Following is my edited easy to read version
Ye Editor
Credit Bubble Bulletin
Weekly Commentary:
Global Quagmire
by Doug Noland
For the Week Ending May 6, 2022:
GLOBAL STOCK INDEXES:
S&P500 had a slight 0.2% decline (down 13.5% y-t-d)
Dow Industrial dipped 0.2% (down 9.5%).
Utilities rallied 1.1% (down 0.5%).
Banks recovered 2.2% (down 14.9%),
Transports increased 0.2% (down 9.6%).
S&P 400 Midcaps declined 0.8% (down 12.7%)
Small cap Russell 2000 fell 1.3% (down 18.1%)
Nasdaq100 lost 1.3% (down 22.2%)
Semiconductors rallied 2.1% (down 24.4%)
Biotechs fell 2.1% (down 17.9%).
With gold bullion slipping $13,
the HUI gold stock index dropped 3.0% (up 5.9%).
U.K.'s FTSE dropped 2.1% (unchanged y-t-d).
Japan's Nikkei increased 0.6% (down 6.2% y-t-d).
France's CAC40 sank 4.2% (down 12.5%)
German DAX fell 3.0% (down 13.9%).
Spain's IBEX 35 lost 3.1% (down 4.5%).
Italy's FTSE MIB slumped 3.2% (down 14.2%)
Brazil's Bovespa fell 2.5% (up 0.3%)
Mexico's Bolsa dropped 3.6% (down 7.0%).
South Korea's Kospi declined 1.9% (down 11.2%).
India's Sensex sank 3.9% (down 5.9%).
China's Shanghai declined 1.5% (down 17.5%).
Turkey's Istanbul National 100 added 1.2% (up 32.4%).
Russia's MICEX fell 2.1% (down 36.8%).
US BONDS:
Three-month Treasury bill rates
ended the week at 0.80%.
Two-year government yields
added two bps to 2.74% (up 200bps y-t-d).
Five-year T-note yields
rose 12 bps to 3.08% (up 182bps).
Ten-year Treasury yields
jumped 19 bps to 3.13% (up 162bps).
Long bond yields
surged 23 bps to 3.23% (up 132bps).
Benchmark Fannie Mae MBS yields
rose 17 bps to 4.32% (up 225bps).
Federal Reserve Credit last week
declined $14.5bn to $8.904 TN.
Over the past 138 weeks,
Fed Credit expanded $5.177 TN, or 139%.
US MORTGAGES:
Freddie Mac 30-year fixed mortgage rates
jumped 17 bps to 5.27% (up 231bps y-o-y)
- the high since August 2009.
Fifteen-year rates rose 12 bps to 4.52%
- the high since December 2009 (up 222bps).
Five-year hybrid ARM rates
jumped 18 bps to 3.96% (up 126bps).
Jumbo mortgage borrowing
30-year fixed rates unchanged
at a more than decade-high 5.38% (up 229bps).
CURRENCY:
For the week, the U.S. Dollar Index
added 0.7% to 103.66 (up 8.4% y-t-d),
trading this week to a nine-year high.
The Chinese (onshore) renminbi
declined 0.87% versus the dollar
(down 4.66% y-t-d).
COMMODITIES:
Wheat:
May 1 – Bloomberg:
“A blistering heat wave has scorched wheat fields in India, reducing yields in the second-biggest grower and damping expectations for exports that the world is relying on to alleviate a global shortage. Temperatures soared in March to the highest ever for the month on record going back to 1901, shriveling India’s wheat crop during a crucial growth period. That’s spurring estimates that yields have slumped 10% to 50% this season, according to almost two dozen farmers and local government officials surveyed by Bloomberg.”
Bloomberg Commodities Index
increased 0.7% (up 31.4% y-t-d).
Spot Gold dipped 0.7% to $1,884 (up 3.0%).
Silver fell 1.8% to $22.36 (down 4.1%).
Copper dropped 3.2% (down 4%).
WTI crude jumped $5.08 to $109.77 (up 46%).
Gasoline surged 8.3% (up 69%)
Natural Gas jumped another 11.0% (up 116%).
Wheat surged 5.0% (up 44%)
Corn declined 3.5% (up 32%).
Bitcoin sank $2,693, or 7.0%,
this week to $35,905 (down 22.6%).
DOUG NOLAND COMMENTARY:
(highly edited)
The Global Bubble, several decades in the making, is in the process of bursting. A new cycle is emerging, replete with extraordinary uncertainties. Acute instability has become a permanent feature, at least through the cycle transition phase. ...
... After rallying 3.0% Wednesday, the S&P500 fell 3.6% in Thursday’s rout. With big tech in the crosshairs, the Nasdaq100 sank 5.0% Thursday, more than reversing Wednesday’s 3.4% recovery. It was the type of volatility one might expect prior to an accident.
... May 2
– Bloomberg:
“Japanese institutional managers -- known for their legendary U.S. debt buying sprees in recent decades -- are now fueling the great bond selloff, just as the Federal Reserve pares its $9 trillion balance sheet. Estimates from BMO Capital Markets based on the most recent data show the largest overseas holder of Treasuries has offloaded almost $60 billion over the past three months. While that may be small change relative to the Japan’s $1.3 trillion stockpile, the divestment threatens to grow.”
... For decades, the U.S. financial system could expand Credit without constraint or worry. Massive trade and Current Account deficits would flood the world with dollar balances that would simply be recycled back into Treasuries and U.S. securities. For the most part, the greatest inflationary manifestations remained comfortably within the confines of the securities and asset markets. ...
Arguably, no sector lavished in monetary excess with such flagrance as the indomitable tech sector. More evidence this week of serious leakage from a historic Bubble. Get ready for one brutal and protracted bear market. Losses will be unprecedented.
Our system faces a serious inflation problem. ... There are today similarities to previous serious “risk off” episodes that almost brought down the global financial system. There are key differences: Global Bubbles are today much grander and interconnected; the world’s financial and economic structures are splintering; inflation has become a serious global issue; and the Fed and global central bank community’s liquidity backstop is problematic like never before.
NEWS SUMMARY OF LAST WEEK
(yellow highlighting added by Ye Editor)
Market Instability Watch:
May 3 – Wall Street Journal:
“Stocks and bonds are falling in tandem at a pace not seen in decades, leaving investors with few places to hide from the market volatility. Through Monday, the S&P 500 was down 13% for 2022 and the Bloomberg U.S. Aggregate bond index—largely U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—was off 10%. That puts them on track for their biggest simultaneous drop in Dow Jones Market Data going back to 1976. The only other time both indexes dropped for the year was in 1994, when the bond index declined 2.9% and the S&P 500 fell 1.5%... This year’s declines have dealt a blow to the 60/40 portfolio model—a mix of 60% stocks and 40% bonds that has long been advertised as offering strong returns and hedging against the expected occasional pullback in stocks…”
May 4 – Financial Times:
“Investors have started backing away from the riskiest corporate bonds in the US, with the amount of debt that trades at distressed levels doubling since the start of the year. The value of junk bonds trading for 70 cents on the dollar or less, considered a sign of distress and a warning that a company may struggle to repay debts, has climbed to $27bn from about $14bn at the end of 2021…”
Bursting Bubble/Mania Watch:
May 5 – Bloomberg:
“A common warning on Wall Street for a decade is that trading desks have been overrun by people who are too young to know what it’s like to navigate a Federal Reserve tightening cycle. They’re finding out now. In markets, there’s turbulence, then there’s whatever you call the last two days, when a 900-point Dow rally was followed 12 hours later by a 1,000-point decline. Hundreds of billions of dollars of value are conjured and incinerated across assets in the space of a day lately, a stark reversal from the straight-up trajectory of the post-pandemic era. Where once every dip was bought, now every bounce is sold. Thursday was only the fourth day in 20 years in which stocks and bonds each posted 2%-plus declines…”
May 5 – Bloomberg:
“Bitcoin tumbled the most since January as the rout in financial markets deepened in the wake of increasing concern of recession. The largest digital currency fell as much as 11% to $35,611, the biggest intraday drop since Jan. 21. It had gained 5.3% on Wednesday. Ether slumped as much as 8.7%. Avalanche and Solana, among some of the largest gainers after the U.S. central bank raised rates Wednesday, were down as much as 15% and 11%, respectively.”
Russia / Ukraine Watch:
May 5 – Wall Street Journal:
“Russia is intensifying strikes on Ukrainian infrastructure, seeking to disrupt deliveries of Western weapons as Moscow’s offensive in the east appears to have stalled… Missile strikes in recent days have targeted rail hubs and electrical power facilities—particularly in Ukraine’s west, where arms are flowing into the country from the West. Pentagon officials say the strikes haven’t disrupted the handoff of arms at Ukraine’s borders. ‘The shipments of supplies and weapons and materiel going in continues every day, including today, and we’ve seen no indication that that flow has been impeded,’ Pentagon spokesman John Kirby said…”
May 4 – Associated Press:
“Complaining that the West is ‘stuffing Ukraine with weapons,’ Russia bombarded railroad stations and other supply-line targets across the country, as the European Union moved to further punish Moscow for the war… by proposing a ban on oil imports.”
May 4 – Reuters:
“Russian Defence Minister Sergei Shoigu said… the Russian military would consider NATO transport carrying weapons in Ukraine as targets to be destroyed, RIA news agency quoted him as saying.”
Economic War / Iron Curtain Watch:
May 4 – Reuters:
“The European Union's executive… proposed the toughest package of sanctions yet against Moscow for its war in Ukraine, but several countries worried about the impact of cutting off Russia oil imports stood in the way of agreement. The new punishments, announced by European Commission President Ursula von der Leyen, included sanctions on Russia's top bank and a ban on Russian broadcasters from European airwaves, as well as the embargo on crude oil in six months. The EU faces the task of finding alternatives when energy prices have surged as it imports some 3.5 million barrels of Russian oil and oil products every day and also depends on Moscow's gas supplies.”
May 3 – Bloomberg:
“Russia’s closely watched dollar payments on two bonds are trickling through to investors after the country dipped into its local holdings of the U.S. currency and sidestepped its first foreign default in a century. The transfer of the $650 million had got tangled up in the wide-ranging sanctions imposed after the invasion of Ukraine. And despite the 11th-hour escape before a Wednesday deadline to get the funds to creditors, Russia could face bigger hurdles within weeks that scupper future payments.”
May 6 – Bloomberg:
“China has ordered central government agencies and state-backed corporations to replace foreign-branded personal computers with domestic alternatives within two years, marking one of Beijing’s most aggressive efforts so far to eradicate key overseas technology from within its most sensitive organs. Staff were asked after the week-long May break to turn in foreign PCs for local alternatives that run on operating software developed domestically…”
May 5 – Reuters:
“The Chinese and Russian central banks will discuss the use and promotion of their respective national payment systems in both countries, Beijing's envoy to Moscow told the TASS news agency… ‘Regarding the promotion and use of the Mir and China UnionPay national payment systems in both countries, this question will be decided by the two sides' central banks at consultations,’ Zhang Hanhui said.”
China / Russia / U.S. Watch:
April 30 – Reuters:
“Russia said… it expected commodity flows with China to grow and trade with Beijing to reach $200 billion by 2024, as Moscow faces mounting isolation from the West. China has refused to condemn Russia's actions in Ukraine and has criticized the unprecedented Western sanctions on Moscow. The two countries have bolstered ties in recent years, including announcing a ‘no limits’ partnership in February.”
Europe / Russia Watch:
May 4 – Reuters:
“Sweden has received assurances from the United States that it would receive support during the period a potential application to join NATO is processed by the 30 nations in the alliance, Foreign Minister Ann Linde said in Washington… Sweden and neighbour Finland stayed out of NATO during the Cold War, but Russia's annexation of Crimea in 2014 and its invasion of Ukraine have led the countries to rethink their security policies, with NATO membership looking increasingly likely.”
Inflation Watch:
May 3 – New York Times:
“Already frustrated and angry about high gasoline prices, many Americans are being hit by rapidly rising electricity bills, compounding inflation’s financial toll on people and businesses. The national average residential electricity rate was up 8% in January from a year earlier, the biggest annual increase in more than a decade… In Florida, Hawaii, Illinois and New York, rates are up about 15%...”
May 1 – Bloomberg:
“For the first time ever, farmers the world over — all at the same time — are testing the limits of how little chemical fertilizer they can apply without devastating their yields come harvest time. Early predictions are bleak. In Brazil, the world’s biggest soybean producer, a 20% cut in potash use could bring a 14% drop in yields, according to… MB Agro. In Costa Rica, a coffee cooperative representing 1,200 small producers sees output falling as much as 15% next year if the farmers miss even one-third of normal application. In West Africa, falling fertilizer use will shrink this year’s rice and corn harvest by a third…”
May 3 – Bloomberg:
“The U.S. is shipping the largest amount of crude oil to Europe since Washington ended its ban on exports more than six years ago as buyers seek alternatives to Russian supplies. In April, U.S. producers exported nearly 50 million barrels of crude to European buyers from major terminals in Texas and Louisiana…”
May 2 – Bloomberg:
“Record fuel exports from the U.S. Gulf Coast are eating into domestic supplies, leaving gasoline and diesel tanks on the East Coast emptier than they have been in decades. As much as 2.09 million barrels a day of gasoline, diesel and jet fuel shipped out of the refining hub in April, the highest level since oil analytics firm Vortexa began tracking the data in 2016. The bulk of the exports went to Latin America. The strong pull from overseas shows the world needs U.S. Gulf Coast refiners more than ever.”
Federal Reserve Watch:
May 4 – Bloomberg:
“The Federal Reserve delivered the biggest interest-rate increase since 2000 and signaled it would keep hiking at that pace over the next couple of meetings, unleashing the most aggressive policy action in decades to combat soaring inflation. The U.S. central bank’s policy-setting Federal Open Market Committee on Wednesday voted unanimously to increase the benchmark rate by a half percentage point. It will begin allowing its holdings of Treasuries and mortgage-backed securities to decline in June at an initial combined monthly pace of $47.5 billion, stepping up over three months to $95 billion. ‘Inflation is much too high and we understand the hardship it is causing and we are moving expeditiously to bring it back down,’ Chair Jerome Powell said…”
U.S. Bubble Watch:
May 6 – Associated Press:
“America’s employers added 428,000 jobs in April, extending a streak of solid hiring that has defied punishing inflation, chronic supply shortages, the Russian war against Ukraine and much higher borrowing costs. Friday’s jobs report… showed that last month’s hiring kept the unemployment rate at 3.6%, just above the lowest level in a half-century. The economy’s hiring gains have been strikingly consistent in the face of the worst inflation in four decades. Employers have added at least 400,000 jobs for 12 straight months… Hourly wages rose 0.3% from March and 5.5% from a year ago. Across industries last month, hiring was widespread. Factories added 55,000 jobs, the most since last July. Warehouses and transportation companies added 52,000, restaurants and bars 44,000, health care 41,000, finance 35,000, retailers 29,000 and hotels 22,000. Construction companies, which have been slowed by shortages of labor and supplies, added just 2,000.”
May 3 – Financial Times:
“A record 4.5mn US workers quit jobs in March, while the number of job openings hit a high of 11.5mn, underscoring employers’ struggles to fill positions as inflation ripples through the economy… The rising number of job openings and voluntary resignations have forced companies desperate for employees to raise wages and sweeten incentives to lure workers away from their old jobs — which, in turn, has encouraged even more employees to quit their current posts. The figures for both job openings and workers quitting were the highest since the US labour department began collecting the data in December 2000.”
May 4 – Bloomberg:
“The U.S. trade deficit widened to a record in March, reflecting a surge in imports as companies relied on foreign producers to meet solid domestic demand. The gap in goods and services trade grew 22.3% to $109.8 billion… Net exports subtracted 3.2 percentage points from first-quarter GDP, government figures showed last week… The value of imports of goods and services rose 10.3% in March to $351.5 billion and exports increased 5.6% to $241.7 billion. Both values were records.”
May 2 – Bloomberg:
“A measure of U.S. manufacturing activity unexpectedly dropped in April to the lowest level since 2020 as growth in orders, production and employment softened. The Institute for Supply Management’s gauge of factory activity fell to 55.4 last month from 57.1… The latest data underscore the impact from lingering supply constraints, made worse by restrictive Covid-19 measures in China. Measures of both new orders and production dropped to their lowest levels since May 2020, though remained above the threshold that indicates growth.”
May 5 – CNBC:
“Worker productivity fell to start 2022 at its fastest pace in nearly 75 years while labor costs soared as the U.S. struggled with surging Covid cases… Nonfarm productivity, a measure of output against hours worked, declined 7.5% from January through March, the biggest fall since the third quarter of 1947. At the same time, unit labor costs soared 11.6%, bringing the increase over the past four quarters to 7.2%, the biggest gain since the third quarter of 1982. The metric calculates how much employers pay workers in salary and benefits per unit of output.”
May 5 – Wall Street Journal:
“The average rate for a 30-year fixed-rate home loan rose to 5.27% from 5.1% a week earlier, housing-finance giant Freddie Mac said... That marked the weekly figure’s highest reading in nearly 13 years… The average rate on America’s most popular home loan was 3.22% in early January and 2.96% a year ago. From January to April, rates rose at their fastest three-month pace since 1994.”
May 2 – CNBC:
“Mortgage rates just hit their highest level since 2009, and home prices are continuing to experience double-digit gains. Now, nearly all of the major housing markets in the United States are less affordable than they have been historically, and affordability is near its worst point on record. New calculations from Black Knight, a mortgage technology and data provider, show that 95% of the 100 biggest U.S. housing markets are less affordable than their long-term levels.”
May 1 – New York Times:
“Over the past two years, Americans who own their homes have gained more than $6 trillion in housing wealth. To be clear, that doesn’t mean homebuilders have transferred to buyers $6 trillion worth of new housing, or that existing homeowners have made $6 trillion in kitchen and bathroom upgrades. Rather, most of this money has been created by the simple fact that housing, in short supply and high demand across America, has appreciated at record pace during the pandemic. Millions of people — broadly spread among the 65% of American households who own their home — have gained a share of this windfall.”
May 3 – Bloomberg:
“The heated U.S. housing market is soaring to new extremes in California, where buying a home requires sharp elbows — and a lot of money. Take a two-floor, 2,500-square-foot house listed in Berkeley last month for $1.795 million. The property, built in 1935 but extensively renovated, received 28 offers. It sold to an all-cash buyer for more than $4 million.”
China Watch:
May 4 – Reuters:
“China's services sector activity contracted at the second-steepest rate on record in April, as tighter COVID curbs halted the industry, leading to sharper reductions in new business and employment, a private-sector survey showed… The Caixin services purchasing managers' index (PMI) fell to 36.2 in April, the second-lowest since the survey begun in November 2005 and down from 42 in March. The index hit 26.5 in February 2020 during the onset of the pandemic, representing the biggest contraction in activity on record… A sub-index for new business stood at 38.4, also the second-lowest on record and down from 45.9 the previous month…”
April 30 – Associated Press:
“China’s manufacturing activity fell to a six-month low in April as lockdowns continued in Shanghai and other manufacturing hubs in an attempt to stem COVID-19 outbreaks, according to a survey… The monthly purchasing managers’ index, released by China’s National Bureau of Statistics, fell to 47.4 in April, down from 49.5 in March on a 100-point scale.”
May 6 – Bloomberg:
“China’s property loan growth slowed to the lowest pace in over two decades due to the continued slump in the real-estate market… Outstanding loans in the property sector grew 6% to 53.2 trillion yuan ($8 trillion) at the end of March from a year ago, the slowest pace of expansion since data began in 2009… The growth rate was down from 7.9% at the end of 2021. Residents’ mortgages rose 8.9% to 38.8 trillion yuan from a year ago, slowing from the 11.3% increase at the end of last year… China’s home sales slump deepened in April, with preliminary data from the China Real Estate Information Corp showing an almost 60% decline in sales by the top 100 developers.”
Central Banker Watch:
May 3 – Bloomberg:
“One of the developed world’s last remaining doves turned hawkish as Australia’s central bank rocked markets with a bigger-than-expected interest-rate hike in the middle of an election campaign. Having abandoned his pledge of just two months ago to remain patient, Reserve Bank Governor Philip Lowe topped economists estimates by raising the cash rate 25 bps to 0.35%. That move and suggestions that more hikes will follow sent benchmark three-year bond yields soaring through 3% for the first time in eight years.”
Global Bubble and Instability Watch:
May 1 – Financial Times:
“Covid-19 lockdowns across China are shaking western multinationals’ production lines, snarling supply chains and threatening financial forecasts as Beijing steps up its effort to contain a surge in coronavirus cases. Apple, Coca-Cola, General Electric and Pernod Ricard were among the companies to warn this week of the threat from the spreading lockdowns in the world’s second-largest economy, with many more blaming the strict measures for higher costs, shortfalls in their latest results and more cautious outlooks. An extension of the policies designed to curb the spread of coronavirus has gathered pace in recent weeks, leaving about 345mn people living under full or partial lockdowns across 46 cities, according to… Nomura.”
May 3 – Wall Street Journal:
“The drought in chip availability that has hit auto production, raised electronics prices and stoked supply-chain worries in capitals around the globe has a new pain point: a lack of chips needed for the machines that make chips, industry executives say. The wait time it takes to get machinery for chip-making—one of the world’s most complex and delicate kinds of manufacturing—has extended over recent months. Early in the pandemic it took months from placing an order to receiving the equipment. That time frame has stretched to two or three years in some cases…”
Europe Watch:
May 4 – Bloomberg:
“German factory orders fell more than anticipated after Russia’s invasion of Ukraine darkened the prospects… Demand plunged 4.7% in March from the previous month, driven by a decline in orders from abroad. That’s worse than all but one forecast in a survey of economists by Bloomberg, where the median estimate was for a 1.1% drop.”
Emerging Markets Bubble Watch:
May 5 – Reuters:
“Turkey's annual inflation jumped to a two-decade high of 69.97% in April…, fuelled by the Russia-Ukraine conflict and rising energy and commodity prices after last year's lira crash. The surge in prices has badly strained households just over a year before presidential and parliamentary elections that could bring the curtain down on President Tayyip Erdogan's long rule.”
May 3 – Bloomberg:
“Inflation is so rampant in Brazil, having surpassed 12% a year in early April, that workers at the institution in charge of taming prices are themselves on strike, demanding wage raises to recover lost purchasing power. Brazil’s central bank employees in Brasilia stopped working on Tuesday, piling pressure on the institution to increase their salaries by 26% to compensate for losses to inflation in the past few years.”
Japan Watch:
May 5 – Bloomberg:
“The cost of living in Tokyo rose at the fastest pace in almost three decades in April, as the impact of soaring energy prices became clearer, an outcome that complicates the Bank of Japan’s messaging on inflation and the need for continued stimulus. Consumer prices excluding fresh food in the capital climbed 1.9% from a year ago…”
Covid Watch:
May 5 – Bloomberg:
“South Africa’s daily coronavirus test positivity rate rose to its highest level since Jan. 1 on Thursday as the continent’s most-industrialized nation heads into a fifth wave of infections. There were 9,757 new Covid-19 cases identified, representing a 25.9% positivity rate of those tested, the National Institute for Communicable Diseases said…”
Environmental Watch:
May 5 – CNN:
“Wildfires and straight-line winds that have ravaged New Mexico for a month have created a major disaster, President Joe Biden declared, unlocking critical federal aid as the state continues to battle the largest wildfire burning in the United States… Some 300,000 acres have burned this year in New Mexico -- more than the past two full years combined…”
May 6 – Bloomberg:
“A bird flu virus that’s sweeping across the U.S. is rapidly becoming the country’s worst outbreak, having already killed over 37 million chickens and turkeys and with more deaths expected through next month as farmers perform mass culls across the Midwest… The crisis is hurting egg-laying hens and turkeys the most, with the disease largely being propagated by migrating wild birds that swarm above farms and leave droppings that get tracked into poultry houses.”
Geopolitical Watch:
May 2 – Reuters:
“Eight Chinese naval vessels, including an aircraft carrier, passed between islands in Japan's southern Okinawa chain…, Japan's defence ministry said… The ships, which included several destroyers, sailed between the main Okinawa island and Miyakojima, according to the ministry. Although there was no incursion into Japan's territorial waters, helicopters on board the Liaoning carrier took off and landed…”
May 6 – Reuters:
“Taiwan's air force scrambled on Friday to warn away 18 Chinese aircraft that entered its air defence zone, Taiwan's defence ministry said, part of what is a regular pattern of incursions that has angered the government in Taipei.”
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