SOURCE:
Credit Bubble Bulletin : Weekly Commentary: Bursting Bubbles and Failed Experiments
Saturday, June 18, 2022
For the Week Ending June 17, 2022:
S&P500 sank 5.8% (down 22.9% y-t-d)
Dow fell 4.8% (down 17.7%)
Utilities were clobbered 9.0% (down 10.8%)
Banks fell 4.6% (down 24.0%)
Transports declined 3.7% (down 21.9%)
S&P 400 Midcaps sank 7.6% (down 21.9%)
Small cap Russell 2000 slumped 7.5% (down 25.8%).
Nasdaq100 dropped 4.8% (down 31.0%).
Semiconductors sank 8.9% (down 34.7%).
Biotechs were little changed (down 21.0%).
With gold bullion down $32,
the HUI gold stock index sank 7.7% (down 6.7%).
U.K.'s FTSE dropped 4.1% (down 5.0% y-t-d).
Japan's Nikkei Equities sank 6.7% (down 9.8% y-t-d).
France's CAC40 slumped 4.9% (down 17.8%).
Germany's DAX lost 4.6% (down 17.4%).
Spain's IBEX 35 declined 2.9% (down 6.5%).
Italy's FTSE MIB index fell 3.4% (down 20.3%).
Brazil's Bovespa sank 5.4% (down 4.8%)
Mexico's Bolsa declined 0.9% (down 9.9%).
South Korea's Kospi sank 6.0% (down 18.0%).
India's Sensex dropped 5.4% (down 11.8%).
China's Shanghai Index gained 1.0% (down 8.9%).
Turkey's Istanbul National 100 slipped 0.4% (up 36.4%).
Russia's MICEX rose 3.0% (down 37.8%).
US BONDS
US BONDS
Three-month Treasury bill rates
ended the week at 1.5375%.
Two-year government yields
jumped 12 bps to 3.18% (up 245bps y-t-d).
Five-year T-note yields
rose nine bps to 3.34% (up 208bps).
Ten-year Treasury yields
gained seven bps to 3.23% (up 172bps).
Long bond yields
rose nine bps to 3.28% (up 138bps).
Benchmark Fannie Mae MBS yields
jumped another 20 bps to 4.66% (up 259bps).
Federal Reserve Credit last week increased $12.3bn to $8.893 TN. Over the past 144 weeks, Fed Credit expanded $5.166 TN, or 139%.
US BONDS
Freddie Mac 30-year fixed mortgage rates
surged 55 bps to 5.78% (up 285bps y-o-y)
- the high since November 2008.
Fifteen-year rates jumped 43 bps to 4.81% (up 257bps) to the high since June 2009.
Five-year hybrid ARM rates rose 21 bps to 4.1% (up 181bps) - the high back to January 2010.
Jumbo mortgage 30-year fixed rates up 32 bps to 5.89% (up 270bps) - the high since March 2011.
CURRENCIES
For the week, the U.S. Dollar Index increased 0.5% to 104.65 (up 9.4% y-t-d).
CURRENCIES
For the week, the U.S. Dollar Index increased 0.5% to 104.65 (up 9.4% y-t-d).
The Chinese (onshore) renminbi slipped 0.11% versus the dollar (down 5.37% y-t-d).
COMMODITIES
Bloomberg Commodities Index
COMMODITIES
Bloomberg Commodities Index
sank 6.4% (up 27.8% y-t-d).
Spot Gold declined 1.7% to $1,839 (up 0.6%).
Silver slipped 1.0% to $21.67 (down 7.0%).
Copper dropped 6.2% (down 10%).
WTI crude slumped $11.11 to $109.56 (up 46%).
Gasoline plunged 9.1% (up 70%)
Natural Gas sank 21.5% (up 86%).
Wheat dipped 2.2% (up 36%)
Corn added 1.5% (up 29%).
Bitcoin collapsed $8,520, or 29.6%,
this week to $20,520 (down 56%).
DOUG NOLAND COMMENTARY:
(highly edited)
The FOMC hiked rates 75 bps Wednesday, the largest rate boost since Greenspan’s lone 75 bps move more than 27 years ago (November 1994).
For anything bigger, it’s back to the Volcker era.
The 1994 tightening cycle and attendant acute bond/derivatives market upheaval fundamentally altered Federal Reserve doctrine. It’s been gradualism ever since.
The 1994 tightening cycle and attendant acute bond/derivatives market upheaval fundamentally altered Federal Reserve doctrine. It’s been gradualism ever since.
Gradualism is out. Importantly, the Fed’s current objective is to meaningfully tighten financial conditions specifically to control runaway inflation.
A cycle that commenced in the early nineties has run its course, and the Fed has no alternative than to adapt to new inflation realities.
For a few decades, the Fed has had the luxury of directing its policy focus to the financial markets. Consumer price inflation was relatively contained and stable. It was also aberrational.
A historic cycle has, finally, come to its conclusion.
The Philadelphia Oil Services Index collapsed 19.8%.
A historic cycle has, finally, come to its conclusion.
The Philadelphia Oil Services Index collapsed 19.8%.
The Dow Jones Utilities Index was hammered 9.5%.
The S&P500 Materials Index fell 8.3%, and the Philadelphia Gold & Silver Index (XAU) sank 8.7%
The dollar/yen traded at a 24-year high 135.5 in Wednesday trading,
How does an economy slide from a 3.6% unemployment rate and 11 million available jobs to recession? Dislocation in the Credit market.
The dollar/yen traded at a 24-year high 135.5 in Wednesday trading,
How does an economy slide from a 3.6% unemployment rate and 11 million available jobs to recession? Dislocation in the Credit market.
NEWS SUMMARY:
Market Instability Watch:
Bursting Bubble / Mania Watch:
Economic War / Iron Curtain Watch:
Market Instability Watch:
June 13 – Bloomberg (Srinivasan Sivabalan and Maria Elena Vizcaino): “Treasury yields posted their biggest two-day jump in decades on Monday, roiling assets around the world in one of the strongest signs yet that the era of easy money is coming to an end. Global markets blew through milestones that seemed far-fetched even a few days ago. Yields on three-year US Treasuries soared, capping the biggest two-day rise since 1987.”
June 14 – Bloomberg (Lu Wang and Melissa Karsh): “The smart money dumped stocks at the fastest pace on record as a vicious selloff sent the S&P 500 into a bear market. Hedge funds tracked by Goldman Sachs Group Inc. offloaded US equities for a seventh straight day Monday, with the dollar amount of selling over the last two sessions exploding to levels not seen since the firm’s prime broker began tracking the data in April 2008… In the note published Tuesday, Goldman said short sales at its hedge-fund clients climbed ‘aggressively,’ with broad-based investing strategies -- or macro products -- like exchange-traded funds dominating the flows.”
Bursting Bubble / Mania Watch:
June 14 – CBS (Irina Ivanova): “Many technology companies that expanded during the pandemic are now pulling back, laying off workers and retracting job offers as the U.S. economy slows. On Tuesday, the cryptocurrency exchange Coinbase said it was cutting its workforce by 18%, or about 1,100 people… The slump is affecting a wide range of companies. Coinbase's cuts come one day after cryptocurrency company BlockFi, which had grown nearly sixfold in 2021, announced it was laying off about 250 people. Privacy and marketing company OneTrust last week let go 950 employees, Stitch Fix cut 330 and identity-verification company ID.me dismissed 130. Transportation company Bird slashed a similar number, while PolicyGenius gave pink slips to 170. And that's just in the past two weeks.”
June 16 – Reuters (Lisa Pauline Mattackal and Medha Singh): “Major cryptocurrency volatility has hit stablecoins, typically considered the market's safer-havens, with investors pulling money out of the sector and several losing the peg to their underlying assets. The market capitalization of stablecoins had plummeted to $156.8 billion on Thursday, from around $181 billion at the start of May, CoinGecko data showed. Tether, the world's largest stablecoin, briefly dropped to $0.993 on Wednesday…”
Russia / Ukraine War Watch:
June 11 – Reuters (Natalia Zinets): “Up to 300,000 tonnes of grain may have been stored in warehouses that Kyiv says were destroyed by Russian shelling last weekend, deputy agriculture minister Taras Vysotskyi said….”
Economic War / Iron Curtain Watch:
June 15 – Bloomberg: “Russia stepped up the use of energy as a weapon by further cutting natural gas shipments via its biggest pipeline to Europe, prompting Germany to accuse the Kremlin of trying to drive up prices. Gazprom PJSC is curbing gas supplies via its Nord Stream pipeline to Germany by 60%... The move adds to a 15% reduction in flows to Italy, the continent’s second-largest customer of Russian gas, putting more pressure on already tight European energy markets and sending gas prices surging more than 25%.”
June 13 – Associated Press (Krutika Pathi and Elaine Kurtenbach): “India and other Asian nations are becoming an increasingly vital source of oil revenues for Moscow despite strong pressure from the U.S. not to increase their purchases, as the European Union and other allies cut off energy imports from Russia… Such sales are boosting Russian export revenues at a time when Washington and allies are trying to limit financial flows supporting Moscow’s war effort. A report by the… Centre for Research on Energy and Clean Air, an independent think tank… said Russia earned 93 billion euros ($97.4bn) in revenue from fossil fuel exports in the first 100 days of the country’s invasion of Ukraine, despite a fall in export volumes in May.”
June 15 – Bloomberg (Arne Delfs): “German Economy Minister Robert Habeck said he believes a decision Tuesday by Gazprom PJSC to cut gas flows through the key Nord Stream pipeline by 40% was ‘politically motivated’ and not due to technical issues as the Russian company stated. Maintenance work on the pipeline that would have a ‘relevant’ impact on supply isn’t due to be carried out by Siemens Energy AG until the fall and, in any case, wouldn’t affect 40% of the infrastructure, Habeck told reporters… ‘In that sense, I have the impression that what happened yesterday is a political decision and not a decision that can be justified in technical terms,’ he said.”
June 14 – Reuters (Lucia Mutikani): “U.S. producer price index for final demand rose 0.8% last month after advancing 0.4% in April. A 1.4% jump in the prices of goods accounted for nearly two-thirds of the rise in the PPI. Goods prices, which rose 1.3% in April, were driven by soaring costs for energy products… Wholesale gasoline prices rebounded 8.4% after falling 3.0% in April, making up 40% of the rise in the costs of goods. Jet fuel increased 12% after shooting up 14.8% in April. There were also increases in the cost of residential natural gas, steel mill products and diesel fuel… Excluding food and energy, goods prices rose 0.7% after increasing 1.1% for two straight months.”
June 13 – Bloomberg (Alex Tanzi): One-year ahead median inflation expectations climbed in May to 6.6% from 6.3%, tying the highest reading since the survey began in June 2013. That’s going to take a bigger bite out of Americans’ wallets, as forecasts for household spending jumped for a fifth month by a series high 9%...”
June 14 – Financial Times (Amanda Chu and Justin Jacobs): “The national average price of diesel hit a fresh peak of $5.72 a gallon this week, up 75% over the past year… It is one of the sharpest fuel cost increases on record… The surge in the price of diesel, a workhorse fuel, is coursing through the US economy, helping to push price increases in the world’s largest economy to 40-year highs.”
June 13 – Wall Street Journal (Kirk Maltais): “Soybean prices have soared some 30% this year to a record, a surge that promises further pain for consumers facing the most severe bout of food inflation in a decade. The continuous contract for soybeans on the Chicago Board of Trade ended trading Thursday at $17.69 a bushel, topping the previous high of $17.68, set in September 2012 when drought scorched the U.S. crop.”
Federal Reserve Watch:
U.S. Bubble Watch:
June 15 – Yahoo Finance (Alexandra Semenova): “U.S. retail sales registered a bigger-than-expected drop in May as motor vehicle sales plunged and record gasoline prices prompted households to cut back spending on other items… Retail sales fell 0.3% last month, down sharply from April's downwardly revised 0.7% increase, following 0.9% initially reported. May's print also marked the first decline in five months… Weakness in May's print was led by a slowdown in car purchases as vehicles and borrowing got more expensive. Sales at motor vehicle and parts dealers fell 3.5% in May. Without the autos component of the report, retail sales rose 0.5% during the month. Spending at gas stations was up 4%, with last month's sales rising 43.2% against the prior year.”
June 16 – Bloomberg (Olivia Rockeman): “New US home construction dropped in May, highlighting the impacts of ongoing supply chain challenges and sinking sales as mortgage rates rise. Residential starts declined 14.4% last month to a 1.55 million annualized rate, the lowest in more than a year… April construction was revised sharply higher to a 1.81 million rate, which was the strongest since 2006. Applications to build… fell to an annualized 1.7 million units, the lowest since September. The monthly decline in starts was the largest since April 2020…”
June 15 – Reuters (Lucia Mutikani): “Confidence among U.S. single-family homebuilders dropped to a two-year low in June as high inflation and rising mortgage rates reduced affordability for entry-level and first-time buyers, a survey showed… The National Association of Home Builders/Wells Fargo Housing Market index fell two points to 67 this month, the lowest reading since June 2020. It was the sixth straight monthly decline in the index… The component measuring traffic of prospective buyers fell five points to 48, marking the first time this gauge has fallen below the breakeven level of 50 since June 2020.”
June 15 – Wall Street Journal (Orla McCaffrey): “Americans have more equity in their homes than ever before. Total U.S. home equity increased almost 20% in the first quarter to $27.8 trillion, a record high, according to the Federal Reserve. The increase is another consequence of a red-hot housing market… Rising home values are boosting the finances of the Americans who already own them… About 60% of equity was withdrawn via cash-out refinances in 2021, according to mortgage-data firm Black Knight. Homeowners are likely to turn to home-equity lines of credit, said Andy Walden, vice president of enterprise research strategy at Black Knight.”
June 16 – Bloomberg (John Gittelsohn and Paulina Cachero): “Mortgage rates in the US surged the most in more than three decades, ratcheting up pressure on would-be homebuyers and cooling the housing market. The average for a 30-year loan jumped to 5.78%, up from 5.23% last week… That was the largest one-week increase since 1987.”
June 16 – CNBC (Sarah O’Brien): “For consumers in search of an affordable new car, there’s little relief on the horizon. The monthly costs to finance a vehicle purchase have hit record highs. Consumers face monthly payments averaging $656 for a new car, financed at 5.1% over 70.5 months, according to… Edmunds.com. For used cars, the average monthly payment is $546, with an average rate of 8.2% and loan length of 70.8 months.”
Economic Disruption Watch:
China Watch:
June 15 – Bloomberg (Tom Hancock): “Official Chinese economic statistics for May told a story of a lockdown-wounded economy improving on the back of stronger industrial output and investment - but a deeper look suggests an economy still contracting. Headline industrial output in May grew an unexpected 0.7% from a year earlier, but output of electricity was down 3.3% and power consumption was down 1.3% for the same period… ‘We believe some fundamentals might be worse than the official data suggest,’ economists at Nomura Holdings Inc. wrote…, pointing to falling production of power, cement, crude steel, autos and smartphones, and also an index of road freight which was almost 19% lower than a year earlier. That decline may have continued into this month, with truck activity down more than 20% in the first two weeks of June…”
June 16 – Bloomberg: “China’s home prices fell for a ninth month in May, signaling demand remains weak despite increased government support for the slumping property market. New home prices in 70 cities… dropped 0.17% last month from April, when they slid 0.3%... Chinese households have turned to hoarding cash this year, a sign that people are bracing for tougher times even as some cities emerge from crippling Covid lockdowns.”
June 16 – Reuters (Engen Tham): “A protest planned by hundreds of bank depositors in central China seeking access to their frozen funds has been thwarted because the authorities have turned their health code apps red… The depositors were planning to travel to the central province of Henan this week from across China to protest against an almost two-month block on accessing at least $178 million of deposits, which has left companies unable to pay workers and individuals unable to access savings.”
Global Bubble and Instability Watch:
June 16 – Bloomberg (Evelyn Cheng): “A measure of risk levels for debt in Asia has surpassed its 2009 financial crisis high, thanks to a surge in downgrades of Chinese property developers since late last year, ratings agency Moody’s said… Among the relatively risky category of Asian high-yield companies outside Japan that are covered by Moody’s, the share with the most speculative ratings of ‘B3 negative’ or lower has nearly doubled from last year — to a record high of 30.5% as of May, the firm said.”
Europe Watch:
June 11 – Financial Times (Nikou Asgari): “Investors are starting to worry again about high levels of government debt in the eurozone, as the prospect of rising interest rates revives concerns that have largely lain dormant in recent years. Borrowings by debt-laden countries including Italy, Greece and Spain have increased in the decade since the region’s sovereign debt crisis… Markets were more willing to fund those large debt piles while borrowing costs were ultra-low and the European Central Bank was continuing with its massive bond-buying programme. But the ECB’s plans to withdraw such stimuli… mean the bonds of these southern European nations are once again under pressure.”
June 13 – Wall Street Journal (Matthew Dalton): “For decades, European industry relied on Russia to supply low-cost oil and natural gas that kept the continent’s factories humming. Now Europe’s industrial energy costs are soaring in the wake of Russia’s war on Ukraine, hobbling manufacturers’ ability to compete in the global marketplace. Factories are scrambling to find alternatives to Russian energy…, bringing production to a halt. Europe’s producers of chemicals, fertilizer, steel and other energy-intensive goods have come under pressure over the last eight months as tensions with Russia climbed ahead of the February invasion. Some producers are shutting down…”
June 16 – Financial Times (Guy Chazan, David Sheppard, Nastassia Astrasheuskaya and Roman Olearchyk): “The German government has appealed to the population to conserve energy after Russia cut supplies through a critical Baltic Sea pipeline bringing gas to Europe. Deputy chancellor Robert Habeck said the situation was ‘serious’ and that companies and citizens should do what they could to save energy. ‘Every kilowatt hour helps in this situation,’ he said... Russia’s state-controlled gas exporter Gazprom has cut flows through the Nord Stream pipeline by 60% in recent days, citing technical problems. But Germany claims the move is political…”
June 13 – Bloomberg (Tugce Ozsoy): “The cost to insure against a debt default by Turkey’s government in the next five years surged, heading for the highest closing level in almost two decades. Credit default swaps rose as high as 870 bps on Monday, reflecting investor concerns over a deepening rout in the lira and the government’s reliance on unorthodox monetary policies to support it. The advance took the CDS contracts above the level reached during the 2008 global financial crisis and all the way back to 2003…”
June 14 – Reuters (Manoj Kumar and Nidhi Verma): “High global energy and raw material prices combined with a weak rupee fueled the fastest annual rise in India's wholesale prices in more than 30 years… Wholesale prices, akin to producer prices, climbed 15.88% in May from year ago levels, staying in double-digits for a 14th straight month, and was, according to economists, India's highest since September 1991.”
June 16 – Bloomberg (Masaki Kondo): “The Bank of Japan would face a huge loss on its super-sized holdings of government bonds if it were to buckle under ever greater market pressure and abandon its easy monetary policy as hedge funds rush to short the debt securities. Thanks to its quest to boost prices in deflation-prone Japan, the BOJ now owns 526 trillion yen ($4 trillion) of government bonds -- almost half the total -- an amount that rivals the size of the economy.”
June 16 – Reuters (Tom Westbrook and Alun John): “Japan ran its biggest single-month trade deficit in more than eight years in May as high commodity prices and declines in the yen swelled imports… The growing trade deficit underscores the headwinds the world's third-largest economy faces from a slide in the yen and surging costs of fuel and raw materials… Imports soared 48.9% in the year to May… That outpaced a 15.8% year-on-year rise in exports in the same month, resulting in a 2.385 trillion yen ($17.80bn) trade deficit, the largest shortfall in a single month since January 2014.”
Environmental Watch:
June 17 – Associated Press (Paulo Santalucia): “Water is so low in large stretches of Italy’s largest river that local residents are walking through the middle of the expanse of sand and shipwrecks are resurfacing. Authorities fear that if it doesn’t rain soon, there’ll be a serious shortage of water for drinking and irrigation for farmers and local populations across the whole of northern Italy.”
Covid Watch:
June 16 – Wall Street Journal (Sarah Neville, John Burn-Murdoch and Jamie Smyth): “European countries are experiencing a surge in Covid-19 hospital admissions driven by sub-variants of the highly infectious Omicron strain, threatening a fresh global wave of the disease as immunity levels wane and pandemic restrictions are lifted. Admissions have risen in several countries including France and England… The BA.5 sub-variant of Omicron now accounts for more than 80% of new infections in Portugal. In Germany, where admissions have been rising for over a week, the share of Covid-19 infections ascribed to BA.5 doubled at the end of last month. Experts warn that the widespread scaling back of testing and surveillance may be compromising the ability of countries to spot new mutations and react quickly.”
Geopolitical Watch:
June 12 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “China’s defence minister began his speech at the Shangri-La Dialogue security conference by claiming inaccurately that China had never started a war against another country. Yet minutes later, General Wei Fenghe warned the audience of officials and security experts from Indo-Pacific countries that the People’s Liberation Army would ‘crush’ any effort by Taiwan to pursue independence. ‘The US fought a civil war for its unity. China never wants such a civil war. We will resolutely crush any attempt to pursue Taiwanese independence,’ Wei told the audience…”
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