Wage growth is on the march in Japan, as nominal cash earnings jumped 4.8% in December from the prior year period, blowing past the 3.7% consensus to mark the hottest single reading since 1997.  That striking data point further stokes an inflationary impulse which left nationwide CPI at a meaty 3.6% year-over-year clip in December.  

Accordingly, a reluctant Bank of Japan has been forced into action, hiking overnight interest rates by one quarter percentage point to 0.5% late last month, its most restrictive rate stance since early 2008. However, EZ-money-minded Kazuhiro Masaki, director-general of the BoJ’s monetary affairs department, stuck to his rhetorical guns in an address to parliament this morning, declaring that “we must support economic activity with loose monetary policy.”

Not so fast, Goldman Sachs believes. Further tightening is in the offing as soon as July per predictions from senior Japan economist Tomohiro Ota, with benchmark borrowing costs poised to reach 1.5%, a level unseen for 30 years.  

More broadly, the post-Covid outbreak in price pressures has furnished one meritorious result: the complete extinguishment of worldwide government debt priced to yield less than nothing. The global tally of such upside-down contraptions topped $15 trillion in August 2019, equivalent to nearly 30% of outstanding sovereign obligations.  As U.S. and European price indices legged higher in summer in 2022 and central banks responded with belated, aggressive monetary tightening, negative yielding debt remained above $2.5 trillion with virtually all of that loss-making paper confined to the Land of the Rising Sun.

Now, there is none. 

Wake up and smell the coffee, or maybe just go back to sleep. Global arabica bean futures advanced by 1.2% this morning to $3.8875 per pound, representing the 11^th consecutive rise. That’s the longest such winning streak since the 1970s, leaving the essential commodity higher by 112% from this time last year.  Supply concerns loom large as Brazil, the world’s largest producer, will see its 2025-26 crop fall 4.4% year-over-year to a three-year nadir of 51.81 million bags, if estimates from government agency Conab hit the mark.

Egg prices are likewise going vertical thanks in part to a bird flu epidemic that has killed more than 29 million mother hens since October and 100 million over the past three years. Wholesale prices in the Midwest rose above $7 per dozen last week according to the Department of Agriculture. Prior to last year, that price had never topped $4 outside a brief spurt in late 2022 and averaged a bit more than $1 going back to 2008.  

As Bloomberg noted Tuesday, today’s parabolic move is spurring some restaurants towards drastic measures. “I tell our managers, when you’re able to get [a case of] these large brown eggs for $55, you get as many as you can in your cooler,” relays Chad Coulter, CEO of breakfast-focused Biscuit Belly. “We’re just stocking up whenever we can get them at that specific price.”

The Louisville-headquartered fast-casual chain, which operates primarily in the southeast, has likewise pivoted to processed, liquid eggs for several dishes rather than pass rising costs on to diners. “We know the consumer is fed up high prices,” Coulter concludes. “We’re just going to hold off for now and just watch it.”

In the meantime, what’s for dinner?

Stocks managed to rebound from some early softness, finishing at session highs with a 0.4% gain on the S&P 500, while Treasurys remained well bid with 10-year yields dipping nine basis points to 4.43%, the lowest closing level seen so far in 2025. WTI crude remained under pressure at $71 a barrel, gold continued its potent rally at $2,863 per ounce, bitcoin churned above $97,000 following pronounced overnight weakness and the VIX retreated below 16.

- Philip Grant

Bring the popcorn for this sequel. Here’s Paul Tudor Jones reviewing the lay of the land on CNBC this morning:

The one thing that I would say is this is a completely, totally different landscape than Trump 1.0. We could have a 30% correction in the stock market and just be back to slightly overvalued. I think Trump being Trump, I don’t know if it will play as well as it did in 1.0, because there’s no room for mistakes.

He’s my president now, I pray he makes all the right decisions, because we are precariously perched from a macro standpoint. . . it’s going to take a maestro to pull this off in a way that kind of preserves where we are now in the major asset classes.

Let the games begin. While threats from the White House to slap levies on an array of trading partners continue to hog headlines, cost-conscious investors scored a Monday coup: Vanguard announced it will trim its expense ratios by between one and six basis points from 87 mutual funds and ETFs. The behemoth fund manager – which looked after $10.1 trillion in assets as of Dec. 31 – trumpeted the move as the largest fee reduction in its history, providing customers with a projected $350 million in savings this year alone.  Vanguard’s average fee on an asset-weighted basis now stands at just seven basis points according to Bloomberg, a fraction of the 44 basis points charged by its peers.

As Jack Bogle’s firm foregoes revenue by way of squeezing the competition, a startup trading venue sets its sights on the New York-based establishment. The Wall Street Journal relayed Friday that The Texas Stock Exchange has officially solicited SEC approval to begin listing companies as soon as early next year. The nascent TXSE (that’s pronounced “tex-ee”), which emphasized a business friendly, low-cost operating model during a monthslong effort to woo investors, has raised some $160 million from the likes of Citadel, BlackRock and Charles Schwab.

“It’s unmistakable that there’s a shifting landscape” favoring the relatively low tax and light regulatory touch of the Lone Star state, CEO James Lee told the Journal. Home cooking could aid the firm’s effort, as more than 10% of Fortune 500 firms are headquartered in Texas, with Tesla’s Elon Musk securing shareholder approval to join those ranks last year and Meta Platforms is reportedly in negotiations to follow suit.  Geographic tailwinds and all, the WSJ notes that fully electronic TXSE “will need to attract substantial trading volume” to attain viability, a task which could prove “challenging.”

Meanwhile, the outfit that famously espouses “a mission to democratize finance for all” expands its corporate footprint in telling fashion. Robinhood Markets announced on Monday that it will permit users in all 50 states to speculate on next week’s Super Bowl via a partnership with derivatives exchange Kalshi, building on last fall’s foray into event contracts tied to the presidential election. “The accessibility and ‘fun’ angle of sports competitions resonate with individual investors who enjoy engaging with topical, real-time events,” Michael Ashley Shulman, chief investment officer at Running Point Partners, told Reuters. “Expanding into event contracts is consistent with Robinhood’s strategy to offer novel ways for users to engage with the market.”

You win some, you lose some.

Stocks managed a snappy mid-session rebound following a second consecutive Sunday evening gap lower in overnight futures but lost some momentum late in the day to leave the major indices lower by about 75 basis points (reports of trade-related progress with Canada spurred futures higher in after markets trading). Treasurys were a mixed picture with the long bond dipping six basis points to 4.77% while the two-year note backed up to 4.26% from 4.22% Friday. WTI crude settled just below $73 a barrel, gold advanced to $2,815 per ounce, bitcoin hovered near $102,000 and the VIX rose two points and change to finish near 19.

- Philip Grant

From the Financial Times:

Scientists have discovered a rich range of organic compounds in samples retrieved from an asteroid by a U.S. spacecraft, including many of the key chemical building blocks of life.

A global analysis of material from asteroid Bennu, published in Nature and Nature Astronomy on Wednesday, suggests molecules carried on meteorites may have contributed to the emergence of living organisms on Earth around 4 billion years ago.

“There were things in the samples that completely blew us away,” said Sara Russell, cosmic mineralogist at London’s Natural History Museum who is one of the study leaders. “The richness of the molecules and minerals preserved are unlike any extraterrestrial samples studied before.”

Make way for the upstarts: CNBC reports that a slew of financial technology firms are muscling into the private-banking business in Singapore. The likes of U.S.-based Arta Finance and Moomoo “are aggressive, favoring in your face advertisements” touting their use of artificial intelligence and lower fees relative to incumbent wealth managers.  

An oft-overlooked cohort of well-to-do but not uber-wealthy customers presents an inviting demographic for those newcomers. Under Singapore law, individuals with net financial assets of at least $740,000 (excluding primary residence) qualify as accredited investors. For context, UBS, the world’s largest wealth manager, last year culled thousands of accounts with $2 million or less to burnish its own profitability.

Arta, backed by the likes of former Google CEO Eric Schmidt and ex-UBS boss Ralph Hamers, offers access to unlisted products such as hedge funds beginning at just $25,000 per investment, a fraction of the typical minimum threshold on offer at legacy private banks. 

The march of progress likewise confers a leg up on early adopters. “Many of our competitors have not fully embraced the shift towards integrating technology with personalized service,” Amanda Ong, Arta’s country manager for Singapore, told CNBC. “We wanted to apply the. . . principle of making investing more accessible, utilizing our tech-enabled platform to complement the personalized service that high-net-worth individuals have come to expect,” Moomoo Singapore CEO Gavin Chia declared in a recent advertorial. 

While fintech makes its move in Asia’s premier economic enclave, the freshly (re)minted Oval Office occupant ushers in a new day in stateside speculation. Yesterday, the Trump Media & Technology Group announced plans to form a financial services division dubbed Truth.Fi. The outfit will market Trump-endorsed assets including exchange traded funds, cryptocurrencies and other products “that strengthen the Patriot Economy,” with brokerage Charles Schwab serving as custodian.

Devin Nunes, former California congressman turned Trump Media CEO, put it this way in the press release: “Developing American First investment vehicles is another step towards our goal of creating a robust ecosystem through which American patriots can protect themselves from the ever-present threat of cancellation, censorship, debanking and privacy violations committed by Big Tech and woke corporations.”

On that score, the Commander in Chief looks to succeed where other bold-faced names have failed. The Wall Street Journal highlights the plight of GloriFi – a Biden-era, Peter Thiel and Ken Griffin-backed lender catering to right-of-center leaning customers – which was forced to shut its doors in October 2022, a mere three months after detailing plans to merge with blank check firm DHC Acquisition Corp. at a $1.7 billion valuation. GloriFi filed for liquidation under Chapter 7 bankruptcy in February 2023, accompanied by a morass of investor litigation chronicled by Forbes columnist Ann Rutledge earlier this month.

Of course, customers of regulated banks enjoy government backstop under the auspices of the Federal Deposit Insurance Corp., a privilege which mostly does not extend to the fintech complex, nor the fat-and-happy crypto hodlers.

Accordingly, today’s complementary backdrop of bounding technological advances alongside euphoric bull market conditions presents pronounced potential pitfalls.  See the analysis “Credit risk for the young” in the Jan. 17 edition of Grant’s Interest Rate Observer for more.  

Reserve Bank credit stands at $6.78 trillion following an $8 billion downtick over the past seven days. The Fed’s portfolio of interest-bearing assets has declined by just over $60 billion since the final week of 2024 and stands 24% below its spring 2022 peak.

Stocks rallied again by about half a percent on the S&P 500 and Nasdaq 100 to leave Monday’s selloff further in the rear-view mirror, while Treasurys also saw some strength with 2- and 30-year yields settling at 4.18% and 4.76%, each down three basis points on the day. WTI crude flipped back above $73 a barrel, gold notched fresh highs at $2,793 per ounce, bitcoin rose to $105,000 and the VIX slipped below 16.

- Philip Grant

From The Wall Street Journal:

Big shipping companies say they won’t send vessels back to the Red Sea despite a pledge by Iran-backed Houthi militants in Yemen not to attack them as long as a cease-fire in Gaza holds.

The world’s top three container shippers, MSC Mediterranean Shipping, A.P. Moller-Maersk and CMA CGM, in recent days said they would stick with other routes given what they called the unpredictable situation in Gaza and broader tensions in the Middle East.

“You don’t want to send a gas carrier that will go up in flames,” said Nils Haupt, spokesman for Germany’s biggest shipper, Hapag-Lloyd. “We don’t know when we will be returning. . .”

Before the Hamas-Israel conflict, ships traveling through the Red Sea carried about 40% of the goods traded between Asia and Europe. The ships now diverting around South Africa add as much as two weeks of sailing time and higher freight rates that are passed on to the cargo owners.

And then, perhaps, to the consumer.

The abrupt arrival of artificial intelligence upstart Deepseek isn’t the only deflationary impulse emanating from the Middle Kingdom. Industrial profits among larger Chinese firms fell 3.3% in 2024, data released Monday show, marking the third consecutive year-over-year decline in a data series which had shown only two such drops from 2000 through 2021.  Total corporate profits slipped 4.7% year-over-year from January through November, undercutting the 4% drop seen in 2022 as “Covid zero” lockdowns remained in force.

Factory activity is likewise on the wane ahead of the Lunar New Year holiday, which begins Wednesday. January’s reading of the manufacturing purchasing managers index registered at 49.1 (sub 50 figures signify contraction), trailing the 50.2 economist consensus and sagging to its lowest level since Beijing trotted out a multi-pronged monetary-cum-fiscal stimulus package last fall.

“The first major read on China’s economy at the start of 2025 is alarming,” Bloomberg economists Chang Shu and Eric Zhu wrote Monday. “Growth lost momentum even after intensified stimulus toward the end of last year. The surprisingly weak PMIs underline the urgency for stronger policy support.”

An ongoing, slow-motion property meltdown – which continues apace more than three years after China Evergrande defaulted under the weight of some $300 billion in debt – overlays uncomfortably upon that industrial downshift.  Mega-developer China Vanke Co. announced Monday that net losses reached RMB 45 billion ($6.2 billion) in 2024, with more than half of that shortfall taking place in the fourth quarter, after the government trimmed downpayment requirements for second-home buyers to 15% from 25%. The firm likewise disclosed that that chair Yu Liang and CEO Zhu Jiusheng have each resigned, citing “work adjustment reasons” and “health reasons,” respectively.

Indeed, such “sudden and simultaneous” departures by a prominent corporate player are “unprecedented in recent memory,” Foreky Wong, founding partner at Hong Kong-based advisory firm Fortune Ark Restructuring, told the Financial Times.  Xin Jie, head of state-owned enterprise Shenzhen Metro, will assume the chairmanship, a development that cheered Vanke’s creditors as its 3.15% dollar-pay bond due in May rallied to 91 cents from 80 late last week.  

That bulled up reaction reflects investor expectation of overt policy support for the stricken developer alongside limited systemic fallout from any debt restructuring, CreditSights head of Asia credit strategy Zerlina Zeng opined to the pink paper. However, if market sentiment changes “and we see a funding freeze. . . and that leads to banks becoming even less willing to extend money to property [firms], even at the project level, then that would [mean] big trouble for the Chinese government,” she added.

Stocks came under notable pressure with the S&P 500 and Nasdaq 100 losing 1.5% and 2.9%, respectively, though the averages managed to pare their losses into the bell, while Treasurys caught a strong bid with two-year yields sinking 10 basis points to 4.17% and the long bond settling at 4.76% from 4.85% Friday. WTI crude fell to $73 a barrel, gold pulled back to $2,743 per ounce, bitcoin slipped below $102,000 and the VIX jumped three points and change to settle just below 18.

- Philip Grant

Buy now, or pay later. From the Financial Times:

Chinese authorities have sought to boost the stock market and restore confidence in the world’s second-largest economy by telling local insurance companies and mutual funds to invest more in domestic stocks.

Regulators have told state insurers to invest a minimum of 30% of their new policy premiums in local shares, while mutual funds have been told to increase these shareholdings by 10% annually for the next three years. This is the first time regulators have set an explicit target for investments.

Like interest rates, exchange traded funds get in all the cracks. Roughly 300 freshly launched U.S. ETFs last year relied on derivatives as a “significant component” of their investment strategy, CFRA Research found last week, representing just over 40% of total debuts. For context, just over 50 derivatives focused funds rolled out in 2014, accounting for 20% of all new ETFs.  

Noting that such products – including buffer funds, which use options to provide a pre-determined range of investment results over a defined period – can help investors manage portfolio risk, CFRA head of ETF research Aniket Ullal pointed out that “in aggregate. . . the new ETFs being listed are quite far removed from the industry’s traditional roots in low-cost replication of broad indices.”

A suite of prospective progeny aptly illustrates that migration. On Jan. 10, Tuttle Capital Management filed SEC paperwork laying the groundwork for 10 single-stock, zero-day option covered call ETFs tracking the usual suspects such as Nvidia, MicroStrategy and Tesla.  Though daily options expiry for individual names are not yet available (apart from Fridays when quarterly, monthly and weekly contracts expire), CEO and eponym Matthew Tuttle explained to Bloomberg that “my thinking is, if I do believe that’s going to happen, I want to be first in line for it.” 

For his part, Morningstar head of client solutions Ben Johnson deemed the contraptions “another blast from the ETF industry’s spaghetti cannon, a shot fired in hopes that a few of these products might stick to the wall. [Sponsors are] clearly not at all interested in whether these products have any long-term investment merit.”

While the virtues of such explosive pasta may be up for debate, Elon Musk’s magic dust has indisputably enlivened one heretofore obscure entrant.  Bloomberg reports today that the ERShares Private-Public Crossover ETF (ticker: XOVR) gathered $120 million last month, roughly doubling the seven-year-old fund’s assets under management.

Catalyzing that influx: the purchase of a stake in closely held SpaceX in early December via a special purpose vehicle. The rocket and spacecraft manufacturer, which now represents XOVR’s top holding at 8.1% of the portfolio, garnered a $350 billion valuation in a tender offer late last year, double that seen 12 months earlier.  

Yet Crossover’s newfound success could itself serve to dull the value proposition for its investors. “If this fund is extraordinarily successful and they’re unable to acquire [more] SpaceX shares, a 9% SpaceX position you thought you were buying into very quickly can become a 2% SpaceX position,” independent ETF analyst Dave Nadig warned Bloomberg’s Emily Graffeo, who adds that the mechanism by which XOVR marks its lynchpin asset in order to meet daily share creations and redemptions remains a mystery.

Meanwhile, the speculator-in-chief’s triumphant return to the Oval Office looks to further spice up today’s ETF feast. On Tuesday, REX Financial and Osprey Funds jointly filed with the SEC to launch a fund tracking the instantly notorious Trump Coin, the meme cryptocurrency which vaulted past a $70 billion valuation on a fully diluted basis hours after its Friday debut and is currently worth just over $35 billion by Coinmarketcap.com’s lights.  

The proposed vehicle, which has yet to disclose a fee schedule, would invest in the token via a Cayman Islands-based subsidiary according to the filing.

“The type of filing and the preliminary details included suggest that the fund would be legally different from how the popular bitcoin ETFs operate,” CNBC reported Tuesday. “This could help the fund launch more quickly, but it could also increase the likelihood that regulators reject the proposal.” Then again, “crypto products were viewed skeptically by former SEC chair Gary Gensler, but both the ETF and crypto industry expect that a wider scope of funds could launch under the Trump administration.”

A $16.8 billion weekly decline in Reserve Bank credit leaves the Fed’s holdings of interest-bearing assets at $6.79 trillion. That’s down $61 billion from the day after Christmas and 23.9% below the March 2022 peak.

No bull market breather today, as some early consolidation gave way to another upside push to leave the S&P 500 half a percent in the green, leaving year-to-date gains at 4% and change. Treasurys came under pressure on the long end with 10- and 30-year yields each rising five basis points to 4.65% and 4.87%, respectively, while WTI crude retreated towards $74 a barrel and gold finished slightly below unchanged at $2,753 per ounce. Bitcoin fell below $103,000 and the VIX remained at 15.  

- Philip Grant

From Bloomberg:

EFishery Pte, one of Indonesia’s most prominent startups, may have inflated its revenue and profit over several years, according to an internal investigation triggered by a whistleblower’s claim about the company’s accounting.

A preliminary, ongoing probe into the agritech startup, backed by investors including SoftBank Group Corp. and Temasek Holdings Pte, estimates that management inflated revenue by almost $600 million in the nine months through September last year, according to a 52-page draft report circulated among investors and reviewed by Bloomberg News. That would mean more than 75% of the reported figures were fake, the report said. 
 

It’s a dweller’s market.  Home prices are on the hop across the United States, freshly released data from Redfin show, as each of the top 50 metro areas logged a year-over-year increase in December to mark the first such comprehensive updraft since May 2022. That clean sweep is particularly impressive considering the fact that 30-year mortgage rates now average upwards of 7% per Freddie Mac compared to about 3% in 2021.  Galloping interest rates helped send the market into deep freeze in April of 2023, with only 19 of the top metro areas seeing year-over-year price growth, the weakest share since 2012.

“Places that have been long known as affordable. . . like Cleveland and Milwaukee, are now seeing double digit price increases – and that’s after home prices skyrocketed during the pandemic,” commented Redfin senior economist Elijah de la Campa. “Affordable housing havens have become harder and harder to come by; even places that saw some price relief last year, like Texas and Florida, are now seeing prices tick back up.”

An uptick in pending supply likewise takes shape, as the Census Bureau relayed last Thursday that nationwide housing starts registered at a 1.5 million seasonally adjusted annualized pace in December. That reading, the fourth strongest over the last 30 months and up 16% from the same period in 2023, topped each of the 56 economist guesstimates compiled by Bloomberg.  Owing to persistent underbuilding relative to population growth over the past decade, the shortfall of housing units available for rent and sale stood at 3.7 million units in the third quarter, a November analysis from Freddie Mac concluded.  

Improving market conditions for one key construction input accompany those housing tailwinds, as lumber futures now change hands at $585 per thousand board feet, up 31% from the late-June nadir and 10% north of their average price over the past two years.  Thanks to Covid-induced supply hiccups and feverish demand in response to generous fiscal and monetary stimulus, lumber prices spiked to nearly $1,700 in May 2021 after averaging $356 over the five years through 2019.

Of course, the changing of the guard in Washington ushers in a new era of potentially precarious policy risks, as President Trump reiterated his threat Monday to slap 25% tariffs on all goods shipped from Canada and Mexico beginning Feb. 1. “I will immediately begin the overhaul of our trade system to protect American workers and families,” Trump said in his inauguration address. “Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens.”   Under now-former President Biden, the U.S. Department of Commerce increased average levies on Canadian softwood lumber to 14.54% last summer from 8.05% in 2023.

Yet that prospective uptick wouldn’t necessarily change the game for operators north of the border. Lumber and oriented-strand board (an engineered wood product) typically account for just 3% of new home costs. Meanwhile, Canada’s share of operable softwood lumber capacity across North America ebbed to 36.4% last year from 47.4% in 2003 per commodity pricing firm Fastmarkets.

Might Mr. Market be poised to smile on timber stocks once more following a mostly dour post-virus backdrop?  See the Dec. 6, 2024, edition of Grant’s Interest Rate Observer for a bullish analysis of one leading industry player.

New President, same bull market. Stocks rallied by 0.9% on the S&P 500 to push the broad index to within a percentage point of its high-water mark reached early last month, while long-dated Treasurys also enjoyed a green session with 10- and 30-year yields each dropped four basis points to 4.57% and 4.8%, respectively. WTI crude retreated below $76 a barrel, gold ripped 1.3% to $2,744 per ounce – less than 2% from its October peak – while bitcoin advanced above $106,000 and the VIX fell three-quarters of a point to 15.

- Philip Grant

An informative pair of Bloomberg bulletins:

Eli Lilly & Co. reported preliminary fourth quarter revenue that missed analyst estimates on lower-than-expected sales of its weight-loss and diabetes shots.  Fourth-quarter sales are expected to be $13.5 billion, Lilly said Tuesday morning in a statement, below the $14 billion average estimate of analysts surveyed by Bloomberg. Both Zepbound for obesity and Mounjaro for diabetes came in below projections. . .Other drugs performed within Lilly’s expectations, the company said.

Cocoa futures gained after chocolate maker Lindt & Spruengli AG reported strong sales growth, indicating that demand remained resilient despite record prices.

Ares Management detailed a noteworthy fundraising feat Tuesday, closing its latest European direct lending fund with €17.1 billion ($17.5 billion) in equity commitments. That sum tops Ares’ €15 billion target and represents, per the press release, “the largest institutional fund in the global direct lending market to date.” The firm’s previous 2021-vintage European vehicle notched €11.1 billion in equity commitments.

Though institutional investors continue to pile into private credit in the face of a global updraft in borrowing costs, so-called alternative managers cast a wider net in their search for assets. The Financial Times relayed last week that the likes of Apollo, KKR and Blackstone are lobbying the incoming Trump administration to “allow tax-deferred defined contribution plans such as 401(k)s to back unlisted investments such as leveraged buyouts, low-rated private loans and illiquid property deals.”

Apollo boss Marc Rowan argued the case for bringing such wares to the masses at a company-hosted event last fall, pointing to the heavy representation of tech behemoths such as Nvidia within retirement portfolios and assuring the audience that “we’re going to fix this and we’re in the process of fixing it.”

Of course, such a remedy would loudly reverberate across Wall Street, as Moody’s relayed last week that individual investors account for roughly half of global wealth but only 16% of alternative asset manager AUM. Then again, the rating agency identifies several potential hold-ups to industry’s grand ambitions, including “reputational risks if private asset funds fail to perform as expected, particularly considering the hefty fees.”

Writing that “illiquidity is a feature of private assets” and is “typically one of the [industry’s] drivers of outperformance,” the Moody’s analysts pointed out that “retail investors tend to be more sensitive to market volatility and increase redemption requests during periods of market stress,” potentially turning that feature into a bug. “New fund structures that target the wealth channels and allow for some access to liquidity have not been tested over several periods of severe market stress.”

Indeed, a darkening of today’s largely blue-sky growth picture could spell trouble for the fast-growing, cyclically untested asset class, one fiduciary believes. Wellcome Trust chief investment officer Nick Moakes (who is set to retire from his post at the end of March) told the FT Tuesday that “if the world gets a little bit more difficult economically, I think there are some accidents waiting to happen in the private credit world. . . [the industry] has sucked in an enormous amount of capital. That has meant that the lending standards that are applied in certain parts of private credit markets have diminished.”

Defaults within that category will register at 3% clip this year if a freshly released analysis from KBRA is on the beam, compared to a 1.9% clip for 2024, as investor hopes for a more pronounced easing cycle have ebbed substantially of late. “Companies at the bottom end of our credit assessment distribution could face a reckoning in 2025,” the rating agency warns.

Such a shakeout would largely spare the direct lending industry’s leading lights, Moakes predicts to the pink paper, though that prospect may prove cold comfort for limited partners: “You can construct all kinds of cataclysmic scenarios where they take each other down, but actually, they won’t, because what they’ve done is very clever. This stuff is all sitting in LP vehicles. So, the liability is all with the investors.”

Stocks again drifted towards unchanged on the S&P 500 after an early move, this time erasing a gap higher after recovering from an initial lurch lower Monday with December CPI print looming tomorrow morning (economists expect 2.8% annual growth on the headline figure). The long bond tested 5% intraday before settling at 4.98%, though the rest of the Treasury complex enjoyed a firmer tone with two-year yields dipping three basis points to 4.37%.  WTI crude retreated below $78 a barrel, gold advanced to $2,677 per ounce, bitcoin hovered at $96,500 and the VIX edged below 19.

- Philip Grant

Don’t do the rhyme if you can’t do the time. From CoinDesk:

The crypto industry's most notorious rapper, Heather Morgan – more widely known as Razzlekhan – released a new music video as U.S. authorities stand ready to imprison her for criminally laundering portions of the crypto loot her husband was convicted of pilfering from Bitfinex.

In the song, 'Razzlekhan vs. The United States," Morgan's outlandish and [provocatively] clad musical persona gyrates and scowls into the camera. Despite the legalese of the song's name, its lyrics don't make an overt attack on the investigation and court proceedings that landed her a federal sentence of 18 months in prison.

"This ain't no free country; it running on money; capitalists chummy; old white men hella grumpy," raps Morgan, bound in red ropes. The aggressive image strikes a sharp contrast with the conservatively dressed defendant that wept in a Washington courtroom as she apologized for her role in concealing and cashing out parts of the stolen fortune of almost 120,000 bitcoin.

Let’s make a deal: News of a prominent corporate merger splashed across the wires Friday morning, with Constellation Energy agreeing to purchase closely held peer Calpine for $16.6 billion in cash and stock along with the assumption of nearly $13 billion in debt. The combination “creates the [country’s] largest coast-to-coast power generator,” as S&P Global analyst Aneesh Prabhu puts it, boosting Constellation’s share of the crucial California and Texas markets to 23% and 10%, respectively, from 11% and near-zero.

In response, Constellation shares vaulted higher by 25% in an otherwise sloppy tape, underscoring the extent to which the artificial intelligence revolution renders power generation front of mind for Mr. Market.

The Wall Street Journal points out that queries on large language models such as ChatGPT can require up to 10 times the energy as a conventional Google search, while data centers may account for 9% of domestic energy demand by 2030 per estimates from the Electric Power Research Institute, roughly double their current share of consumption.  Total domestic power demand will rise 20% by 2033 if estimates from consulting firm ICF hit the mark, marking a decisive shift as that metric has remained virtually inert for more than a decade.

Instructively, today’s AI-induced commercial imperative extends to the power industry’s red-headed stepchild.  On Tuesday, coal-fired producer Hallador Energy Co. (HNRG on the Nasdaq) announced a commitment agreement with an unnamed “leading global data center developer” to deliver energy and capacity to an Indiana-based facility. The parties entered an exclusive, 105-day negotiating window beginning Jan. 2., with a definitive agreement likely sufficient to lock in the majority of Halldor’s energy and capacity for the next decade at a price premium to the forward curve, the company advises.

Buoyed in part by a 7% rally in reaction to that news, HNRG shares have returned 62% since Grant’s Interest Rate Observer laid out the bull case in the May 24, 2024, edition. Over that period, the S&P 500 has returned 11%. “It’s exciting,” CEO Brent Bilsland told Grant’s last spring. “We spent the last 19 years in a contracting market. Now, we’re entering a market that’s expanding because, for the first time in 25 years, demand for electricity is growing in everything, from electric vehicles to AI to the onshoring of industry.”

A red-hot December payrolls report served to dim hopes for future Fed rate cuts, in turn throwing asset prices for a loop with the S&P 500 down 1.5% to push the broad index into negative territory for January. Treasury yields jumped to 4.4% for the two-year note and 4.96% on the long bond, up 13 and four basis points, respectively, while WTI crude approached its October highs at just below $77 a barrel and gold posted its fourth straight green finish at $2,692 per ounce. Bitcoin rose to near $95,000 and the VIX wrapped up the week a bit below 20.

- Philip Grant

Eat your heart out, CDC. From the New York Post:

People living in an Italian village are banned from getting sick.

Residents of Belcastro in the southern region of Calabria — one of the poorest regions in Italy — are “ordered to avoid contracting any illness that may require emergency medical assistance,” a decree from Mayor Antonio Torchia stated.

The ordinance also instructs residents not to take risks or get in accidents that could end up endangering their health, local media reported.

No time like the present: Corporate borrowers are looking to get while the getting’s good, with investment-grade supply in the U.S. poised to reach $200 billion in January, if Bloomberg-compiled estimates of Wall Street dealers prove accurate, the highest on record for the opening month of the year.

“Issuers are taking advantage of calm markets, low volatility and tight spreads before January 20^th,” Palinuro Capital CIO Alfonso Peccatiello told Bloomberg, referencing Donald Trump’s imminent return to the Oval Office. Option-adjusted spreads on the ICE BofA US Corporate Index settled Tuesday at 84 basis points, down from 108 basis points at this time last year to hover near their tightest of the post-Lehman Brothers era.

Of course, that shrinking risk premium tells only part of the tale, as benchmark 10-year Treasury yields have vaulted more than 100 basis points since the Federal Reserve commenced its rate-cutting cycle in mid-September, reaching 4.7% today for the first time since last spring.

More broadly, the post-Covid era has proven decidedly unremunerative to long-dated Treasury bulls, as the iShares 20+ Year Treasury Bond ETF has generated a minus 37% total return over the past four years. During that stretch, the lynchpin vehicle has seen net assets climb to just under $50 billion from $18 billion in January 2021.

“By now, plenty of faces have been ripped off by the most recent bond-market tantrum,” Thomas Tzitzouris, director of fixed income research at Strategas, commented to Bloomberg. “Even though we’d love to say that the worst is over, there’s no indication that shorts are exhausted or that data is supportive” of a rebound. Tzitzouris added that the combination of upward pressure on yields with the narrowest default-risk compensation for corporate creditors of the cycle leaves both speculative and default risk-free assets in the “danger zone.”

Strategists at Bank of America reach a similar conclusion, writing that last January’s $192 billion in fresh corporate supply – which blew past the prior record for the month established in 2017 – “were in part due to very strong investor demand, which ultimately allowed investment-grade spreads to tighten.” This time, the skimpy pickup is itself bringing borrowers to the fore. Thus, “the environment of still-tight spreads but higher interest rate volatility could result in more supply but weaker demand.”  

A solid long bond auction, which priced at just above 4.91% compared to a 4.92% When Issued, helped the Treasury complex erase its early losses to finish unchanged to slightly stronger on the day, while stocks likewise settled down to the tune of a flat showing following the recent spurt of volatility. WTI crude retreated towards $73 a barrel, gold powered higher at $2,663 per ounce, bitcoin dropped below $94,000 and the VIX edged below 18.

The stock market is closed Thursday on account of the National Day of Mourning for Former President Jimmy Carter, with the bond market set for a truncated session ending at 2PM ET.

- Philip Grant