Global Macro Monitor

Today’s release of the U.S. Treasury International Capital (TIC) flows data highlights a continued trend of foreign central banks reducing their holdings of U.S. notes and bonds, albeit at a notably decelerated pace. Between June ’22 and June ’23, foreign central banks divested $73 billion in Treasury notes and bonds. This divestment rate is notably more gradual compared to the preceding six months, mainly due to the big dumps observed in 2022 rolling out of the 12-month cumulative total.

Concurrently, the Federal Reserve (Fed) has rolled off $596 billion from its holdings of notes and bonds over the past year.

By contrast, looking back to June 2012, foreign central banks acquired $663 billion in notes and bonds on a rolling 12-month basis, whereas the Fed’s acquisitions amounted to $125 billion. The former purchases were rooted in a strategic policy to prevent excessive appreciation of exchange rates, while the latter transactions constituted part of the Fed’s quantitative easing strategy, both characterized by a complete lack of price sensitivity.

This shift in the roles of central banks, transforming from primary buyers to notable sellers, stands as a significant factor contributing to the recent surge in real interest rates, particularly in the more market-driven segment of the yield curve. We suggest that this trend could persist, influencing rates in the long-term sector of the curve.

That is unless safe haven flows come out of risk assets and reverse the yield spikes.

Stay frosty, folks.   

Stunning.  Not far from the electric trolley buses with motors powered by electricity from overhead wires that I used to ride to work in San Francisco.

The Treasury released the latest budget data earlier today, which shows the 12-month rolling deficit at $2.3 trillion or 8.4 percent of GDP. 

We are confused as to how many are worried about the deficit coming in at 6 percent for the fiscal year.  According to our analysis — and it ain’t rocket science, folks — we are already there and then some.  Here is CBO’s take,  

CBO’s most recent baseline projections, which were published in May, show revenues totaling $4.8 trillion and outlays totaling $6.4 trillion, for a deficit of $1.5 trillion for 2023.1 On the basis of its estimate of the deficit through July and preliminary estimates of revenues and outlays in August and September, CBO now expects that the total deficit for 2023 will be $1.7 trillion, or about $200 billion larger than the estimate it published in May. Revenues and outlays alike are now anticipated to be below amounts CBO projected in May, but the reduction in revenues is larger. – CBO

In order to hit the CBO estimate of a $1.7 trillion  FY2023 deficit, the August and September deficits will have to average $50 billion.  Not likely.   We suspect the bond market is finally waking up.

This issue should be front and center on investors’ radar as we suspect it will become a headline issue very soon. 

COTD = Chart of the Day

Stunning demographic data from Japan. 

The country’s bear market in babies almost matches its 30-year plus bear market in stocks, where the Nikkei 225 is still 17 percent below its December 29, 1989 price peak.  A prereq to sustainable long-term, vibrant economic growth is a growing labor force enhanced by productivity gains.  

An estimated 42% of adult Japanese women may end up never having children, the Nikkei newspaper reported, citing a soon-to-be-published estimate by a government research group..

Birthrates are a critical issue for Japan and other countries with rapidly aging populations. The island nation posted the fewest births in its recorded history last year, continuing a seven-year decline. With a smaller workforce and fewer taxpayers to sustain the world’s third-largest economy, Japan has become one of the world’s most indebted countries.  – Bloomberg

They will beat their swords into plowshares
and their spears into pruning hooks. – Book of Isaiah

• The global manufacturing sector remained mired in contraction at the start of the second half of the year. July saw output decline further as the downturn in new order intakes was extended to a thirteenth consecutive month.
• Manufacturing production decreased for the second month in a row in July, with the rate of contraction gathering pace. The main drag on output was a severe downturn in activity in the euro area, where production contracted to the greatest extent since the height of the global pandemic in spring 2020. The performances of Austria, Germany and Italy were especially weak. There were also signs of weakness developing in Asia. Japan, mainland China, South Korea, Taiwan, Vietnam and Malaysia all saw output contract. North America was a comparative bright spot, with mild growth in Canada and Mexico. A slight expansion of output in the US represented a stabilisation following June’s marked retrenchment.
• The downturn at global manufacturers was driven by several factors, including weak new order intakes, deteriorating international trade flows and a correction in stock levels in response to the weak demand environment. – S&P Global

QOTD = Quote of the Day

We’ve been sounding the alarm every month and were definitely a lone wolf.

Deficits don’t matter…until they do. – GMM, May ‘23