Credit Bubble Bulletin
by Doug Noland
March 25, 2022
My edited easy to read version follows:
Ye Editor
For the Week Ending March 23, 2022
GLOBAL STOCK INDEXES:
S&P500 rose 1.8% (down 4.7% y-t-d)
Dow Industrials increased 0.3% (down 4.1%)
Utilities surged 3.5% (up 0.8%).
Transports declined 0.7% (down 0.6%).
Banks gained 1.1% (down 0.7%),
S&P 400 Midcaps gained 0.2% (down 4.6%)
Small cap Russell 2000 fell 0.4% (down 7.5%)
Nasdaq100 rose 2.3% (down 9.6%)
Semiconductors jumped 2.7% (down 10.7%)
Biotechs declined 1.1% (down 8.9%).
With GOLD bullion recovering $37,
the HUI gold stock index rallied 3.5% (up 21.6%).
U.K.'s FTSE rose 1.1% (up 1.3% y-t-d).
Japan's Nikkei surged 4.9% (down 2.2% y-t-d).
France's CAC40 fell 1.0% (down 8.4%)
German DAX declined 0.7% (down 9.9%).
Spain's IBEX 35 lost 1.0% (down 4.4%).
Italy's FTSE gained 1.4% (down 10.2%)
Brazil's Bovespa surged 3.3% (up 13.6%)
Mexico's Bolsa was unchanged (up 4.1%)
South Korea's Kospi gained 0.8% (down 8.3%).
India's Sensex fell 0.9% (down 1.5%).
China's Shanghai fell 1.1% (down 11.7%).
Turkey's Istanbul National 100 added 1.5% (up 17.1%).
Russia's MICEX increased 0.6% (down 34.4%).
US BONDS
Three-month Treasury bill rates
ended the week at 0.5125%.
Two-year government yields
jumped 33 bps to 2.27%
(up 154bps y-t-d).
Five-year T-note yields
surged 40 bps to 2.55%
(up 128bps).
Ten-year Treasury yields
rose 33 bps to 2.48%
(up 97bps).
Long bond yields
gained 16 bps to 2.59%
(up 68bps).
Benchmark Fannie Mae MBS yields
spiked 47 bps to 3.71% (up 164bps)
- the high since December 2018.
Federal Reserve Credit last week
expanded $28.7bn to a record $8.924 TN.
Over the past 132 weeks, Fed Credit
expanded $5.198 TN, or 139%.
US MORTGAGES:
Fifteen-year rates jumped 24 bps to 3.63%
(up 118bps).
Five-year hybrid ARM rates rose 17 bps to 3.36%
(up 52bps).
Jumbo mortgage 30-year fixed rates
up two bps to 4.52% (up 127bps)
- the high since December 2018.
COMMODITIES:
Spot Gold rallied 1.9% to $1,958 (up 7.1%).
Silver recovered 2.3% to $25.53 (up 9.5%).
Copper declined 0.9% (up 5%).
WTI crude surged $9.20 to $113.90 (up 51%).
Gasoline inflated 7.1% (up 56%)
Natural Gas spiked 14.6% (up 49%).
Wheat jumped 3.6% (up 43%)
Corn gained 1.7% (up 27%).
Bitcoin rose $2,611, or 6.2%,
this week to $44,396 (down 4%).
DOUG NOLAND COMMENTARY:
(highly edited)
It’s been some time since the Fed
commenced a serious tightening cycle.
Previous moves to raise rates progressed gingerly,
so as not to risk upsetting the cherished stock market.
One has to go back to 1994 for a Federal Reserve determined to actually tighten financial conditions.
The Fed boosted rates 25 bps on February 4, 1994, 25 bps in both March and April, 50 bps in May, 50 bps in August, 75 bps in November and 50 bps in February 1995. Rates were hiked 300 bps in twelve months to 6.00%.
... It’s worth noting that the spread between three-month T-bills and two-year Treasury yields rose another 11 bps this week to a 20-year high 173 bps.
Meanwhile, the 2-yr/10-yr Treasury spread narrowed four bps this week to 20 bps, about the narrowest level since the pandemic market crisis.
Basically, long-term Treasury yields (10-yr at 2.48%) signal that inflation is not a major longer-term issue, and/or the Fed’s tightening cycle likely winds down within the next year or so.
Today, both stocks and longer-term bonds are understandably skeptical of a sustained aggressive tightening cycle.
And it is this dynamic that for now supports the sufficiently loose financial conditions conducive to sustained inflationary pressures.
Not only are Fed officials now talking 50 bps rate increases, but the FOMC is expected to unveil a framework for shrinking its balance sheet (“quantitative tightening” or QT) at the May 4th meeting.
NEWS SUMMARY FOR LAST WEEK:
Russia / Ukraine Watch:
March 25
– Reuters:
“Moscow signalled on Friday it was scaling back its ambitions in Ukraine to focus on territory claimed by Russian-backed separatists in the East as Ukrainian forces went on the offensive to recapture towns outside the capital Kyiv. In an announcement that appeared to indicate more limited goals, the Russian Defence Ministry said a first phase of its operation was mostly complete and it would now focus on the eastern Donbass region, which has pro-Russia separatist enclaves.”
Economic War / Iron Curtain Watch:
March 24
– Reuters:
It is ‘foolish’ to believe that Western sanctions against Russian busiesses could have any effect on the Moscow government, Russian ex-president and deputy head of security council Dmitry Medvedev was quoted as saying… The sanctions will only consolidate the Russian society and not cause popular discontent with the authorities, Medvedev told Russia's RIA news agency…”
March 22
– Bloomberg:
“Russia plans to demand ruble payments for natural gas purchases from European nations, deepening its standoff with the west and potentially aggravating Europe’s worst energy crunch since the 1970s. Gas prices surged more 30% after President Vladimir Putin ordered the central bank to develop a mechanism to make ruble payments for natural gas within a week at a meeting with his government. Putin’s move showed a growing willingness on both sides to use Russian energy supplies as a weapon in the struggle between Moscow and the west over the war in Ukraine. The specifics of the new arrangement weren’t immediately clear, but by demanding payments in rubles, Putin is essentially forcing European companies to directly prop up his currency after it was sent into free-fall by sanctions placed on the Russian economy.”
March 25
– Reuters:
“The United States will work to supply 15 billion cubic metres of liquefied natural gas (LNG) to the European Union this year to help it wean off Russian energy supplies... The EU is aiming to cut its dependency on Russian gas by two-thirds this year and end all Russian fossil fuel imports by 2027 due to Russia's invasion of Ukraine. Russia supplies around 40% of Europe's gas needs. Concerns over security of supply were reinforced this week after Russia ordered the switch of gas contract payments to roubles…”
March 23
– Bloomberg:
“China’s oil refiners are discreetly purchasing cheap Russian crude as the nation’s supply continues to seep into the market. Unlike India’s state-run oil refiners, which have issued a number of tenders seeking to buy Russia’s flagship Urals crude among other grades, traders say China’s state processors are negotiating privately under the radar with sellers.”
March 21
– Bloomberg:
“S&P Global Ratings is withdrawing its credit grades on Russian entities after the European Union’s decision last week to ban firms from providing ratings to companies established in the country. The withdrawal will take place before the April 15 deadline imposed by the EU, analysts Michelle James and Arnaud Humblot wrote… It comes after the rating company suspended commercial operations in the country following Russia’s invasion of Ukraine.”
“Russia’s move to transfer almost 800 foreign-owned jets to its own aircraft register amid foreign sanctions has triggered a wave of insurance claims from leasing firms whose fleets have effectively been commandeered. Lessors will assert that registering the planes in Russia when they’re already on the books in other territories amounts to a qualifying event for claims, including under their war-risk policies…”
U.S. / Russia Watch:
March 25
– Bloomberg:
“Russian Foreign Minister Sergei Lavrov accused the West of waging ‘hybrid war, a total war’ through sanctions against his country. European leaders want to ‘destroy, strangle the Russian economy and Russia as a whole,’ Lavrov told a meeting… Russia has no intention of being isolated and has ‘many friends, allies, partners in the world’ that it will continue to work with, Lavrov said.”
China / Russia Watch:
March 22
– Bloomberg:
“China’s top Russia envoy urged Chinese business people in Moscow to seize economic opportunities created by the crisis, a strategy that could help soften the blow from international sanctions. Ambassador Zhang Hanhui… told about a dozen business heads to waste no time and ‘fill the void’ in the local market, the Russia Confucius Culture Promotion Association said… While the summary made no mention of sanctions or sanctions compliance, Zhang described the situation as an opportunity.”
Europe / Russia Watch:
March 22
– Financial Times:
“Russia is throttling capacity on a major pipeline that sends crude oil to global markets, driving prices higher and raising fears that Moscow was prepared to retaliate against western sanctions by curbing its own energy supplies. Up to 1mn barrels a day of oil shipped through the Caspian Pipeline Consortium’s pipeline from central Asia to the Black Sea could be cut for up to two months while repairs are made to storm-damaged loading facilities, Russia’s deputy energy minister said… The supply interruption comes on the eve of US president Joe Biden’s trip to Europe, where EU countries are expected to discuss imposing sanctions on Russia’s oil sector…”
March 24
– Bloomberg:
“European Union officials suspect that China may be ready to supply semiconductors and other tech hardware to Russia as part of an effort to soften the impact of sanctions imposed over the invasion of Ukraine. The EU is concerned that China is ready to help President Vladimir Putin’s government weather the economic penalties it has put in place along with the U.S., the U.K. and Japan with particular focus on the availability of high-tech components, according to two people with knowledge…”
Market Instability Watch:
March 23
– Bloomberg:
“The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt total returns, has fallen 11% from a high in January 2021. That’s the biggest decline from a peak in data stretching back to 1990, surpassing a 10.8% drawdown during the financial crisis in 2008. It equates to a drop in the index market value of about $2.6 trillion, worse than about $2 trillion in 2008.”
March 23
– Bloomberg:
“The Treasury 10-year yield is on the verge of breaching a downward trend line that characterized the bond bull market for decades. Since the 1980s, the benchmark yield has pushed up against the long-term trajectory in 1990, 1994, 2000, 2007 and in late 2018, only to reverse course and head lower. The test is resuming after the recent selloff pushed 10-year yields above 2.40% on Wednesday, from 1.51% at the end of last year. The ‘market selloff is testing long-term lines that have defined a bull market for decades,’ Paul Ciana, a technical strategist at Bank of America Corp., wrote…”
Inflation Watch:
March 21
– Wall Street Journal:
“American frackers are raising the number of drilling rigs in oil fields by more than 20%, but don’t expect a similarly sized increase in production. Though the number of active U.S. oil-directed rigs has grown by roughly one-fifth in the past six months, much of the new activity is to make up for a depleted inventory of wells drilled before the pandemic, executives said. Frackers brought the best of those online last year instead of drilling new ones and will have to drill more than usual this year to offset those lost wells.”
March 22
– Reuters:
“Sky-high fertilizer prices have farmers worldwide scaling back its use and reducing the amount of land they're planting, fallout from the Ukraine-Russia conflict that has some agricultural industry veterans warning of food shortages. Western sanctions on Russia, a major exporter of potash, ammonia, urea and other soil nutrients, have disrupted shipments of those key inputs around the globe. Fertilizer is key to keeping corn, soy, rice and wheat yields high. Growers are scrambling to adjust.”
Biden Administration Watch:
March 24
– Reuters:
“The U.S. Trade Representative's office said… it has reinstated 352 expired product exclusions from U.S. ‘Section 301’ tariffs on Chinese imports, well short of the 549 exclusions that it was previously considering. The reinstated product exclusions will be effective retroactively from Oct. 12, 2021, and extend through Dec. 31, 2022, USTR said. They cover a wide range of the initially estimated $370 billion worth of Chinese imports that former president Donald Trump hit with punitive tariffs of 7.5% to 25%.”
U.S. Bubble Watch:
March 24
– Yahoo Finance:
“At 187,000, new jobless claims improved for a back-to-back week and reached the lowest level since September 1969. Continuing claims also fell further to reach 1.35 million — the least since January 1970. The labor market has remained a point of strength in the U.S. economy, with job openings still elevated but coming down from record levels as more workers rejoin the labor force from the sidelines.”
March 25
– Bloomberg:
“Soaring prices have showered property owners with record equity windfalls, sending cash-out refinancings to levels not seen since the peak of mid-2000s housing frenzy. For some people, that means cash for a remodel or vacation. But others are putting that money to work by buying second, third or even 10th houses… Across the U.S., newbie investors are seeking to harness the power of home-price inflation to grow fast and get rich by becoming landlords. They’re contributing to soaring values, especially for starter homes that are in short supply. But even that can work in these buyers’ favor — as long as they’re willing to pay up — because Americans getting priced out of homeownership are in turn fueling demand for rentals.”
March 23
– Bloomberg:
“Sales of new U.S. homes fell in February for a second month… Purchases of new single-family homes decreased 2% to a 772,000 annualized pace following a downwardly revised 788,000 in January… The median estimate in a Bloomberg survey of economists called for a 810,000 rate… The new-home sales report… showed the median sales price of a new home jumped 10.7% in February from a year earlier, to $400,600… There were 407,000 new homes for sale as of the end of February, the most since August 2008, though roughly 91% were either under construction or not yet started. At the current sales pace, it would take 6.3 months to exhaust the supply of new homes…”
Fixed-Income Bubble Watch:
March 21
– Bloomberg:
“Hopes for a soft landing for the U.S. economy are fading in the bond market. The Treasury yield curve is hurtling toward an inversion and traders have added to bets on interest rate cuts as soon as next year. They’re growing more concerned that a rapid-fire series of hikes from the Federal Reserve could cause a recession, following Chair Jerome Powell’s willingness to act more aggressively to get ahead of resurgent inflation. ‘The soft landing probability is declining by the day,’ said TD Securities’ head of global rates strategy, Priya Misra... ‘It is possible but really needs inflation to subside soon.’”
Economic Dislocation Watch:
March 23
– Bloomberg:
“Congestion in the key Chinese ports of Shenzhen and Hong Kong due to Covid-19 lockdowns has risen to the highest level in five months, posing possible delays to goods heading to the U.S. this summer.”
March 22
– Bloomberg:
“More than a million containers set to ride 6,000-plus miles of railway linking Western Europe to Eastern China via Russia are now having to find new routes by sea, adding to costs and threatening to worsen the global supply chain chaos. With Moscow’s war raging in Ukraine, exporters and logistics firms transporting auto parts, cars, laptops and smartphones are now looking to avoid land routes passing through Russia or the combat zone. Security risks and payment hurdles stemming from sanctions are mounting, as is wariness that customers in Europe could boycott products that used Russian rail.”
March 24
– Bloomberg:
“China’s Guangdong province, the industrial hub with a GDP bigger than South Korea, is facing another round of power shortages after being forced to curtail electricity twice last year. Guangdong faces a tight supply situation throughout the year and a large shortfall in the second quarter, Zhang Mianrong, chairman of the Guangzhou Power Exchange Center, said… Guangdong was hit by power shortages last summer when low reservoirs sapped hydropower while a heat-wave boosted air-conditioning demand. It had to curtail electricity to some factories again in the fall when the entire country faced a shortage of coal.”
March 24
– Wall Street Journal:
“In his nine years selling fertilizer to corn and rice farmers in West Africa, Malick Niang says he has never seen such a severe supply crunch—or such high prices. Since Russia invaded Ukraine, shipping companies have avoided docking at St. Petersburg, Russia, to collect goods, Mr. Niang said. That, together with the impact of the West’s financial sanctions against Moscow, means fertilizer exports from Russia—the world’s largest producer—have fallen sharply. Mr. Niang contacted sellers elsewhere, such as in Senegal and Morocco, but was told their order books are full until the end of the year. ‘Maybe we will find one or two options different from Russia, but it’s going to be very expensive,’ he said.”
China Watch:
March 22
– Reuters:
“Embattled China Evergrande Group will unveil a debt restructuring proposal for its creditors by the end of July, it said…, after concerns about its financial health were renewed by a delay in publishing its annual results. Evergrande, whose $22.7 billion worth of offshore debt is deemed to be in default, is seeking to ‘further enhance communications’ with creditors to reach the end-July target, its executive director Siu Shawn told investors on a call.”
March 23
– Wall Street Journal:
“China’s property sector is in deep trouble—but it will be some time before investors can see the full extent of the damage. In the past week, six developers, including the major international borrowers China Evergrande Group and Kaisa Group Holdings Ltd., said they couldn’t publish audited annual results by Hong Kong’s March 31 deadline, with some blaming pandemic-related problems… Others have recently parted company with the accountancy firms that previously audited their books. The information vacuum could further damage confidence…”
March 21
– Bloomberg:
“Chinese local governments’ revenue from land sales contracted 29.5% in January-February from the same period a year ago, the biggest slump for the period since at least 2015 when comparable data begins… The figures underscore the impact the continued housing slump is having on government finances at a time when local authorities are under enormous pressure to bolster economic growth by spending more on infrastructure. Goldman Sachs... estimates that combining income from land sales and property-related taxes, government revenue directly from the real estate sector shrank by 23.5% in January-February from a year ago…”
Europe Watch:
March 21
– Reuters:
“German producer prices maintained their record-breaking rise in February, increasing 25.9% year on year mainly because of energy prices… The jump in factory gate costs, considered a leading indicator for consumer prices, was the biggest since 1949, the statistics office said.”
March 25
– Bloomberg:
“German business confidence plunged to the lowest level since the early months of the pandemic after Russia’s invasion of Ukraine clouded the outlook and caused energy prices to soar. A business-expectations gauge compiled by the Munich-based Ifo Institute fell to 85.1 in March from 98.4 in February -- more than all but one of 27 economists predicted in a Bloomberg survey and the worst reading since May 2020.”
March 24
– Reuters:
“European economies face the risk of a shortage of diesel, the preferred fuel for heavy industry, as sanctions on Russian energy threaten to disrupt imports while supply from elsewhere remains limited. Russia is Europe’s largest supplier of diesel and related fuels, sending over three quarters of a million barrels per day for use in European heavy machinery, transportation, farming, fishing and for power and heating.”
March 23
– Bloomberg:
“Euro-area consumer confidence slumped to its lowest level since the early months of the pandemic as Russia’s invasion of Ukraine pushed up energy prices and threatened to exacerbate already-record inflation. A monthly gauge from the European Commission showed a reading of -18.7 in March -- down from -8.8 in February and worse than all but one prediction in a Bloomberg survey of 25 economists.”
Japan Watch:
March 22
– Bloomberg:
“Japan’s worst power crisis in over a decade is a culmination of events starting from the Fukushima disaster, and is an issue that the nation won’t be able to quickly shake. The world’s third-largest economy has been running on a thinner supply of electricity since the triple meltdown at Fukushima in March 2011 shut its massive fleet of nuclear reactors. Market reforms over the next 10 years that aimed to boost security of supply and make the grid cleaner led to utilities retiring inefficient and dirty power plants, crimping resources further. That set the background for the current scenario. A strong earthquake last week stretched the power grid…”
Covid Watch:
March 25
– Bloomberg:
“Shanghai’s new Covid-19 cases jumped more than 60% in a single day, hitting a record 1,609 on Friday, even as authorities widened restrictions that have limited access to food and medical care with devastating consequences… Scores of buildings and apartment blocks remained locked down in the Chinese financial hub amid the growing outbreak, part of a wave that’s challenging China’s zero-tolerance approach… Frustrated residents are struggling to secure fresh food as some compounds refuse to let them leave, while accessing medical care gets harder…”
Environmental Watch:
March 20
– Bloomberg:
“China’s increased reliance on coal to combat an energy shortage was never going to bode well for its ambitions to cut planet-warming emissions. Now, thanks to new analysis of satellite data, the effects of that climate choice could already be evident from space. A plume of methane, which traps over 80 times more heat than carbon dioxide in its first two decades in the atmosphere, was detected by the European Space Agency’s Sentinel-5P satellite near a remote coal mine in Inner Mongolia... The Sentinel-5P had never before spotted the powerful greenhouse gas in that location, suggesting new or expanded activity.”
Geopolitical Watch:
March 19
– Reuters:
“The U.S. destroyer Ralph Johnson's sail-through of the Taiwan Strait on March 17 was a ‘provocative’ act by the United States and sent the wrong signals to pro-Taiwan independence forces, the Chinese military said…. Such an act was ‘very dangerous’, a Chinese military spokesperson said in a statement, adding that troops were organised to monitor the Ralph Johnson's passage.”
March 24
– Financial Times:
“North Korea… claimed to have successfully tested its longest-range intercontinental ballistic missile yet, saying its nuclear forces were ‘fully ready to thoroughly check and contain any dangerous military attempts of the US imperialists’. The claims came after Pyongyang… raised tensions in East Asia by testing a missile the South Korean military said reached an altitude of more than 6,000km — the highest a North Korean missile has ever flown.”
March 20
– Bloomberg:
“Yemen’s Houthi rebels attacked at least six sites across Saudi Arabia late Saturday and early on Sunday, including some run by state oil giant Saudi Aramco. The Iran-backed group targeted an Aramco fuel depot in Jazan in the southwest of the kingdom and a liquefied natural gas plant in the Red Sea city of Yanbu…”
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