Trouble Under the Hood

Ian Reynolds October 9, 2024

Trouble Under The Hood

We finally got the rate cuts but suddenly things are not so good.

Since the FED cut by 50bps, rates have only gone one way - up 50 bps !!
There seems to be a global shortage of both cash and collateral of enough quality.
There’s been a significant change in repo fails since early August.
The yen carry trade continues to be unwound.
China forced to stimulate it's economy.
USD / YEN back up to intervention levels (149)

US 10 Year Govt Bond Yield Daily
US 10 Year Govt Bond Yield Daily

Turbulent US Funding Market Forewarns of a Volatile End to 2024 [Bloomberg]

Bank of England warns of ‘future stress’ from hedge fund bets against US Treasuries

Banks Tap Hong Kong’s Discount Window for Most Funds Since 2019 [Bloomberg]

Breaking

New Zealand Steps Up Pace of Rate Cuts as Economy Weakens [Bloomberg]

Global Food Prices Jump Most In 18 Months As Supermarket Inflation Storm Worsens [Zerohedge]

US Says It’s Weighing Google Breakup as Remedy in Monopoly Case [Bloomberg]

Boeing to cut 17,000 jobs and delay 777X jet as revenues fall short[FT]

In Focus

China

Confirmation of deflation coming at China like a train and why the authorities are panicking. Much lower than expected CPI and annualised PPI 1% lower.

china cpi-Oct-13-2024-04-17-56-4340-AM

China CPI, PPI September 2024

Shanghai Composite Daily

After 2 weeks of insane volatility and volume, Saturday 12 October's Ministry of Finance press conference was positive but not specific enough for markets.

china vice finance

Vice Minister of Finance Wang Dongwei

Senior officials from the National Development and Reform Commission (NDRC) provided an update on the "comprehensive implementation of a package of incremental policies to robustly promote upward economic momentum, optimize structural development, and sustain a positive growth trajectory."

The key points were

The ministry will use local government special bonds to help the housing market stop declining and stabilize. This is important because such bonds in the past were only allowed to be used for public projects and infrastructure programs that can generate returns.
There are more measures in planning and still “a relatively large room” for the central government to raise debt and for the fiscal deficit to increase.
The ministry plans to increase debt quota for local government by a “relatively large” amount, which will be used to replace their existing hidden debt. This will be the most forceful step taken in recent years to address the problem, he said, and it will significantly relieve local authorities’ debt pressure. This will allow localities to allocate more resources to boosting the economy, he said.
Local governments are under pressure to repay their staggering debt pile so they haven’t been able to expand spending, which is needed to shore up economic activities. The overall broad budget expenditure shrank 3% in the first eight months from a year ago.
China to allow special local bonds for unsold home purchases
China will seek to raise local government debt limit by “relatively large” amount through the legislature. It means the potential gathering of the Standing Committee of the National People’s Congress later this month will be highly anticipated.
Vice Minister Wang said the ministry will complete the task of issuing 1 trillion yuan of special sovereign bonds this year on time. That’s a bit of a let-down for investors who expected officials to unveil the value of additional special sovereign bonds at the presser.

Source Bloomberg: China Allows Local Governments to Use Bonds to Buy Unsold Homes

Seems they still don't want to do what is actually required.

They want to lift the stock market at all costs and hope that's enough to loosen financial conditions and rescue the Chinese economy. But there is a problem with that.

Contrary to Western societies, Chinese households have most of their wealth stored in the housing market - not in the stock market. The Chinese economy needs some true stimulus.

Fiscal is the only solution. Credit creation has been exhausted: corporates were fully tapped (phase 1) in 2016 already, and households are also fully tapped now (phase 2). New money creation can only come from the government via fiscal deficits.

But how much is needed? Banks point towards a 3-5 trillion Yuan package (~500bn USD). That would be decent, but a true Chinese fiscal bazooka will look more like 7-8 trillion Yuan (~1 trillion USD).

China urgently needs some large, targeted fiscal stimulus. Anything less than 3-4 trillion Yuan will be taken negatively from markets over the medium run. Source: Alf

Goldman: China Must Do QE Now, "Or It Will End Up In A Bigger Hole In 12 Months"[Zerohedge]

China Markets Warn Xi That More Stimulus Is Needed to Fuel Rally[Bloomberg]

Why so many millionaires are fleeing China, by hook or by crook. Or by jet-ski[Sydney Morning Herald]

World Bank Warns China’s Slowdown May Deepen, Pressure East Asia

Volatility Grips Chinese Stocks as Traders Wait for MOF Briefing[Bloomberg]

Japan

Japan PPI September 2024

japan ppi yopy

More bad news for Govt, Ministry of Finance & PBoC as PPI moving higher. Markets have moved yield on 10 year JGB from 0.8% to 0.95% in the last week and USD / YEN from 141 to 149.

Japan is now deep in trouble with markets firmly controlling currency and monetary policy. Only the shenanigans in China have distracted more Japanese focus.

Japan posts highest number of bankruptcies in a decade [Asian Business Review]

Yen in 150s Would Bring Forward Next BOJ Hike, Former Director Says [Bloomberg]

Japanese Buy Record Amount of US Sovereign Bonds in August

US Economy

FOMC Minutes Show Fed Considerably More Divided Over Size Of Rate Cut [Zerohedge]

The minutes showed that, whatever cuts are now / later, all think CPI going to 2%. But that's not what the numbers are suggesting currently.

It's always the case that when the FED wants to convince the public of what a good job they're doing they send out committee members to spruik. And this week was a FED speaker-fest.

FOMC MEMBER BOWMAN (MON. 1:00PM)
FOMC MEMBER KASHKARI (MON. 1:50PM)
FOMC MEMBER MUSALEM (MON. 6:30PM)
FOMC MEMBER KUGLER (TUES. 3:00AM)
FOMC MEMBER BOSTIC (TUES. 12:45PM)
FOMC MEMBER COLLINS (TUES. 4:00PM)
FED VICE CHAIR JEFFERSON (TUES. 7:30PM)
FOMC MEMBER BOSTIC (WED. 8:00AM)

Fed’s Bostic Keeps Door Open to Skipping Rate Cut in November [Wall St Journal]
FOMC MEMBER LOGAN (WED. 9:15AM)
FOMC MEMBER GOOLSBEE (WED. 10:30AM)
FED VICE CHAIR JEFFERSON (WED. 12:30PM)
FED FOMC MINUTES (WED. 2:00PM)
FOMC MEMBER DALY (WED. 6:00PM)
FOMC MEMBER COOK (THURS. 9:15AM)
FOMC MEMBER BARKIN (THURS. 10:30AM)
FOMC MEMBER WILLIAMS (WED. 11:00AM)

Fed's Williams reckons more rate cuts lie ahead, amid solid economy [Reuters]
FOMC MEMBER GOOLSBEE (FRI. 9:45AM)
FOMC MEMBER LOGAN (FRI. 10:45AM)
FOMC MEMBER BOWMAN (FRI. 1:10PM)