A rebound in prices paid in the Services sector surveys combined with hawkish comments from Boston Fed’s Collins to send the dollar higher and stocks, bonds, bitcoin, and gold all lower. Oil prices bucked the trend.

Today’s price action is consistent with the market dynamic we’ve seen play out over the past few months, characterized by elevated sensitivity to economic data, with equity markets seemingly adopting a ‘bad news is good news’ view, rallying on weak growth data, and selling off on strong data – amid fears that too strong data will increase the risk of an additional rate hike.

Rate-hike expectations jumped hawkishly higher after Collins told business leaders in Boston that:

“This phase of our policy cycle requires patience, and holistic data assessment, while we stay the course… And while we may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data.”

With Nov odds of a hike jumping from 30% to around 45%m back up to where they were post-Powell Jackson-Hole speech…

Source: Bloomberg

‘Soft’ (survey) data soared to its strongest since Jan 2022 today while ‘hard’ data slumped to its weakest since May 2023…

Source: Bloomberg

So ‘soft’ survey data is showing price pressures rebounding and ‘hard’ data shows growth is slowing – smells like stagflation to us.

All of which weighed on stocks, dragging them all lower with Nasdaq the ugliest horse in today’s glue factory (down around 1%), Small Caps were the least ugly but all majors indices are lower on the week (since Friday) with Russell 2000 hammered…

The S&P 500 closed back below its 50DMA (joining The Dow and Small Caps). Nasdaq found support at its 50DMA today…

The so-called ‘Magnificent 7’ stocks were slammed today – the biggest drop in a month (not helped by AAPL – hit by reports that China is banning iPhones from goct agencies; and pressure on the social media giants from EU regulatory designations)…

Source: Bloomberg

NVDA tumbled back to pre-earnings levels…

NVDA saw some modest 0-DTE call-buiying as it started to lose momentum but that was overhwlkemed by put-buying negative delataq flow into the bell…

Source: SpotGamma

0-DTE traders tried to fade the initial dump in AAPL too… then covered before a wave of 0-DTE put-buying sent the largest market cap companyt in the world dramatically lower…

Source: SpotGamma

Regional banks were dumped on the back of front-end yields rising (implying a lack of relief on the funding costs front)…

Treasuries were also dumped – especially at the shorter-end – helped by surging oil prices (2Y +7bps, 30Y unch)…

Source: Bloomberg

The yield curve (2s30s) flattened (inverted deeper), reversing all of the payrolls steepening…

Source: Bloomberg

The dollar extended recent gains – to its highest close since March…

Source: Bloomberg

Crypto was marginally lower on the day but Bitcoin saw some crazy (illiquid) moves intraday as it dived to run stops from last week’s payroll drop then ran stops at $26,000 then dived back down again…

Source: Bloomberg

Oil prices bucked the broad risk-off trend, rising for the 9th straight session to close at 10-month highs with WTI topping $88…

Gold prices tumbled with Spot falling down to its 200DMA and finding support…

The relative outperformance of oil over gold has pushed the number of barrels of Saudi Crude per ounce of gold down to around 20… where next?

Source: Bloomberg

Finally, as Goldman’s Brian Garrett noted this morning, it has been 91 days since the S&P 500 suffered a 1.5% loss or greater in a day…

That’s unusual – it has happened only 5 times in the last 15 years. As we have discussed recently, Sep + Oct are seasonally-volatile months…

…and, at the same time, Goldman’s index-trading desk highlights the “low-ness” of equity protection costs.

The Musk vs ADL (and the censorship industrial complex) battle escalated further this morning with the X/Twitter owner highlighting a new article from Newsweek:

Good article https://t.co/8cRi66IQvR

— Elon Musk (@elonmusk) September 6, 2023

“The ADL taught me that nastygrams from Jew haters were just the price we pay for liberty, worthy of being filed and forgotten,” writes Ron Coleman in the op-ed.

“This is not Weimar Germany; it is America. We have a First Amendment, we have civil rights, we have a working democracy.

That is part of the good we have done.

“But” Coleman explains, “the ADL no longer believes this…”

“It has become part of a great online censorship machine that is being exposed day after day as an anti-free speech enterprise.”

The following clip suggests just that…

In this hidden camera clip, I (Kyle Undercover) CAUGHT the ADL discussing how they attempt to influence Elon Musk to pick and chose who they want to be banned from HIS platform.#ADL #elonmusk #X #Twitter #banned #platform pic.twitter.com/xK3MeIql7L

— AɯƙɯαɾԃMαɱα™® (@Aspiemama_107) September 2, 2023

As Coleman concludes:

“The ADL’s efforts to censor Twitter confirms what we have known for years: Not only is today’s ADL not doing the world some good. It is doing something much worse. How much longer will we be allowed to say so?”

As InformationLiberation.com’s Chris Menahan detailed earlier, Anti-Defamation League CEO Jonathan Greenblatt on Tuesday responded to Twitter/X owner Elon Musk’s criticism of their aggressive pro-censorship ad boycott campaigns by accusing him of “engaging with a highly toxic antisemitic campaign” which will incite violence against Jewish people.

From Haaretz, “ADL Hits Back at Elon Musk for Engaging With ‘Highly Toxic Antisemitic Campaign’ “:

Anti-Defamation League CEO Jonathan Greenblatt on Tuesday issued his first public comments after an antisemitic social media campaign spearheaded by X chairman Elon Musk targeted his organization.

“It is profoundly disturbing that Elon Musk spent the weekend engaging with a highly toxic antisemitic campaign on his platform – a campaign started by an unrepentant bigot that then was heavily promoted by individuals such as white supremacist Nick Fuentes, Christian nationalist Andrew Torba, conspiracy theorist Alex Jones and others,” Greenblatt said.

Musk had defended himself against allegations of antisemitism, all while he and several of his prominent far-right supporters accused the ADL of fomenting antisemitism in an act of explicit victim-blaming. Musk further threatened to take legal action against the Jewish anti-discrimination organization, accusing it of being behind the company’s $22 billion drop in value after advertisers fled en masse over the proliferation of hate speech on the platform following his takeover.

Greenblatt noted that the campaign “manifested in the real world when masked men marched in Florida on Saturday brazenly waving flags adorned with swastikas and chanting ‘Ban the ADL.’ “

“But to be clear, the real issue is neither ADL nor the threat of a frivolous lawsuit. This urgent matter is the safety of the Jewish people in the face of increasing, intensifying antisemitism,” he continued.

The ADL CEO charged Musk with engaging with and elevating these antisemites at a time of unprecedented spikes in antisemitism targeting Jewish institutions and private residential communities.

“And so, this behavior is not just alarming nor reckless. It is flat out dangerous and deeply irresponsible. We need responsible leaders to lead, to stop inflaming hatred and to step back from the brink before it’s too late,” Greenblatt added.

Musk can probably add this inflammatory rhetoric to his lawsuit against the ADL.

Without a doubt, the time when the most “unprecedented spikes in antisemitism targeting Jewish institutions” occurred was in 2017 after Trump’s election when over 245 bomb threats were called into Jewish community centers throughout America.

The ADL used the threats to harangue President Trump for “emboldening anti-Semites” and legislation was passed as a result of lobbying from the ADL to increase funding and security grants to Jewish groups.

(2/2)
• Doubling budget for @StateDept Antisemitism Envoy
• Doubling @DHSgov terrorism prevention grants
• Doubling non-profit security grants
• Funding new grants to better prevent and respond to hate crimes
• Fully funding new Holocaust education programs

— ADL (@ADL) December 22, 2020

It turned out nearly all of the JCC bomb threats were carried out by “18 year old” Israeli-American Michael Ron David Kadar, who was found to have a bitcoin wallet worth millions of shekels (a few copycat threats were called in by African-American Juan Thompson).

Zero photographs of Kadar’s face were ever released.

Kadar was found guilty in Israel in June 2018 for the bomb threats and sentenced to ten years in prison.

In 2019, evidence was dug up by geneticist Franklin Stahl, Ph.D., a member of the National Academy of Science, suggesting that Kadar’s Israeli mother, Dr. Tamar Kadar, who is a chemical weapons researcher at the Mossad-operated Israeli Institute for Biological Research, may have been the real culprit behind the calls.

Stahl reported that Kadar, who evidence indicates was actually 27 years old and not 18 years old at the time of his arrest, was nothing more than a fall guy.

Additionally, Kadar appears to have been freed from prison by Israel and allowed to travel back to America only to be arrested and jailed on a weapons charge in Illinois.

Kadar’s story completely fell off the map shortly after it was uncritically reported in 2017 and the ADL refused to remove his hoax calls from their list of “anti-Semitic incidents” for 2017.

The ADL never apologized to Trump or his supporters for smearing them for supposedly inciting these (hoax) bomb threats and never offered to give back the money they got from Congress due to hyping the threats.

“The new information does not change our view that the bomb threats against Jewish institutions were anti-Semitic and harmful to the communities targeted,” the ADL said in a press release after Kadar’s arrest.

“No matter who placed the calls or why the calls were placed, the outcome was the same: they instilled fear and disrupted communities across the country.”

This battle – between Musk and the activist censors – is far from over.

Update(1539ET): Maui? East Palestine? No, Blinken is in the capital of Ukraine where he just announced $1 billion more in US aid to the the country.

“The U.S. commitment includes more military assistance, but also funds to bolster its future defense and its own democracy and economy,” the NY Times noted following the Secretary of State’s remarks to the press.

This includes, interestingly enough, some half-billion dollars for “cleaner, more resilient” energy infrastructure, and over a couple hundred million more for civilian and city infrastructure, including for clean water, food, medical support, and home generators. And then there’s this detail: seized funds from Russian oligarchs will be included as part of this round of aid…

US: FUNDS TO UKRAINE INCLUDE $5.4M IN FORFEITED OLIGARCH ASSETS

.@SecBlinken: Americans will “invest more than $520 million” to make Ukraine’s energy infrastructure “cleaner, more resilient” pic.twitter.com/s9SAamq9CU

— Tom Elliott (@tomselliott) September 6, 2023

* * *

US Secretary of State Antony Blinken made a surprise visit to Ukraine on Wednesday at a moment of waning Western faith in the ability of the counteroffensive to make any breakthroughs. It marks the highest level visit by an American official since last February President Biden visited Kyiv for the first time.

Like with prior trips, Blinken came bearing gifts, announcing over $1 billion in new US aid – while Moscow has charged that Washington will fund Kyiv until the “last Ukrainian”. But Blinken’s message is: “We want to make sure that Ukraine has what it needs, not only to succeed in the counteroffensive, but has what it needs for the long term, to make sure that it has a strong deterrent,” he told reporters.

The trip and announcement seems to confirm that the Zelensky government’s latest bold moves related to anti-corruption “house cleaning” was done at the behest of Washington and NATO, likely for the sake of PR and to keep US taxpayer dollars flowing into Kiev’s coffers.

“I’m here first and foremost to demonstrate our ongoing and determined support for Ukraine as it deals with this aggression,” Blinken assured.

To review of the immediate context, only in the past days and week…

• Ukraine’s government cracked down on corrupt army recruiters
• Zelensky sacked his defense minister amid a long-running corruption probe related to overpriced contracts for military items
• Zelensky in an interview said a presidential election during wartime is impossible, but hinted there could be a path forward if the West funds it

Interestingly, the newly appointed defense minister to replace Oleksii Reznikov is a Tatar Muslim originally from Crimea (was he another diversity hire?) named Rustem Umerov, and he’s been swiftly approved by parliament. Umerov had previously been chairman of Ukraine’s State Property Fund.

The Parliament of Ukraine has appointed Rustem Umerov @rustem_umerov as the new Minister of Defense of Ukraine.
He took the oath of Member of the Cabinet of Ministers of Ukraine at the plenary of the Parliament.
Welcome aboard, Minister.
🇺🇦 pic.twitter.com/PQx9qaYMNV

— Defense of Ukraine (@DefenceU) September 6, 2023

A meeting between Blinken and Zelensky is expected to happen Wednesday evening (local time). Like other Western leaders, Blinken flew into Eastern Europe and completed the final leg of the trip to Kyiv by train.

Blinken’s trip is taking place just after a new major aerial assault by Russia reportedly killed at least 16 in the city of Kostiantynivka in eastern Ukraine, according to an update by Zelensky. On Telegram he condemned “The audacity of evil” and what he further called “The brazenness of wickedness. Utter inhumanity.”

“At this moment, the attack by Russian terrorists has killed 16 people…a regular market. Shops. A pharmacy. People who did nothing wrong. Many wounded. Unfortunately, the number of casualties and injured may rise. My condolences to all who have lost loved ones!” Zelensky added in the written statement, “The Russian evil must be defeated as soon as possible.”

As for the faltering counteroffensive, the NY Times has tried to paint a rosier picture than what’s been featured in the last months:

Mr. Blinken was expected to meet with President Volodymyr Zelensky on Wednesday evening. His visit comes as the Ukrainian counteroffensive in the southeast has gained some traction after three months of grueling, bloody fighting. Ukrainian troops have broken through a main line of Russia’s defenses in one location, Ukraine’s Army has said, and are turning their attention to breaking through in another heavily defended patch of territory.

The State Department official cited Ukraine’s “impressive progress” on the battlefield in recent weeks. But swift gains are unlikely, military analysts say…

⚡️US Secretary of State Antony #Blinken may announce today in #Kyiv a new aid package for #Ukraine worth $1 billion, Reuters reported.

Blinken’s visit to Ukraine will last for two days.

📷: CNN pic.twitter.com/KmYyX73IAq

— KyivPost (@KyivPost) September 6, 2023

Meanwhile, it should be noted that many of the earliest pics of Blinken’s surprise visit to hit the web and news feeds featured him posing with a cute dog. Was this meant more for American public consumption? Per the NYT:

Soon after arriving in Kyiv, Mr. Blinken was introduced to Patron, a mine-sniffing Jack Russell Terrier that is a much-loved mascot for Ukraine’s war effort. Mr. Blinken petted and held Patron, a video posted by RBK, a Ukrainian news outlet, showed.

Cute doggy and US billions.

Blinken showing humanity as he brings the courageous Ukranians 1bb$ in aid. He should be praised.

— Billy Snider (@sniderstyle) September 6, 2023

Zelensky previewed what’s expected to be discussed during his meeting with Blinken, having said earlier, “All requests from the warriors will be addressed by senior generals, government officials and our international relations officials.”

Over the weekend, when looking at the latest market dislocations, we told readers in our private twitter feed (which is open to subscribers) that long retailers (XRT)/short homebuilders (XHB) could be a “stellar convergence trade“…

… and no sooner did we tell readers that homebuilder luck may have run out now that 30Y mortgage rates are back to generational highs, than we saw the XHB tumble 4%, double the slide in the XRT, and a solid start to bets that the outperformance of homebuilders vs retailers is now over.

We were therefore not surprised to read in Goldman’s EOD wrap late last night, that the bank’s trading desk was “peppered with questions on weakness, notably within homebuilders with the group -6% on the day (2 sigma move lower).”

According to Goldman, the biggest catalyst for the hit to homebuilders, was the sharp resumption of Friday’s rate steepening (the US 10Y jumped +9bps to 4.27%, and flirting with YTD highs) which drove broader pockets of heavy weakness on long duration assets (R2K sold off -210bps). Goldman thinks this was a product of

• 1) heavy IG corp supply
• 2) crude rallying +1.3% on the back of Saudi 1M b/d production cut extension through December
• 3) positioning as longs are unwound by HFs (similar to Friday, our rates desk saw steepening flows from levered accounts).

Goldman’s traders add that in addition to the aforementioned points on rising yields and crude, there was also a mixed (negative) “competitor note which highlighted that channel feedback across a range of building product categories/suppliers continues to highlight solid new construction momentum BUT with underwhelming remodel activity.”

And then there was offside positioning, which however is not as short as it once was as most got stopped out after better than expected earnings. Bottom line: “pressure on homebuilders is 90% rates/oil trade.”

The move in homebuilders was also discussed by Goldman trader Rich Privorotsky this morning, when he said that while the Tuesday drop was an outlier, it was also “odd how much they rallied into Labor day. I find homebuilders to be the poster boy of soft landing. Strong labor markets and higher for longer rates is ironically creating the perfect set of conditions that is a.) severely restricting existing home supply (can’t move if your new mortgages is 2-3x your old one) and b.)  the lack of recession means demand is good enough to sustain a need for new homes/household formation.”

However, echoing our caution (and in part, trade reco), Privorotsky notes that “the trade is very convex on the downside, if the economy slows enough rates will come down (mobility returns to housing market)…peculiarly lower prices could create more supply.”

It’s then that the XHB short – which is effectively a bet on a hardish landing/recession – will really pay off.

More in the full notes available to pro subs.

Via SchiffGold.com,

Peter Schiff recently appeared on Fox Digital and poured a bucket of cold water on those who believe the Federal Reserve is winning the inflation fight. In fact, the Fed isn’t making any progress at all.

Peter started the interview by noting that the Bureau of Labor Statistics (BLS) has revised the nonfarm payroll numbers down for all seven months this year.

If we’ve done something seven times in a row, it doesn’t seem very random. Because if these were random numbers, sometimes they’d be too high, sometimes they’d be too low. Like, it’s difficult to toss heads seven times in a row. So, if you toss it seven times in a row, maybe the coin is not fair.”

Peter said he thinks the BLS is biased in its assumptions and thinks the labor market is stronger than it actually is.

Obviously, unemployment picked up. So, that’s a sign of weakness. Average hourly earnings — up less than expected, which is problematic because prices continue to rise.”

Peter also noted there was a big spike in spending last month, but a very small gain in incomes.

The way consumers handled that was raiding their savings.”

The savings rate plunged to 3.5%.

In fact, American consumers have blown through nearly all of the excess savings they accumulated during the government pandemic lockdowns. Aggregate savings peaked at $2.1 trillion in August 2021. As of June, the San Francisco Fed estimated that aggregate savings had dropped to $190 billion.

That’s a sign that the economy is weak because consumers need that rainy day fund, right? Because it’s raining. They’re having a hard time.”

And Peter said it also shows the Fed isn’t making any progress in its inflation fight.

Consumers keep spending and reducing their savings in spite of the rate hikes. The rate hikes are supposed to reduce spending and increase savings. That’s how they bring down inflation. But nothing has worked, and so inflation is going to get worse.”

When you boil it all down, this is stagflation.

The economy is weakening, the labor market is weakening, but consumer prices are strengthening.”

Peter said he thinks we’ve bottomed out on headline CPI and noted that we really haven’t seen much of a reduction in core CPI.

So, now we’re bending back up again and the Fed is at five-and-a-half. They’re no closer to getting 2% inflation than when they had rates at zero.”

Meanwhile, federal budget deficits continue to spiral upward. The government is spending more instead of less.

Nothing has worked, and the markets are completely wrong on their benign outlook for future inflation.”

Peter said the “proper response” would be for the Fed to continue to raise rates while the federal government cuts spending. Of course, the Biden administration isn’t going to cut spending. And while you might see another quarter-point rate hike in September, it’s not going to be enough.

We actually need much higher interest rates. The problem is we can’t afford them. So any interest rate high enough to fight inflation is too high for the markets. And in fact, not only does the Fed create a recession. But it creates a financial crisis, and that financial crisis will be considerably worse than the one we had in 2008.”

This week, the ADP Research Institute, the research arm of the payroll processing firm, released a new report about a ‘real-time way’ to measure worker motivation. What they found is that a majority of workers aren’t motivated, and this might impact long-term productivity. 

Researchers said, “We designed the Employee Motivation and Commitment Index as a tool to help define optimal functioning for employees and specific roles within an organization. The score measures how employees feel about their place at work and whether they’re thriving and growing.” 

ADP researchers survey 2,500 workers each month and have noticed the EMC index has slid throughout 2023:

 “In August 2023, the EMC Index fell from 108 to 100, its lowest point since June 2022. The index peaked in December 2022 at 121 after a year of robust pay growth, strong hiring, and the rise of remote work.” 

They said, “We found a strong relationship between output and worker motivation and commitment.” And noted, “A person’s industry might influence their level of motivation and commitment.” 

Workers in transportation and warehousing, education, and healthcare industries were the least motivated, while technology, information, and construction workers were the most motivated. 

The biggest takeaway is that most workers aren’t motivated at work, which could soon impact productivity. There was no clear explanation as to why workers are slacking off, whether they believe their labor is worth much more (look what’s happening with the unionized workforce) or if these folks are spending too much time on TikTok.

Workers who are unmotivated in low-skilled/low-paying jobs must understand automation and artificial intelligence will displace them by the end of the decade. Now is the time to get retrained in a field less likely to be replaced by robots (here’s a tip: become an airline pilot). 

Sliding motivation at work is yet another ominous sign ‘Bidenomics’ is a failure. 

Authored by David Waugh via AmericanMind.org,

An independent alternative to financial repression…

After Silicon Valley Bank failed, President Biden told Americans they “can rest assured that our banking system is safe. Your deposits are safe.” Yet, for many, it is increasingly clear that this is not the case.

Across the Western world, banks are unsafe for those holding views that diverge from state-approved media narratives. Banks routinely close accounts of depositors with views that diverge from the accepted narrative, often without notice, a practice called “debanking.”

Even a cursory review of recent debanking incidents makes it clear that conservatives and conservative groups are disproportionately affected. And the advent of a cashless economy fueled by central bank digital currencies (CBDC) will exacerbate this trend. With CBDCs, governments will be able to directly control access to financial services.

Though it has accelerated, debanking is not uniquely American, nor is it new. Across the West, digitized banking has resulted in a top-down politicization of financial services, enabling the debanking of individuals and large enterprises.

A decade ago, the Obama Administration’s “Operation Choke Point” pressured banks to cease relationships with businesses perceived to hold unacceptable ideological views. The trend has only picked up steam since then.

JP Morgan Chase has been shutting down conservative accounts since at least 2019, and though shareholders are fighting back, there is no guarantee they will succeed. 

Last year, the Canadian government famously used emergency powers to freeze accounts and seize the assets of a group of truckers protesting vaccine mandates. 

British politician Nigel Farage recently made headlines when Coutts, a private bank founded in the seventeenth century, decided to close his account even though he had been a customer for over 40 years. The bank decided, in private memos, that their account holder was a “disingenuous grifter” and that there could be “reputational” harms in continuing their relationship with him.

Farage used his media influence to wage a public relations battle against Coutts and its parent company NatWest, the CEO of which was forced to resign—not for terminating Farage’s account, but for revealing client details to a reporter. In any case, regular people don’t have the ability to draw public attention to the problem of debanking.

Are financial apps any better? Unfortunately, no.

PayPal and other payment providers regularly shut down the accounts of customers who engage in wrongthink—demonstrating how hard it is to access any financial services once you have been blacklisted.

Making matters worse, calls for a “cashless society” and the introduction of central bank digital currencies will streamline the government’s ability to control access to finance.

We’ve already seen the state work behind the scenes to control what you are allowed to read and hear; imagine if the woke controllers get to decide if you can buy groceries this month.

Once money takes the form of a CBDC, it becomes fully programmable, allowing governments to decide what purchases can be made with it. Money can even be given an expiration date to incentivize spending and penalize savers. As economist Jonathan Newman put it, “programmable money means programmable citizens.”

A group of state-level officials is calling on banks to change their practices. Florida Governor Ron DeSantis and some Republicans have enacted anti-CBDC legislation, but their work would not stop implementation at the federal level.

Americans can restore their sovereignty from banks and their allies by owning a decentralized cryptocurrency like Bitcoin. When you own Bitcoin, you remove a portion of your finances from the discriminatory banking system, and hold repressive institutions accountable by forcing them to compete with an alternative.

Today, Bitcoin, the best known cryptocurrency, is commonly associated with speculation in the West. But in countries with unstable or unreliable currencies, it is seen as a way to gain independence from corrupt financial systems. This use case for crypto will become increasingly important with the advent of CBDCs.

As a digital bearer asset, Bitcoin grants the holder independent control, similar to physical-bearer assets like gold or bonds.

Previously, individuals had to use third-party payment rails to transact digitally, allowing banks or governments to stop or reverse transactions. Now, anyone can use Bitcoin (or other cryptocurrencies) to store and transfer wealth without an intermediary’s permission.

It is important to note that not all cryptocurrencies are created equal. Iris scanning schemes like Sam Altman’s Worldcoin or Sam Bankman-Fried’s FTT token are not decentralized. Their creators or governing bodies are susceptible to government pressure.

When you own a digital asset independent from the banking system, you own a hedge against the threat of being debanked. Bitcoin eliminates the ability of banks to freeze all of your wealth and the ability to transact.

With CBDCs on the horizon, a presidential administration that views the banking system as a political weapon, and with banks happy to comply, it is past time for Americans to understand that Bitcoin deserves a place in their toolkit for resisting tyranny.

Last week, just as the stock of recently bankrupt Chinese property giant Evergrande reopened for trading after being halted for two years, and plunged 87% in Hong Kong trading, we said that – as has become the norm in this broken market – a squeeze is imminent.

*EVERGRANDE FALLS 87% IN HONG KONG AFTER STOCK RESUMES TRADING

Just wait for the squeeze

— zerohedge (@zerohedge) August 28, 2023

We didn’t have long to wait, and on Wednesday, the newly bankrupt Evergrande closed up 83%, its biggest surge since its 2009 listing, as a frenzy of speculative retail bets that Chinese authorities will widen support for the property sector sent some of the country’s ailing developers surging by the most on record. For those who waited the 10 days for the squeeze and doubled their money, congrats.

The Bloomberg China builders index gained nearly 10% Wednesday, the most in more than a month as heavily indebted developers, most of them near bankruptcy and with depressed valuations, were among those to rally the most, with Sunac China Holdings Ltd. soaring 68% alongside a spike in trading volume. China Evergrande Group

The sudden upturn comes after a rout in August, when the property sector showed signs of deepening financial problems. As discussed on Monday, authorities introduced bolder measures in recent weeks to put a floor under the crisis, including lower down payments and looser mortgage rules for some homebuyers.

The latest boost came from a Securities Times article, which went a step further to say China should drop home-buying restrictions in most regions other than top-tier cities.

“It’s some hedge funds speculating on more stimulus,” said Xin-Yao Ng, investment manager of Asian equities at abrdn Asia Ltd. “The distressed developers are definitely the speculators’ pick to bet on stimulus as they see the biggest delta to policy news.”  Alternatively, they just read our tweet.

According to Bloomberg “the magnitude of the rally suggests some investors see a glimmer of hope from the government’s latest efforts, though whether the measures will succeed in reviving the sector remains in doubt.” Alternatively, the magnitude of the rally merely shows how many shorts had piled into the sector and were furiously squeezed, especially with prices in the pennies.

A record wave of developer defaults has pushed many of them to mere penny stocks, whose shares trade at around one Hong Kong dollar. Such cheap valuation subjects them to volatile moves on any potential catalysts. The property gauge now trades at a price-to-book ratio of 0.3, compared with a five-year-average of 0.47. Even with this week’s gains, the index remains more than 30% below this year’s high in January.

Shares of Country Garden Holdings Co., once the country’s largest property developer, now trade at around HK$1.2 apiece, about 8% of their peak level. Wednesday’s 21% jump, accompanied by a record trading volume, only added around $750 million in value to the battered company’s market capitalization.

“If you ask me if this sector is worth buying – for investors, it’s a no. For speculators, it’s a yes,” said Kenny Wen, head of Investment strategy at KGI Asia Ltd. “It’s likely that we see other property developers having new crisis through the end of this year. China’s property trouble is not solved completely.”

The punchline came from Steven Leung, executive director at UOB Kay Hian, who – 2 weeks after we said to brace for a brutal squeeze – said that the rally may be driven by short squeeze of some heavily-shorted names. The major gainers are mostly small- and medium-sized developers which tend to have big swings, he said.

Meanwhile, the broader equities market was muted, another evidence that investors expect the sector’s rebound to be fleeting. The CSI 300 benchmark of onshore shares was down 0.2%, while the Hang Seng China Enterprises Index climbed 0.1%. Distressed chinese high-yield dollar bonds, mostly issued by developers, were also largely unchanged with little liquidity Wednesday, according to credit traders. Country Garden’s dollar bonds still trade at deeply distressed levels around 9-14 cents on the dollar despite a recent rebound, indicating investors remain on edge about the risk of an eventual default.

Investor attention will likely turn next to any signs of recovery in housing demand, according to Willer Chen, senior analyst at Forsyth Barr Asia.

“The high frequency sales data in the next two weeks is crucial for investor judgment on whether the policy is helpful enough,” Chen said.

By Bas van Geffen, senior macro strategist at Rabobank

In the land of the blind, they say, the one-eyed man is king. We have often accused Europe of being blissfully unaware of the shifting tectonic plates on the geopolitical sphere, but the eye patch that German Chancellor Scholz has to wear following an unfortunate accident while jogging has so far failed to give him the clarity that many of his European counterparts still seem to lack as well. While the Chancellor was busy soliciting memes on X, it is in fact his economy minister whose eyes have been opened.

In a speech to German ambassadors, Habeck went where Chancellor Scholz didn’t dare go. The minister warned that Europe’s external environment is vastly different than it has been over the past decades: Habeck concludes that trade and investment are now drenched in (geo)politics, and that Europe may not be able to continue to deal with both the US and China like it has in the past; Europe may be forced to choose sides.

Asian countries, meanwhile, are increasingly unhappy with the strength of the world’s reserve currency. US dollar strength has sent a number of Asian currencies to multi-month lows, prompting interventions.

The PBOC fixed the yuan at 7.1969, which is a record gap to the spot rate and a record 1,139 pips stronger than a survey conducted by Bloomberg. Regardless of the interventions, CNY is trading around 7.31.

Not only the PBOC sought to stem the bleed from the strong dollar. The Japanese Ministry of Finance warned that they would not shy away from “any options if speculative moves persist”. Masato Kanda told reporters that it is important for the currency to reflect fundamentals. The Ministry of Finance issued a similar warning last month, when USD/JPY rose above the 145 level.

Yet, one can wonder which fundamentals are relevant if not the huge difference between US and Japanese monetary policy, which is likely to persist for some time. Risks are still skewed to a scenario where the Fed may have to tighten further than markets have been anticipating so far. Conversely, Bank of Japan officials continue to reiterate that their policy will have to stay accommodative, although Hajime Takata pointed out this morning that there had been some progress towards achieving the Bank’s inflation goal: “green shoots are finally emerging, [but] we need to continue patiently with large-scale easing as uncertainties are extremely high.”

Similar green shoots are visible in European inflation data, but there are equally red flags. According to the ECB’s Consumer Expectations Survey, expectations of medium-term inflation have risen slightly again. The median estimate of 3-years ahead inflation ticked up from 2.3% to 2.4%. Although consumer expectations are still trending down on a longer-term view, this uptick isn’t what the Governing Council would like to see. That said, it is difficult to attach much value to this survey, given that it is still very new and generally lags a bit. So Council members may prefer to look at other measures of inflation expectations, including the Survey of Professional Forecasters and market-based indicators.

Indeed, the market seemed to look through the survey’s release, arguably supported by further comments from ECB officials as they return from their holiday breaks. Chief Economist Lane focused on the positive elements of the inflation data, and he concluded that core inflation should fall throughout the fall.

Moreover, more hawks seem to be getting on board with a potentially very long hold at current levels. Bundesbank president Nagel cautioned against bets that the ECB would return to rate cuts shortly after the central bank is done hiking, which suggests he also sees the dangers of overshooting the mark. Recall that Ms. Schnabel recently noted that a higher terminal rate does not have the same effect as a longer period of high rates, considering that overdoing the hiking cycle could lead to a bigger economic downturn than necessary and a subsequent undershoot of inflation in the medium term, rather than a durable convergence to 2%.

And odds of a European recession remain fairly high, as re-confirmed by the German data this morning. Factory orders fell by a stunning 11.7% m/m in July, confirming the heavy weather that the manufacturing sector has hit – something that had already been flagged by the PMI surveys.

This sharp decline is the reversal of two months of strong gains, though, so the three month trend is not as bad as the headline print. For example, orders from Eurozone countries fell 24.4%, but that follows a 26.6% gain in June. This softens the July data somewhat, but overall the picture for the German industry remains quite bleak.

Authored by Steven Vanelli via Knowledge Leaders Capital blog,

With government stimulus over, accumulated savings starting to become depleted, rents soaring, and student loans about to switch back on, it appears a credit cycle has begun where borrowers struggle to fulfill their financial commitments.

In the charts below, we identify the overall delinquency rate and then break it out by age cohort. We are focusing on the data series provided by the New York Federal Reserve about loans that are 90+ days late.

Starting with mortgage loans, the overall delinquency rate is 63bps, near record lows, likely due to the huge home appreciation of the last few years which padded the equity cushion for most homeowners. Even the youngest cohort (18-29 years old) has a delinquency rate only 30bps higher than the aggregate. Unlike the 2007-2011 period, the credit cycle is not playing out in the real estate market.

Let’s move on to some forms of consumer loans, where the story is a little more daunting.

Auto loans are definitely the epicenter of the credit cycle. While the overall average is a still somewhat tame 2.41%, younger borrowers are not keeping up. Younger borrowers have delinquency rates that are 1-2% higher than the average while the inverse is true for older borrowers. Eighteen-to-thirty-nine year-old borrowers have the highest delinquency rate in 13 years.

Somehow, I sense that used car lots are going to start filling up again as these vehicles get repossessed. This should put downward pressure on used car prices, bringing that element of inflation down. This is one of the channels through which monetary policy works.

Lastly, I’ll take a look at credit card delinquencies.

Here is where we can really see the stresses building.

• First, the overall delinquency rate has about doubled from 2.5% to 5% over the last couple years.

• Second, older borrowers have seen a tick up in delinquency rates, a feature we don’t really see in other credit products.

• Third, one in 12 younger 18-29 year-old borrowers are 90+ days late making their credit card payments.

In conclusion, we are in the early days of a consumer credit cycle. Younger borrowers are the weakest link in this analysis, and this makes me wonder where rates go when student debt payments turn back on at the end of the month.