For the Week:

The S&P500 rallied 4.3% (down 13.3% y-t-d), and the Dow rose 3.0% (down 9.6%). The Utilities surged 6.4% (up 2.4%). The Banks gained 2.1% (down 18.0%), and the Broker/Dealers recovered 4.8% (down 11.0%). The Transports advanced 5.8% (down 11.3%). The S&P 400 Midcaps rose 4.8% (down 11.6%), and the small cap Russell 2000 jumped 4.3% (down 16.0%). The Nasdaq100 rallied 4.4% (down 20.7%). The Semiconductors jumped 4.4% (down 24.8%). The Biotechs gained 1.5% (down 13.3%). With bullion rallying $38, the HUI gold index recovered 3.0% (down 19.9%).

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).

Greek 10-year yields sank 29 bps to 2.95% (up 163bps y-t-d). Ten-year Portuguese yields sank 35 bps to 1.84% (up 138bps). Italian 10-year yields fell 30 bps to 3.02% (up 185bps). Spain’s 10-year yields sank 34 bps to 1.92% (up 136bps). German bund yields dropped 21 bps to 0.82% (up 100bps). French yields fell 24 bps to 1.38% (up 118bps). The French to German 10-year bond spread narrowed three to 56 bps. U.K. 10-year gilt yields declined eight bps to 1.86% (up 99bps). U.K.’s FTSE equities index gained 2.0% (up 0.5% y-t-d).

Japan’s Nikkei Equities Index slipped 0.4% (down 3.4% y-t-d). Japanese 10-year “JGB” yields declined three bps to 0.19% (up 12bps y-t-d). France’s CAC40 % (down 1%). The German DAX equities index rose 1.7% (down 15.1%). Spain’s IBEX 35 equities index increased 1.3% (down 6.4%). Italy’s FTSE MIB index rallied 5.6% (down 18.1%). EM equities were strong. Brazil’s Bovespa index jumped 4.3% (down 1.6%), and Mexico’s Bolsa index rose 1.9% (down 9.6%). South Korea’s Kospi index gained 2.4% (down 17.7%). India’s Sensex equities index jumped 2.7% (down 1.2%). China’s Shanghai Exchange Index declined 0.5% (down 10.6%). Turkey’s Borsa Istanbul National 100 index added 3.0% (up 39.6%). Russia’s MICEX equities index rallied 5.6% (down 41.5%).

Investment-grade bond funds posted outflows of $2.442 billion, while junk bond funds reported inflows of $4.828 million (from Lipper).

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%. Fed Credit inflated $6.055 Trillion, or 215%, over the past 507 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $6.4bn to $3.359 TN. “Custody holdings” were down $156bn, or 4.4%, y-o-y.

Total money market fund assets increased $7.5bn to $4.590 TN. Total money funds were up $88bn, or 2.0%, y-o-y.

Total Commercial Paper dropped $20.6bn to $1.150 TN. CP was up $11bn, or 0.9%, over the past year.

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). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates sinking 39 bps to a 15-week low 5.21% (up 198bps).

Currency Watch:

July 25 – Bloomberg (Chester Yung): “A measure of Hong Kong’s interbank liquidity halved in the past two months, with analysts forecasting more cash drainage as the city’s de-facto central bank defends its currency. The Hong Kong Monetary Authority has bought a total HK$172 billion ($22bn) of local currency since May 11, shrinking the aggregate balance to about HK$165 billion. That has pushed up local interest rates, helping narrow the gap with the US to help the HKMA maintain its dollar peg. The intervention though is draining the city’s liquidity… That’s prompted the monetary authority to vehemently defend its currency policy last week.”

For the week, the U.S. Dollar Index declined 0.8% to 105.90 (up 10.7% y-t-d). For the week on the upside, the Brazilian real increased 6.3%, the Norwegian krone 2.7%, the Japanese yen 2.1%, the British pound 1.4%, the South African rand 1.2%, the Swiss franc 1.1%, the South Korean won 1.1%, the Canadian dollar 1.0%, the Australian dollar 0.8%, the Mexican peso 0.8%, the Swedish krona 0.7%, the Singapore dollar 0.6%, the New Zealand dollar 0.2% and the euro 0.1%. The Chinese (onshore) renminbi increased 0.10% versus the dollar (down 5.76% y-t-d).

Commodities Watch:

The 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%), and Natural Gas declined 0.8% to $8.23. (up 121%). Copper surged 6.7% (down 20%). Wheat rallied 6.4% (up 5%), and Corn spiked 9.9% (up 5%). Bitcoin gained $1,048, or 4.6%, this week to $23,780 (down 49%).

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.”

Ukraine War Watch:

July 28 – Washington Post (Liz Sly): “Russian advances in Ukraine have slowed almost to a standstill as newly delivered Western weapons help Ukrainian forces reclaim much of the advantage they had lost in recent months, opening a window of opportunity to turn the tide of the war in their favor again. Russian troops have made no significant territorial gains since the Ukrainian retreat on July 2 from the eastern city of Lysychansk under withering artillery fire. The retreat gave Russia full control over Luhansk, one of the two oblasts, or regions, that make up the broader eastern Donbas area, and it marked Russia’s only meaningful strategic success since its retreat from territory around Kyiv in April.”

July 28 – Bloomberg (Natalia Zinets): “Ukraine stepped up its drive to retake its Russian-controlled south by trying to bomb and isolate Russian troops in hard-to-resupply areas, but it said on Thursday it saw evidence that Moscow was redeploying its forces to defend the territory. In messages to mark the annual Day of Ukrainian Statehood, President Volodymyr Zelenskiy congratulated Ukrainians and sounded defiant. ‘We will not give up. We will not be intimidated. Ukraine is an independent, free, indivisible state. And it will always be so,’ he wrote on Telegram.”

U.S./Russia/China Watch:

July 27 – Reuters (Idrees Ali, David Brunnstrom and Michael Martina): “The United States… accused China of increased ‘provocations’ against rival claimants in the South China Sea and said its ‘aggressive and irresponsible behavior’ meant it was only a matter of time before a major incident or accident. Jung Pak, deputy assistant secretary for East Asia at the State Department, told a U.S. think tank there was ‘a clear and upward trend of PRC provocations against South China Sea claimants and other states lawfully operating in the region,’ referring to the People’s Republic of China.”

July 24 – Financial Times (Demetri Sevastopulo): “The US military’s top officer said China had become more aggressive in intercepting military aircraft and undertaking unsafe aerial manoeuvres over the past five years. General Mark Milley, chairman of the US joint chiefs of staff, said China was conducting ‘dangerous intercepts’ against American military aircraft and ships and was also targeting Canada, Australia, Japan and Washington’s other allies. ‘The number of Chinese intercepts at sea and in the air has increased significantly over five years,’ Milley told the Financial Times and The Associated Press…”

July 24 – Associated Press (Eric Wallerstein): “The Chinese military has become significantly more aggressive and dangerous over the past five years, the top U.S. military officer said during a trip to the Indo-Pacific… U.S. Gen. Mark Milley, chairman of the Joint Chiefs of Staff, said the number of intercepts by Chinese aircraft and ships in the Pacific region with U.S. and other partner forces has increased significantly over that time… ‘The message is the Chinese military, in the air and at sea, have become significantly more and noticeably more aggressive in this particular region,’ said Milley, who recently asked his staff to compile details about interactions between China and the U.S. and others in the region.”

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.”

Fixed-Income Bubble Watch:

July 27 – Bloomberg (Alexandra Harris, Liz Capo McCormick and Jack Pitcher): “Blue-chip companies that need to borrow in the US now are increasingly relying on commercial paper to avoid locking in longer-term borrowing costs in a market beset by turbulence… Corporate treasurers have instead been turning more to commercial paper, a type of unsecured debt that typically lasts 270 days or less. The total amount of these IOUs outstanding has mushroomed to nearly $1.2 trillion this year, up more than 20% from its lows in 2020, with computing giant Apple Inc. and pipeline-owner Kinder Morgan Inc. among those that have been dipping more into the market this year.”

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 28 – Bloomberg: “China’s top leadership gave a downbeat assessment of economic growth but didn’t announce new stimulus policies at a key meeting, calling on officials to ensure that housing projects are completed following a wave of mortgage boycotts. The country should achieve ‘the best outcome’ possible for economic growth this year while sticking to a strict Covid Zero policy, according to a statement after a meeting of the Politburo… The leadership urged efforts be made to stabilize employment and prices to keep the economy running in a ‘reasonable range.’ There was no mention of the national economic goals as there was at the April meeting…”

July 28 – Bloomberg: “China’s top leadership is committing to ample liquidity as the nation contends with a slowdown. So far, a lot of that cash is sitting in the financial system instead of being transmitted to the real economy. Cash-rich lenders and funds have been using the money to buy policy bank bonds and high-grade corporate debt, as well as the dollar as the growing interest-rate differential between China and the US boosts the currency’s appeal… The cost to borrow overnight in the pledged repo market slid to the lowest since early 2021 this week, and the Politburo on Thursday pledged to maintain liquidity at ‘reasonably ample’ levels to support the economy.”

July 27 – Financial Times (Sun Yu and Cheng Leng): “Beijing is seeking to mobilise up to Rmb1tn ($148bn) of loans for millions of stalled property developments, in its most ambitious attempt to revive the debt-stricken sector and head off a backlash by homebuyers. In a bid to end a property downturn that played a big role in bringing year-on-year growth down to just 0.4% in the second quarter, the People’s Bank of China will initially issue about Rmb200bn of low-interest loans, charging about 1.75% a year, to state commercial banks… Under the plan, recently approved by China’s State Council, or cabinet, the banks will use the PBoC loans along with their own funds, lent at market rates, to refinance stalled real estate projects.”

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 25 – Bloomberg: “China’s economic recovery gained momentum in July as business activities resumed and confidence improved, despite disruptions from sporadic Covid outbreaks across the country. That’s the outlook based on Bloomberg’s aggregate index of eight early indicators for this month. The overall gauge was 5, a level indicating the economy is heating up. That was unchanged from June… Small business confidence improved on stronger expectations and better credit conditions, according to Standard Chartered Plc., which surveys more than 500 smaller firms each month. Overall production remained robust, while construction activity picked up thanks to policy support… However, activity in July ‘failed to accelerate,’ with readings normalizing from the recovery in June…”

July 26 – Bloomberg (John Cheng and Lorretta Chen): “China’s biggest developer is pulling out all the stops to ensure it can service its debt, an indication that the industry’s year-long liquidity crunch is worsening even as policymakers pledge support. Country Garden Holdings Co. is selling stock at a 13% discount to raise HK$2.83 billion ($361 million). Some of the proceeds will be used to repay offshore debt, it said, helping spur gains in the company’s dollar bonds — held by global investors such as BlackRock Inc. and Schroders Plc.”

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 25 – Financial Times (Cheng Leng in Hong Kong and Edward White): “Two weeks after seasoned regulator Liu Rong arrived in the central province of Henan, plain-clothes security officials clashed with hundreds of protesters outside a local branch of the People’s Bank of China. The protesters were desperate to recover about Rmb40bn ($5.9bn) in frozen deposits from four rural banks. Beijing’s deployment of Liu, a veteran of Chinese bank regulation, suggested the central government wanted a speedy solution to the stand-off. A day after the rare outbreak of public dissent on July 10, Liu’s team doused the flames of unrest with a promise to reimburse funds the protesters had lost to fraud — but wider damage had already been done. The protests in Henan drew national attention, partly because local officials manipulated the personal health apps of more than 1,000 depositors to imply that they were at high risk of Covid-19 and prevent them from protesting.”

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.”

Central Banker Watch:

July 27 – Bloomberg (Francesco Canepa and Giselda Vagnoni): “The European Central Bank seems almost certain to face a test of its resolve to rein in excessive bond yields in coming weeks as the euro zone’s biggest debtor, Italy, heads for elections that a rightist bloc with a eurosceptic past is expected to win. The ECB, in an attempt to cushion the impact of rising borrowing costs on Italy and other parts of the euro zone’s south, said last week that it would intervene in support of countries whose debt comes under market pressure through no fault of their own. With the interest premium that creditors demand from Italy rising again and the country nursing a debt outlook downgrade from S&P, expectations of ECB action seem set to grow as the election campaign heats up and investors put a price on radical parties’ economic promises.”

July 25 – Bloomberg (Aaron Eglitis, Carolynn Look, Alexander Weber and Jana Randow): “The European Central Bank may not be done with big increases in interest rates after surprising with an initial half-point hike last week, according to Governing Council member Martins Kazaks. ‘I would not say that this was the only front-loading,’ Kazaks, one of the ECB’s most-hawkish officials, said… ‘I would say that the rate increase in September also needs to be quite significant.’”

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.”

EM 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.”

July 28 – Bloomberg (Beril Akman, Kerim Karakaya and Burhan Yuksekkas): “Turkey’s central bank governor downplayed the inflation crisis plaguing his country, blaming external shocks and defending the ultra-loose policies he credits for forging the most recession-proof economy in Europe. Governor Sahap Kavcioglu said… consumer inflation will end the year almost 18 percentage points higher than the central bank’s last projections showed in April. It’s now set to reach 60.4%, about 12 times the official target, before slowing to 19.2% by the end of next year and 8.8% in 2024.”

Social, Political, Environmental, Cybersecurity Instability 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.”

Levered Speculation Watch:

July 27 – Bloomberg (Lulu Yilun Chen and Bei Hu): “Benjamin Fuchs’s hedge fund firm BFAM Partners has seen assets shrink by about a third in the past year to just over $3 billion after being saddled with heavy losses on Chinese credit bets… The Hong Kong-based firm set up a ‘liquidating vehicle’ of ‘certain illiquid assets’ to help meet June requests for withdrawals from its Asian Opportunities Fund… Redemptions for the month amounted to less than 10% of assets, said the person, asking not to be named as the information is private.”

Geopolitical Watch:

July 28 – Reuters (Greg Torode): “A U.S. aircraft carrier and its strike group have returned to the South China Sea after a port call in Singapore, deploying in the disputed region as tensions with China rise over a possible visit to Taiwan by congressional leader Nancy Pelosi. Officials with the U.S. Navy’s Seventh Fleet confirmed the deployment of the USS Ronald Reagan to the vital trade route but did not comment on questions about tensions over the trip by Pelosi… ‘USS Ronald Reagan and her strike group are underway, operating in the South China Sea following a successful port visit to Singapore,’ Commander Hayley Sims said…”

July 29 – Reuters (Stanley Widianto): “Some 4,000 soldiers mostly from Indonesia and the United States will conduct a joint military exercise next week that underscores ‘the importance we place on a free and open Indo-Pacific region,’ a senior U.S. military official said… The annual ‘Super Garuda Shield’ exercise, which the United States called ‘significantly larger in scope and scale than previous exercises’, comes against a backdrop of heightened tensions with China over the latter’s growing assertiveness in the region.”

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.”

July 28 – Associated Press (Hyung-Jin Kim): “North Korean leader Kim Jong Un warned he’s ready to use his nuclear weapons in potential military conflicts with the United States and South Korea…, as he unleashed fiery rhetoric against rivals he says are pushing the Korean Peninsula to the brink of war. Kim’s speech to war veterans on the 69th anniversary of the end of the 1950-53 Korean War was apparently meant to boost internal unity in the impoverished country amid pandemic-related economic difficulties… ‘Our armed forces are completely prepared to respond to any crisis, and our country’s nuclear war deterrent is also ready to mobilize its absolute power dutifully, exactly and swiftly in accordance with its mission,’ Kim said…”