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Credit Bubble Bulletin : Weekly Commentary: Just the Facts - July 29, 2022
Sunday, July 31, 2022
Cedit Bubble Bulletin
Weekly Commentary
by Doug Noland
My edited easy to read version follows:
Ye Editor
For the Week Ending July 29, 2022:
GLOBAL STOCK INDEXES:
The S&P500 rallied 4.3% (down 13.3% y-t-d) Dow rose 3.0% (down 9.6%)
Utilities surged 6.4% (up 2.4%)
Banks gained 2.1% (down 18.0%)
Transports advanced 5.8% (down 11.3%)
S&P 400 Midcaps rose 4.8% (down 11.6%)
Small cap Russell 2000 jumped 4.3% (down 16.0%)
Nasdaq100 rallied 4.4% (down 20.7%)
Semiconductors jumped 4.4% (down 24.8%)
Biotechs gained 1.5% (down 13.3%).
With bullion rallying $38,
the HUI gold stock index recovered 3.0%
(down 19.9%)
U.K.'s FTSE gained 2.0% (up 0.5% y-t-d).
Japan's Nikkei slipped 0.4% (down 3.4% y-t-d).
France's CAC40 (down 1%).
German DAX rose 1.7% (down 15.1%).
Spain's IBEX 35 increased 1.3% (down 6.4%).
Italy's FTSE MIB rallied 5.6% (down 18.1%)
Brazil's Bovespa jumped 4.3% (down 1.6%)
Mexico's Bolsa rose 1.9% (down 9.6%).
South Korea's Kospi gained 2.4% (down 17.7%).
India's Sensex jumped 2.7% (down 1.2%).
China's Shanghai declined 0.5% (down 10.6%).
Turkey's Istanbul National 100 added 3.0% (up 39.6%).
Russia's MICEX rallied 5.6% (down 41.5%).
US BONDS & MORTGAGE RATES:
Three-month Treasury bill rates
ended the week at 2.275%.
Two-year government yields
declined nine bps to 2.89% (up 215bps y-t-d).
Five-year T-note yields
fell 17 bps to 2.68% (up 141bps).
Ten-year Treasury yields
declined 10 bps to 2.65% (up 114bps).
Long bond yields
increased four bps to 3.01% (up 111bps).
Benchmark Fannie Mae MBS yields
sank 35 bps to 3.82% (up 175bps).
Federal Reserve Credit last week
declined $4.1bn to $8.866 TN.
Fed Credit is down $34.8bn
from the June 22nd peak.
Over the past 150 weeks,
Fed Credit expanded $5.139 TN, or 138%.
Freddie Mac 30-year fixed mortgage rates
Freddie Mac 30-year fixed mortgage rates
sank 24 bps to a seven-week low 5.30% (up 219bps y-o-y).
Fifteen-year rates
fell 17 bps to 4.58% (up 225bps).
Five-year hybrid ARM rates
slipped two bps to 4.29% (up 188bps)
Jumbo mortgage 30-year fixed rates
sinking 39 bps to a 15-week low 5.21% (up 198bps).
Currency Watch:
For the week, the U.S. Dollar Index
Currency Watch:
For the week, the U.S. Dollar Index
declined 0.8% to 105.90 (up 10.7% y-t-d).
The Chinese (onshore) renminbi
increased 0.10% versus the dollar (down 5.76% y-t-d).
Commodities Watch:
Bloomberg Commodities Index jumped 4.6% (up 22.8% y-t-d).
Commodities Watch:
Bloomberg Commodities Index jumped 4.6% (up 22.8% y-t-d).
Spot Gold jumped 2.2% to $1,766 (down 3.5%).
Silver surged 9.5% to $20.36 (down 12.7%).
WTI crude rose $3.92 to $98.62 (up 31%).
Gasoline dropped 3.4% (up 40%)
Natural Gas declined 0.8% to $8.23. (up 121%).
Copper surged 6.7% (down 20%).
Wheat rallied 6.4% (up 5%)
Corn spiked 9.9% (up 5%).
Bitcoin gained $1,048, or 4.6%, this week
to $23,780 (down 49%).
ECONOMIC NEWS SUMMARY:
Market Instability Watch:
July 25 – Wall Street Journal (Eric Wallerstein): “Companies with speculative-grade credit ratings have slowed their pace of borrowing, illustrating how rising interest rates have upended the pandemic-driven boom. Junk-rated companies have raised roughly $74 billion so far this year, just a quarter of the nearly $300 billion from the same period last year, according to Refinitiv. That has led to an $80 billion drop in the net supply of high-yield bonds, a figure that is expected to grow to $130 billion by the end of the year, according to Goldman Sachs Group Inc. Such a fall would mark the biggest annual decline on record.”
Economic War/Iron Curtain Watch:
July 27 – Associated Press (Christoph Steitz and Nina Chestney): “Russia delivered less gas to Europe on Wednesday in a further escalation of an energy stand-off between Moscow and the European Union that will make it harder, and costlier, for the bloc to fill up storage ahead of the winter heating season. The cut in supplies… has reduced the capacity of Nord Stream 1 pipeline - the major delivery route to Europe for Russian gas - to a mere fifth of its total capacity… On Tuesday, EU countries approved a weakened emergency plan to curb gas demand after striking compromise deals to limit cuts for some countries, hoping lower consumption will ease the impact in case Moscow stops supplies altogether. The plan highlights fears that countries will be unable to meet goals to refill storage and keep their citizens warm during the winter months and that Europe's fragile economic growth may take another hit if gas will have to be rationed.”
Inflation Watch:
July 26 – CNBC (Jessica Dickler): “Higher prices have taken a toll. In an economy that has produced the highest inflation rate since 1981, Americans are struggling to keep up with expenses and are putting less money aside for emergencies or long-term financial goals, several recent studies show. Nearly 40% of consumers cannot put any money at all into savings, according to a recent analysis… by the American Consumer Credit Counseling, while about 19% said they had to reduce their savings rate. As of the second quarter of 2022, 48% of consumers said the rising cost of basic necessities impacted their family’s lifestyle, a steep jump from 39% in the first quarter. ‘The pandemic, wars overseas and other world events have had unprecedented effects on our society when it comes to household finances,’ Allen Amadin, president and CEO of American Consumer Credit Counseling, said...”
Biden Administration Watch:
July 28 – Financial Times (Tom Mitchell, Edward White and Felicia Schwartz): “Xi Jinping warned Joe Biden not to ‘play with fire’ as the Chinese and US presidents spoke for the first time since Beijing was angered by news of a potential visit to Taiwan by… Nancy Pelosi. In a statement posted on the Chinese foreign ministry’s website after the leaders talked on Thursday, Xi… said his administration would ‘resolutely safeguard China’s national sovereignty and territorial integrity’. ‘Those who play with fire will perish by it. It is hoped that the US will be clear-eyed about this,’ China’s president added. China’s foreign ministry also quoted Biden as saying that Washington’s ‘one China’ policy had not changed and that his administration did not support independence for the self-ruled island, which Beijing claims as part of its territory.”
Federal Reserve Watch:
July 27 – Financial Times (Colby Smith): “Since the Federal Reserve in March embarked on what has become the fastest pace of interest rate rises since 1981, it has provided painstaking detail about its future plans to tighten monetary policy. On Wednesday, that changed, with chair Jay Powell announcing the US central bank would shy away from offering an official running commentary on its quest to stamp out soaring inflation. ‘It’s time to just go to a meeting-by-meeting basis and to not provide the kind of clear guidance that we had provided,’ Powell said… after the Fed increased its main interest rate by 0.75 percentage points for the second month in a row.”
U.S. Bubble Watch:
July 28 – CNBC (Jeff Cox): “The U.S. economy contracted for the second straight quarter from April to June, hitting a widely accepted rule of thumb for a recession, the Bureau of Economic Analysis reported… Gross domestic product fell 0.9% at an annualized pace for the period, according to the advance estimate. That follows a 1.6% decline in the first quarter and was worse than the Dow Jones estimate for a gain of 0.3%.”
July 26 – Associated Press (Matt Ott): “U.S. consumer confidence slid again in July as higher prices for food, gas and just about everything else continued to weigh on Americans. The Conference Board said… its consumer confidence index fell to 95.7 in July from 98.4 in June, largely due to consumer anxiety over the current economic conditions, particularly four-decade high inflation. It’s the lowest reading since February of 2021. The business research group’s present situation index… fell from 147.2 to 141.3.”
July 29 – Bloomberg (Reade Pickert): “The drumbeat of recession grew louder after the US economy shrank for a second straight quarter, as decades-high inflation undercut consumer spending and Federal Reserve interest-rate hikes stymied businesses and housing. Gross domestic product fell at a 0.9% annualized rate after a 1.6% decline in the first three months of the year, the Commerce Department’s preliminary estimate showed... Personal consumption, the biggest part of the economy, rose at a 1% pace, a deceleration from the prior period.”
July 27 – CNBC (Diana Olick): “Mortgage demand edged lower for the fourth straight week.., even though interest rates have fallen from their recent highs… Applications for a loan to purchase a home fell 1% for the week but were 18% lower than the same week one year ago. More supply is coming onto the housing market, as competition cools among buyers. But prices and rates are still high, and inflation is weakening consumer confidence.”
July 26 – Bloomberg (Jordan Yadoo): “Sales of new US homes fell for the fifth time this year in June to a more than two-year low, as a mix of high prices and rising mortgage rates thwarted prospective buyers. Purchases of new single-family homes decreased 8.1% to 590,000 annualized pace from a downwardly revised 642,000 in May… Separate reports last week showed a slowdown in building activity and a two-year low in home resales amid intensifying affordability concerns. The new-home sales report… showed the median sales price of a new home rose 7.4% from a year earlier, to $402,400. It marked the smallest annual gain since November 2020. The number of homes sold in June and awaiting the start of construction -- a measure of backlogs -- rose from a month earlier to 184,000, the most since January…”
July 25 – Reuters (Cheng Leng in Hong Kong and Edward White): “Top U.S. retailer Walmart… slashed its profit forecast as surging prices for food and fuel prompted customers to cut back on discretionary purchases, and its shares slid 10% in trading after the bell. Shares of rivals including Target and Amazon.com also tanked after Walmart's warning, which signaled a ‘proverbial train wreck’ for retailers, Burt Flickinger, managing director at Strategic Resource Group, said.”
July 23 – Financial Times (Alexandra White, Colby Smith and Caitlin Gilbert): “In Eric Farmelant’s nearly decade-long career as a real estate broker in Miami, he had never witnessed renters engage in bidding wars over rental properties until the coronavirus pandemic fuelled scorching demand for beachfront housing in Florida. He can no longer show four or five listings to clients because many of the properties are being rented sight unseen. ‘You’re seeing renters putting down a year’s worth of rent up front to get their offer accepted,’ said Farmelant, who works for Ibis Realty Group. Rents, in turn, are up nearly 40% since January 2021, according to Apartment List, indicative of a broader trend that has gripped the country.”
July 24 – Wall Street Journal (Rachel Louise Ensign): “Wealthy people ramped up borrowing in the first half of the year despite rising rates and a stock-market rout that hit the value of their portfolios. The wealth-management units at Morgan Stanley and Bank of America posted double-digit loan growth in the second quarter. The increase came from well-heeled clients taking out mortgages and loans backed by assets like stock-and-bond portfolios, executives said. Morgan Stanley said mortgages rose 30% in its wealth unit from a year earlier to $50 billion, while securities-backed and other loans grew 23% to $93 billion. At Bank of America, wealth-management loans rose 12% from a year earlier to $222 billion, outpacing a 4% increase in the bank’s consumer division.”
China Watch:
July 29 – Bloomberg (Charlotte Yang): “Chinese stocks plunged Friday to cap a brutal month which marked the return of almost all the worries that have spooked investors for much of the past year. From signs of a renewed crackdown on the tech sector to an escalation of the crisis engulfing property developers and a rebound in Covid-19 cases, traders have had to contend with a lot of bad news in July. With little sign that authorities are planning to go big on policy support, doubts are rising once again about whether a bottom has yet to be seen for the market. The Hang Seng China Enterprises Index of stocks slumped 2.8% on Friday, taking its July loss to over 10% -- its worst monthly performance in a year.”
July 24 – Bloomberg: “China’s deepening property bust is sending shock waves through the nation’s 400-million-strong middle class, upending the belief that real estate is a surefire way to build wealth. Now, as property developments stall across the country and house prices fall, many Chinese homeowners are slashing spending, postponing marriage and other life decisions, and, in a growing number of cases, withholding mortgage payments on unfinished homes. Peter, for one, has given up on starting his own business and buying a BMW 5 series after construction on his 2 million-yuan ($300,000) home in Zhengzhou, the capital of Henan province, was halted by China Aoyuan Group. He is now saddled with a mortgage that’s eating up 90% of his disposable income on a home he may never see.”
July 26 – CNBC (Evelyn Cheng): “China’s property sales are set to plunge this year by more than they did during the 2008 financial crisis, according to new estimates from S&P Global Ratings. National property sales will likely drop by about 30% this year — nearly two times worse than their prior forecast, the ratings agency said, citing a growing number of Chinese homebuyers suspending their mortgage payments. Such a drop would be worse than in 2008 when sales fell by roughly 20%… Since late June, unofficial tallies show a rapid increase in Chinese homebuyers refusing to pay their mortgages across a few hundred uncompleted projects — until developers finish construction on the apartments. Most homes in China are sold before completion, generating an important source of cash flow for developers.”
July 29 – Bloomberg: “China is considering a plan to seize undeveloped land from distressed real estate companies, using it to help finance the completion of stalled housing projects that have sparked mortgage boycotts across the country… The proposal, which is still under discussion…, would take advantage of Chinese laws allowing local governments to wrest back control of land sold to real estate companies if it remains undeveloped after two years, without compensation. That would give authorities more leeway to direct funds toward uncompleted homes, potentially to the detriment of creditors who would lose claims on some of developers’ most valuable assets.”
July 27 – Bloomberg: “Chinese banks are rushing to boost capital as they prepare for a potential spike in bad loans due to the economic slowdown and spreading housing crisis. A record amount of fresh money has come from financial markets, with banks selling 29% more bonds in the first half of the year compared to last year to replenish capital and cover credit losses… In the year through July 27, lenders had sold a combined 568 billion yuan ($84bn) of Additional Tier 1 debt, which is among the first to absorb losses in times of stress, and Tier 2 bonds. China’s big-four state-owned banks are the major sellers of the bonds this year…”
July 26 – Reuters (Josh Horwitz): “Chinese smartphone sales in April-June fell 14.2% on year and volumes hit a decade low, Counterpoint Research said…, as China struggles to recover from the impact of COVID-19 lockdowns and the industry braces for more uncertainty. Quarterly sales volumes were 12.6% lower than those seen in the first quarter of 2020, when the pandemic hit China and sales were the worst since the fourth quarter of 2012, when the iPhone 5 was introduced...”
July 27 – Bloomberg: “Scorching temperatures across China are straining power grids as the country tries to ramp up industrial activity to support the economy, while farmers scramble to save crops such as rice and cotton from the impact of the searing heat. Several regions have already posted record power demand and have cut electricity to factories at peak hours to make sure there’s enough to keep air conditioners running. Rice crops and fruit and vegetables in southern China are at risk of being damaged by the heat, and melting glaciers are causing floods in the cotton-growing regions of Xinjiang. The heat is testing China’s ability to keep its factories running, from the eastern manufacturing center of Zhejiang that borders Shanghai to the technology hub of Shenzhen in the south.”
Global Bubble and Instability Watch:
July 26 – Reuters (Wayne Cole): “Australian inflation sped to a 21-year high last quarter and is likely to accelerate even further as food and energy costs explode, stoking speculation interest rates will need to more than double to bring the outbreak under control… Data from the Australian Bureau of Statistics showed the consumer price index (CPI) jumped 1.8% in the June quarter, just short of market forecasts of 1.9%. The annual rate picked up to 6.1% from 5.1%, the highest since 2001 and more than twice the pace of wage growth.”
July 28 – Reuters (Cynthia Kim): “South Korea's property market has abruptly gone from sizzling hot to floundering, piling pressure on some of the world's most debt-saddled consumers as the sector experiences the fastest interest rate hikes on record. Prices of Seoul apartments last week reported their sharpest decline in 26 months, while transaction volumes in the capital dropped 73% in June from a year earlier. The 2.6 quadrillion won ($1.97 trillion) debt tied to the property market faces a major test as borrowing costs rise, with a slump and higher mortgage repayments likely to result in weaker consumption.”
Europe Watch:
July 25 – Reuters (Rachel More and Miranda Murray): “German business morale fell more than expected in July, the Ifo business sentiment survey showed…, as the institute that compiles it said high energy prices and looming gas shortages had left Europe's largest economy on the cusp of recession. The Ifo institute's closely watched business climate index dropped to 88.6, its lowest in more than two years and below the 90.2 forecast... June's reading was marginally revised down to 92.2.”
July 28 – Reuters (Rachel More, Paul Carrel and Reinhard Becker): “German inflation edged up unexpectedly in July, driven by an energy supply crisis as a further reduction in gas flows from Russia prompted concerns about even higher energy bills. Consumer prices, harmonised to make them comparable with inflation data from other European Union countries (HICP), increased by 8.5% on the year… ‘The increase in HICP inflation is a warning sign for the European Central Bank,’ ING economist Carsten Brzeski.”
July 28 – Bloomberg (Laura Malsch): “Confidence in the euro-area economy fell to the weakest in almost 1 1/2 years as fears of energy shortages haunt consumers and businesses, and the European Central Bank’s first interest-rate increase in a more than decade feeds concerns that a recession is nearing. A gauge compiled by the European Commission dropped to 99 in July from 103.5 the previous month. That’s well below the level of 102 that economists had expected. Consumer confidence led the decline, slumping to its lowest level on record as households increasingly fret about the outlook.”
Emerging Market Crisis Watch:
July 27 – Bloomberg (Selcuk Gokoluk and Irene García Pérez): “Bondholders of emerging markets that may have to restructure debt are watching Sri Lanka’s unfolding credit crisis with a burning question: What will China do? Beijing is the largest official creditor to developing nations and investors say it’s unclear how lenient it’ll be in demanding repayment from distressed borrowers. They view Sri Lanka as a test case, and whether China demands repayment in full or accepts a haircut will determine how much private creditors including bondholders could recover in case of a default. A record 21 emerging market sovereigns’ dollar bonds are trading in distressed territory... Some of those may join Sri Lanka and Belarus who defaulted this year as the global economic slowdown and the war in Ukraine cut all but the highest-rated sovereign issuers off from international debt capital markets.”
Environmental Watch:
July 23 – Wall Street Journal (Patrick Thomas): “Intense heat and dry conditions are stressing U.S. agriculture, threatening corn, soybeans and other crops, as well as cattle herds. Scorching temperatures this past week have put swaths of the U.S., especially in the South and West, under excessive-heat warnings and advisories. The hot weather is hitting during an important period of the Midwest crop-growing season… The heat is also exacerbating longer-running drought conditions in parts of Kansas, Oklahoma, Texas and other states, risking harm to livestock, parching pastures and leading ranchers to spend more on supplemental feed for cattle.”
July 28 – Associated Press (Michael Biesecker and Helen Wieffering): “To the naked eye, the Mako Compressor Station outside the dusty West Texas crossroads of Lenorah appears unremarkable, similar to tens of thousands of oil and gas operations scattered throughout the oil-rich Permian Basin. What’s not visible through the chain-link fence is the plume of invisible gas, primarily methane, billowing from the gleaming white storage tanks up into the cloudless blue sky. The Mako station… was observed releasing an estimated 870 kilograms of methane – an extraordinarily potent greenhouse gas — into the atmosphere each hour. That’s the equivalent impact on the climate of burning seven tanker trucks full of gasoline every day. But Mako’s outsized emissions aren’t illegal, or even regulated. And it was only one of 533 methane ‘super emitters’ detected during a 2021 aerial survey of the Permian conducted by Carbon Mapper, a partnership of university researchers and NASA’s Jet Propulsion Laboratory.”
Geopolitical Watch:
July 25 – Reuters (Yimou Lee, Fabian Hamacher and Ann Wang): “Roads emptied and people were ordered to stay indoors in parts of Taiwan, including its capital Taipei, on Monday for an air-raid exercise as the island steps up preparations in the event of a Chinese attack. Sirens sounded at 1:30 p.m. for the mandatory street evacuation drills, which effectively shut towns and cities across northern Taiwan for 30 minutes. A ‘missile alert’, asking people to evacuate to safety immediately, was sent via text message.”
Market Instability Watch:
July 25 – Wall Street Journal (Eric Wallerstein): “Companies with speculative-grade credit ratings have slowed their pace of borrowing, illustrating how rising interest rates have upended the pandemic-driven boom. Junk-rated companies have raised roughly $74 billion so far this year, just a quarter of the nearly $300 billion from the same period last year, according to Refinitiv. That has led to an $80 billion drop in the net supply of high-yield bonds, a figure that is expected to grow to $130 billion by the end of the year, according to Goldman Sachs Group Inc. Such a fall would mark the biggest annual decline on record.”
Economic War/Iron Curtain Watch:
July 27 – Associated Press (Christoph Steitz and Nina Chestney): “Russia delivered less gas to Europe on Wednesday in a further escalation of an energy stand-off between Moscow and the European Union that will make it harder, and costlier, for the bloc to fill up storage ahead of the winter heating season. The cut in supplies… has reduced the capacity of Nord Stream 1 pipeline - the major delivery route to Europe for Russian gas - to a mere fifth of its total capacity… On Tuesday, EU countries approved a weakened emergency plan to curb gas demand after striking compromise deals to limit cuts for some countries, hoping lower consumption will ease the impact in case Moscow stops supplies altogether. The plan highlights fears that countries will be unable to meet goals to refill storage and keep their citizens warm during the winter months and that Europe's fragile economic growth may take another hit if gas will have to be rationed.”
Inflation Watch:
July 26 – CNBC (Jessica Dickler): “Higher prices have taken a toll. In an economy that has produced the highest inflation rate since 1981, Americans are struggling to keep up with expenses and are putting less money aside for emergencies or long-term financial goals, several recent studies show. Nearly 40% of consumers cannot put any money at all into savings, according to a recent analysis… by the American Consumer Credit Counseling, while about 19% said they had to reduce their savings rate. As of the second quarter of 2022, 48% of consumers said the rising cost of basic necessities impacted their family’s lifestyle, a steep jump from 39% in the first quarter. ‘The pandemic, wars overseas and other world events have had unprecedented effects on our society when it comes to household finances,’ Allen Amadin, president and CEO of American Consumer Credit Counseling, said...”
Biden Administration Watch:
July 28 – Financial Times (Tom Mitchell, Edward White and Felicia Schwartz): “Xi Jinping warned Joe Biden not to ‘play with fire’ as the Chinese and US presidents spoke for the first time since Beijing was angered by news of a potential visit to Taiwan by… Nancy Pelosi. In a statement posted on the Chinese foreign ministry’s website after the leaders talked on Thursday, Xi… said his administration would ‘resolutely safeguard China’s national sovereignty and territorial integrity’. ‘Those who play with fire will perish by it. It is hoped that the US will be clear-eyed about this,’ China’s president added. China’s foreign ministry also quoted Biden as saying that Washington’s ‘one China’ policy had not changed and that his administration did not support independence for the self-ruled island, which Beijing claims as part of its territory.”
Federal Reserve Watch:
July 27 – Financial Times (Colby Smith): “Since the Federal Reserve in March embarked on what has become the fastest pace of interest rate rises since 1981, it has provided painstaking detail about its future plans to tighten monetary policy. On Wednesday, that changed, with chair Jay Powell announcing the US central bank would shy away from offering an official running commentary on its quest to stamp out soaring inflation. ‘It’s time to just go to a meeting-by-meeting basis and to not provide the kind of clear guidance that we had provided,’ Powell said… after the Fed increased its main interest rate by 0.75 percentage points for the second month in a row.”
U.S. Bubble Watch:
July 28 – CNBC (Jeff Cox): “The U.S. economy contracted for the second straight quarter from April to June, hitting a widely accepted rule of thumb for a recession, the Bureau of Economic Analysis reported… Gross domestic product fell 0.9% at an annualized pace for the period, according to the advance estimate. That follows a 1.6% decline in the first quarter and was worse than the Dow Jones estimate for a gain of 0.3%.”
July 26 – Associated Press (Matt Ott): “U.S. consumer confidence slid again in July as higher prices for food, gas and just about everything else continued to weigh on Americans. The Conference Board said… its consumer confidence index fell to 95.7 in July from 98.4 in June, largely due to consumer anxiety over the current economic conditions, particularly four-decade high inflation. It’s the lowest reading since February of 2021. The business research group’s present situation index… fell from 147.2 to 141.3.”
July 29 – Bloomberg (Reade Pickert): “The drumbeat of recession grew louder after the US economy shrank for a second straight quarter, as decades-high inflation undercut consumer spending and Federal Reserve interest-rate hikes stymied businesses and housing. Gross domestic product fell at a 0.9% annualized rate after a 1.6% decline in the first three months of the year, the Commerce Department’s preliminary estimate showed... Personal consumption, the biggest part of the economy, rose at a 1% pace, a deceleration from the prior period.”
July 27 – CNBC (Diana Olick): “Mortgage demand edged lower for the fourth straight week.., even though interest rates have fallen from their recent highs… Applications for a loan to purchase a home fell 1% for the week but were 18% lower than the same week one year ago. More supply is coming onto the housing market, as competition cools among buyers. But prices and rates are still high, and inflation is weakening consumer confidence.”
July 26 – Bloomberg (Jordan Yadoo): “Sales of new US homes fell for the fifth time this year in June to a more than two-year low, as a mix of high prices and rising mortgage rates thwarted prospective buyers. Purchases of new single-family homes decreased 8.1% to 590,000 annualized pace from a downwardly revised 642,000 in May… Separate reports last week showed a slowdown in building activity and a two-year low in home resales amid intensifying affordability concerns. The new-home sales report… showed the median sales price of a new home rose 7.4% from a year earlier, to $402,400. It marked the smallest annual gain since November 2020. The number of homes sold in June and awaiting the start of construction -- a measure of backlogs -- rose from a month earlier to 184,000, the most since January…”
July 25 – Reuters (Cheng Leng in Hong Kong and Edward White): “Top U.S. retailer Walmart… slashed its profit forecast as surging prices for food and fuel prompted customers to cut back on discretionary purchases, and its shares slid 10% in trading after the bell. Shares of rivals including Target and Amazon.com also tanked after Walmart's warning, which signaled a ‘proverbial train wreck’ for retailers, Burt Flickinger, managing director at Strategic Resource Group, said.”
July 23 – Financial Times (Alexandra White, Colby Smith and Caitlin Gilbert): “In Eric Farmelant’s nearly decade-long career as a real estate broker in Miami, he had never witnessed renters engage in bidding wars over rental properties until the coronavirus pandemic fuelled scorching demand for beachfront housing in Florida. He can no longer show four or five listings to clients because many of the properties are being rented sight unseen. ‘You’re seeing renters putting down a year’s worth of rent up front to get their offer accepted,’ said Farmelant, who works for Ibis Realty Group. Rents, in turn, are up nearly 40% since January 2021, according to Apartment List, indicative of a broader trend that has gripped the country.”
July 24 – Wall Street Journal (Rachel Louise Ensign): “Wealthy people ramped up borrowing in the first half of the year despite rising rates and a stock-market rout that hit the value of their portfolios. The wealth-management units at Morgan Stanley and Bank of America posted double-digit loan growth in the second quarter. The increase came from well-heeled clients taking out mortgages and loans backed by assets like stock-and-bond portfolios, executives said. Morgan Stanley said mortgages rose 30% in its wealth unit from a year earlier to $50 billion, while securities-backed and other loans grew 23% to $93 billion. At Bank of America, wealth-management loans rose 12% from a year earlier to $222 billion, outpacing a 4% increase in the bank’s consumer division.”
China Watch:
July 29 – Bloomberg (Charlotte Yang): “Chinese stocks plunged Friday to cap a brutal month which marked the return of almost all the worries that have spooked investors for much of the past year. From signs of a renewed crackdown on the tech sector to an escalation of the crisis engulfing property developers and a rebound in Covid-19 cases, traders have had to contend with a lot of bad news in July. With little sign that authorities are planning to go big on policy support, doubts are rising once again about whether a bottom has yet to be seen for the market. The Hang Seng China Enterprises Index of stocks slumped 2.8% on Friday, taking its July loss to over 10% -- its worst monthly performance in a year.”
July 24 – Bloomberg: “China’s deepening property bust is sending shock waves through the nation’s 400-million-strong middle class, upending the belief that real estate is a surefire way to build wealth. Now, as property developments stall across the country and house prices fall, many Chinese homeowners are slashing spending, postponing marriage and other life decisions, and, in a growing number of cases, withholding mortgage payments on unfinished homes. Peter, for one, has given up on starting his own business and buying a BMW 5 series after construction on his 2 million-yuan ($300,000) home in Zhengzhou, the capital of Henan province, was halted by China Aoyuan Group. He is now saddled with a mortgage that’s eating up 90% of his disposable income on a home he may never see.”
July 26 – CNBC (Evelyn Cheng): “China’s property sales are set to plunge this year by more than they did during the 2008 financial crisis, according to new estimates from S&P Global Ratings. National property sales will likely drop by about 30% this year — nearly two times worse than their prior forecast, the ratings agency said, citing a growing number of Chinese homebuyers suspending their mortgage payments. Such a drop would be worse than in 2008 when sales fell by roughly 20%… Since late June, unofficial tallies show a rapid increase in Chinese homebuyers refusing to pay their mortgages across a few hundred uncompleted projects — until developers finish construction on the apartments. Most homes in China are sold before completion, generating an important source of cash flow for developers.”
July 29 – Bloomberg: “China is considering a plan to seize undeveloped land from distressed real estate companies, using it to help finance the completion of stalled housing projects that have sparked mortgage boycotts across the country… The proposal, which is still under discussion…, would take advantage of Chinese laws allowing local governments to wrest back control of land sold to real estate companies if it remains undeveloped after two years, without compensation. That would give authorities more leeway to direct funds toward uncompleted homes, potentially to the detriment of creditors who would lose claims on some of developers’ most valuable assets.”
July 27 – Bloomberg: “Chinese banks are rushing to boost capital as they prepare for a potential spike in bad loans due to the economic slowdown and spreading housing crisis. A record amount of fresh money has come from financial markets, with banks selling 29% more bonds in the first half of the year compared to last year to replenish capital and cover credit losses… In the year through July 27, lenders had sold a combined 568 billion yuan ($84bn) of Additional Tier 1 debt, which is among the first to absorb losses in times of stress, and Tier 2 bonds. China’s big-four state-owned banks are the major sellers of the bonds this year…”
July 26 – Reuters (Josh Horwitz): “Chinese smartphone sales in April-June fell 14.2% on year and volumes hit a decade low, Counterpoint Research said…, as China struggles to recover from the impact of COVID-19 lockdowns and the industry braces for more uncertainty. Quarterly sales volumes were 12.6% lower than those seen in the first quarter of 2020, when the pandemic hit China and sales were the worst since the fourth quarter of 2012, when the iPhone 5 was introduced...”
July 27 – Bloomberg: “Scorching temperatures across China are straining power grids as the country tries to ramp up industrial activity to support the economy, while farmers scramble to save crops such as rice and cotton from the impact of the searing heat. Several regions have already posted record power demand and have cut electricity to factories at peak hours to make sure there’s enough to keep air conditioners running. Rice crops and fruit and vegetables in southern China are at risk of being damaged by the heat, and melting glaciers are causing floods in the cotton-growing regions of Xinjiang. The heat is testing China’s ability to keep its factories running, from the eastern manufacturing center of Zhejiang that borders Shanghai to the technology hub of Shenzhen in the south.”
Global Bubble and Instability Watch:
July 26 – Reuters (Wayne Cole): “Australian inflation sped to a 21-year high last quarter and is likely to accelerate even further as food and energy costs explode, stoking speculation interest rates will need to more than double to bring the outbreak under control… Data from the Australian Bureau of Statistics showed the consumer price index (CPI) jumped 1.8% in the June quarter, just short of market forecasts of 1.9%. The annual rate picked up to 6.1% from 5.1%, the highest since 2001 and more than twice the pace of wage growth.”
July 28 – Reuters (Cynthia Kim): “South Korea's property market has abruptly gone from sizzling hot to floundering, piling pressure on some of the world's most debt-saddled consumers as the sector experiences the fastest interest rate hikes on record. Prices of Seoul apartments last week reported their sharpest decline in 26 months, while transaction volumes in the capital dropped 73% in June from a year earlier. The 2.6 quadrillion won ($1.97 trillion) debt tied to the property market faces a major test as borrowing costs rise, with a slump and higher mortgage repayments likely to result in weaker consumption.”
Europe Watch:
July 25 – Reuters (Rachel More and Miranda Murray): “German business morale fell more than expected in July, the Ifo business sentiment survey showed…, as the institute that compiles it said high energy prices and looming gas shortages had left Europe's largest economy on the cusp of recession. The Ifo institute's closely watched business climate index dropped to 88.6, its lowest in more than two years and below the 90.2 forecast... June's reading was marginally revised down to 92.2.”
July 28 – Reuters (Rachel More, Paul Carrel and Reinhard Becker): “German inflation edged up unexpectedly in July, driven by an energy supply crisis as a further reduction in gas flows from Russia prompted concerns about even higher energy bills. Consumer prices, harmonised to make them comparable with inflation data from other European Union countries (HICP), increased by 8.5% on the year… ‘The increase in HICP inflation is a warning sign for the European Central Bank,’ ING economist Carsten Brzeski.”
July 28 – Bloomberg (Laura Malsch): “Confidence in the euro-area economy fell to the weakest in almost 1 1/2 years as fears of energy shortages haunt consumers and businesses, and the European Central Bank’s first interest-rate increase in a more than decade feeds concerns that a recession is nearing. A gauge compiled by the European Commission dropped to 99 in July from 103.5 the previous month. That’s well below the level of 102 that economists had expected. Consumer confidence led the decline, slumping to its lowest level on record as households increasingly fret about the outlook.”
Emerging Market Crisis Watch:
July 27 – Bloomberg (Selcuk Gokoluk and Irene García Pérez): “Bondholders of emerging markets that may have to restructure debt are watching Sri Lanka’s unfolding credit crisis with a burning question: What will China do? Beijing is the largest official creditor to developing nations and investors say it’s unclear how lenient it’ll be in demanding repayment from distressed borrowers. They view Sri Lanka as a test case, and whether China demands repayment in full or accepts a haircut will determine how much private creditors including bondholders could recover in case of a default. A record 21 emerging market sovereigns’ dollar bonds are trading in distressed territory... Some of those may join Sri Lanka and Belarus who defaulted this year as the global economic slowdown and the war in Ukraine cut all but the highest-rated sovereign issuers off from international debt capital markets.”
Environmental Watch:
July 23 – Wall Street Journal (Patrick Thomas): “Intense heat and dry conditions are stressing U.S. agriculture, threatening corn, soybeans and other crops, as well as cattle herds. Scorching temperatures this past week have put swaths of the U.S., especially in the South and West, under excessive-heat warnings and advisories. The hot weather is hitting during an important period of the Midwest crop-growing season… The heat is also exacerbating longer-running drought conditions in parts of Kansas, Oklahoma, Texas and other states, risking harm to livestock, parching pastures and leading ranchers to spend more on supplemental feed for cattle.”
July 28 – Associated Press (Michael Biesecker and Helen Wieffering): “To the naked eye, the Mako Compressor Station outside the dusty West Texas crossroads of Lenorah appears unremarkable, similar to tens of thousands of oil and gas operations scattered throughout the oil-rich Permian Basin. What’s not visible through the chain-link fence is the plume of invisible gas, primarily methane, billowing from the gleaming white storage tanks up into the cloudless blue sky. The Mako station… was observed releasing an estimated 870 kilograms of methane – an extraordinarily potent greenhouse gas — into the atmosphere each hour. That’s the equivalent impact on the climate of burning seven tanker trucks full of gasoline every day. But Mako’s outsized emissions aren’t illegal, or even regulated. And it was only one of 533 methane ‘super emitters’ detected during a 2021 aerial survey of the Permian conducted by Carbon Mapper, a partnership of university researchers and NASA’s Jet Propulsion Laboratory.”
Geopolitical Watch:
July 25 – Reuters (Yimou Lee, Fabian Hamacher and Ann Wang): “Roads emptied and people were ordered to stay indoors in parts of Taiwan, including its capital Taipei, on Monday for an air-raid exercise as the island steps up preparations in the event of a Chinese attack. Sirens sounded at 1:30 p.m. for the mandatory street evacuation drills, which effectively shut towns and cities across northern Taiwan for 30 minutes. A ‘missile alert’, asking people to evacuate to safety immediately, was sent via text message.”
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