“New U.S. home construction rebounded in February to the strongest pace since 2006… Residential starts increased 6.8% last month to a 1.77 million annualized rate… Applications to build, a proxy for future construction, eased to an annualized 1.86 million units, though remained elevated… The data point to a pickup in construction activity after weather and omicron-related worker absences tempered building in January. Still, builders are struggling to meet buyer demand in the face of snarled supply chains, high commodities prices and an ongoing struggle to attract skilled labor.”
March 17
– Wall Street Journal:
“In this booming housing market, many homeowners earned more last year from home appreciation than from their jobs. Zillow Group Inc.’s home value index, which estimates the value of the typical U.S. home, rose 19.6% in 2021 to $321,634, an increase of $52,667 from 2020. That figure was slightly higher than what the median U.S. full-time worker earned, which was about $50,000 last year before taxes, according to Census Bureau data... That marked the first time that the annual nationwide dollar growth for the typical home value exceeded the inflation-adjusted median pretax income…, which goes back to 2000.”
March 16
– Associated Press:
“After beginning the year in a buying mood, Americans slowed their spending in February on gadgets, home furnishings and other discretionary items as higher prices for food, gasoline, and shelter are taking a bigger bite out of their wallet. Retail sales increased 0.3% after registering a revised 4.9% jump from December to January… January’s increase was the biggest jump in spending since last March, when American households received a final federal stimulus check of $1,400.”
March 17
– Bloomberg:
“Mortgage rates in the U.S. soared, surpassing 4% for the first time in almost three years. The average for a 30-year loan was 4.16%, up from 3.85% last week and the highest since April 2019, Freddie Mac said... Rates haven’t been above 4% since May of that same year.”
Fixed-Income Bubble Watch:
March 18
– Bloomberg:
“Investors in leveraged loans exposed to Russia are facing steep losses as they struggle to sell in the secondary market. Several leveraged loans have lost about 15% of their value since Russia’s invasion of Ukraine…”
Economic Dislocation Watch:
March 15
– Wall Street Journal:
“Russia and Ukraine together supply almost one-third of the world’s wheat, a quarter of its barley and nearly three-quarters of its sunflower oil… Commercial activity in Ukraine’s ports has stopped since Russia’s invasion began on Feb. 24, and it will be hard for farmers to harvest their crops later this summer and export grains if fighting cuts them off from the land. Agricultural producers may also face shortages of fuel, which is needed for military use.”
March 16
– Associated Press:
“BMW and Volkswagen warned this week that Russia’s invasion of Ukraine is causing shortages of some vital components, forcing them to reduce vehicle production in Europe. The two German carmakers said the war is having a ‘negative’ effect on auto supply chains, which have already been battered by shortages of semiconductors. BMW said… bottlenecks at its suppliers in Ukraine have forced the automaker to adjust or interrupt production at a number of factories… ‘Ukraine is, of course, home to many suppliers, hence we too will have to face production interruptions and supply disruptions for important components,’ Maximilian Schoeberl, BMW’s director of corporate affairs, said…”
China Watch:
March 16
– Bloomberg:
“Stocks across Hong Kong and China staged a stunning rebound after China’s state council vowed to keep its stock market stable amid a historic rout that erased $1.5 trillion in value over the past two sessions. The Hang Seng China Enterprises Index, which tracks mainland companies listed in Hong Kong, jumped 13% on Wednesday, its biggest gain since the global financial crisis. A gauge of Chinese tech firms soared by a record with Alibaba Group Holding Ltd. and Tencent Holdings Ltd. gaining more than 23%.”
March 18
– Bloomberg:
“China’s local authorities saw their income from land sales contract almost 30% in the first two months of the year, showing how the continued housing slump is directly hurting government finances. Revenue in Jan.-Feb. from selling the rights to use state-owned land fell 29.5% from a year ago to 792.2 billion yuan ($124bn)… That’s the biggest slump for the period since at least 2015 when comparable data begins. Land is a significant source of income for China’s cash-strapped local authorities.”
Europe Watch:
March 15
– Reuters:
“Europe’s market for new bonds has suffered the sharpest collapse in first-quarter sales on record as credit markets fall out of favor. Marketwide volume slumped to less than 46.2 billion euros ($50.8bn) so far this month, trailing an average monthly tally of more than 170 billion euros for the first two months of the year… That’s the sharpest drop-off in March sales since at least 2014, when the data first started being tracked.”
Covid Watch:
March 14
– Bloomberg:
“A wastewater network that monitors for Covid-19 trends is warning that cases are once again rising in many parts of the U.S., according to an analysis of Centers for Disease Control and Prevention data…. More than a third of the CDC’s wastewater sample sites across the U.S. showed rising Covid-19 trends in the period ending March 1 to March 10, though reported cases have stayed near a recent low. The number of sites with rising signals of Covid-19 cases is nearly twice what it was during the Feb. 1 to Feb. 10 period…”
Geopolitical Watch:
March 14
– Reuters:
“Taiwan’s air force scrambled again on Monday to warn away 13 Chinese aircraft that entered its air defence zone, Taiwan's defence ministry said, in the latest uptick in tensions across the Taiwan Strait… Taiwan is currently in a heighten state of alert due to fears China could use Russia's invasion of Ukraine to make a similar military move on the island, though Taipei's government has not reported any unusual Chinese movements.”
March 13
– Reuters:
“The United States condemned… an Iranian attack on Iraq's northern city of Erbil and backs Baghdad and governments across the region in the face of threats from Tehran, U.S. National Security Advisor Jake Sullivan said. ‘We will support the Government of Iraq in holding Iran accountable, and we will support our partners throughout the Middle East in confronting similar threats from Iran,’ he said…”
March 13
– Reuters:
“Iran attacked Iraq's northern city of Erbil on Sunday with a dozen ballistic missiles in an unprecedented assault on the capital of the autonomous Iraqi Kurdish region that appeared to target the United States and its allies. The missiles came down in areas near a new U.S. consulate building…”
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