After weeks of euphoric buying, volatility has made its way back to Wall Street. COVID-19 continues to take a heavy toll on the stock market, with a slew of new infections in the U.S. and China sending the stock market on a downward spiral.
However, some stocks are holding up better than others. Small-caps have been charging forward, with the Russell 2000 outpacing the broader market since hitting a low point on March 23.
Bearing this in mind, we used the TipRanks database to locate three small-cap companies that combine that positive niche position with a low cost of entry. These stocks will cost less than $8 per share to buy into, and offer potential growth of 40% or better.
Ceco Environmental (CECE)
We’ll start with Ceco, an industrial company focused on air purification systems. The company offers equipment and solutions for air scrubbing tech, dampers and diverters, industrial ventilation, and silencers to customers around the world. Ceco’s products are used in the oil and gas, power, battery manufacturing, and wastewater industries, among others.
Ceco finished 2019 on a positive note, with $67.7 million in bookings and a backlog of $216.6 million. These numbers bode well for the company’s future, and have helped it to maintain profitability during the corona pandemic. In Q1, Ceco’s 15-cent EPS beat the forecast by 36% even as revenues missed expectations.
Looking ahead, the company is expected to show continued growth in Q2, with revenue reaching as high as $86 million. The forecast for the full year 2020 is for over $358 million on the top line.
Roth Capital analyst Gerry Sweeney sees CECE’s story as a simple one, about a company that does things right and is poised to benefit from that: “The COVID impact remains tough to gauge, but after several years of operational refinement, a solid balance sheet and mix of short, medium & long cycle businesses, CECE is prepared for the tide to recede.”
To this end, Sweeney says "CECE looks attractive for a small cap industrial platform company." The analyst rates the stock a Buy along with a $9.00 price target, which implies a healthy 54% upside. (To watch Sweeney’s track record, click here)
Overall, Wall Street agrees with Sweeney on Ceco. The company’s Strong Buy consensus rating based on a unanimous 5 Buys, all set in the past few weeks. The average price target of $9.20 suggests a premium of 56% from the current share price of $6.02. (See Ceco stock analysis on TipRanks)
Aspen Aerogels (ASPN)
Next up on our list is Aspen Aerogels, a leader in the industrial insulation market. Aspen’s products offer high-performance thermal insulation, flexible enough for uses across a range of industries. The company specializes in aerogel insulation, designing, developing, and manufacturing its full line of products.
Aspen was hit hard by corona, as the economic shutdowns strangled the need for insulations. The share price lost over 50% in the initial market fall, and has not truly recovered.
At the same time, with many states moving to reopen their economies, Aspen is preparing for a potential surge in demand. It’s important to note here that the company beat expectations in Q1 even as it lost 13 cents per share; forecast had been for a 23-cent loss. The Q2 outlook is a 20-cent loss; Aspen believes it can clear that bar, too.
Craid-Hallum analyst Eric Stine writes that Aspen is well-positioned for the resumption of economic activity, with a solid balance sheet and pent-up demand offering the prospect of customers lined up through 2H20 into 2021.
“While not surprising that it withdrew its 2020 guidance given the unprecedented level of uncertainty in the market, we continue to believe that ASPN’s value proposition and foundation remains strong and its core maintenance business resilient… Aspen Aerogels should see meaningful multi-year growth given a disruptive product offering with a compelling value proposition, blue-chip customer list, [and] low penetration (~4%) of the massive $3B energy insulation market,” Stine noted.
Stine’s $12 price target is in line with his upbeat outlook, indicating an impressive potential for 65% growth in the coming year and fully supporting his Buy rating. (To watch Stine’s track record, click here)
Once again, the Street’s aggregate view is also bullish. The unanimous analyst consensus of Strong Buy is based on 4 reviews, and the $10.25 average price target implies an upside of 41%. (See Aspen stock analysis on TipRanks)
Last but not least is Kaleyra, a cloud computing company that offers communications platforms and tools on the popular SaaS model. Products include SMS and voice calling, along with communications data insights and global contact numbers.
In the second half of 2019, KLR’s earnings turned positive, but the COVID-19 epidemic brought that to a halt. The European operations are based in Milan, Italy – and northern Italy was particularly hard-hit by the virus. That outweighed the advantages of cloud-based communications systems in a telecommuting environment, and KLR reported a steep net loss in Q1. EPS came in at negative 35 cents.
Kaleyra proved itself relevant in the crisis, however. The company made available a free texting service for Italy’s emergency medical services. The system allowed medical providers to keep in contact with each other and with potential patients while maintaining physical distance.
For investors, however, probably the most important number here is 21%. That is the company’s year-over-year revenue growth. The top line reached $33.6 million in the first quarter, even with the epidemic.
Northland’s 5-star analyst Michael Latimore covers KLR shares, and he was impressed enough by the company to assign a Buy rating. His $17 price target shows the extent of his confidence – it suggests a whopping 193% upside potential. (To watch Latimore’s track record, click here)
In his comments, Latimore acknowledges that Kaleyra suffered disproportionately from COVID-19. Yet, the analyst went on to tick a list of pros: “Posted 21% growth despite CV19 issues in March. Has 0% customer churn among largest accounts, and 80% of revenue comes from customers that have been with KLR for over one year. Volumes improving in Italy over past few weeks. Ecommerce related services are up. Won new customers, such as the Red Cross.”
This ticker, being new to the stock market, only has 3 analyst reviews on record – but all three agree that this is a stock to buy, making the analyst consensus a unanimous Strong Buy rating. Shares are priced at $5.75, and the average target of $12.83 implies an upside of 121%. (See Kaleyra's stock-price forecast on TipRanks)
To find good ideas for small-cap stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
The post 3 “Strong Buy” Small-Cap Stocks That Could Soar Over 40% appeared first on TipRanks Financial Blog.
How The State Of Global Markets Could Be Pushing The Federal Reserve To Adopt Bitcoin
Analyzing the precarious positions of the world’s fiat economies can drive a conclusion that the Federal Reserve will have to adopt bitcoin.
Analyzing the precarious positions of the world’s fiat economies can drive a conclusion that the Federal Reserve will have to adopt bitcoin.
This is an opinion editorial by Mike Hobart, a communications manager for Great American Mining.
In the wee hours of the morning on Friday, September 23, 2022, markets saw yields on the U.S. 10-year bond (ticker: US10Y) spike up over 3.751% (highs not seen since 2010) shocking the market into fears of breaching 4% and the potential for a run in yields as economic and geopolitical uncertainty continued to gain momentum.
Yields would slowly grind throughout the weekend and at approximately 7:00 a.m. Central Time on Wednesday, September 28, that feared 4% mark on the US10Y was crossed. What followed, approximately three hours later, around 10:00 a.m. on Wednesday, September 28, was a precipitous cascade in yields, falling from 4.010% to 3.698% by 7:00 p.m. that day.
Now, that may not seem like much cause for concern to those unfamiliar with these financial instruments but it is important to understand that when the U.S. bond market is estimated to be about $46 trillion deep as of 2021, (spread across all of the various forms that “bonds” can take) as reported by SIFMA, and taking into consideration the law of large numbers, then to move a market that is as deep as the US10Y that rapidly requires quite a lot of financial “force” — for lack of a better term.
It’s also important to note here for readers that yields climbing on the US10Y denotes exiting of positions; selling of 10-year bonds, while yields falling signals purchasing of 10-year bonds. This is where it is also important to have another discussion, because at this point I can hear the gears turning: “But if yields falling represents buying, that’s good!” Sure, it could be determined as a good thing, normally. However, what is happening now is not organic market activity; i.e., yields falling currently is not a representation of market participants purchasing US10Ys because they believe it to be a good investment or in order to hedge positions; they are buying because circumstance is forcing them to buy. This is a strategy that has come to be known as “yield curve control” (YCC).
“Under yield curve control (YCC), the Fed would target some longer-term rate and pledge to buy enough long-term bonds to keep the rate from rising above its target. This would be one way for the Fed to stimulate the economy if bringing short-term rates to zero isn’t enough.”
–Sage Belz and David Wessel, Brookings
This is effectively market manipulation: preventing markets from selling-off as they would organically. The justification for this is that bonds selling off tend to impact entities like larger corporations, insurance funds, pensions, hedge funds, etc. as treasury securities are used in diversification strategies for wealth preservation (which I briefly describe here). And, following the market manipulations of the Great Financial Crisis, which saw the propping up of markets with bailouts, the current state of financial markets is significantly fragile. The wider financial market (encompassing equities, bonds, real estate, etc.) can no longer weather a sell-off in any of these silos, as all are so tightly intertwined with the others; a cascading sell-off would likely follow, otherwise known as “contagion.”
What follows is a brief recount (with elaboration and input from myself throughout) of a Twitter Spaces discussion led by Demetri Kofinas, host of the “Hidden Forces Podcast,” which has been one of my favorite sources of information and elaboration on geopolitical machinations of late. This article is meant solely for education and entertainment, none of what is stated here should be taken as financial advice or recommendation.
Host: Demetri Kofinas
What we have been seeing over recent months is that central banks across the world are being forced into resorting to YCC in an attempt to defend their own fiat currencies from obliteration by the U.S. dollar (USD) as a dynamic of the Federal Reserve System of the United States’ aggressive raising of interest rates.
An additional problem to the U.S.’s raising of interest rates is that as the Federal Reserve (the Fed) hikes interest rates, which also causes the interest rates that we owe on our own debt to rise; increasing the interest bill that we owe to ourselves as well as those who own our debt, resulting in a “doom loop” of requiring further debt sales to pay down interest bills as a function of raising the cost of said interest bills. And this is why YCC gets implemented, as an attempt to place a ceiling on yields while raising the cost of debt for everyone else.
Meanwhile this is all occurring, the Fed is also attempting to implement quantitative tightening (QT) by letting mortgage-backed securities (MBS) reach maturity and effectively get cleared off their balance sheets — whether QT is “ackchually” happening is up for debate. What really matters however is that this all leads to the USD producing a financial and economic power vacuum, resulting in the world losing purchasing power in its native currencies to that of the USD.
Now, this is important to understand because each country having its own currency provides the potential for maintaining a virtual check on USD hegemony. This is because if a foreign power is capable of providing significant value to the global market (like providing oil/gas/coal for example), its currency can gain power against the USD and allow them to not be completely beholden to U.S. policy and decisions. By obliterating foreign fiat currencies, the U.S. gains significant power in steering global trade and decision making, by essentially crippling the trade capabilities of foreign bodies; allied or not.
This relationship of vacuuming purchasing power into the USD is also resulting in a global shortage of USD; this is what many of you have likely heard at least once now as “tightening of liquidity,” providing another point of fragility within economic conditions, on top of the fragility discussed in the introduction, Increasing the likelihood of “something breaking.”
The Bank Of England
This brings us to events around the United Kingdom and the Bank of England (BoE). What transpired across the Atlantic was effectively something breaking. According to the speakers in Kofinas’ Spaces discussion (because I have zero experience in these matters), the U.K. pension industry employs what Howell referred to as “duration overlays” which can reportedly involve leverage of up to twenty times, meaning that volatility is a dangerous game for such a strategy — volatility like the bond markets have been experiencing this year, and particularly these past recent months.
When volatility strikes, and markets go against the trades involved in these types of hedging strategies, when margin is involved, then calls will go out to those whose trades are losing money to put down cash or collateral in order to meet margin requirements if the trade is still desired to be held; otherwise known as “margin calls.” When margin calls go out, and if collateral or cash is not posted, then we get what is known as a “forced liquidation”; where the trade has gone so far against the holder of the position that the exchange/brokerage forces an exit of the position in order to protect the exchange (and the position holder) from going into a negative account balance — which can have the potential of going very, very deeply negative.
This is something readers may remember from the Gamestop/Robinhood event during 2020 where a user committed suicide over such a dynamic playing out.
What is rumored to have occurred is that a private entity was involved in one (or more) of these strategies, the market went against them, placing them in a losing position, and margin calls were very likely to be sent out. With the potential of a dangerous cascade of liquidations, the BoE decided to step in and deploy YCC in order to avoid said liquidation cascade.
To further elaborate on the depth of this issue, we look to strategies deployed in the U.S. with pension management. Within the U.S., we have situations where pensions are (criminally) underfunded (which I briefly mentioned here). In order to remedy the delta, pensions are either required to put up cash or collateral to cover the difference, or deploy leverage overlay strategies in order to meet the returns as promised to pension constituents. Seeing how just holding cash on a corporate balance sheet is not a popular strategy (due to inflation resulting in consistent loss of purchasing power) many prefer to deploy the leverage overlay strategy; requiring allocating capital to margin trading on financial assets in the aim of producing returns to cover the delta provided by the underfunded position of the pension. Meaning that the pensions are being forced by circumstance to venture further and further out onto the risk curve in order to meet their obligations.
As Bianco accurately described in the Spaces, the move by the BoE was not a solution to the problem. This was a band-aid, a temporary alleviation strategy. The risk to financial markets is still the threat of a stronger dollar on the back of increasing interest rates coming from the Fed.
Howell brought up an interesting point of discussion around governments, and by extension central banks, in that they do not typically predict (or prepare) for recessions, they normally react to recessions, giving credit to Bianco’s consideration that there is potential for the BoE to have acted too early in this environment.
One very big dynamic, as positioned by Kao, is that while so many countries are resorting to intervention across the globe, everybody seems to be expecting this to apply pressure on the Fed providing that fabled pivot. There’s the likelihood that this environment actually incentivizes individualist strategies for participants to act in their own interests, alluding to the Fed throwing the rest of the world’s purchasing power under the bus in order to preserve USD hegemony.
Going further, Kao also brought up his position that price inflation in oil is a major elephant in the room. The price per barrel has been falling as expectations for demand continue to slide along with continual sales of the U.S.’s strategic petroleum reserve washing markets with oil, when supply outpaces demand (or, in this case, the forecast of demand). Then basic economics dictate that prices will diminish. It is important to understand here that when the price of a barrel of oil falls, incentives to produce more diminish, leading to slow downs in investment in oil production infrastructure. And what Kao goes on to suggest is that if the Fed were to pivot, this would result in demand returning to markets, and the inevitability for oil to resume its ascent in price will place us right back to where this problem began.
I agree with Kao’s positions here.
Kao continued to elaborate on how these interventions by central banks are ultimately futile because, as the Fed continues to hike interest rates, foreign central banks simply only succeed in burning through reserves while also debasing their local currencies. Kao also briefly touched on a concern with significant levels of corporate debt around the world.
Lorenz chimed in with the addition that the U.S. and Denmark are really the only jurisdictions that have access to 30-year fixed rate mortgages, with the rest of the world tending to employ floating-rate mortgages or instruments that institute fixed rates for a brief period, later resetting to a market rate.
Lorenz went on, “…with rising rates we’re actually going to be crimping spending a lot around the world.”
And Lorenz followed up to state that, “The housing market is also a big problem in China right now… but that’s kind of the tip of the iceberg for the problems…”
He went on, referring to a report from Anne Stevenson-Yang of J Capital, where he said that she details that the 65 largest real estate developers in China owe about 6.3 trillion Chinese Yuan (CNY) in debt (about $885.5 billion). However, it gets worse when looking at the local governments; they owe 34.8 trillion CNY (about $4.779 trillion) with a hard right hook coming, amounting to an additional 40 trillion CNY ($5.622 trillion) or more in debt, wrapped up in “local financing vehicles.” This is supposedly leading to local governments getting squeezed by China’s collapse in its real estate markets, while seeing reductions in production rates thanks to President Xi’s “Zero Covid” policy, ultimately suggesting that the Chinese have abandoned trying to support the CNY against USD, contributing to the power vacuum in USD.
Contributing to this very complex relationship, Lorenz re-entered the conversation by bringing up the issue of bank reserves. Following the events of the 2008 Global Financial Crisis, U.S. banks have been required to maintain higher reserves in the aim of protecting bank solvency, but also preventing those funds from being circulated within the real economy, including investments. One argument could be made that this could be helping to keep inflation muted. According to Bianco, bank deposits have seen reallocations to money market funds to capture a yield with the reverse repurchase agreement (RRP) facility that is 0.55% higher than the yield on treasury bills. This ultimately results in a drain on bank reserves, and suggested to Lorenz that a furthering of the dollar liquidity crisis is likely, meaning that the USD continues to suck up purchasing power — remember that shortages in supply result in increases in price.
All of this basically adds up to the USD gaining rapid and potent strength against nearly all other national currencies (except perhaps the Russian ruble), and resulting in complete destruction of foreign markets, while also disincentivizing investment in nearly any other financial vehicle or asset.
Now, For What I Did Not Hear
I very much suspect that I am wrong here, and that I am misremembering (or misinterpreting) what I have witnessed over the past two years.
But I was personally surprised to hear zero discussion around the game theory that has been occurring between the Fed and the European Central Bank (ECB), in league with the World Economic Forum (WEF), around what I have perceived as language during interviews attempting to suggest that the Fed needs to print more money in order to support the economies of the world. This support would suggest an attempt to maintain the balance of power between the opposing fiat currencies by printing USD in order to offset the other currencies being debased.
Now, we know what has played out since, but the game theory still remains; the ECB’s decisions have resulted in significant weakening of the European Union, leading to the weakness in the euro, as well as weakening relations between the European nations. In my opinion, the ECB and WEF have signaled aggressive support and desire for developments of central bank digital currencies (CBDCs) as well as for more authoritarian policy measures of control for their constituents (what I see as vaccine passports and attempts at seizing lands held by their farmers, for starters). Over these past two years, I believe that Jerome Powell of the Federal Reserve had been providing aggressive resistance to the U.S.’s development of a CBDC, while the White House and Janet Yellen have ramped up pressures on the Fed to work on producing one, with Powell’s aversion to development of a CBDC seeming to wane in recent months against pressures from the Biden administration (I’m including Yellen in this as she has, in my opinion, been a clear extension of the White House).
It makes sense to me that the Fed would be hesitant to develop a CBDC, aside from being hesitant to employ any technology that is not understood, with the reasoning being that the U.S.’s major commercial banks share in ownership of the Federal Reserve System; a CBDC would completely destroy the function that commercial banks serve in providing a buffer between fiscal and monetary policy and the economic activity of average citizens and businesses. Which is precisely why, in my humble opinion, Yellen wants production of a CBDC; in order to gain control over economic activity from top to bottom, as well as to gain the ability to violate every citizens’ rights to privacy from the prying eyes of the government. Obviously, government entities can acquire this information today anyway, however, the bureaucracy we have currently can still serve as points of friction to acquiring said information, providing a veil of protection for the American citizen (although a potentially weak veil).
What this ultimately amounts to is; one, a furthering of the currency war that has been ensuing since the start of the pandemic, largely going underappreciated as the world has been distracted with the hot war occurring within Ukraine, and two, an attempt at further destruction of individual rights and freedoms both within, and outside of, the United States. China seems to be the furthest along in the world with regards to development of a sovereign power’s CBDC, and its implementation is much easier for it; it has had its social credit score system (SCS) active for multiple years now, making integration of such an authoritarian wet dream much easier, as the invasion of privacy and manipulation of the populace via the SCS is providing a foot in the door.
The reason I’m surprised that I did not hear this make it into discussion is that this adds a very, very important dynamic to the game theory of the decision making behind the Fed and Powell. If Powell understands the importance of maintaining the separation of central and commercial banks (which I believe he does), and if understands the importance of maintaining USD hegemony with regards to the U.S.’s power over foreign influence (which I believe he does), and he understands the desires for bad actors to have such perverse control over a population’s choices and economic activity via a CBDC (which I believe he might), he would therefore understand how important it is for the Fed to not only resist the implementation of a CBDC but he would also understand that, in order to protect freedom (both domestically and abroad), that this ideology of proliferation of freedom would require both an aversion to CBDC implementation and a subsequent destruction of competition against the USD.
It’s also important to understand that the U.S. is not necessarily concerned with the USD gaining too much power because we largely import the majority of our goods — we export USD. In my opinion, what follows is that the U.S. utilizes the crescendo of this power vacuum in an attempt to gobble up and consolidate the globe’s resources and build out the necessary infrastructure to expand our capabilities, returning the U.S. as a producer of high quality goods.
This Is Where I May Lose You
This therefore opens up a real opportunity for the U.S. to further its power… with the official adoption of bitcoin. Very few discuss this, and even fewer may recall, but the FDIC went around probing for information and comment in its exploration of how banks could hold “crypto” assets on their balance sheets. When these entities say “crypto,” they more often than not mean bitcoin — the problem is that the general populace’s ignorance of Bitcoin’s operations cause them to see bitcoin as “risky” when aligning with the asset, as far as public relations are concerned. What’s even more interesting is that we have not heard a peep out of them since… leading me to believe that my thesis may be more likely to be correct than not.
If my reading of Powell’s situation were correct, and this all were to play out, the U.S. would be placed in a very powerful position. The U.S. is also incentivized to follow this strategy as our gold reserves have been dramatically depleted since World War II, with China and Russia both holding signficant coffers of the precious metal. Then there’s the fact that bitcoin is still very early in its adoption with regards to utilization across the globe and institutional interest only just beginning.
If the U.S. wants to avoid going down in history books as just another Roman Empire, it would behoove it to take these things very, very seriously. But, and this is the most important aspect to consider,I assure you that I have likely misread the environment.
- “Introduction To Treasury Securities,” Investopedia
- “Bond Traders Relish Idea Of Fed Rates Above 4%,” Yahoo! Finance
- “10-Year Treasury Note And How It Works,” The Balance
- “Bond Market,” Wikipedia
- “Fixed Income — Insurance And Trading, First Quarter 2021,” SIFMA
- “How Much Liquidity Is In The US Treasury Market,” Zero Hedge
- “What Is Yield Curve Control?” Brookings
- “Using Derivative Overlays To Hedge Pension Duration,” ResearchGate
This is a guest post by Mike Hobart. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.treasury securities bonds yield curve pandemic equities bitcoin btc real estate mortgages housing market currencies euro yuan crypto gold oil
JOLTs jolted: Did the Fed break the labour market?
In the Bureau of Labor Statistics (BLS) August release of the Job Openings and Labor Turnover Survey (JOLTS) report, the number of job openings, a measure…
In the Bureau of Labor Statistics (BLS) August release of the Job Openings and Labor Turnover Survey (JOLTS) report, the number of job openings, a measure of demand for labour, fell to 10.1 million. This was short of market estimates of 11 million and lower than last month’s level of 11.2 million.
It also marked the fifth consecutive month of decreases in job openings this year, while the August unemployment rate had ticked higher to 3.7%, near a five-decade low.
In the latest numbers, the total job openings were the lowest reported since June 2021, while incredibly, the decline in vacancies of 1.1 million was the sharpest in two decades save for the extraordinary circumstances in April 2020.
Healthcare services, other services and retail saw the deepest declines in job openings of 236,000, 183,000, and 143,000, respectively.
With total jobs in some of these sectors settling below pre-pandemic levels, the Fed’s push for higher borrowing costs may finally be restricting demand for workers in these areas.
The levels of hires, quits and layoffs (collectively known as separations) were little changed from July.
The quits rate (a percentage of total employment in the month), a proxy for confidence in the market was steady at 2.8%.
From a bird’s eye view, 1.7 openings were available for each unemployed person, cooling from 2.0 in the month prior but still above the historic average.
The market still appears favourable for workers but seems to have begun showing signs of fatigue.
Ian Shepherdson, Economist at Pantheon Macroeconomics noted that it was too soon to suggest if a new trend had started to emerge, and said,
…this is the first official indicator to point unambiguously, if not necessarily reliably, to a clear slowing in labour demand.
Nick Bunker, Head of Economic Research at Indeed, also stated,
The heat of the labour market is slowly coming down to a slow boil as demand for hiring new workers fades.
Ironically, equities surged as investors pinned their hopes on weakness in headline jobs numbers being the sign of breakage the Fed needed to pull back on its tightening.
Kristen Bitterly, Citi Global Wealth’s head of North American investments added,
(In the past, in) 8 out of the 10 bear markets, we have seen bounces off the lows of 10%…and not just one but several, this is very common in this type of environment.
The worst may be yet to come
As for the health of the economy, after much seesawing in its projections, which swung between 0.3% as recently as September 27 and as high as 2.7% just a couple of weeks earlier, the Atlanta Fed GDPNow estimate was finalized at a sharply rebounding 2.3% for Q3, earlier in the week.
Rod Von Lipsey, Managing Director, UBS Private Wealth Management was optimistic and stated,
…looking for a stronger fourth quarter, and traditionally, the fourth quarter is a good part of the year for stocks.
As I reported in a piece last week, a crucial consideration that has been brought up many a time is the unknown around policy lags.
Cathie Wood, Ark Invest CEO and CIO noted that the Fed has increased rates an incredible 13-fold in a span of just a few months, which is in stark contrast to the rate doubling engineered by Governor Volcker over the span of a decade.
Pedro da Costa, a veteran Fed reporter and previously a fellow at the Peterson Institute for International Economics, emphasized that once the Fed tightens policy, there is no way to know when this may be fully transmitted to the economy, which could lie anywhere between 6 to 18 months.
The JOLTs report reflects August data while the Fed has continued to tighten. This raises the probability that the Fed may have already done too much, and the environment may be primed to send the jobs market into a tailspin.
Several recent indicators suggest that the labour market is getting ready for a significant deceleration.
For instance, new orders contracted aggressively to 47.1. Although still expansionary, ISM manufacturing data fell sharply to 50.9 global, factory employment plummeted to 48.7, global PMI receded into contractionary territory at 49.8, its lowest level since June 2020 while durable goods declined 0.2%.
Moreover, transpacific shipping rates, a leading indicator absolutely crashed, falling 75% Y-o-Y on weaker demand and overbought inventories.
Steven van Metre, a certified financial planner and frequent collaborator at Eurodollar University, argued,
“…the next thing to go is the job market.“
A recent study by KPMG which collated opinions of over 400 CEOs and business leaders at top US companies, found that a startling 91% of respondents expect a recession within the next 12 months. Only 34% of these think that it would be “mild and short.”
More than half of the CEOs interviewed are looking to slash jobs and cut headcount.
Similarly, a report by Marcum LLP in collaboration with Hofstra University found that 90% of surveyed CEOs were fearful of a recession in the near future.
It also found that over a quarter of company heads had already begun layoffs or planned to do so in the next twelve months.
Simply put, American enterprises are not buying the Fed’s soft-landing plans.
A slew of mass layoffs amid overwhelming inventories and a weak consumer impulse will result in a rapid decline in price pressures, exacerbating the threat of too much tightening.
On Friday, the markets will be focused on the BLS’s non-farm payrolls data. Economists anticipate a comparatively small addition of jobs, likely to be near 250,000, which would mark the smallest monthly increase this year.
In a world where interest rates are still rising, demand is giving way, the prevailing sentiment is weak and companies are burdened by excessive inventories, can job cuts be far behind?
The post JOLTs jolted: Did the Fed break the labour market? appeared first on Invezz.recession unemployment pandemic equities stocks fed governor recession interest rates unemployment
Dollar Slump Halted as Stocks and Bonds Retreat
Overview: Hopes that the global tightening cycle is entering its last phase supplied the fodder for a continued dramatic rally in equities and bonds….
Overview: Hopes that the global tightening cycle is entering its last phase supplied the fodder for a continued dramatic rally in equities and bonds. The euro traded at par for the first time in two weeks, while sterling reached almost $1.1490, its highest since September 15. The US 10-year yield has fallen by 45 bp in the past five sessions. Yet, the scar tissue from the last bear market rally is still fresh and US equity futures are lower after the S&P 500 had its best two days since 2020. Europe’s Stoxx 600, which has gained more than 5% its three-day rally is more around 0.9% lower in late morning turnover. The large Asia-Pacific bourses advanced, led by a nearly 6% rally in Hong Kong as it returned from holiday. Similarly, the bond market, which rallied with stocks, has sold off. The US 10-year yield is up around seven basis points to 3.70%, while European yields are 7-14 bp higher. Peripheral premiums are also widening. The dollar is firmer against most G10 currencies, with the New Zealand dollar holding its own after the central bank delivered was seems to be a hawkish 50 bp hike. Emerging market currencies are mostly lower, including Poland where the central bank is expected to deliver a 25 bp hike shortly. After rising to $1730 yesterday, gold is offered and could ease back toward $1700 near-term. December WTI is consolidating after rallying around 8.5% earlier this week as the OPEC+ decision is awaited. Speculation over a large nominal cut helped lift prices. US and European natural gas prices are softer today. Iron ore is extended yesterday’s gains, while December copper is paring yesterday’s 2.35% gain. December wheat is off for a third session, and if sustained, would be the longest losing streak since mid-August.
The Reserve Bank of New Zealand quickly laid to rest ideas that the Reserve Bank of Australia's decision to hike only a quarter of a point yesterday instead of a half-point was representative of a broader development. It told us nothing about anything outside of Australia. The RBNZ delivered the expected 50 bp increase and acknowledged it had considered a 75 bp move. In addition, it signaled further tightening would be delivered. It meets next on November 23, and the market has more than an 85% chance of another 50 bp hike discounted.
Both Australia and Japan's final service and composite PMI were revised higher in the final reading. Japan's service PMI was tweaked to 52.2 from 51.9. It was 49.5 in August. Similarly, the composite is at 51.0, up from 50.9 flash reading and 49.4 in August. In Australia, the service and composite PMI were at 50.2 in August. The flash estimate put it at 50.4 and 50.8, respectively. The final reading is 50.6 and 50.9 for the service and composite PMI.
Softer US yields weighed on the dollar against the yen. On Monday, it briefly traded above JPY145. Today, it traded at a seven-day low, slightly above JPY143.50. US yields are firmer, and the greenback has recovered and traded above JPY144.50 in early European turnover. The intraday momentum indicators are getting stretched, and the JPY144.75 area may cap it today. The Australian dollar traded to almost $.06550 yesterday but has struggled to sustain upticks over $0.6520 today. Initial support is seen in the $0.6450-60 area. Trade figures are out tomorrow. The New Zealand dollar initially rose to slightly through $0.5800 on the back of the hike but has succumbed to the greenback's strength. It returned little changed levels around $0.5730 before finding a bid in Europe. The US dollar reached CNH7.2675 last week and finished last week near CNH7.1420. It fell to almost CNH7.01 today and bounced smartly. A near-term low look to be in place, a modest dollar recovery seems likely.
UK Prime Minister Truss will speak at the Tory Party Conference as the North American session gets under way. We argued that calling retaining the 45% highest marginal tax rate a "U-turn" was an exaggeration and misreading of the new government. It was the most controversial part of the mini budget apparently among the Tory MPs. This was a strategic retreat and a small price to pay for the other 98% of Kwarteng's announcement. Bringing forward the November 23 "medium-term fiscal plan" (still to be confirmed with specifics) is more about process than substance. The fact that she seems to be considering not making good her Tory predecessor pledge to link welfare payments to inflation suggests she has not been chastened by the cold bath reception to her government's first actions. However, on another front, Truss is changing her stance. As Foreign Secretary she drafted legislation that overrode the Northern Ireland Protocol unilaterally. In a more profound shift, she has abandoned the legislation and UK-EU talks resumed this week Truss is hopeful for a deal in the spring. Lastly, we note that the UK service and composite PMI were revised to show smaller deterioration from August. The service PMI is at 50 not 49.2 as the flash estimate had it. It was at 50.9 previously. The composite remains below 50 at 49.1, but the preliminary estimate had it at 48.4 from 49.6 in August.
Germany's announcement of the weekend of a 200 bln euro off-budget "defensive shield" has spurred more rancor in Europe. Not all countries have the fiscal space of Germany. Two EC Commissioners called for an EU budget response. They seem to look at the 1.8 trillion-euro joint debt program (Next Generation fund) as precedent. This is, of course, the issue. During the pandemic, some suggested this was a key breakthrough for fiscal union, a congenital birth defect of EMU. However, this is exactly what the fight is about. If there is no joint action, the net result will likely be more fragmentation of the internal markets. Still, the creditor nations will resist, and Germany's Finance Minister Linder was first out of the shoot. While claiming to be open to other measures, Linder argued that challenge now is from supply shock, not demand. On the other hand, the European Parliament mandated that all mobile phones, tablets, and cameras are equipped with USB-C charge by the end of 2024. The costs savings is estimated to be around 250 mln euros a year. No fiscal union, partial banking, and monetary union, but a charger union.
The final PMI disappointed in the eurozone. The Big 4 preliminary readings were revised lower, suggesting conditions deteriorated further since the flash estimates. It was small change, but the direction was uniform. On the aggregate level, the service PMI was revised lower to 48.8 from 48.9 and 49.8 in August. The composite reading eased to 48.1 from 48.2 preliminary estimate and 48.9 in August. Italy and Spain, for which there is no flash report, were both weaker than expected, further below the 50 boom/bust level. France was the only one of these four that had a composite reading above 50 and improved from August. Separately, France reported a dramatic 2.4% rise in the August industrial output. The median forecast in Bloomberg's survey was for an unchanged report. Lastly, we note that Germany's August trade surplus was a quarter of the size that economists (median in the Bloomberg survey) expected at 1.2 bln euros instead of 4.7 bln. Adding insult to injury, the July balance was revised to 3.4 bln euros from 5.4 bln.
The euro stalled near $1.00 yesterday, the highest level since September 20. However, it has come back better offered today and fell slightly below $0.9925 in early European activity. Initial support is seen around $0.9900 and then $0.9840-50. The euro finished last week slightly above $0.9800. We suspect that market may consolidate broadly now ahead of Friday's US jobs report. The euro's gains seem more a function of short covering than bottom picking. Sterling edged a little closer to $1.15 but could not push through and has been setback to about $1.1380. The intraday momentum indicators allow for a bit more slippage and the next support area is around $1.1350.
Fed Chair Powell has explained that for inflation, one number, the PCE deflator best captures the price pressures. However, he says, the labor market has many dimensions and no one number does it justice. Weekly initial jobless claims fell to five-month lows in late September. On the other hand, the ISM manufacturing employment index fell below the 50 boom/bust level for the fourth month in the past five. The JOLTS report showed the labor market easing, with job openings falling by nearly a million to its lowest level in 14 months. Yet, despite the talk about the Reserve Bank of Australia's smaller cut as some kind of tell of Fed policy (eye roll) and the drop in JOLTS, the fact of the matter is that the market view of the trajectory of Fed policy has not changed. Specifically, the probability of a 75 bp hike is almost 77% at yesterday's settlement, which is the most since last Monday. The terminal rate is still seen in
Attention may turn to the ADP report due today but recall that they have changed their model and explicitly said that it is not meant to forecast the national figures. Those are due Friday. Also, along with the ADP data, the US reports the August trade figures today. We are concerned that the US trade deficit will deteriorate again and note that dollar is at extreme levels of valuation on the OECD's purchasing power parity model. That may be a 2023 story. What counts for GDP, of course, is the real trade balance, and in July it was at its lowest level since last October. Despite the strong dollar, US goods exports reached a record in July. Imports fell to a five-month low, which, at least in part, seems to reflect the difficult in many consumer businesses in managing inventories. The final PMI reading is unlikely to draw much attention. The preliminary reading had the composite rising for the first time in six months but still below the 50 at 49.3. The ISM services offer new information. The risk seems to be on the downside of the median forecast for 56.0 from 56.9.
Yesterday, we mistakenly said that would report is August building permits and trade figure, but they are out today. Permits, which likely fell for the third straight month, as the tighter monetary policy bits. The combination of slowing world growth and softer commodity prices warns the best of the positive terms-of-trade shock is behind it. The trade surplus is expected to fall for the second consecutive month. Even before the RBA delivered the 25 bp rate hike, the market had been downgrading the probability of a half-point move from the Bank of Canada. Last Thursday, the swaps market had it as a 92% chance. At the close Monday, it had been downgraded to a little less 72%. Yesterday, it slipped slightly below 65%. Further softening appears to be taking place today, even after the RBNZ's 50 bp hike. The odds have slipped below 50% in the swaps market.
After finishing last week slightly above CAD1.38, the US dollar has been sold to nearly CAD1.35 yesterday. No follow-through selling has been seen and the greenback was bid back to CAD1.3585. The Canadian dollar has fallen out of favor today as US equity index futures are paring gains after two strong advances. There may be scope for CAD1.3630 today if the sale of US equities resumes. The greenback has found a base around MXN19.95. The risk-off mod can lift it back toward MXN20.10-15. Look for the dollar to also recover more against the Brazilian real after bouncing off the BRL5.11 area yesterday.
Disclaimerbonds pandemic sp 500 equities stocks monetary policy fed link currencies us dollar canadian dollar euro gdp recovery gold japan hong kong canada european europe uk france spain italy germany poland eu
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