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Weekly Commentary: 2021 Year in Review

Weekly Commentary: 2021 Year in Review

Books will be written chronicling 2021. I’ll boil an extraordinary year’s developments down to a few simple words: “Things Ran Wild”. Covid ran wild. Monetary inflation ran wild. Inflation, in general, ran completely wild. Speculation and asset inflation ran really wild. More insidiously, mal-investment and inequality turned wilder. Extreme weather ran wild. Bucking the trend, confidence in Washington policymaking ran – into a wall.
Covid running wild. With the hope for vaccines and a waning pandemic, few anticipated the tragedy of more than 475,000 Covid deaths (exceeding 2020). As the year comes to its conclusion, we are shocked by daily new cases exceeding 500,000 – and two million for the week. Globally, daily cases exceed two million.

Inflation running wild. CPI surged 6.8% y-o-y in November, the strongest consumer price inflation since June 1982. Core PCE, the Fed’s favored inflation gauge, rose above 6% for the first time since 1983. Surging food and energy prices, in particular, punish those who can least afford it.

Monetary inflation running wild. Federal Reserve Credit expanded $1.391 TN over the past year, or 19%, to a record $8.742 TN. The Fed’s balance sheet inflated an astonishing $5.015 TN, or 135%, in the 120 weeks since QE was restarted in September 2019. Federal Reserve Assets have now inflated 10-fold since the mortgage finance Bubble collapse.

M2 “money” supply inflated another $2.478 TN (12 months through November) to a record $21.437 TN – with egregious two-year growth of $6.185 TN, or 40.6%. Bank Deposits surged $1.957 TN over the past year (12.1%), with two-year growth of $4.812 TN (36%). Money Fund Assets rose another $408 billion y-o-y, or 9.5%, to $4.70 TN. The myth that QE effects remain well contained within Treasury and securities markets has been debunked.

In the seven pandemic quarters through Q3 2021, Non-Financial Debt surged $9.183 TN, or 16.8%, in history’s greatest Credit expansion.
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Weekly Commentary: Just the Facts – December 24, 2021

Weekly Commentary: Just the Facts – December 24, 2021

For the Week:

The S&P500 rallied 2.3% (up 25.8% y-t-d), and the Dow rose 1.7% (up 17.5%). The Utilities were little changed (up 11.7%). The Banks gained 1.4% (up 34.1%), and the Broker/Dealers advanced 2.2% (up 29.5%). The Transports rose 2.3% (up 29.4%). The S&P 400 Midcaps jumped 2.5% (up 21.2%), and the small cap Russell 2000 surged 3.1% (up 13.5%). The Nasdaq100 advanced 3.2% (up 26.5%). The Semiconductors surged 4.6% (up 40.7%). The Biotechs increased 1.3% (down 1.6%). With bullion up $19, the HUI gold index jumped 2.5% (down 15.3%).

Three-month Treasury bill rates ended the week at 0.055%. Two-year government yields rose five bps to 0.69% (up 57bps y-t-d). Five-year T-note yields gained seven bps to 1.24% (up 88bps). Ten-year Treasury yields jumped nine bps to 1.49% (up 58bps). Long bond yields rose 10 bps to 1.91% (up 26bps). Benchmark Fannie Mae MBS yields gained six bps to 2.09% (up 74bps).

Greek 10-year yields jumped 13 bps to 1.32% (up 70bps y-t-d). Ten-year Portuguese yields gained 15 bps to 0.41% (up 38bps). Italian 10-year yields surged 22 bps to 1.11% (up 57bps). Spain’s 10-year yields jumped 17 bps to 0.51% (up 46bps). German bund yields gained 13 bps to negative 0.25% (up 32bps). French yields jumped 15 bps to 0.12% (up 46bps). The French to German 10-year bond spread widened two to 37 bps. U.K. 10-year gilt yields surged 17 bps to 0.93% (up 73bps). U.K.’s FTSE equities index gained 1.4% (up 14.1% y-t-d).

Japan’s Nikkei Equities Index increased 0.8% (up 4.9% y-t-d). Japanese 10-year “JGB” yields added two bps to 0.07% (up 5bps y-t-d). France’s CAC40 jumped 2.3% (up 27.7%). The German DAX equities index added 1.4% (up 14.9%). Spain’s IBEX 35 equities index rallied 3.0% (up 6.1%). Italy’s FTSE MIB index advanced 1.5% (up 21.5%). EM equities were mixed. Brazil’s Bovespa index fell 2.2% (down 11.9%), while Mexico’s Bolsa gained 0.9% (up 19.9%). South Korea’s Kospi index slipped 0.2% (up 4.8%). India’s Sensex equities index added 0.2% (up 19.6%). China’s Shanghai Exchange declined 0.4% (up 4.2%). Turkey’s Borsa Istanbul National 100 index sank 9.3% (up 28.1%). Russia’s MICEX equities index declined 0.6% (up 12.6%).

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Weekly Commentary: Trouble on the Horizon

Weekly Commentary: Trouble on the Horizon

November 19 – Reuters (Francois Murphy and Paul Carrel): “Austria will become the first country in western Europe to reimpose a full COVID-19 lockdown, it said on Friday as neighbouring Germany warned it may follow suit, sending shivers through financial markets worried about the economic fallout. Europe has again become the epicentre of the pandemic, accounting for half of global cases and deaths. A fourth wave of infections has plunged Germany, Europe’s largest economy, into a national emergency, Health Minister Jens Spahn said, warning that vaccinations alone will not cut case numbers.”
As desperately as we want to put Covid behind us, the irrepressible virus refuses to succumb. Germany reported a record 65,000 new infections Thursday. And, according to Bloomberg (Chris Reiter and Tim Loh), infections are now doubling every 12 days – a trajectory that if continued will overwhelm hospitals within weeks. “In Berlin, there were 79 intensive-care beds available for the city’s 3.8 million people on Friday, while in the northern port city of Bremen, there were just five beds for its 680,000 residents.”

Here at home, infections are on the rise again, as we head into colder weather and the holiday season. Friday from CNBC: “The U.S. reported a seven-day average of nearly 95,000 new Covid infections Thursday, up 31% over the past two weeks…” Outbreaks were up about 50% in two weeks in the Midwest and Northeast. My concern is elevated by fear of somewhat waning vaccine efficacy associated with the early vaccination push. I also suspect there will be less enthusiasm for booster shots. Reasons for optimism include natural immunities, Pfizer’s new antiviral pill, and a list of other encouraging treatments.

Meanwhile, I am not optimistic about the impact Europe’s Covid outbreak will have on the unfolding global financial crisis. Once again, Covid brandishes nefarious timing…

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Weekly Commentary: Losing Control

Weekly Commentary: Losing Control

Tesla’s market capitalization surpassed $1.1 TN this week, the first junk-rated company with a trillion-dollar valuation. Now the richest individual in the world, Elon Musk’s wealth this week reached a staggering $300 billion. The S&P500, Dow, Nasdaq100, and Nasdaq Composite ended the week at all-time highs. Microsoft retook the top spot as the world’s most valuable company.

October 29 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “U.S. equity funds attracted large inflows in the week to Oct. 27… According to Lipper data, U.S. equities funds attracted investments worth a net $12.99 billion, which were the largest since the week to Aug. 18.”

Plenty to divert attention away from critical global market developments. Ominous Bond Market Convulsions.

October 28 – Reuters (Wayne Cole): “Australia’s central bank on Friday lost all control of the yield target key to its stimulus policy as bonds suffered their biggest shellacking in decades and markets howled for rate hikes as soon as April. An already torrid week for debt got even worse when the Reserve Bank of Australia (RBA) again declined to defend its 0.1% target for the key April 2024 bond, even though its yield was all the way up at 0.58%. Scenting capitulation, speculators sent the yield sky-rocketing to 0.75% while yields on three-year bonds recorded their biggest monthly increase since 1994. All eyes were now on the RBA’s policy meeting on Nov. 2 where investors were wagering it would call time on yield curve control (YCC) and its guidance of no rate rises until 2024.”

October 29 – Financial Times (Hudson Lockett and Tabby Kinder): “The Reserve Bank of Australia declined to defend its bond-yield target, a pillar of its quantitative easing programme, unleashing what one trader described as ‘carnage’ in the country’s sovereign bond market…
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Weekly Commentary: A True Central Banker

Weekly Commentary: A True Central Banker

Who can blame him? Certainly not me.

October 20 – Financial Times (Martin Arnold and Guy Chazan): “Jens Weidmann has decided to step down after a decade as head of Germany’s central bank, only weeks after the country’s general election and shortly before a crucial decision on the future of eurozone monetary policy. The president of the Bundesbank has been one of the most vocal critics of the ultra-loose monetary policy pursued by the European Central Bank, where he fought an often lonely battle against its bond buying and negative interest rate policies. The 53-year-old said… he was leaving for ‘personal reasons’. But colleagues said he was tired of opposing ECB policies and expected these frustrations to increase as the economy recovers, inflation rises and the ECB’s generous stimulus becomes harder to justify.”

Jens Weidmann fought the good fight – a superior intellectual warrior overwhelmed by the onslaught of rank inflationism. He is a statesman in an age of few, a too often lone voice for sanity in a world of monetary absurdity. The foundation of Weidmann’s analytical framework rests on the profound importance of two simple words (you won’t hear uttered by a U.S. central banker): “stable money.”

Weidmann’s plight is testament to why virtually every central banker falls in line. From the FT: “Labelled by former ECB president Mario Draghi as nein zu allem, no to everything, Weidmann articulated the view of monetary hawks…” While Weidmann resigns with scant fanfare, inflationist extraordinaire “Super Mario” governs as Italy’s Prime Minister. As for U.S. inflationism luminaries, while it’s unclear if Ben Bernanke still collects millions from lunch dates and appearances ($250k for 40 minutes in Abu Dhabi! ), collaborator Janet Yellen runs the U.S. Treasury.

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Weekly Commentary: Controllable

Weekly Commentary: Controllable

Now that was wild. Let’s start with the Chinese developers. Indicative of the more troubled companies, Kaisa Group bond yields surged to almost 51% in Wednesday trading, up from 36% to begin the week (20% to start the month). Yields closed the week at 44.7%. After beginning the week at 23.3% (October at 16.6%), Yuzhou Group bond yields surged to almost 38% in Thursday trading, before reversing sharply lower to end Friday’s session at 27.7%. China Aoyuan yields began the week at 16.6%, jumped to almost 20% on Thursday, but were back down to 17% by week’s end. Evergrande yields ended the week at 75%. Acute instability for bonds of a sector that, according to Nomura analysts, has accumulated a frightening $5 TN of debt.

An index of Chinese dollar developer bonds began the week with yields of 17.5%, up from 14.4% to begin the month and 10% back in July. Yields closed Thursday trading at a record 20%, before ending the week at 19.3%.

Ample volatility as well in the cost of insuring against default for the major Chinese banks. China Development Bank CDS surged 10 Monday to 77 bps, up from 43 bps points at the beginning of September to the highest level since the pandemic crisis. China Development Bank CDS then reversed sharply lower, ending the week down at 62 bps. Industrial and Commercial Bank of China CDS traded to 78 bps (high since April ’20), up from 48 on September 17, before closing out the week at 76 bps. China Construction Bank traded to a post-pandemic high 75 bps (ended week at 74), after beginning the year at 36 bps.

It’s been a wild ride for China’s sovereign CDS. After beginning October at 47, China CDS closed last week (10/8) at 52.5 bps.

…click on the above link to read the rest of the article…

Weekly Commentary: Contagion

Weekly Commentary: Contagion

Another big miss for non-farm payrolls, with September’s 194,000 jobs gain less than half the 500,000 forecast. But with the Unemployment Rate down to 4.8% and Average Hourly Earnings up 4.6% y-o-y (not to mention almost 11 million job openings), there’s ample evidence that much of the labor market has turned exceptionally tight. The Senate passed debt ceiling legislation that should kick the can until early December. But let’s skip immediately to the week’s pressing developments.

It’s turning into a debacle. Evergrande bonds ended the week at 20 cents on the dollar, with yields surging to 72.5%. China’s real estate sector was hammered this week following the surprise default by mid-sized developer Fantasia Holdings.

October 6 – Bloomberg (Rebecca Choong Wilkins): “China’s property industry has suffered its first default on a dollar bond since China Evergrande Group sank deeper into crisis in recent weeks, fueling investor concerns over other highly leveraged borrowers and about global contagion. Fantasia Holdings Group Co., which develops high-end apartments and urban renewal projects, failed to repay a $205.7 million bond that came due Monday. That prompted a flurry of rating downgrades late Tuesday to levels signifying default. Creditors are now scanning debt repayment calendars as they try to suss out where the next flashpoints across the increasingly strained property industry may be — nearly a dozen firms have debt maturing through early 2022.”

October 7 – Wall Street Journal (Frances Yoon and Quentin Webb): “Fantasia’s nonpayment surprised investors because the… developer had recently said it had no liquidity issues, and indicated it had enough cash to repay the outstanding amount on a five-year dollar bond it issued in 2016. Fantasia, like Evergrande, was an active issuer of high-yield dollar bonds in the last few years…

…click on the above link to read the rest of the article…

Weekly Commentary: Dangerous Addiction

Weekly Commentary: Dangerous Addiction

July 20 – Reuters (Karen Pierog): “Risk-off sentiment that drove Monday’s sell-off on Wall Street and rally in U.S. Treasuries widened credit spreads on corporate bonds to multi-month highs. The spread on the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, spiked from 318 bps on Friday to 344 bps as of the last update late Monday, its highest level since late March, according to Refinitiv data. It was also the biggest widening in a day since last June.”
The S&P500 dropped 1.6% in Monday trading, as U.S. stocks followed global equities lower. The VIX Index spiked to 25, a two-month high, while 10-year Treasury yields dropped to a five-month low 1.17%. Germany’s DAX and France’s CAC 40 indices sank 2.6% and 2.5% – to lows since May. Hong Kong’s Hang Seng Index fell another 1.8%, with the Hang Seng China Financials Index trading this week at an eight-month low. Global “Risk Off” was gathering momentum.

July 20 – Bloomberg: “Fresh signs of a cash crunch at China Evergrande Group sent shares and bonds of the world’s most indebted developer to new lows on Tuesday, stoking fears of broader market contagion. The property giant’s stock tumbled to the lowest level since April 2017, extending its two-day loss to 25%. Several of Evergrande’s local and offshore bonds sank to records, with its dollar note due 2025 falling to as low as 54 cents. Bonds of other junk-rated Chinese borrowers declined, while a gauge of developer shares dropped to a nearly three-year low. The nation’s bank stocks also slumped.”

July 20 – Bloomberg (Rebecca Choong Wilkins and Alice Huang): “Rising concerns over the financial health of China Evergrande Group are weighing down the broader market of high-yield bonds as contagion fears rise…
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Weekly Commentary: Under Fire

Weekly Commentary: Under Fire

The week had an ominous feel. Ten-year Treasury yields dropped another seven bps to 1.29% – completely disregarding much stronger-than-expected reports on consumer and producer prices. German bund yields fell another six bps to a three-month low negative 0.35%. Equities were down for the week in Europe, but the notable equities weakness was posted by the broader U.S. market. The Midcaps dropped 3.3%, and the small cap Russell 2000 sank 5.1%. Risk aversion typically leaves its initial mark at the “Periphery.”
Treasury market notwithstanding, inflation has become a problem in more ways than one. Consumer Prices (CPI) jumped 0.9% in June, versus expectations of a 0.5% increase. Year-over-year CPI was up 5.4% (expectations 4.9%), the strongest jump since 2008. And for analysts with issues with year-over-year “base-effects”, consumer inflation was up 3.3% in only five months. Core CPI also gained 0.9% for the month, with a 4.5% y-o-y increase. Producer Prices rose a data series record 7.3% y-o-y. Import Prices jumped 1% for the month and 11.2% y-o-y. University of Michigan one-year Inflation Expectations rose to 4.8%, the high since the summer of 2008. Also, at 4.8%, the New York Fed’s survey of one-year inflation expectations jumped to the highest level in data back to 2013.

To this point, inflation has not been an issue for the markets. It has become a problem for millions of Americans. For the institution of the Federal Reserve, it’s a metastasizing malignancy.

I understand why each Fed official sticks tightly with the party line “inflation will be transitory.” They don’t want to rattle the markets with thoughts of a traditional tightening cycle. And I think I understand why they adopted their framework aiming for a period of above target inflation – and why they swore off responding to incipient inflationary pressures. Again, they sought to retain flexibility to remain highly accommodative monetary policy, ensuring financial conditions would remain exceptionally loose (and markets high).
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Weekly Commentary: Just the Facts – May 21, 2021

Weekly Commentary: Just the Facts – May 21, 2021

For the Week:
The S&P500 slipped 0.4% (up 10.6% y-t-d), and the Dow declined 0.5% (up 11.8%). The Utilities added 0.4% (up 4.7%). The Banks fell 1.0% (up 35.1%), and the Broker/Dealers declined 1.2% (up 22.6%). The Transports sank 2.8% (up 23.7%). The S&P 400 Midcaps dropped 1.2% (up 16.6%), and the small cap Russell 2000 dipped 0.4% (up 12.2%). The Nasdaq100 was little changed (up 4.1%). The Semiconductors rallied 2.4% (up 9.2%). The Biotechs gained 0.5% (down 2.5%). With bullion surging $38, the HUI gold index jumped 4.4% (up 6.9%).

Three-month Treasury bill rates ended the week at negative 0.0025%. Two-year government yields added a basis point to 0.15% (up 3bps y-t-d). Five-year T-note yields increased one basis point to 0.82% (up 46bps). Ten-year Treasury yields declined a basis point to 1.62% (up 71bps). Long bond yields declined two bps to 2.32% (up 67bps). Benchmark Fannie Mae MBS yields were unchanged at 1.86% (up 52bps).

Greek 10-year yields sank nine bps to 0.97% (up 35bps y-t-d). Ten-year Portuguese yields declined four bps to 0.56% (up 53bps). Italian 10-year yields fell four bps to 1.03% (up 49bps). Spain’s 10-year yields declined three bps to 0.555% (up 51bps). German bund yields were unchanged at negative 0.13% (up 44bps). French yields dipped two bps to 0.25% (up 58bps). The French to German 10-year bond spread narrowed about two to 38 bps. U.K. 10-year gilt yields fell three bps to 0.83% (up 63bps). U.K.’s FTSE equities index declined 0.4% (up 8.6% y-t-d).

Japan’s Nikkei Equities Index rallied 0.8% (up 3.2% y-t-d). Japanese 10-year “JGB” yields dipped a basis point to 0.08% (up 6bps y-t-d). France’s CAC40 was unchanged (up 15.0%). The German DAX equities index was little changed (up 12.5%). Spain’s IBEX 35 equities index gained 0.6% (up 14.0%). Italy’s FTSE MIB index rose 0.8% (up 12.3%). EM equities were mostly higher. Brazil’s Bovespa index added 0.6% (up 3.0%), and Mexico’s Bolsa advanced 1.1% (up 13.0%). South Korea’s Kospi index was little changed (up 9.8%). India’s Sensex equities index surged 3.7% (up 5.8%). China’s Shanghai Exchange was about unchanged (up 0.4%). Turkey’s Borsa Istanbul National 100 index gained 0.7% (down 1.7%). Russia’s MICEX equities index increased 0.6% (up 11.3%).
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Weekly Commentary: Un-Anchored

Weekly Commentary: Un-Anchored

A big week on the inflation front.

April CPI was reported up 0.8% versus estimates of 0.2%. And while the 4.2% y-o-y increase was partly a function of the year ago negative CPI prints, it’s worth noting CPI was up 2.1% over just the past four months. “Core” CPI increased a much stronger than expected 0.9% for the month and was up 3.0% year-over-year. Used car and truck prices surged 10.0%, with air fares up 10.2%. The CPI’s Housing component increased 0.5% for the month, while gaining only 2.6% y-o-y.

Producer Prices were also stronger than expected. At 0.6%, April’s increase was double estimates. The 6.2% y-o-y increase was above the 5.8% estimate – and the strongest price advance in the data series dating back to November 2010. Producer Prices surged a notable 3.4% over the past four months.

April Import Prices were reported up 0.7% for the month. This pushed the y-o-y price increase to 10.6%, up from March’s 7.0% – to the strongest import price inflation since October 2011. Prices for Industrial Supplies jumped another 1.7%, this following March’s 5.2% surge.

The University of Michigan consumer survey’s One-Year Inflation Expectations component jumped to 4.6% from April’s 3.4%. Inflation Expectations have not been higher since June 2008’s 5.1%. It’s worth noting WTI Crude surged to $140 back in June ‘08, as aggressive Fed rate cuts (3.25 percentage points over eight months to 2.0%) fueled myriad speculative Bubble blow-offs. This month’s UofM survey’s Five-Year Inflation Expectations jumped from 2.7% to 3.1%, the high since March 2011.

“Higher Inflation Prompts Sharp Drop in Michigan Sentiment,” read the Bloomberg headline. Unexpectedly, Consumer Sentiment dropped to 82.8 in May from April’s 88.3, the weakest reading since February. The Current Economic Conditions component sank 6.4 points to 90.8. Elsewhere, April Retail Sales badly missed estimates.
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Weekly Commentary: Generational Turning Point

Weekly Commentary: Generational Turning Point

There is an overarching issue I haven’t been able to get off my mind: Are we at the beginning of something new or in the waning days of the previous multi-decade cycle?

May 5 – Wall Street Journal (James Mackintosh): “We could be at a generational turning point for finance. Politics, economics, international relations, demography and labor are all shifting to supporting inflation. After more than 40 years of policies that gave priority to the fight against rising prices, investor- and consumer-friendly solutions are becoming less fashionable, not only in the U.S. but in much of the world. Investors are woefully unprepared for such a shift, perhaps because such historic turning points have proven remarkably hard to spot. This may be another false alarm, and it will take many years to play out, but the evidence for a general shift is strong across five fronts.”

The “five fronts” underscored in Mr. Mackintosh’s insightful piece are as follows: 1) “Central banks, led by the Federal Reserve, are now less concerned about inflation.” 2) “Politics has shifted to spend even more now, pay even less later.” 3) “Globalization is out of fashion.” 4) “Demographics worsen the situation.” 5) “Empowered labor puts upward pressure on wages and prices.”

The analysis is well-founded, as is the article’s headline: “Everything Screams Inflation.” After surging another 3.7% this week (lumber up 12%, copper 6%, corn 9%), the Bloomberg Commodities Index has already gained 20% this year. Lumber enjoys a y-t-d gain of 93% – WTI Crude 34%, Gasoline 51%, Copper 35%, Aluminum 26%, Steel Rebar 32%, Corn 51%, Soybeans 22%, Wheat 19%, Coffee 18%, Sugar 13%, Cotton 15%, Lean Hogs 59%… The focus on inflation is clearly justified. Yet Mackintosh began his article suggesting a “Generational Turning Point for finance” – rather than inflation. Let’s explore…

I mark the mid-eighties as the beginning of the current super-cycle. A major collapse in market yields (following the reversal of Paul Volcker’s tightening cycle) promoted financial innovation and the expansion of non-bank Credit expansion.

…click on the above link to read the rest of the article…

Weekly Commentary: Peak Monetary Stimulus

Weekly Commentary: Peak Monetary Stimulus

Not again. Bloomberg is referring to “the bond market riddle.” The Financial Times went with the headline, “US Government Bond Investors Left Bewildered by ‘Bonkers’ Market Move.” It’s been three weeks of declining Treasury yields in the face of robust economic data (and surging commodities prices!). Too soon to be discussing a new “conundrum,” but I am finding the various explanations of Treasury market behavior interesting – if not convincing.

Treasury market sentiment had turned negative. A decent short position had developed, and it’s perfectly reasonable to expect the occasional squeeze. Squeezes, after all, have become commonplace throughout the markets. But could there be something more fundamental unfolding?

Over the years, I’ve relied upon a “Core vs. Periphery” model of market instability as a key facet of my analytical framework. Instability and financial crises typically emerge at the “periphery” – at the fringe where the structurally weakest and most vulnerable to risk aversion and tightening financial conditions – reside. I believe this dynamic is already in play for the global Bubble, with the emerging markets earlier in the year experiencing an opening round of instability. Are we in the “quiet” before the next EM storm?

The dog that didn’t bark. Ten-year Treasury yields are down 18 bps this month. Meanwhile, the dollar index dropped 2.5% to a six-week low. Why haven’t the emerging markets mustered a more impressive rally, especially considering the degree of bearish sentiment that had developed? Could this be as good as it gets? The week’s developments lent support to the latent fragility at the “Periphery” thesis. Are central bank responses to liquidity overabundance and mounting inflationary pressures an escalating risk to fragile EM Bubbles?
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Weekly Commentary: Powell on Inflation

Weekly Commentary: Powell on Inflation

The Treasury yield spike runs unabated. Ten-year Treasury yields rose another 10 bps this week to 1.72%, the high since January 23, 2020. The Treasury five-year “breakeven” inflation rate rose to 2.65% in Tuesday trading, the high since July 2008. The Philadelphia Fed’s Business Survey Prices Paid Index surged to a 41-year-high. In the New York Fed’s Manufacturing Index, indices of Prices Paid and Received both jumped to highs since 2011.
While crude oil’s notable 6.4% decline for the week spurred a moderate pullback in market inflation expectations (i.e. “breakeven rates”), this did not translate into any relief in the unfolding Treasury bear market.

Chairman Powell was widely lauded for his adept handling of Wednesday’s post-FOMC meeting press conference. He was well-prepared and could not have been more direct: The Federal Reserve will not anytime soon be contemplating a retreat from its ultra-dovish stance. It was music to the equities mania, as the Dow gained 190 points to trade above 33,000 for the first time. Treasury yields added a couple bps, but without any of the feared fireworks. Markets were breathing a sigh of relief.

Labored breathing returned Thursday. Ten-year Treasury yields spiked another 10 bps, trading above 1.75% for the first time since January 2020. And after trading as low as 0.76% during Powell’s press conference, five-year Treasury yields spiked to almost 0.90% in increasingly disorderly Thursday trading. The Nasdaq100 was slammed 3.1%, with the S&P500 sinking 1.5%.

The Treasury market would really like to take comfort from the Fed’s steadfast dovishness. It’s just been fundamental to so much. It’s worked incredibly well for so long. Not now. This raises a critical issue: Paradigm shift? Regime change? What’s driving Treasury yields these days? What is the bond market fearing? If it’s inflation, is Fed dovishness friend or foe?

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credit bubble bulletin, doug noland, inflation, price inflation, fed, us federal reserve, jerome powell

Weekly Commentary: Regime Change

Weekly Commentary: Regime Change

Ten-year Treasury yields closed out a tumultuous week at 1.41% bps, pulling back after Thursday’s spike to a one-year high 1.61%. Ten-year Treasury yields are now up 49 bps from the start of the year and almost 100 bps (1 percentage point) off August 2020 lows. More dramatic, five-year yields jumped 16 bps this week to 0.73%.

Surging yields are a global phenomenon. Ten-year yields were up 12 bps in Canada (to 1.35%), 30 bps in Australia (1.90%), 28 bps in New Zealand (1.89%), five bps in Germany (-0.26%), and five bps in Japan (0.16%) – with Japanese JGB yields hitting a five-year-high.

“Periphery” bond markets were under intense pressure, Europe’s and EM. Greek yields surged 22 bps to 1.11%, while Italian yields rose 14 bps to 0.76%. EM dollar bonds were bloodied. Yields were up 31 bps in Turkey (5.90%), 28 bps in the Philippines (5.90%), 25 bps in Peru (2.39%), 23 bps in Indonesia (2.57%), 16 bps in Qatar (2.14), 16 bps in Ukraine (6.95%), and 16 bps in Mexico (2.92%). Local currency bonds were walloped. Yields were up 125 bps in Lebanon, 31 bps in Brazil, 29 bps in Colombia, 27 bps in Romania, 19 bps in Poland, and 17 bps in Hungary.

Global bond markets have an inflation problem. The international central bank community has an inflation problem. Perhaps Treasuries and the Fed face the biggest challenge in managing around mounting inflationary risks.

The U.S., after all, is running unprecedented peacetime deficits, with a new $1.9 TN stimulus package scooting through Congress. This legislation will be followed by what is sure to be a major infrastructure program. There is literally colossal deficits and Treasury issuance as far as the eye can see.

February 23 – Bloomberg (Gerson Freitas Jr.): “Commodities rose to their highest in almost eight years amid booming investor appetite for everything from oil to corn…
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Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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