SOURCE:
by Doug Noland
Following is my edited easy to read version
Ye Editor
For the Week Ending August 5, 2022:
S&P500 increased 0.4% (down 13.0% y-t-d)
The Dow was little changed (down 9.7%).
Utilities added 0.9% (up 3.3%).
Banks were about unchanged (down 17.9%)
Broker/Dealers surged 4.1% (down 7.3%).
Transports were little changed (down 11.4%)
S&P 400 Midcaps slipped 0.3% (down 11.9%)
Small cap Russell 2000 rose 1.9% (down 14.4%)
Nasdaq100 gained 2.0% (down 19.1%)
Semiconductors jumped 2.9% (down 22.6%)
Biotechs surged 6.5% (down 7.6%).
While bullion gained $10,
the HUI gold stock index
declined 1.3% (down 20.9%).
Three-month Treasury bill rates ended the week at 2.4225%.
Two-year government yields surged 34 bps to 3.23% (up 249bps y-t-d).
Five-year T-note yields jumped 28 bps to 2.96% (up 169bps).
Ten-year Treasury yields rose 18 bps to 2.83% (up 132bps).
Long bond yields gained six bps to 3.07% (up 117bps).
Benchmark Fannie Mae MBS yields
surged 32 bps to 4.14% (up 207bps).
U.K.'s FTSE added 0.2% (up 0.7% y-t-d)
U.K.'s FTSE added 0.2% (up 0.7% y-t-d)
Japan's Nikkei gained 1.3% (down 2.1% y-t-d).
France's CAC40 increased 0.4% (down %)
German DAX gained 0.7% (down 14.5%).
Spain's IBEX 35 little changed (down 6.3%).
Italy's FTSE MIB increased 0.8% (down 17.4%)
Brazil's Bovespa jumped 3.2% (up 1.6%)
Mexico's Bolsa dropped 3.0% (down 12.3%).
South Korea's Kospi advanced 1.6% (down 16.4%).
India's Sensex gained 1.4% (up 0.2%).
China's Shanghai declined 0.8% (down 11.3%).
Turkey's Istanbul National 100 jumped 6.1% (up 48.1%).
Russia's MICEX sank 7.2% (down 45.8%).
Federal Reserve Credit last week declined $18.3bn to $8.847 TN.
Federal Reserve Credit last week declined $18.3bn to $8.847 TN.
Fed Credit is down $53.1bn from the June 22nd peak.
Over the past 151 weeks, Fed Credit expanded $5.121 TN, or 137%. o-y.
Freddie Mac 30-year fixed mortgage rates
Freddie Mac 30-year fixed mortgage rates
dropped 31 bps to a 17-week low 4.99% (up 222bps y-o-y).
Fifteen-year rates
sank 32 bps to 4.26% (up 216bps).
Five-year hybrid ARM rates
declined four bps to 4.25% (up 184bps).
Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 17 bps to 5.38% (up 241bps).
For the week, the U.S. Dollar Index gained 0.7% to 106.62
For the week, the U.S. Dollar Index gained 0.7% to 106.62
(up 11.4% y-td).
The Chinese (onshore) renminbi declined 0.26% versus the dollar
(down 6.0% y-t-d).
Bloomberg Commodities Index dropped 3.3% (up 18.8% y-t-d).
Spot Gold increased 0.5% to $1,776 (down 2.9%).
Silver fell 2.3% to $19.90 (down 14.6%).
WTI crude sank $9.61 to $89.01 (up 18%).
Gasoline slumped 8.3% (up 28%)
Natural Gas declined 2.0% to $8.06 (up 116%).
Copper slipped 0.6% (down 20%).
Wheat sank 4.0% (up 1%)
Corn declined 1.6% (up 3%).
Bitcoin declined $520, or 2.2%, this week
to $23,260 (down 49.8%).
DOUG NOLANDS COMMENTARY
(highly edited)
Meanwhile, China’s crisis took a turn for the worse. During the week of July 11 to 15, the Bloomberg China Real Estate Developers Index sank 10%, with Country Garden collapsing 27%. Country Garden bond yields surged 11.5 percentage points to a record 41.0%. China’s CSI 300 Bank Index sank 7.7%, the largest weekly loss since 2018. Chinese bank and sovereign CDS spiked higher, as fears mounted that China’s developer crisis was rapidly turning systemic.
After trading to 3.48% on June 14th, 10-year Treasury yields were all the way down to 2.58% by August 1st.
August 2 – MarketWatch (Andrew Keshner): “Americans added $312 billion in debt during the second quarter -- an increase that New York Fed researchers called 'pretty sizable.' In a sign of the continuing toll from decades-high inflation, Americans loaded an extra $46 billion on their credit cards during the second quarter and their balances saw the sharpest increase in more than 20 years, according to the Federal Reserve Bank of New York. Credit card debts grew 5.5% from the first to second quarter and 13% year-over- year. The annualized increase was the sharpest cumulative increase in more than two decades…”
This year began with the strongest growth in household borrowings since 2006 (Q1 8.3% annualized). An inflationary economic backdrop develops powerful self-sustaining momentum, where rising prices spur strong Credit growth – the requisite monetary fuel for only higher prices.
I can't accept that collapsing Chinese Bubbles and such a belligerent approach with Taiwan are coincidental.
Bursting Bubble and Mania Watch:
July 31 – Financial Times (Richard Waters): “The venture capital world is in the grip of a silent crash. Unlike the stock market, there are no daily market indices to broadcast the pain, and no individual share prices for anxious tech employees to watch as their personal wealth evaporates. In fact, for many of the investors and entrepreneurs who have just lived through a historic boom in venture investing, it is even possible to pretend a crash isn’t happening at all. Loose rules that require only sporadic writedowns, the estimated value of private companies, have made it easy for many to turn the other way. Josh Wolfe, co-founder of Lux Capital, likens the response to ‘the classic five stages of grief’. ‘We’re probably somewhere between anger and bargaining,’ he says… Yet investors and company founders, Wolfe adds, are still resisting the full implications of a market downturn that will have a profound effect on the start-up economy.”
July 31 – Bloomberg (Jacqueline Poh): “The number of companies that have delayed or canceled financing plans has soared to at least 358 as the global economy continues to battle inflation and energy shortages. The deals, including initial public offerings, bonds, loans and acquisitions, amount to more than $254 billion. The Americas saw the highest number of transactions being postponed or shelved at 184, which was more than double the tally for other regions… The high Americas’ numbers were due to a slowdown in its equity market with 136 IPOs pulled since January, making up two-thirds of total listings shelved for the year globally.”
August 2 – Yahoo Finance (David Hollerith): “Hackers drained nearly $200 million from crypto bridge project Nomad in the latest crypto-related theft. In a matter of two hours on Monday evening, the total value of crypto assets held on Nomad dropped from $190.3 million to $11,815 as of early Tuesday...”
China/Taiwan/U.S. Watch:
August 4 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “China fired a series of ballistic missiles into waters close to ports in Taiwan and conducted other military drills on Thursday, in an attempt to punish the country for hosting a visit by US House Speaker Nancy Pelosi. Taiwan’s defence ministry said China fired 11 Dongfeng missiles between 1.56pm and 4pm towards waters north, north-east, south and east of Taiwan, in an ‘irrational action destroying regional peace’. The Dongfeng ballistic missiles are some of the People’s Liberation Army’s most potent weapons. They include the anti-ship intermediate range DF-21, which is viewed as a tool for deterring the US Navy and its aircraft carrier strike groups… Taipei also said four drones had flown over islets next to Kinmen, the Taiwan-controlled island just off the Chinese coastal city of Xiamen…”
August 5 – Reuters (Tony Munroe): “China is halting cooperation with the United States in a number of areas, including dialogue between senior-level military commanders and climate talks, in retaliation for House Speaker Nancy Pelosi's visit to Taiwan... China's foreign ministry also said that it was also suspending cooperation with Washington on prevention of cross-border crime and drug trafficking, andon repatriating illegal migrants, among eight specific measures… China also cancelled a planned bilateral meeting on a maritime military security mechanism. Beijing separately announced that it would personally sanction Pelosi and her immediate family in response to her ‘vicious’ and ‘provocative" actions.’”
Economic War/Iron Curtain Watch:
August 1 – Reuters (Natalia Zinets): “The first ship to carry Ukrainian grain through the Black Sea since Russia invaded Ukraine five months ago left the port of Odesa for Lebanon on Monday under a safe passage deal described as a glimmer of hope in a worsening global food crisis. The sailing was made possible after Turkey and the United Nations brokered a grain and fertiliser export agreement between Russia and Ukraine last month - a rare diplomatic breakthrough…”
August 2 – Financial Times (Kathrin Hille and William Langley): “China has blocked imports from hundreds of Taiwanese food producers and temporarily suspended exports of natural sand to the country in what Taipei perceives as the opening shot in a campaign to punish it economically for a visit by US House Speaker Nancy Pelosi. Since Monday night, when US and Taiwanese officials confirmed that Pelosi would travel to Taiwan to meet President Tsai Ing-wen…, the China Customs Administration has suspended imports of more than 2,000 of about 3,200 food products from Taiwan. Beijing has a long history of punishing other countries for behaviour it dislikes by cutting them off from its market and has made extensive use of such levers against Taiwan. But analysts and government officials said the move was a huge expansion of such economic warfare.”
Inflation Watch:
August 1 – Reuters (Elizabeth Dilts Marshall): “As high inflation forces Americans to spend more on gas and bills, young and low-income consumers are starting to feel financial pressure. Generation Z consumers and those with low credit scores are falling behind on credit card and auto loan bills and accumulating credit card debt at a pace not seen since before the pandemic. For instance, credit card balances for people ages 25 and younger rose by 30% in the second quarter from a year earlier, compared with an increase of just 11% among the broader population, according to… VantageScore. Balances for non-prime borrowers, or people with credit scores below 660, rose by nearly 25% over the same period.”
U.S. Bubble Watch:
August 5 – Associated Press (Paul Wiseman): “Defying anxiety about a possible recession and raging inflation, America’s employers added a stunning 528,000 jobs last month, restoring all the jobs lost in the coronavirus recession. Unemployment fell to 3.5%, lowest since the pandemic struck in early 2020. July’s job creation was up from 398,000 in June and the most since February. The red-hot jobs numbers… arrive amid a growing consensus that the U.S. economy is losing momentum. The U.S. economy shrank in the first two quarters of 2022 — an informal definition of recession. But most economists believe the strong jobs market has kept the economy from slipping into a downturn.”
August 2 – Reuters (Lucia Mutikani): “U.S. job openings fell by the most in just over two years in June as demand for workers eased in the retail and wholesale trade industries, but overall the labor market remains tight… Despite the larger-than-expected decrease in vacancies reported by the Labor Department in its Job Openings and Labor Turnover Survey, or JOLTS report…, the jobs market still favors workers. At least 4.2 million workers voluntarily quit their jobs in June and layoffs declined… Job openings, a measure of labor demand, were down 605,000 to 10.7 million on the last day of June, the fewest since September 2021… June's decline was the largest since April 2020, when the economy was reeling from the first wave of the COVID-19 pandemic.”
August 4 – CNBC (Jeff Cox): “Initial claims for unemployment insurance totaled 260,000 last week, near the highest level since November amid a shift in the U.S. labor market. The total for the week ended July 30 was in line with the Dow Jones estimate but a gain of 6,000 from the previous week’s downwardly revised level…”
August 2 – Bloomberg (Alex Tanzi): “US household debt increased by 2% to $16.2 trillion in the second quarter, with mortgages, auto loans and credit-card balances all seeing sizable increases, according to a report by the New York Federal Reserve Bank. The increase in borrowing, which equals to $312 billion over three months, reflected in part higher prices for homes and cars. Americans also are putting more on their credit cards to cover rising costs amid decades-high inflation. The main driver was mortgage debt, which accounted for two-thirds of the rise last quarter. And the 13% jump in credit-card debt year-over-year was the sharpest gain in more than 20 years…”
August 1 – CNBC (Diana Olick): “Rising mortgage rates and inflation in the wider economy caused housing demand to drop sharply in June, forcing home prices to cool down. Home prices are still higher than they were a year ago, but the gains slowed at the fastest pace on record in June, according to Black Knight… The annual rate of price appreciation fell two percentage points from 19.3% to 17.3%. Price gains are still strong because of an imbalance between supply and demand. The housing market has had a severe shortage for years. Strong demand during the coronavirus pandemic exacerbated it.”
August 1 – CNBC (Annie Nova): “The U.S. Department of Education is expected to lose close to $200 billion from federal student loans made over the last 25 years, due in part to pandemic-era relief pausing the bills for borrowers. Originally, the Education Department estimated these loans would generate around $114 billion in income; they will, however, actually cost the federal government $197 billion, according to the Government Accountability Office…”
China Watch:
August 2 – Reuters (Ellen Zhang and Ryan Woo): “China's services activity grew at the fastest rate in 15 months in July as easing COVID curbs boosted consumer confidence, but foreign demand fell and companies cut staff for the seventh month in a row… The Caixin services purchasing managers' index (PM) rose to 55.5 in July, the fastest growth since April 2021, rising further from the robust reading of 54.5 in June… A sub-index for new business soared to nine-month high, thanks to improved domestic demand, but new export business contracted for the seventh successive month, the Caixin survey showed.”
July 30 – Bloomberg: “China's factory activity contracted unexpectedly in July after bouncing back from COVID-19 lockdowns the month before, as fresh virus flare-ups and a darkening global outlook weighed on demand… The official manufacturing purchasing managers' Index (PMI) fell to 49.0 in July from 50.2 in June…, below the 50-point mark that separates contraction from growth and the lowest in three months.”
August 3 – Bloomberg: “In a country that only tolerates dissent in small doses—and relies on property as its economic growth engine—a mortgage boycott by hundreds of thousands of middle-class Chinese has become a five-alarm fire for authorities. It began with a 590-word letter penned by angry purchasers of the half-built Dynasty Mansion project, whose pleas for China Evergrande Group to complete homes they’d long been paying for had fallen on deaf ears. ‘All homebuyers with outstanding mortgage loans will stop paying,’ unless construction resumes before Oct. 20, they threatened. The ultimatum raced across social media platforms WeChat and Douyin, becoming a call to action for those caught out by China’s rapidly deflating property bubble. In days, the letter became a template for protests from Shanghai to Beijing, and Shenzhen to Zhengzhou, with homeowners cutting and pasting from it to draft their own boycott manifestos. Within four weeks, more than 320 projects in about 100 cities were facing similar protests, roiling markets and forcing authorities to corral banks and developers to defuse the unrest.”
July 31 – Bloomberg: “China’s banks face mortgage losses of $350 billion in a worst-case scenario as confidence plunges in the nation’s property market and authorities struggle to contain deepening turmoil. A spiraling crisis of stalled projects has dented the confidence of hundreds of thousands of homebuyers, triggering a mortgage boycott across more than 90 cities and warnings of broader systemic risks. The big question now is not if, but how much it will batter the nation’s $56 trillion banking system. In a worst-case scenario, S&P Global Ratings estimated that 2.4 trillion yuan ($356bn), or 6.4% of mortgages, are at risk while Deutsche Bank AG is warning that at least 7% of home loans are in danger.”
August 1 – Wall Street Journal (Rebecca Feng): “Embattled property developer China Evergrande Group said one of its units has been told to honor a $1.1 billion guarantee, revealing yet another large financial obligation that wasn’t previously disclosed. Evergrande… said one of its subsidiaries in China had provided counter guarantees to an unnamed entity by pledging its shares in Shengjing Bank Co., a regional lender based in the city of Shenyang…”
Central Banker Watch:
August 4 – Reuters (William Schomberg and David Milliken): “The Bank of England raised interest rates by the most in 27 years on Thursday, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13%. Reeling from a surge in energy prices caused by Russia's invasion of Ukraine, the BoE's Monetary Policy Committee voted 8-1 for a half percentage point rise in Bank Rate to 1.75% - its highest level since late 2008 - from 1.25%... MPC member Silvana Tenreyro cast a lone vote for a smaller 25-bps increase. The BoE warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1%...”
Europe Watch:
August 3 – Financial Times (Olaf Storbeck): “A serious shortage of natural gas supplies could trigger ‘a chain reaction with unforeseeable consequences’ for the German economy, said Commerzbank, one of the country’s biggest corporate lenders. The German bank warned… of a ‘severe recession’ in the country if Russia cuts off gas supplies, saying it could trigger an economic crisis similar ‘to the one that occurred after the financial crisis in 2009’. Commerzbank added that the rationing of gas would then ‘probably be inevitable’. Germany’s banks are particularly exposed to the huge increase in gas prices triggered by Russia’s move last month to sharply reduce supplies. Prior to Moscow’s invasion of Ukraine, Germany imported 55% of its natural gas from Russia…”
July 31 – Reuters (Miranda Murray and Rene Wagner): “German retailers ended the first half of 2022 with the sharpest year-on-year sales drop in nearly three decades, as inflation, the Ukraine war and the coronavirus pandemic take their toll… Retail sales in June decreased 8.8% in real terms compared with the same month last year, the biggest drop since the time series began in 1994…”
August 2 – Bloomberg (Jack Wittels and Kwaku Gyasz): “Water levels on the Rhine River are set to fall perilously close to the point at which it would effectively close, putting the trade of huge quantities of goods at risk as the continent seeks to stave off an economic crisis. The river at Kaub, Germany -- a key waypoint for the shipment of commodities -- is set to drop to 47 centimeters (18.5 inches) by the weekend. That would take it to within 7 centimeters of being all but impassable. Europe is already facing its worst energy-supply crunch in decades as Russia chokes off natural gas, stoking inflation. Now climate change is adding to the continent’s woes.”
Emerging Markets Crisis Watch:
August 3 – Bloomberg (Michelle Jamrisko, Faseeh Mangi, and Anusha Ondaatjie): “Pakistan is scrambling for a bailout to avert a debt default as its currency plummets. Bangladesh has sought a preemptive loan from the International Monetary Fund. Sri Lanka has defaulted on its sovereign debt and its government has collapsed. Even India has seen the rupee plunge to all-time lows as its trade deficit balloons. Economic and political turbulence is rattling South Asia this summer, drawing chilling comparisons to the turmoil that engulfed neighbors to the east a quarter century ago... Back then, what seemed like an isolated event—Thailand’s July 1997 baht devaluation to cope with currency speculation—spread like a virus to Indonesia, Malaysia, and South Korea. Panic-stricken lenders demanded early repayments, and investors pulled out of stocks and bonds in emerging markets, including in Latin America and Russia, which defaulted on some of its debt in August 1998. A month later hedge fund Long-Term Capital Management, which had made highly leveraged bets on Russian and Asian securities, buckled.”
August 3 – Bloomberg (Beril Akman): “Turkish inflation accelerated again and may be months away from peaking, soaring to levels unseen since 1998 as the central bank sticks with its ultra-loose monetary course. The upward march of consumer prices has already forced officials and economists to rewrite forecasts multiple times this year… Data… showed that annual inflation sped up to 79.6% last month from 78.6% in June... Istanbul, Turkey’s most populous city, saw price growth exceed 99% in July from a year earlier.”
Environmental Watch:
August 2 – Bloomberg (Pratik Parija and Vrishti Beniwal): “Rice could emerge as the next challenge for global food supply as a shortage of rain in parts of India, by far the world’s biggest exporter, has caused planting area to shrink to the smallest in about three years. The threat to India’s rice production comes at a time when countries are grappling with soaring food costs and rampant inflation. Total rice planted area has declined 13% so far this season due to a lack of rainfall in some areas… Traders are worried that a drop in rice production will complicate India’s inflation fight and trigger restrictions on exports. Such a move will have far-reaching implications for the billions of people that depend on the staple. India accounts for 40% of global rice trade…”
Levered Speculation Watch:
August 2 – Financial Times (Laurence Fletcher): “Hedge funds are heading for one of their worst years of performance on record, leaving investors frustrated with how many managers have failed to offset sharp falls in equity and bond markets. Funds were down 5.6% on average in the first six months of 2022, according to HFR. While a narrower HFR daily index of performance shows them clawing back around 0.5 per cent last month, the industry is nevertheless on track for its second-worst year of returns since 1990… — beaten only by steep losses during the 2008 global financial crisis. Much of the pain has been concentrated in so-called long-short equity funds, which manage around $1.2tn in assets… They dropped 12% on average in the first half of the year… The group was expected to have gained only around 1% in July, according to an estimate by JPMorgan…, a much shallower rebound than the 7% rally last month for global equities. ‘Clearly, in long-short equity it’s been a complete disaster,’ said Scott Wilson, chief investment officer… at Washington University in St Louis, Missouri, adding that some funds had given up years of gains in this year’s sell-off.”
Geopolitical Watch:
August 4 – Associated Press (Jon Gambrell): “Iranian officials now speak openly about something long denied by Tehran as it enriches uranium at its closest-ever levels to weapons-grade material: The Islamic Republic is ready to build an atomic weapon at will. The remarks could be bluster to force more bargaining-table concessions from the U.S. without planning to seek the bomb. Or, as analysts warn, Iran could reach a point like North Korea did some 20 years ago where it decides having the ultimate weapon outweighs any further international sanctions.”
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