Month: September 2024

US equity futures gain, and trade just shy of all time highs, led by Tech (especially Mag7 and Semis) as global markets trade higher ahead of the FOMC tomorrow as traders continue to increase probability of 50bps cut (~70% chance now) prompted by another Nick Timiraos WSJ article saying the decision between at 25 vs 50bps rate cut is complicated but withholding a larger cut could raise awkward questions. As of 8:00am ET, S&P futures are up 0.4%, rising for a 7th consecutive day, while Nasdaq 100 futs gain 0.5%, with INTC (+6.9%) the standout and MSFT +1.9% on a new $60 billion buyback. European stocks are also broadly higher as Asian markets are mixed and Japan stocks tumbled 2% after reopening from holiday and getting dragged lower by the surging yen.  Bond yields are lower across the curve as the 10Y TSY yields drop to 3.60%, a new 2024 low ahead of tomorrow’s Fed rate decision where odds are now 70% of a 50bps rate cut. The USD remains under pressure, dropping for a fifth consecutive session, falling 0.1% to the lowest since January. Commodities are mixed: crude down, natgas up, precious down, base up, and Ags higher. For the US session, focus is on retail sales this morning, with the market looking to firm up expectations for tomorrow’s FOMC meeting (currently ~-40bps priced). The latest BofA card spending data suggests retail sales will miss estimates (est are for headline retail sales at -0.2%, control group +0.3%) reflecting mixed card spending and a moderation from the 7.7% annualized pace of retail control growth over the prior two months, but a potential boost from back-to-school shopping. Also this morning we have IP, NAHB housing market data and pre-recorded remarks from FOMC non-voter Logan (note, her remarks will not address monetary policy or the economy, reflecting the FOMC’s blackout period).

In premarket trading, Microsoft  gains +2% after after it raised its quarterly dividend 10% and announced a new $60 billion stock repurchase program. Intel is up +6.5% after it announced it will make custom AI chips for Amazon AWS. Here are some other notable premarket movers:

• AppLovin climbs 2.4% following an upgrade of the software maker to buy at UBS on improving revenue growth visibility.
• HP Enterprise rises 3.5% as BofA upgrades to buy from neutral, citing numerous upcoming catalysts for the computer hardware and storage company.
• Shopify advances 2.1% following an upgrade to buy at Redburn Atlantic, which sees the company as a prime beneficiary of expected accelerated growth in US social e-commerce.
• SolarEdge Technologies shares fall 7.1% as Jefferies cuts to underperform from hold, citing significant headwinds in Europe.
• Torrid Holdings shares gain 3.5% after William Blair raised the apparel retailer to outperform from market perform, seeing potential for the stock to “effectively” double over the next six to 12 months.
• Viasat shares fall 3.7% as JPMorgan cut the recommendation on the communication company to neutral from overweight, after United Airlines chose to partner with Elon Musk’s Starlink instead of the broadband satellite provider to power its inflight Wi-Fi.

On the eve of the Fed’s first rate cut in more than four years, investor attention will home in on US retail figures due later (our preview is here). The numbers will feed into a debate raging across markets over whether the Fed will ease by 25 basis points, or by double that amount.

“August’s US retail sales report is, arguably, the most important of today’s releases, given that a soft print would likely see participants go ‘all-in’ on the idea of a jumbo 50 basis point Fed cut tomorrow,” wrote Michael Brown, a strategist at Pepperstone Group Ltd., in a note. “Though it’s tough to imagine an equally aggressive paring of dovish bets were the data to beat expectations.”

Former NY Fed President Bill Dudley was among those expecting a 50 basis-point move. “Monetary policy is tight, when it should be neutral or even easy,” he wrote in a Bloomberg column. “And a bigger move now makes it easier for the Fed to align its projections with market expectations, rather than delivering an unpleasant surprise not warranted by the economic outlook.”

But for Jacques Henry, head of cross-asset research at Silex in Geneva, such a large reduction is “a double-edged sword,” as it could suggest the Fed is worried the US economy is slowing faster than expected. The quarter-point cut he expects brings the risk of some short-term disappointment for equity markets. “There could be some drawback on sectors such as real estate and tech,” Henry said.

Meanwhile, optimism around Fed rate cuts has boosted investor sentiment for the first time since June, according to a global survey by Bank of America, Fund managers see a 79% chance of a soft landing as rate cuts support the economy. Still, investors are “nervous bulls,” with risk appetite tumbling to an 11-month low, said BofA strategist Michael Hartnett. The poll also showed a big rotation into bond-sensitive sectors such as utilities from those that typically benefit from a robust economy. 

European stocks climb to their highest in two-weeks with all 20 sectors in the green. The Stoxx 600 was up 0.7%, led by retail and banking stocks while healthcare and telecommunications stocks lagged. Gains were also boosted by the latest German ZEW Investor Confidence print which was weaker than expected (expectations 3.6 vs cons 17; current situation -84.5 vs -80 cons, lowest since May 2020/expectations lowest since Oct ‘23) boosting hopes for even more rate cuts by the ECB. Here are the biggest European movers Tuesday:

• Hermes advances as much as 1.4% after the luxury fashion house was upgraded to outperform from neutral at BNP Paribas Exane, which said the company will be stronger than peers for longer
• Flutter shares rise as much as 1.3% in London trading after the group agreed to acquire Playtech’s Italian gambling operation Snaitech for a total enterprise value of €2.3 billion in cash
• Kingfisher gains as much as 8.4%, the most in about four years, after the UK home-improvement retailer lifted the bottom-end of its guidance ranges for annual earnings and cash flow
• Barry Callebaut shares rise as much as 7.8% after getting a double upgrade to overweight at Barclays, while Lindt & Spruengli shares also gain after being raised by one notch at the broker
• SUSS MicroTec rises as much as 13% as Jefferies starts coverage with a buy rating, describing the process equipment provider as a “hidden gem” within the European semiconductor sector
• Pure Biologics surge as much as 30% after the Polish biotechnology company signed a term sheet on a possible partnership with an undisclosed US company to develop two drug projects
• Auction Technology Group shares rise as much as 5.1% after the online marketplace platform operator was upgraded by analysts at JPMorgan, who said the shares are now “overly discounting” the risk to earnings in 2025
• Dometic falls as much as 14%, the most since March 2020, after the Swedish recreational vehicle and camping equipment maker issued a profit warning, saying that macroeconomic challenges were weighing on sales
• THG shares drop as much as 5.2% after the online retailer reported weaker-than-expected first-half results and said it expected earnings for the year at the lower end of consensus estimates
• Essentra shares sink 25%, their steepest drop since 2016, after the component maker cut its guidance for full-year adjusted operating profit by about 17% at the midpoint
• JTC drops as much as 7.4% on Tuesday after releasing its first-half results, with the financial firm retreating from yesterday’s record high close 

Earlier in the session, Asian stocks were mixed as gains in Hong Kong were negated by losses in Japanese stocks as a stronger yen weighed on exporters. The MSCI Asia Pacific Index rose less than 0.1%, recovering from early declines, as Tencent and Alibaba climbed in Hong Kong. The nation’s benchmark index rose nearly the most in three weeks. Meanwhile, Japan’s Topix plunged nearly 2% as the market reopened following a holiday on Monday as stocks caught down to the recent plunge in the USDJPY. Markets in mainland China, Taiwan and South Korea were closed for holidays, while Australian shares climbed for a fourth day, and Indian stocks rose. Benchmarks also traded higher in Southeast Asia, led by the Philippines, Singapore and Malaysia.

All eyes are on policy decisions and commentary this week by the Federal Reserve and Bank of Japan. The yen strengthened through the psychological level of 140 per dollar Monday amid expectations the gap between US and Japanese interest rates will narrow further. “We continue to think the earnings picture of Japan’s exporters and multinationals will likely get murkier, as much of the forex gains that have greatly flattered corporate earnings in the past two years disappear,” Asymmetric Advisors said in a note.

In FX, the Bloomberg Dollar Spot Index drops for a fifth consecutive session, falling 0.1% to the lowest since January ahead of Wednesday’s Federal Reserve policy decision.  “The US retail sales numbers out later today will likely be significant,” Michael Wan, a senior currency analyst at MUFG Bank in Singapore, wrote in a research note. They “may perhaps help to settle the ongoing debate about whether the Fed may do a 25 or 50 basis point cut later this week.” The yen erased an earlier loss against the dollar as a slide in Japanese shares boosted demand for the currency as a haven.

In rates, treasuries inch higher, with US 10-year yields falling 1 bp to 3.61%. Treasuries are narrowly mixed in early US trading with the curve flatter as front-end yields rise about 1bp on the day with 7Y-30Y sectors little changed. 2s10s, 5s30s spreads extend Monday’s flattening move and remain near session lows. Bunds outperform Treasuries in the wake of weaker-than-expected September ZEW survey data. Focal points of US include August retail sales data and 20-year bond auction. Treasury coupon auctions resume with $13b 20-year bond reopening at 1pm New York time; WI 20-year yield near 3.995% is ~17bp richer than last month’s, which drew good demand.

In commodities, oil prices are little changed, with WTI trading near $70.10 a barrel. Spot gold falls $7 to around $2,576/oz. Bitcoin rises 2%.

Looking to the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for August, Canada’s CPI for August, and the German ZEW survey for September. From central banks, the FOMC will begin their two-day meeting today.

Market Snapshot

• S&P 500 futures up 0.2% to 5,650.50
• STOXX Europe 600 up 0.5% to 517.71
• MXAP little changed at 183.82
• MXAPJ up 0.6% to 574.41
• Nikkei down 1.0% to 36,203.22
• Topix down 0.6% to 2,555.76
• Hang Seng Index up 1.4% to 17,660.02
• Shanghai Composite down 0.5% to 2,704.09
• Sensex up 0.2% to 83,115.80
• Australia S&P/ASX 200 up 0.2% to 8,140.90
• Kospi up 0.1% to 2,575.41
• German 10Y yield little changed at 2.11%
• Euro little changed at $1.1135
• Brent Futures down 0.1% to $72.67/bbl
• Gold spot down 0.0% to $2,582.31
• US Dollar Index down 0.14% to 100.63

Top Overnight News

• Fed watcher Nick Timiraos wrote “Fed Prepares to Lower Rates, With Size of First Cut in Doubt: The central bank usually prefers to move in increments of a quarter point. This time, it’s complicated” which noted the decision whether to cut by 25bps or 50bps will come down to how Powell leads his colleagues through a finely balanced set of considerations, while he added that data over the past months showed inflation resumed a steady decline to the 2% goal but the labor market has cooled: WSJ
• US officials are traveling to China with a warning to Beijing about the flood of exports being sent by Chinese companies around the world as the country’s domestic growth cools. WSJ  
• Washington and Tokyo are nearing a deal that would impose fresh restrictions on the ability of non-US chip firms to export products to China. FT
• Shigeru Ishiba has taken the lead in the latest Nikkei opinion poll asking who the best person is to lead the LDP (and therefore become the country’s next PM). Nikkei
• There’s little chance that the European Central Bank will lower interest rates again next month, according to Governing Council member Gediminas Simkus. BBG
• UniCredit is set to ask the ECB within days for regulatory permission to build a stake of as much as 30% in Commerzbank, a person familiar said. BBG
• Justin Trudeau suffered a big political setback as his Liberal Party lost a special election in Montreal. It’s the second major defeat at the ballot box for the Canadian PM after his party lost a seat in the Toronto area in June, raising the pressure on him to step aside before the next election. BBG
• Blinken is headed back to the Middle East, but a Gaza ceasefire breakthrough isn’t imminent. WSJ
• Israel updated its war goals, adding the safe return of its citizens to their homes near the border with Lebanon. RTRS
• A panel of federal judges sounded skeptical about TikTok’s legal arguments as the company combats a recent bill that would force the platform to be sold or face a US ban. NYT
• BofA September Global Fund Manager Survey: Sentiment improves for first time since June on “Fed cuts = soft landing” optimism; cash level dips to 4.2%; Big rotation to bond sensitives from cyclicals, overweight utilities since 2008; Tactically survey says the bigger the Fed cut, the better for cyclicals.
• Microsoft announced a quarterly dividend increase of 10% to USD 0.83/shr and a new USD 60bln share repurchase program.
• Intel said it and AWS are expanding their strategic collaboration by co-investing in custom chip designs, including an AI fabric chip and a custom Xeon 6 chip; the partnership supports US semiconductor manufacturing and AWS’s data centre expansion in Ohio. Separately, it said it plans to establish Intel Foundry as an independent subsidiary to provide clearer separation for external customers and suppliers. Will be pausing manufacturing buildout projects in Poland and Germany.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly positive but with gains capped as participants continued to second-guess the magnitude of the looming Fed rate cut, while markets in Mainland China, Taiwan and South Korea remained closed for holidays. ASX 200 marginally edged higher and printed a fresh intraday record high with early advances led by real estate and tech. Nikkei 225 suffered on return from the long weekend and fell beneath 36,000 amid headwinds from the recent currency strength. Hang Seng shrugged off early cautiousness and gradually climbed higher ahead of the Mid-Autum Festival in Hong Kong, while Midea Group’s H shares surged over 8% on its Hong Kong debut following Hong Kong’s largest IPO in three years.

Top Asian News

• US and Japan are nearing a deal to curb chip technology exports to China, according to FT.
• Japanese Finance Minister Suzuki said FX fluctuations have both merits and demerits on Japan’s economy, while they will respond appropriately after analysing the impact of FX moves. Furthermore, he reiterated that rapid FX moves are undesirable and it is important for currencies to move in a stable manner reflecting fundamentals.
• German KfW executive says looking to grow investments in India to USD 1bln from current USD 400mln over the next few years.

European bourses, Stoxx 600 (+0.5%) opened on a firmer footing, and have traded at session highs throughout the European morning, not deviating much from the levels seen at the cash open. European sectors hold a strong positive bias; Retail is the clear outperformer, propped up by post-earnings strength in Kingfisher (+7.2%). Healthcare is found at the foot of the pile, alongside Telecoms. US Equity Futures (ES +0.2%, NQ +0.5%, RTY +0.3%) are modestly firmer across the board, with very slight outperformance in the tech-heavy NQ, attempting to pare back some of the losses seen in the prior session.

Top European News

• ECB’s Simkus says the economy is developing in line with forecasts; the likelihood of an October rate cut is very small; will not have many new data points in October.
• EU Commission President von der Leyen proposes France’s Sejourne as Commissioner for Industrial Strategy and Ribera for Competition Commissioner; proposes Sefcovic as the Trade Commissioner and Dombrovskis as the Economy Commissioner. Serafin as the Budget Commissioner. Kubilius as Defence Commissioner

FX

• USD is a touch softer vs. peers as the dovish Fed repricing continues. Markets now assign a near 70% chance of a 50bps cut by the Fed this week vs. circa. 15% in the wake of last week’s CPI data. Today’s US Retail Sales at 13:30 BST / 08:30 EDT is due.
• EUR is steady vs. the USD after another batch of soft data from Germany saw the pair pullback from its session high at 1.1146. If upside in the pair resumes, the 6th September high resides at 1.1155.
• GBP is flat vs. the USD with UK-specifics light in the run up to UK CPI tomorrow and the BoE policy announcement on Thursday with the former unlikely to have much impact on the latter. The 1.3218 high for today’s matches that of Monday’s.
• JPY is steady vs. the USD after the pair failed to hold below 140 yesterday (printed a trough at 139.57). Focus this week will no doubt be on the FOMC on Wednesday ahead of the BoJ on Friday.
• Antipodeans are both broadly steady vs. the USD. AUD/USD has just about eclipsed yesterday’s best of 0.6753 and is at its highest level since 6th September; 0.6767 was the high that day.
• CAD is steady vs. the USD in the run up to today’s CPI metrics. Today’s release comes in the context of comments over the weekend from BoC Governor Macklem that the Bank could begin cutting rates in 50bps increments.
• Canada’s ruling party has lost a key Quebec seat in the Montreal special election, framed as a blow to PM Trudeau, via CBC.

Fixed Income

• USTs are essentially flat; overnight focus was on the latest WSJ Timiraos piece which highlighted that when the Fed has doubts around the size of its first cut it generally favours 25bps; however, “this time, it’s complicated”. This could potentially be the reason USTs caught a slight bid to a 115-21 high, where it currently resides.
• Bunds are firmer; a modest bounce was seen across fixed income as European players rejoined the session. Specific developments were slim but the move was potentially a function of participants reacting to an overnight Timiraos piece. A move which took Bunds to a 135.39 peak, stopping 10 ticks shy of last week’s 135.49 best.
• Gilts are firmer, in tandem with the broader strength seen across peers; Gilts hit a new contract peak at 101.52, but unable to matierally hold above 101.50 ahead of the 2054 Gilt auction. The tap was strong but not as stellar as the last outing, but Gilts themselves were unreactive to the auction.
• UK sell GBP 2.75bln 4.375% 2054 Gilt: b/c 2.89x (prev. 3.35x), average yield 4.329% (prev. 4.636%), tail 0.2bps (prev. 0.2bps)

Commodities

• Crude futures began the European morning on a firmer footing, but has since slipped off best levels and currently trades towards the bottom end of today’s ranges; Brent’Nov currently within a 72.35-73.21/bbl range.
• Mixed trade overall in the precious metals complex, with spot silver flat and gold dips lower but spot palladium outperforms with gains of some 1% at the time of writing. XAU sits in a narrow USD 2,574.63-2,587.02/oz range.
• Mixed trade across base metals futures with traders not committing to a particular direction ahead of the upcoming risk events. APAC trade was also tentative amidst the lack of Chinese participants amid the Mid-Autumn festival break.
• PBF’s 166k BPD Torrance California refinery reports flaring due to malfunction

Geopolitics: Middle East

• US Secretary of State Blinken will travel to Egypt today for US-Egypt strategic dialogue.
• “Houthi leader: ready to send hundreds of thousands of trained fighters to Hezbollah”, via Sky News Arabia.

Geopolitics: Other

• North Korea’s Foreign Minister travelled to Russia, according to KCNA.
• Two Chinese Coast Guard ships arrived in Russia’s Port of Vladivostok for joint drills, according to RIA.

US Event Calendar

• 08:30: Aug. Retail Sales Advance MoM, est. -0.2%, prior 1.0%
  • Aug. Retail Sales Ex Auto MoM, est. 0.2%, prior 0.4%
  • Aug. Retail Sales Ex Auto and Gas, est. 0.3%, prior 0.4%
  • Aug. Retail Sales Control Group, est. 0.3%, prior 0.3%
• 08:30: Sept. New York Fed Services Business, prior 1.8
• 09:15: Aug. Industrial Production MoM, est. 0.2%, prior -0.6%
  • Aug. Manufacturing (SIC) Production, est. 0.2%, prior -0.3%
  • Aug. Capacity Utilization, est. 77.9%, prior 77.8%
• 10:00: July Business Inventories, est. 0.3%, prior 0.3%
• 10:00: Sept. NAHB Housing Market Index, est. 41, prior 39

DB’s Jim Reid concludes the overnight wrap

If you’ve been following DB’s macro research over the last few days, you’ll be aware of the view that if there was no informed Fed sources massaging the market back down to 25bps by the close of play last night, then the consensus here is that this would imply the Fed is leaning towards 50bps tomorrow night. For most of yesterday the market was pricing in around 40bps of cuts which as Matt Raskin pointed out in a great chart we highlighted yesterday, left this meetings’ pricing the furthest from both a 25 and 50bps move two days out from the meeting since for over 15 years. So a very rare level of uncertainty. As we type this morning, the pricing has ticked up further to 43.5bps, or in other words a 74% chance of a 50bp move. Overnight, we’ve had another WSJ article from Nick Timiraos, although it didn’t steer things in either direction and the headline indicates the ongoing uncertainty, saying “Fed Prepares to Lower Rates, With Size of First Cut in Doubt”.

In recent times, the closest parallel to this uncertainty is the decision in March 2023, amidst the regional bank turmoil. Before SVB’s collapse on March 10 last year, it was widely expected that the Fed would proceed with a rate hike on March 22. But as the turmoil grew worse, there were serious doubts about whether the Fed would still go ahead, and there were similar debates happening about whether a dovish decision might signal that things were worse than markets thought. Ultimately, the Fed did proceed with the hike, but on the Monday before the decision, futures were still only pricing it as a 73% chance, and right before the announcement it had only drifted up to 80%. So there was a little bit of doubt as to what they’d do, although not to the extent that we’re seeing today.

Of course, there are quite a few residual nerves today about going for 50bps. Indeed, on all the recent occasions when the Fed have accelerated up to 50bp cuts, bad things have then happened. That was the case when they opened in 2001 and 2007 with 50bp cuts, whilst the first Covid cut in March 2020 was also an initial 50bp move (followed up by a 100bp cut less than two weeks later). But although the precedents aren’t good, it’s worth bearing in mind that correlation isn’t causation, and it’s hardly like the GFC only happened because the Fed opened with 50bps. So it’ll be fascinating what history has to say about this time.

With growing anticipation for a 50bp cut, that helped pushed US Treasury yields down to fresh lows. For instance, the 2yr yield (-3.1bps) closed at a fresh two-year low yesterday of 3.55%, and the 10yr yield (-3.4bps) closed at a 15-month low of 3.62%. It was a similar story for real yields, and the 10yr real yield (-4.2bps) fell back to 1.53%, which hasn’t been seen since July 2023. Already that’s been filtering through into lower mortgage rates, and last week’s data from the MBA showed that the average 30yr mortgage rate in the US was down to 6.29% in early September, the lowest in over 18 months. However there wasn’t much negative impact from rates going up aggressively as most homeowners have a 30yr fixed (low) rate. So it’s unlikely that lower mortgage rates will have a big impact on housing unless it goes a lot lower and prompts refinancing and more voluntary home moves.

We will get a final batch of data today before tomorrow’s big decision, as US retail sales and industrial production numbers for August are out later. So it’ll be interesting to see how they affect estimates for Q3 growth. Currently, the Atlanta Fed’s GDPNow tracker stands at an annualised rate of +2.5% for this quarter, and we’ll get another update today after that data is out, so one to keep an eye on. We didn’t get much data yesterday, although there was the Empire State manufacturing survey for September, which posted its strongest reading since April 2022, at 11.5 (vs. -4.0 expected).

For equities, the main theme yesterday was the rotation trade, as the Magnificent 7 (-0.70%) fell back again even as the small-cap Russell 2000 (+0.31%) advanced. That continued the theme from Friday, and it means that over the last two sessions, the Russell 2000 is now up +2.81%, whereas the Mag 7 is down -0.39%. That weakness among the Mag 7 was led by Apple (-2.78%) as the first weekend of new iPhone pre-order sales appeared to have come in at the weaker side of expectations. But the broader mood was positive, with the S&P 500 (+0.13%) advancing for a sixth session in a row, closing just -0.60% beneath its all-time high from mid-July. Indeed, three quarters of the index constituents were higher on the day, led by financials (+1.22%) and energy (+1.20%) stocks, which helped the equal-weighted S&P 500 (+0.66%) to reach a new all-time high.

Over in Europe, that rotation theme was also evident. The STOXX 600 (-0.16%) posted a modest decline, mostly as the STOXX Technology Index (-1.25%) saw a decent pullback. Sovereign bonds also echoed the US rally, with yields on 10yr bunds (-2.6bps), OATs (-0.7bps) and BTPs (-3.3bps) all moving lower. Moreover, for BTPs that left them at 3.48%, their lowest closing level so far this year.

Overnight in Asia it’s been a fairly quiet morning, with markets in mainland China and South Korea closed for public holidays. But in Japan, equities have slumped amidst the continued appreciation of the Japanese Yen, with the Nikkei (-1.81%) and the TOPIX (-1.76%) both seeing sharp declines. Indeed, the prospect of a 50bp Fed rate cut saw the Japanese Yen strengthen past 140 per dollar at one point yesterday, which is its strongest since July 2023, although this morning it’s weakened again to 140.71 though. Nevertheless, there has bene some more positivity elsewhere, and in Hong Kong, the Hang Seng is up +1.44% this morning. Looking forward, US equity futures are pointing a bit lower, with those on the S&P 500 down -0.11% as we await the Fed’s decision tomorrow.

To the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for August, Canada’s CPI for August, and the German ZEW survey for September. From central banks, the FOMC will begin their two-day meeting today.

A new report from the Financial Times details how US and Japanese officials are nearing a deal to curb tech exports to China’s chip industry. This comes two weeks after Beijing threatened severe economic retaliation against Tokyo if it proceeded with new chip export curbs.

FT spoke with insiders who said US and Japanese officials are nearing a ‘breakthrough’ in talks to coordinate new export controls against China’s chip industry. The curbs would target non-US companies, forcing them to obtain licenses to sell products directly to Chinese companies that directly or indirectly connect to the nation’s chip industry. 

The new trade restrictions would close loopholes in existing rules and add additional restrictions at a time when Huawei and other Chinese firms have managed to circumnavigate Western chip trade restrictions in recent years.

One of Washington’s primary objectives is to make it much more challenging for Chinese firms to acquire critical chipmaking tools, such as those from ASML in the Netherlands and Tokyo Electron in Japan. 

Here’s more from FT:

The US also wants them to restrict servicing, including software updates, and maintenance of the tools, in a move that would significantly hurt China. The controls would have a similar impact to those already on US companies and citizens.

Negotiations have centered on aligning the three countries’ export control rules so Japanese and Dutch companies will not be subject to the FDPR, which one person in the Netherlands described as a “diplomatic bomb.”

One of the top concerns, while the Biden administration shines the beacon of democracy that continues to bully its allies, is the real possibility that Beijing unleashes severe economic retaliation against Tokyo.

In a recent but separate Bloomberg report, Toyota Motor told Tokyo officials that new chip export curbs could be devastating because they would halt access to critical minerals from the world’s second-largest economy. 

The question becomes whether Tokyo should fall in line with the Biden administration’s crusade against China’s tech industry.

“Japan shouldn’t tighten its export control just because the US is making such a request,” Akira Minamikawa, an analyst with the research firm Omdia, recently said, adding, “Japan should have its own philosophy, decide what’s best for the country and stand firm.”

Meanwhile…

FT noted that Biden plans to unveil the new export controls before November’s presidential election. 

China’s high-tech advancements, such as domestic 5G smartphones and AI chips, are further evidence that Western sanctions have yet to slow Beijing’s accession to become a global superpower.

Authored by Jeffrey Tucker via The Brownstone Institute,

There is a lack of public comment and debate about Kamala Harris’s call for price controls on groceries and rents, the most stunning and frightening policy proposal made in my lifetime. 

Immediately, of course, people will reply that she is not for price controls as such. It is only a limit on “gouging” (which she variously calls “gauging”) on grocery prices. As for rents, it’s only for larger-scale corporations with many units. 

This is nonsense. If there really are national price-gouging police running around, every single seller of groceries, from small convenience stores to farmers’ markets to chain stores, will be vulnerable. No one wants the investigation so they will comply with de facto controls. No one knows for sure what gouging is. 

Don Boudreaux is correct:

“A government that threatens to punish merchants for selling at nominal prices higher than deemed appropriate by government clearly intends to control prices. It’s no surprise, therefore, that economists routinely analyze prohibitions against so-called ‘price gouging’ using exactly the same tools they use to analyze other forms of price controls.”

As for rental units, the only result will be fewer amenities, new charges, new fees for what used to be free, less service, and a dramatically reduced incentive to build new units. That will only lead to a pretext for more subsidies, more public housing, and more government provision generally. We have experience with that and it is not good. 

The next step is nationalizing housing and rationing of groceries because there will be ever fewer available. 

The more the betting odds favor Kamala, the stronger the incentive to raise prices as high as possible now in anticipation of price controls come next year. That will provide even more seeming evidence for the need for more controls and a genuine crackdown. 

Price controls lead to shortages of anything they touch, especially in inflationary times. With the Federal Reserve seemingly on the verge of cutting rates for no good reason – rates are very low in real terms by any historical standard – we might see wave two of inflation later next year. 

Here are real interest rates historically considered as they stand. Do you see a case here for lowering them?

Next time, however, merchants will not be in a position to respond rationally. Instead, they will confront federal price investigators and prosecutors. 

Kamala is wrong that this will be the “first-ever” ban on price gouging. We had that in World War II, along with rationing tickets on meat, animal fats, foil, sugar, flour, foil, coffee, and more. It was a time of extreme austerity, and people put up with it because they believed it was saving resources for the war effort. It was enforced the same as we saw with covid lockdowns: a huge network enlisting state and local institutions, media, and private zealots ready to rat out the rebels.

Franklin Roosevelt issued Executive Order 8875 on August 28, 1941. It claimed broad powers to manage all production and consumption in the US. On January 30, 1942, the Emergency Price Control Act granted the Office of Price Administration (OPA) the authority to set price limits and ration food and other commodities. Products were added as shortages intensified.

And yes, all of this was heavily enforced.

In case you are doing the math, that’s a $200,000 fine today for noncompliance. In other words, this was very serious and highly coercive. 

Technology limited enforcement, however, and black markets sprung up everywhere. The so-called Meatleggers were the most famous and most demonized by government propaganda. 

What happens when the government restricts meat consumption?

During World War II, food rationing led to significant changes in consumption habits in the United States.

Adults and children over 12 were limited to 2 lbs of meat per week, which was monitored through rationing… pic.twitter.com/goCU1FGMnD

— Meat Head (@markeatsmeat) February 20, 2024

In a nation with more agriculture in demographic proximity, people relied on local farmers and various methods of bartering goods and services. 

Years went by and somehow people got through it but production for civilian purposes came to a near standstill. The GDP for the period looked like growth but the reality was a continuation and intensification of the Great Depression that began more than a decade earlier. 

There are fewer people alive now that recall these days but I’ve known some. They adopted habits of extreme conservation. I once had a neighbor who simply could not bear to throw away tin-foil pie pans because she had lived through rationing. After she died, her kids discovered her vast collection and it shocked them. She was not crazy, just traumatized. 

How would such a thing transpire today?

Look at the program SNAP, the new name for food stamps. For those who qualify, the money goes into a special account managed by the federal government. The recipient is sent an EBT (Electronic Benefits Transfer) card, which is used like a credit card in stores. It costs taxpayers some $114 billion a year, and works out as a huge subsidy to Big Agriculture, which is why the program is administered by the Department of Agriculture. 

Transitioning that program to the general population would not be difficult. It would be a simple matter of expansion of eligibility. As shortages grow, so too could the program until the entire population would be on it and it would be mandatory. It could also be converted into a mobile app instead of a piece of plastic as a fraud-prevention measure. With everyone carrying cell phones, this would be an easy step. 

And where could people spend the money? Only at participating institutions. Would non-participation institutions be entitled to sell food, for example, at local farmers’ co-ops? Maybe at first but that’s before the media demonization campaigns come along to decry the rich who are eating more than their fair share and the sellers who are exploiting the national emergency. 

You can see how this all unfolds, and none of it is implausible. Only a few years ago, governments around the country canceled gatherings for religious holidays, limited the numbers of people who could gather in homes, and banned public weddings and funerals. If they can do that, they can do anything, including the rationing of all food. 

The program that Harris has proposed is not like other matters that she has flip-flopped on. She is serious and repeats it. She spoke about it even during the debate with Trump but there was no followup or critique of the scheme offered. Nor does such a crazy plan require some legislation and a vote by Congress. It could come in the form of an executive order. Yes, it would be tested by the Supreme Court but, if recent history holds, the program would be long in effect before the Court weighed in. Nor is it clear how it would rule. 

The Supreme Court in 1942 heard the case of Albert Yakus, a Boston-based meat seller who was criminally prosecuted for violating the wholesale beef price ceiling. In Yakus vs. United States, the Supreme Court ruled for the government and against the meat-selling criminal. That’s the existing precedent. 

Nor does all this have to unfold immediately following the inauguration. It can happen as matters become ever worse following anti-gouging edicts and when inflation worsens. After all, a presidency that believes in central planning and forced economic austerity would last a full four years, and the coercion could grow month after month until we have comprehensively enforced deprivation by the end, and no one remembers what it was like to buy groceries at market prices with their own money. 

I wish I could say that this is an outlandish and fear-mongering warning. It is not. It is a very realistic scenario based on repeated statements and promises plus the recent history of government management of the population. There is likely another wave of inflation coming. This time it will meet with a promise to use every coercive power of government to prevent increases in prices on groceries and rents. 

What if voters actually understood this? What then? 

Keep in mind the main legacy of the Covid years: governments learned the fullness of what they could do under the right circumstances. That’s the worst possible lesson but that is what has stuck. The implications for the future are grim. 

Fed chair Jerome Powell has signaled that interest rate cuts are on the horizon, amid a cooling labor market marked by fewer job additions and rising unemployment.

Today, the benchmark interest rate stands at 5.25- 5.50%, up from near-zero levels in 2022. Historically, equities have performed better after gradual rate cuts compared to swift reductions typically seen during economic crises. Sectors of the economy are also impacted in different ways, due to shifting consumer demand and interest rate sensitivity.

This graphic, via Visual Capitalist’s Dorothy Neufeld, breaks down sector performance after the first interest rate cut, based on data from PinPoint Macro Analytics.

Ranked: Sector Performance During Rate Cut Cycles

Below, we show the average performance of each sector relative to the broad equity market 12 months after the first rate cut between 1973 and 2024:

Average historical data of rate cycles from 1973 to present day.

Consumer non-cyclicals see the strongest returns after the first rate cut, particularly during recessions, thanks to steady demand for staple goods.

This traditionally defensive sector includes companies such as Procter & Gamble, Walmart, and Coca-Cola. Notably, consumer staples are the only S&P 500 sector that have produced positive returns on average, during the recession stage of the business cycle since 1960. During the slowdown phase, it also outperformed the vast majority of sectors, averaging 15% returns over these periods.

Meanwhile, the tech sector underperforms the market six months after the first rate cut, but performance bounces back over a 12 month period since lower interest rates generally benefit growth stocks by reducing borrowing costs. However, some of today’s largest tech companies have been more resilient to higher rates due to large cash reserves and heightened investor interest in AI-related stocks.

On the other hand, financials historically experience the weakest performance. This is due to the fact that interest rate cuts often signal that the economy is slowing, putting pressure on loan growth, credit losses, and default risk.

To learn more about this topic from a sector-composition perspective, check out this graphic on the largest company in each S&P 500 sector in 2024.

Authored by Jeff Carlson & Hans Mahncke via Truth Over News,

One of the more important policy issues for markets in the US election may be corporate tax rates. Kamala Harris has said she wants to raise corporate taxes from the current rate of 21% up to a lofty 28%. During her 2020 primary campaign Kamala said she wanted to raise corporate taxes all the way to 35% – and this may still be her real target. By contrast, President Trump has said he wants to cut the corporate tax rate to at least 20% but would prefer to drop the corporate tax rate to 15% if possible.

How much revenue is generated from corporate taxes?

The answer to this question may surprise some people. In 2023 the federal government collected just under $420 billion in corporate taxes. This compares to the approximately $2.18 trillion in individual taxes and $1.6 trillion in payroll taxes. The amount paid in corporate taxes is not as large as many intuitively expect – a little more than double the total amount of aid that we’ve allocated to the Ukraine war. 

Corporate tax revenue has actually been declining on a percentage basis for decades. The reasons for the decline have everything to do with incentives and competition – incentives for businesses to invest, locate and produce in the United States and competitiveness of American companies in a global environment. And it’s all intrinsically tied into economic activity, productivity, wages and employment. We as a nation have stymied business activity through a combination of high taxes and excessive regulations.

Who actually pays corporate taxes? Hint: it isn’t the corporations.

Corporations are actually just tax collectors – legal entities that serve to collect taxes on behalf of the corporation’s owners. The true taxpayers are primarily the company’s shareholders – and to some degree, labor and customers – not the corporations that Kamala tries to vilify. When Kamala says she’s going to raise taxes on corporations, what she’s really saying is she’s going to raise taxes on you and me.

As our system stands now, shareholders’ dividends and capital gains are reduced by taxes collected by the corporation. Dividends are profits that a corporation distributes amongst its shareholders. Capital gains come from an increase in the value of a corporation’s assets. If the corporation did not pay corporate taxes on “behalf” of the shareholder these extra dollars would flow through to shareholders in the form of increased profits and dividends, reinvestment in the business (which generates additional profits) and share repurchases. These increased cash flows to shareholders would then be taxed at the shareholder level.

If this argument is not sitting well, consider this example. A corporation could, in theory, give year-end bonuses to its workers such that the amount exactly equaled the corporation’s taxable income. After the payment to workers, the corporation would have zero taxable income. Because the corporation would record no profits in this case, shareholders would pay no tax as they too would receive no profits. But workers would now have a significantly increased tax bill – and in all likelihood be taxed at a higher overall rate than the corporation would have been. The corporation merely serves as the vehicle or conduit – the legal structure – for tax payments.

What about customers and labor – don’t they shoulder much of the corporate tax bill through higher prices for goods or lower wages? 

As it turns out, there is some material debate about these two groups. In a normalized market environment, customers probably don’t pay much in corporate tax as it is very hard to pass this cost through. The ultimate price of the corporation’s end product or service is determined by market forces – not tax rates. And corporations have many differing competitors – including sole proprietorships and foreign corporations with differing tax structures. Market competition determines the final selling price – not taxes.

The amount of corporate taxation that labor bears is less clear – the arguments center around the availability and flexibility of capital – the ability to shift production to lower cost areas, etc. The Tax Policy Center has concluded – fairly close to Treasury estimates – that labor bears about 25% of the corporate tax burden. Some estimates have labor bearing as much as 70% of the cost.

In our opinion, the amount of corporate taxes that are borne by labor is probably north of the 25% figure – but likely well shy of the 70% estimates. The reason for this lies primarily in the mobility of capital. Money is far more fungible and easily moved than labor. If returns are higher abroad due to lower foreign tax rates, investors will quickly move capital to those places. Labor has a more difficult time taking advantage of higher wages elsewhere.

When corporations are burdened with a higher tax rate, their return on capital falls, making them less attractive for investment. In order to attract capital, companies are forced to reduce costs in an attempt to boost returns. And, in general, labor is the largest cost component for most corporations, making it a prime target for cost cutting. The accelerating shift towards the use of AI may lead to an even greater amount of the tax burden being shouldered by labor.

Think of it in simple terms. If corporations were hit with a tax hike tomorrow, which group could more quickly adjust. Investors who could quickly sell and redeploy their capital overseas – or labor with their families and homes? The matter becomes a bit more complicated in real terms because if such a tax was enacted, share prices would be impacted immediately, but hopefully you get our point.

So the answer to who really pays corporate taxes appears to be primarily shareholders with labor sharing in some material percentage of the cost. What should be clear is that corporations do not truly pay taxes – they merely collect them on behalf of third parties for payment.

Why are tax rates different at the corporate level versus the shareholder level?

At the heart of the matter, the tax rate is lower for capital gains and dividends paid to shareholders to reduce the impact of double-taxation – profits used to pay dividends have already been taxed at the corporate tax rate. The capital gains and dividend tax rates are arbitrary but the intent has been to pick a number that was not so high as to completely discourage investment into companies by investors.

Why do we have differing corporate and individual taxation systems in the first place?

Our nation’s tax system evolved in fits and starts with various taxes being implemented and then repealed – some ruled unconstitutional. Our modern tax era began in 1909 – in response to rising political pressure to tax the rich – when Congress enacted an excise tax on corporations at the urging of President William Howard Taft. In a concurrent move, President Taft proposed the 16th Amendment to establish a personal income tax.

The excise tax on corporations did not require a constitutional amendment and was originally intended to be a temporary measure until the passage of the 16th Amendment which occurred in 1913. Like all things government, legislation once enacted does not die and so the two concurrent tax systems – corporate and individual were born. And they have been creating inefficiencies and needless complexities for our nation ever since.

We should consider abolishing the Corporate Tax – not raising it.

Reducing or eliminating the corporate tax rate would go a long way towards drawing businesses and business activity back to the United States. Our corporate tax structure creates countless unnecessary complexities and conflicts with our individual tax code. Do away with that structure – even if shareholder taxes are adjusted in a manner that is revenue neutral to the Treasury – and you have gained significant economic efficiencies.

Some other reasons to abolish the corporate tax:

Removal of political gamesmanship – An entire lobbying force working to get tax breaks for corporations is gone overnight. Gone too are the incentives for politicians to grant their corporate constituencies favors via the tax code. Kill the corporate tax code and you immediately remove a big motivation for corporate money being involved in the political arena – along with special interests.

Legal & Tax Departments – Tax compliance and tax strategy related departments would be rendered obsolete and would result in the saving of literally billions of dollars and countless man-hours. Tax lawyers and consultants would need to find another avenue for work. And smaller businesses would be placed on a more equal footing.

Tax status – There would be no need for non-profit distinction – and the associated games being engaged in by both companies and the IRS.

The entire tax system would be vastly simpler. Any corporate tax burden borne by labor would be removed. The increased level of investment by corporations – along with higher dividends – would re-invigorate our entire economy. Corporations would run their companies based on underlying economics without the distorting influence of tax strategy behavior.

Corporate CEOs would focus on what are now pre-tax profits. Foreign investment would flood back into the United States. International tax problems and distortions would disappear. U.S. corporate cash held overseas could be repatriated for use domestically.

Lowering (or removing) the corporate tax does not mean that taxation of corporate income is avoided. Instead, taxes would now be paid at the individual versus corporate level. Corporations could stop focusing on tax strategies and could instead place their full focus on generating profits. And Labor would see their corporate tax burden lifted.

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The short-cover rally Goldman analysts forecasted early last week in Chinese iron ore prices has completely reversed. After all, analysts from the bank said the rally should be sold. Now, analysts have revised their Q4 2024 iron ore price forecast to $85/t, down from $100, based on strong global supply and soft demand in the world’s second largest economy. They add that the buildup in Chinese port stocks suggests prices will be pressured lower unless lower-cost producers cut production. 

Last week, ahead of Goldman’s iron ore note telling clients, “desk expect short cover rally,” prices in Singapore sank to the $90/t level, the lowest level since 2022, on concern that global supply is running ahead of demand. Prices jumped shortly to the $95/t level, where Goldman told clients: “Be ready to sell at the $95-100” level, noting that iron ore’s “fundamental outlook remains bleak.” 

One week later, on Monday, Goldman analysts Aurelia Waltham, Daan Struyven, and Samantha Dart pointed out that iron ore prices recently hit a nearly two-year low of $90/t, driven by strong global supply despite stabilizing Chinese demand. 

They said prices of the industrial metal have plunged by around 20% since July, but shipments remain 2% higher than last year, with similar arrivals into China. They added that India has reduced exports, but without a significant demand recovery, further production cuts from lower-cost producers are needed to rebalance the market and shore up prices.

Due to the supply imbalance, the analysts revised their Q4 2024 price forecast down to $85/t, noting that restocking before China’s Golden Week could provide short-term support. However, they said prices are expected to drop further in October on rising stocks. 

The most important chart from the analyst’s chart pack is that elevated iron ore stocks in China due to a faltering economy have driven down prices. In other words, stocks must come down to experience a meaningful price recovery. 

Here’s more color on the depressing iron ore market from the analysts: 

Following soft China macro data in July, activity came in broadly below market expectations, and our China economists have downgraded their 2024 GDP growth forecast to 4.7% from 4.9% previously. Year-on-year industrial production growth fell, fixed asset investment growth improved less than expected, although export growth was stronger. After two months of decline, the volume of steel exports increased by 21% MoM to 9.5Mt in August, bringing YTD YoY growth to +19%. This likely helped to limit the extent of the drop in flat steel production last month (-4.6% MoM in August) and iron ore consumption as Mysteel data showed sluggish domestic demand.

Looking ahead, we maintain the view that the potential for falling exports is a key risk to steel production in China over the coming year and could result in a further decline in Chinese iron ore demand, given that we see increased support from domestic demand as unlikely.

Following a substantial fall in the iron ore price over the past three months, China’s approaching Golden Week holiday (beginning October 1st) could bring some price stabilisation over the next two weeks as mills restock raw materials, creating a demand pull on port stocks. Indeed, last week’s data showed a 2.6% WoW increase in mills’ in-plant stocks, marking the largest jump since the pre-Lunar New Year restock. There is also a near-term risk of a short covering rally due to substantial short positioning in both iron ore and Chinese steel markets.

However, while the build in port stocks came to a halt last week, they remain ~30Mt above the 2016-2023 September average. Meanwhile, total Chinese iron ore stocks (including tonnes held at mills) continue to rise, counter-seasonally, and despite Indian iron ore shipments having declined in response to lower prices. Furthermore, even with India’s decline, high frequency vessel tracking data shows that global iron ore seaborne shipments in the first two weeks of September were 3% higher than the same period in 2023, and Vale has raised guidance for this year to 323-330Mt.

As a result, we believe that another leg lower in prices towards the 95th percentile (~$80/t on a grade adjusted basis) would be needed to (1) completely remove new Indian tonnes from the seaborne market and (2) pressure supply further down the cost curve in order to rebalance fundamentals. We therefore revise down our 2024Q4 price forecast to $85/t (previously $100/t).

In a separate note, a team of Goldman analysts led by Aurelia Waltham and Daan Struyven said that iron ore’s “fundamental outlook remains bleak” as prices traded at a two-year low. 

This was the most stunning chart from the analysts’ report: Only 1% of steel mills are profitable in the world’s second-largest economy. As profitability collapses, hot metal output declines.

Earlier this month, Goldman’s Rich Privorotsky told clients, “Iron ore is dropping to 90, China will continue to struggle, and commodities as a whole, I think, are reflecting the downgrade to growth expectations in the geography.” 

China’s steel industry has been under pressure amid a severe property market downturn and weak economic recovery.

Last month, Baowu Steel Group Chairman Hu Wangming warned that economic conditions in the world’s second-largest economy felt like a “harsh winter.”

As the world’s largest steel producer, Baowu Steel’s chairman said the steel industry’s downturn could be “longer, colder, and more difficult to endure than expected,” potentially mirroring the severe downturns of 2008 and 2015.

Another team of Goldman analysts, led by Yuting Yang and Lisheng Wang, recently published high-frequency economic indicators, including consumption and mobility; production and investment; other macro activity, and markets and policy, that revealed there was no imminent recovery in China.

Meanwhile, JPM Global Manufacturing PMI has slid (<50) into a contraction. 

Besides cutting iron ore price targets, Goldman Daan Struyven recently slashed his expected range for Brent oil prices by $5 to $70-$85 per barrel, citing weaker Chinese oil demand, high inventories, and rising US shale production.  

None of this is new to the market, where sentiment is downright apocalyptic. As noted several weeks ago, bullish positioning in oil just hit an all-time low.

China’s rapid deceleration and signs of a US slowdown have capped further upside for commodity prices. Whether US interest rate cuts that begin this week will boost economic growth remains uncertain. At the same time, more clarity on Chinese economic policies is expected to emerge after the US elections in November. 

Authored by Conor Gallagher via NakedCapitalism.com,

The situation in Europe is getting so bad on so many different levels, the Brussels crowd had to bring in “Super” Mario Draghi to save the day — or at least write a report telling them what to do…

Draghi has spent time at Goldman Sachs, the European Central Bank (ECB) during the sovereign debt crisis, and as unelected prime minister of Italy during the early days of the Covid pandemic and runup to Project Ukraine. Depending on where you sit, he could be an odd choice to chart a path forward; while Draghi knows his way around a crisis control center, he’s also plenty experienced at creating them.

He was one of the chief architects of the EU’s disastrous economic war against Russia and he’s always been a grim reaper for working class citizens of his native country of Italy. No wonder that for months the neoliberal, war-loving spreadsheet crowd in Brussels has eagerly awaited the report as if it is manna from heaven that will help deliver them from the corner they have backed themselves into.

Curiously, his report was delayed by months, which only increased the anticipation, and it finally dropped last week, conveniently timed at another crisis point. Project Ukraine is quickly unraveling and pressure is coming from all directions for Berlin to give the go ahead for joint EU debt in order to make the EU “competitive” again and buy a bunch of weapons to do something (nobody is too sure of what exactly) about Russia. Indeed, Draghi’s report doesn’t say, nor does it ever consider making nice with Moscow.

That’s because the report, “EU Competitiveness: Looking Ahead” is a political document more than economic one intended to not only give cover to the bloc’s disastrous Russia policies, but continue to double down. And it is already being used as more ammunition for those in the Baltics, Poland, the media, US-funded think tanks in Europe, and more who are calling on Germany to support debt for an extended Cold War. Specifically, they wanted Super Mario to tell them how to get out of the predicament of their own making without changing course on Russia and a host of other issues, and Draghi delivered — as long as you don’t let reality get in the way. His answer? More money. Lots of it.

He calls for massive infusions of cash into multiple sectors: green, tech, energy, and of course defense. According to Draghi, the price tag is a minimum of 800 billion euros annually until 2030.

Asked if his message was “implement your report, or die?” he replied that “It’s ‘Do this, or it’s a slow agony.’”

The EU certainly needs an economic plan, but Draghi’s report never questions whether ongoing belligerence toward Moscow (and loss of pipeline Russian gas) is in the bloc’s best interest and it never mentions Brussels’ obsession with austerity, which is once again being forced on member countries. From a purely economic standpoint, the report is trash economics that reads like something out of the late-stage USSR, according to economist Philip Pilkington.

But it does plug nicely into the political economy of today’s EU, which is being subsumed under Washington and NATO. It is engaged in open economic war and an proxy war in Ukraine against Russia, both of which have hurt working class citizens across the bloc. The austerity-obsessed EU is once again forcing its member states to enact austerity budgets. Draghi’s report was requested by European Commission President Ursula von der Leyen, who is working to amass more power to her mostly unaccountable throne, and is one of many voices calling for a defense union and militarization and the ability to borrow and potentially levy taxes to pay for those debts.

Source: https://x.com/WhiteHouse/status/1454246494010318850

So while Draghi’s report is ostensibly about across-the-board bloc “competitiveness” (there’s plenty on weakening antitrust, for example), Russia still dominates the conversation in the halls of power. Von der Leyen wants to create an “air shield” against Russia. The EU’s new High Representative  for Foreign Affairs and Security Policy is proposing a €100 billion (to start) eurobond issue to pay for more weapons to be used against Russia.

And Poland, one of the biggest backers of the war against Russia, might also be getting additional input over a whole lot of EU money. Piotr Serafin, a Tusk confidant and Poland’s European commissioner in Brussels, looks likely to be in charge of the EU Commission budget portfolio, one of the most powerful positions as the bloc is set to sort out its seven-year spending plans.

What these people do with a blank check in the name of competitiveness?

The very same week Draghi’s report came down, so did another from Nicole Koenig, head of policy for the Munich Security Conference, commonly referred to as “Davos with guns.”  It is set to welcome in current NATO figurehead Jens Stoltenberg as its new chairman next year, and Koenig endorses the idea of a debt-based fund to fuel weapons purchases as part of a European defense union.

Despite all the buildup to Draghi’s report and it being accompanied by similar calls from the Munich Security Conference and every American plutocrat-funded think tank, the immediate response out of Germany was mostly nein. 

Germany’s Finance Minister Christian Lindner said plainly that “Germany will not agree to this.”

Lindner is part of the three party ruling coalition that would be unable to garner 33 percent of the vote if elections were held tomorrow. His fiscally conservative Free Democratic Party currently polls around 3-4 percent — not even enough to get them seats in the next Bundestag.

Friedrich Merz, the leader of the Christian Democratic Union (CDU) and current odd-on favorite to be the next chancellor of Germany, said the following: “I want to say this very clearly, now and in the future, I will do everything I can to prevent this European Union from spiraling into debt.”

The CDU currently polls around 31-33 percent nationally. The insurgent party on the left and right, the Alternative for Germany (17-19 percent) is anti-EU and would never support joint borrowing.  I haven’t seen a position from the Sahra Wagenknecht Alliance (7-10 percent), but would imagine its hyperfocus on German working class issues means it is also not in favor.

Robert Habeck, leader of the war mongering Greens (10-12 percent), is in support.

Chancellor Olaf Scholz is remaining silent on the issue, omitting any mention of it from his Wednesday speech to the Bundestag. While he has in the past made his opposition known, it’s worth knowing if his thinking has changed as it did repeatedly for nearly every step of escalation in Ukraine. Scholz’s government enjoys record unpopularity, and his Social Democratic Party is being decimated — in the European elections they were embarrassed, in recent state elections they were thrashed, and in national polling they have fallen from 26 percent of the vote in the 2021 election to 14 percent currently.

So yeah, the timing for Berlin to deal with such major European funding requests is not ideal. From another point of view, though, maybe there’s no better time to take advantage of the chaos and get the green light from the lame duck government in Berlin. There are once again rumblings that Scholz should step aside and clear the way for his pugnacious defense minister Boris Pistorius who has been pounding the table for endless military spending ever since he was plucked from the obscure position as the Saxony State Minister of the Interior and Sports.

Secretary of Defense Lloyd J. Austin III is greeted upon arrival to the Ministry of Defense in Berlin by German Defense Minister Boris Pistorius and US Ambassador Amy Gutmann Jan 19, 2023. (DoD photo by U.S. Air Force Tech. Sgt. Jack Sanders)

Any attempt to enact a joint borrowing scheme would require unanimity from the European Council, which is composed of all the bloc’s heads of state, but there is a belief that if Germany goes along others like the Netherlands can be persuaded.

Germany is dealing with its biggest political upheaval since World War II, it’s deindustrializing, and it’s in a recession largely caused by structural problems and its own missteps. Standards of living are declining following years of record immigration, and it’s all combining to produce the most unpopular government in modern German history.

Despite all Germany’s problems, it is still the most powerful economy in Europe that drives the bloc, and any major EU changes must run through Berlin.

And everyone is pressing now.

Poland and the Baltics are haranguing for more. Southern Europe is on board. Countries like Italy and France have supported joint borrowing for years.

US-funded think tanks stateside and in Europe, which really act as plutocrat-funded shadow governments, are pumping out piece after piece about how Europe (Germany) must use joint debt to fund defense.

Here’s yet another recently-released report from the Council on Foreign Relations, “From the Ukraine Conflict to a Secure Europe.” It argues like so many others that the EU, as an auxiliary to NATO, must take the lead role in ensuring that Russia is bordered by unfriendly states:

A European pillar based on the EU would go a long way toward easing if not eliminating the continuing tension between NATO and the EU in the field of security. For all practical purposes, the EU would become a member of the alliance, and cooperation between the two entities should be seamless. Non-NATO EU members would thus enjoy an implicit Article 5 security guarantee, which would be extended to new members as the EU expanded to include non-NATO allies in the Balkans and the former Soviet space.

Unfortunately for Germany and the EU, that will also include propping up whatever is left of Ukraine and probably making sure its bondholders are made whole while still finding spare change to bring Armenia, Moldova, Georgia, and who knows, Kazakhstan(?) on board as well. How to pay for all the color revolution efforts, bribes, military hardware, state aid, and everything else required by the EU’s now-openly subservient role to US imperial ambitions? The CFR piece cites Macron’s big April speech at the Sorbonne as a blueprint, which of course requires common EU debt.

Yet Germany remains opposed.

The country is dealing with its own budget woes and is cutting almost everywhere except on the military. It has a constitutionally-enshrined cap on spending, known as the debt brake, which it tried to sneak around last year, but a court struck it down. And Berlin is even cutting contributions to the EU rather than looking to back bloc-wide debt.

At issue is how EU debt would be repaid. It would either be done through the creation of new EU budget resources, such as taxes levied by the bloc, or through an increase in member states’ contributions to the budget.

Following the release of Draghi’s report, German bond yields rose as investors placed bets on more spending and, therefore, more rate hikes. As I understand it, it would also make the currency stronger since the debt would be safer, and that would be about the final nail in the coffin of the German model as a stronger euro would be another strike against Germany’s export-oriented industry — or whatever is left of it.

At the same time that German yields rose, however, Italy’s borrowing costs fell. That’s because if the EU and its AAA rating covered the debt of poorer member states or borrowed directly to cover member states’ energy crisis needs and more military spending, countries like Italy would have an easier go of it.

Italy currently pays a little under five percent on its 10-year debt, while the EU pays just over three percent. That’s why countries across the EU south, which face higher borrowing costs, are in favor of EU-wide bonds. Countries like Italy in southern Europe have faced decades of privatizations, budget cuts, and wage suppression in efforts to appease the market gods all to no avail.

How fitting that it would be that joint debt might finally get the go-ahead, not to improve the lives of citizens, but to spend hundreds of billions on a bunch of  weapons that will leave them bankrupt and still outclassed by Russian firepower and manpower. Maybe there’s some hope for some military Keynesianism militarism effect, but at least to start with, it will likely be funding overpriced and ineffective American weapons.

One can read in Draghi’s plan or Macron’s Sorbonne speech about their concerns for the working man, European families, as well as the climate, and should a plan for joint debt go through there will no doubt be efforts to spin it that way (there already are) but it’s not hard to see where the priorities lie.

The release of his report comes at the same time that the EU is pushing more austerity on its members states. Brussels is then turning around and using those artificial budget shortages as a reason to borrow at the EU level to cover military expenses.

Bloomberg reported back in March that EU officials and investors are using the fiscal rules to push for an EU-wide bond program that would bring investors bigtime profits while allowing the bloc to ramp up military spending without individual nations incurring more debt. See? Win-win, except for the vast majority of Europeans who work for a living and will continue to see social services crumble while life gets more expensive.

This is not a plan to “save” Europe. It is part of the ongoing effort to recreate Europe as a neoliberal paradise for the financial sector and an anti-Russian servant to Washington.

No hundreds of billions in weapons purchases and streamlining will make a difference in Ukraine or in some hypothetical war agaisnt Russia, but it does take advantage of the self-inflicted crisis to shift more power to Brussels, reward investors, and punish workers holding back productivity. The report laments how the US is so much more “successful” in the realms of private equity and venture capital, and has such higher productivity in sectors like healthcare. Yes, who wouldn’t want to emulate the US healthcare system? Maybe all the military hardware will be useful in disciplining the local population in the name of competetiveness, however:

We should be moving to a four day work week, not a six day one. Forty percent or more of of jobs are either pointless or actively harmless. Get rid of them to start. https://t.co/Ubdr4Q5VCi

— Ian Welsh (@iwelsh) July 2, 2024

Think a lot more EU spending will benefit the bloc’s climate goals. There’s a good chance it could take money away from energy investment as Draghi’s report calls for Brussels to free up funding by modifying the European Investment Bank Group’s lending policies and the EU’s sustainable finance frameworks and environmental, social and governance rules to allow for defense investments instead. And let’s not forget that militaries and warfare are the biggest emitters around.

And as the EU cements its role as an underling to Washington and NATO, it will almost certainly need to proceed with further “de-risking” from China the same way it did with Russia. Yet, China dominates multiple stages of the green tech industry. From Draghi’s report:

Some believe that there is little chance that Draghi’s and all the others’ plans come to fruition. Personally, judging by how Project Ukraine has gone and the West’s overall vitriol directed at Russia, I think it’s safer to assume Europe is a long ways from spent and that the EU will continue to dig.

I guess we’ll see. It will certainly be clarifying to see if Germany has an ounce of sovereignty left or if it will give in on its sacred cow. As Ukraine continues to flounder and reaches the inevitable conclusion, it’s likely the calls on Germany to relent will only grow louder and more recriminating.

As the hysteria over Europe’s “agonizing death” reaches a fever pitch it’s worth remembering that there’s one option that always goes unmentioned by the likes of Draghi, Macron, and company.

The Failed Logic Behind the Draghi Report (and All the Others Like It) 

Let’s take a step back and really look at what Super Mario is saying in his 400-page screed.

It’s all about EU competitiveness. Well, there are plenty of issues, but one of the biggest reasons the EU’s slow decline became a full-blown crisis is energy. What happened? Here’s Draghi’s story:

Europe has abruptly lost its most important supplier of energy, Russia. All the while, geopolitical stability is waning, and our dependencies have turned out to be vulnerabilities…EU companies still face electricity prices that are 2-3 times those in the US. Natural gas prices paid are 4-5 times higher. Europe was able to satisfy its demand for imported energy by procuring ample pipeline gas, which accounted for around 45% of the EU’s natural gas imports in 2021. But this source of relatively cheap energy has now disappeared at huge cost to Europe. The EU has lost more than a year of GDP growth while having to re-direct massive fiscal resources to energy subsidies and building new infrastructure for importing liquefied natural gas.

There’s more:

High energy costs in Europe are an obstacle to growth, while lack of generation and grid capacity could impede the spread of digital tech and transport electrification. Commission estimates suggest that high energy prices in recent years have taken a toll on potential growth in Europe. Energy prices also continue to affect corporate investment sentiment much more than in other major economies. Around half of European companies see energy costs as a major impediment to investment – 30 percentage points higher than US companiesii. Energy-intensive industries (EIIs) have been hit hardest: production has fallen 10-15% since 2021 and the composition of European industry is changing, with increasing imports from countries with lower energy costs. Energy prices have also become more volatile, increasing the price of hedging and adding uncertainty to investment decisions.

Notice the lack of agency in Draghi’s telling? It’s as if a natural disaster swept down from the heavens, destroyed all the pipelines transporting Russian gas to the EU, and now prevents them from ever being repaired. In reality, the decision is wholly that of the Scholzs, Macrons, and von der Leyens of Europe (and their benefactors). Notice in the following graphs that prices were a little higher than the US, but where does the divergence really start to take off?

Draghi doesn’t investigate further. But as Russian President Vladimir Putin recently put it for the hundredth time at the Eastern Economic Forum in Vladivostok:

It is very strange, and I cannot get my head around it. They up and blew up the gas pipeline in the Baltic Sea. They blew up both Nord Stream 1 pipelines and one Nord Stream 2 pipeline. The second one is fully functional, though. What stops the German government from pressing the button, coming to terms with us and turning it on? How much is it? 25 billion cubic metres through one pipeline?…It was the Poles who shut down the Yamal-Western Europe pipeline. Now Ukraine is closing [transit through Ukraine], and the Nord Stream 2 route along the Baltic Sea bed is not turned on. Well, if they don’t want to, they don’t have to. It will be a loss for them. For us, there will be a certain reduction in revenues, but it’s no big deal.

The EU’s self-imposed lack of competitiveness now requires hundreds of billions to rectify. Since reports are the theme of the week, here’s one more: the German business association BDI released a study claiming that 20 percent of industrial value creation in the country is under threat. At the top of the list of causes is high energy prices and it says Germany needs about $1.55 trillion of investment by 2030.

That’s not all, of course. Not only did the EU harm itself by refusing pipelined gas from its neighbor, it now must spend billions arming itself to supposedly protect against that very same neighbor it launched a proxy war against.

Maybe instead of harming oneself economically, antagonizing your neighbor, continuing to run around like headless chickens warning that the Russians are about to overrun Europe if you don’t spend billions attempting to militarize, you could just not do any of that.

The EU could just stop all this now. The goal was clearly to cause a collapse of the Putin government, install a puppet friendly to the West, and exploit Russia. It failed.

Time to go hat in hand and start begging and maybe in time regain some of what has been lost. Russia has no designs to conquer Europe. So there’s no need to drop hundreds of billions on weapons that, at best, would help escalate to a nuclear war.

Instead get 400 pages of smart-sounding economic nonsense in line with all the think tank fantasies about the EU taking the Russia baton from the Americans who will turn their attention toward China.

Or in Draghi-speak:

With the return of war in the EU’s immediate neighborhood, the emergence of new types of hybrid threats, and a possible shift of geographic focus and the defense needs of the US, the EU will have to take growing responsibility for its own defense and security. The EU’s defense industrial base is facing structural challenges in terms of capacity, know-how and technological edge. As a result, the EU is not keeping pace with its global competitors.

He adds that Brussels must encourage mergers in the defense industry, and companies should have no restrictions on accessing EU funding. Currently, bureacrats are forced to concoct schemes to get around the ban on the EU budget funding defense purchases as EU law stipulates that such funds go to boring old items like agriculture and regional development. But who needs stuff like that when you can point long-range missiles at Moscow and be targeted in return?

Will open-ended spending on defense do what all the weapons to the Ukraine proxy war and unprecedented sanctions couldn’t do?

I guess we’ll see. Draghi’s smart-sounding report is a good companion peace to the recent argument that they just need to keep up the pressure until…Putin dies of old age. That’s the thinking from former senior CIA analyst and Principal Deputy National Intelligence Officer for Russia and Eurasia at the National Intelligence Council Peter Schroeder, writing at Foreign Affairs that, “what is certain is that, at some point, he will die.” More:

The evidence suggests that on Ukraine, Putin simply is not persuadable; he is all in. For him, preventing Ukraine from becoming a bastion that the West can use to threaten Russia is a strategic necessity. He has taken personal responsibility for achieving that outcome and likely judges it as worth nearly any cost. Trying to coerce him into giving up is a fruitless exercise that just wastes lives and resources.

Did it really takes hundreds of thousands of lives lost and hundreds of billions spent for brain geniuses like Schroeder to understand what Russia had been telling them along? Well, if we read on we get to this:

If Putin is unwilling to halt his assault on Ukraine, then the war can end in only one of two ways: either because Russia has lost the ability to continue its campaign or because Putin is no longer in power.

We’ll see how that works out. If it doesn’t, well, hopefully Draghi is still kicking so he can get to work on another report.

How many Earths would we need if the entire global population lived like one country?

In this graphic, Visual Capitalist’s Marcus Lu visualized data from the Global Footprint Network to see the number Earths required to sustain a world population that lived like Americans, Germans, and more.

Data and Methodology

The data we used to create this graphic is listed in the table below. Figures were published in 2022 (with data as of 2018).

These estimates are based on each country’s ecological footprint, which is measured in global hectares (gha).

It represents the amount of biologically productive land and water a population requires to produce all of the resources it consumes and to absorb the waste it generates, using prevailing technologies.

Key Takeaways From This Data

The data shown in this graphic sheds light on how different countries impact the planet.

Countries that exceed their respective biocapacity are known as biocapacity debtors. This means that the country is net-importing biocapacity through trade, liquidating national ecological assets or emitting more carbon dioxide waste into the atmosphere than its own ecosystems absorb.

Countries that have an ecological surplus, on the other hand, are known as biocapacity creditors. If everyone on the planet lived like these countries, we would need fewer Earths rather than more Earths.

Earth Overshoot Day

Another interesting concept is Earth Overshoot Day, which marks when humanity’s demand for ecological resources in a given year exceeds what the planet can regenerate in that year. For 2024, overshoot day fell on Aug. 1.

If you enjoyed this post, check out The Countries With No Earth Overshoot Day, from featured creator Statista.

Authored by Tom Ozimek via The Epoch Times (emphasis ours),

A military court in Congo sentenced three U.S. citizens to death on Sept. 13 for their alleged involvement in a failed coup attempt targeting the government of Congolese President Félix Tshisekedi.

Benjamin Reuben Zalman-Polun, 36, Marcel Malanga, 21, and Tyler Thompson, 21, were among 37 individuals who received the death penalty on Friday after being convicted on charges of conspiracy, terrorism, and attempted coup.

The verdict was handed down in an open-air court session in the yard of a military prison on the outskirts of Kinshasa, the capital of the Congo, on Friday, and read out on live TV.

Most of the defendants were Congolese but, besides the three Americans, there was also a Briton, a Belgian, and a Canadian. The defendants, who wore blue and yellow prison-issued tops as they sat before the judge, were given five days to appeal their sentences.

Richard Bondo, a lawyer who defended the six foreigners, argued that the investigation was flawed because his clients were given inadequate interpreters. He vowed to appeal the verdict.

The coup attempt, led by Christian Malanga, a U.S.-based Congolese politician, unfolded on May 19, 2023, when armed men briefly occupied a presidential office. The Congolese military quickly intervened, and Malanga was killed while resisting arrest. Five others also died in the botched takeover attempt.

Malanga’s son, Marcel Malanga, is one of the three Americans sentenced to death. He previously told the court that his father had threatened to kill him unless he took part in the coup attempt. His mother, Brittany Sawyer, maintains that her son was innocent and was simply following his father, who considered himself to be president of a shadow Congolese government in exile.

Thompson, who was Marcel’s friend and played high school football with him in Utah, had traveled to Congo on vacation to explore the world, according to his family, who maintain he had no knowledge of the elder Malanga’s coup plans. The Thompsons’ lawyer in Utah, Skye Lazaro, told The Associated Press that the family is heartbroken over the verdict.

Zalman-Polun, the third American to receive the death penalty, was a business associate of Christian Malanga.

In Washington, U.S. State Department spokesperson Matthew Miller said at a press briefing on Sept. 13 that embassy staff had attended the proceedings and will continue to monitor the situation closely.

“We understand that the legal process in the DRC allows for defendants to appeal the court’s decision,” he said.

Asked if he believes the proceedings involving the three Americans have been fair, Miller said he didn’t want to pass judgment yet but that the department will be following developments closely as the appeals process plays out.

Utah Sens. Mitt Romney and Mike Lee, both Republicans, expressed sympathy for the families of the three Americans but they have not publicly called on the U.S. government to push for their release.

“My thoughts are with the families during this difficult time,” Lee said on Friday. “We will continue to work with the State Department to receive updates on this case.”

Romney spokesperson Dilan Maxfield called it “an extremely difficult and frightening situation for the families involved,“ adding that Romney’s office has ”consistently engaged with the State Department and will continue to do so.”

Some 50 people were charged in connection with the botched coup, with around two dozen acquitted and the remaining 37 sentenced to death.

Congo reinstated the death penalty earlier this year, ending a more than two-decade moratorium. Under the country’s penal code, the president determines the method of execution. In the past, militants have been executed by firing squad.

Reuters and The Associated Press contributed to this report.

For the third time since the Ukraine war began in February 2022, President Putin has approved an expansion of Russia’s military, on Monday signing a decree to boost the number of soldiers by 180,000.

This means Russia’s armed forces will include 1.5 million active servicemen going into winter. It is also a clear signal that Russia doesn’t plan on reducing the intensity of the fight in the Donbass anytime soon. This will bring the overall number of military personnel within Russia’s army, including all reserve forces, to over 2,300,000. 

Putin had previously sign-off on two prior expansion waves: an increase of 137,000 in August 2022 and another expanse of 170,000 in December 2023.

In the fall of 2022, when Ukraine’s much-hyped counteroffensive was in full swing, Putin had called up some 300,000 reservists to join the fight.

With this latest troop increase, Putin could also be signaling NATO that Russia will not back down, at a moment the US and UK are mulling approving Ukraine’s use of long-range missiles to attack inside Russian territory.

The Associated Press summarizes of current estimated battlefield numbers:

The most capable Russian troops have been pressing an offensive in eastern Ukraine, where they have made incremental but steady gains in the past few months.

In June, Putin put the number of troops involved in what the Kremlin calls the “special military operation” in Ukraine at nearly 700,000.

And Reuters has highlighted that this makes Russia’s army second in manpower size only to China’s PLA military:

President Vladimir Putin on Monday ordered the regular size of the Russian army to be increased by 180,000 troops to 1.5 million active servicemen in a move that would make it the second largest in the world after China’s.

In a decree published on the Kremlin’s website, Putin ordered the overall size of the armed forces to be increased to 2.38 million people, of which he said 1.5 million should be active servicemen.

The Russian army will become the second largest army in the world after Putin’s decree.

According to statistics, the top three in terms of military personnel today were China, India and the United States. Now only the PLA will be larger than the Russian army in terms of numbers.… pic.twitter.com/Usz97R7SNM

— S p r i n t e r (@SprinterFamily) September 16, 2024

This new expanse might also be the result of Ukraine’s Kursk offensive. Kiev officials hoped that the invasion of southern Russia might force the relocation of regular troops from Donetsk to defend and take back villages on Russian soil.

But so far that calculation appears to have failed. Moscow has denied that it was forced to relocate significant amounts of troops. A Russian counteroffensive is underway, confirmed to be intensifying starting days ago, while at the same time Russian troops in Ukraine’s east are making steady gains.