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Bloodbath: Futures, Yuan Tumble as 10Y Yields Soar On Global Stagflation Fears

Bloodbath: Futures, Yuan Tumble as 10Y Yields Soar On Global Stagflation Fears

It’s a bloodbath.

With Bank of America conveniently reminding…

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on

Bloodbath: Futures, Yuan Tumble as 10Y Yields Soar On Global Stagflation Fears

It's a bloodbath.

With Bank of America conveniently reminding us over the weekend that markets never bottom on a Friday, and that Mondays tend to be the worst day of the week for markets...

... that's exactly what is playing out today as risk assets are puking across the globe, with S&P 500 futures crashing, the Chinese yuan tumbling amid a growing slowdown in China, and the US 10-year Treasury yield climbing as high as 3.2% as risk parity funds are getting monkeyhammered... again.

A slide in US stock futures set up Wall Street’s main indexes to extend weeks of declines on concerns of a recession amid monetary tightening and surging inflation. Contracts on the S&P 500 fell 2.1% as of 7:15 a.m. in New York, trading at session lows, as the MSCI gauge of world stocks extended its retreat from a November peak to 16% as a wave of risk aversion continues to sweep through global markets after Friday’s U.S. jobs data left little room for a change of course in the Fed’s rate-increase and quantitative-tightening plans. Sentiment took a further knock over the weekend as Chinese Premier Li Keqiang warned the nation’s employment situation had turned grave because of Covid restrictions. The greenback extended a two-year high, rising on Monday against all of its major peers. Oil declined more than 2.5% as concern over slowing demand in Asia outweighed a Group-of-Seven pledge to ban Russian oil. Most Treasuries fell, with the five-year rate briefly jumping to the highest since 2008.

Nasdaq 100 futures slipped 2.5%, putting the tech-heavy index on course to extend its six-week streak of declines, with major tech stocks again down in premarket trading after Apple and Amazon.com closed lower for six straight weeks as the Federal Reserve tightens policies to fight inflation amid a spate of disappointing earnings and weak forecasts. The tech sector also remains pressured by rising bond yields and concerns over an economic slowdown. Apple fell as much as 2.6% premarket, after closing down to record its longest declining streak since November 2018. Amazon was 2.7% lower premarket, after closing at its lowest level in more than 2 years. Microsoft -2.5%, Alphabet -2.7%, Meta Platforms -2.6%, Netflix -2.5% and Nvidia -3% premarket.

  • In other notable premarket moves, Rivian Automotive tumbled as much as 9.6% after a media report that Ford was selling 8 million shares in the electric-pickup maker at a discount.

  • Cryptocurrency-exposed shares decline as Bitcoin is falling toward levels last seen in July 2021, part of a wider retreat in digital tokens. Riot Blockchain (RIOT US) -6.1%, Marathon Digital (MARA US) -6.3%, MicroStrategy (MSTR US) -4.8%.
  • Uber (UBER US) shares down 4% in U.S. premarket trading as CEO Dara Khosrowshahi says company has made progress in terms of profitability but the goal posts have changed and now it’s about free cash flow and getting there fast, CNBC reports, citing an email to staff on May 8.
  • Faraday Future (FFIE US) shares rose 9.3% in premarket trading on Monday after the Special Committee completed its previously announced review.
  • Rivian (RIVN US) falls as much as 9.6% in U.S. premarket trading as a post-IPO lockup on the stock expires, while CNBC reported Ford and another investor are looking to sell shares in the electric-pickup maker at a discount..
  • Prestige Consumer Healthcare (PBH US) upgraded to outperform from perform at Oppenheimer, which says the over-the- counter medications maker looks attractively valued after a recent pullback in its shares and .
  • Zanite (ZNTE US) shares climb 13% in U.S. premarket after its shareholders approved the business combination with Embraer’s urban air mobility subsidiary.
  • Southwest Gas (SWX US) shares could be active management after activist investor Carl Icahn reached a deal with the utility owner at the weekend to oust its CEO and name up to four directors to its board.

The S&P 500 capped its fifth week of declines on Friday, its longest losing streak since June 2011, as initial optimism following the Federal Reserve’s meeting faded. Growth-linked and technology stocks continue to be under pressure with the yield on U.S. five-year Treasury notes hitting the highest level since September 2008 as investors fear higher yields will threaten future earnings growth.

Not helping matters is the continued surge in benchmark 10Y yields which rose to 3.20% this morning and are just a few basis points away from taking out their November 2018 highs of 3.24%.

The Nasdaq 100 Index is down 22% this year, one of the worst performers among global gauges, despite a brief relief rally last week as Fed Chair Jerome Powell quelled fears of a 75-basis point rate hike.

“Lots of Fed watchers, both professional and amateur, have opined that Powell is delusional because the only way to bring inflation down is to cause a recession,” Ed Yardeni, president of Yardeni Research Inc., wrote in a note. “Of course, this crowd remains very bearish on both bonds and stocks.”

Strict lockdowns in China to curb the coronavirus have also been weighing on investor appetite. Chinese Premier Li Keqiang warned over the weekend of a “complicated and grave” employment situation as Beijing and Shanghai tightened curbs in the country’s most important cities. Goldman Sachs Group Inc. strategists, including David Kostin, said the outlook for U.S. stocks isn’t particularly bright, even if an outright recession is avoided.

The short-term outlook for stocks “is still messy and there may be more downside as markets worry about a significant economic slowdown or ‘hard landing’ and aggressive interest-rate hikes,” Diana Mousina, senior economist at AMP Investments, wrote in a note.

In Europe, the Stoxx 600 fell 2.1% with with miners, travel and real estate the worst-performing sectors. 524 Stoxx 600 members were down, and just 59 up. Here are some of the biggest European movers today:

  • BBVA shares rise as much as 2.3% as Deutsche Bank upgrades the stock to buy from hold, noting that the Spanish lender’s performance remains robust in most units.
  • EuroAPI gains as much as 7.5% as JPMorgan initiates coverage with an overweight rating, calling the Sanofi spinoff  a “transformation story with significant upside”
  • Ideagen surges as much as 47% after the software company agrees to be acquired by funds managed by Hg Pooled Management for 350p/share in cash.
  • NCC Group shares rise as much as 1.6% to outperform a falling tech sector after the company says sales in 2H will be substantially higher than 1H.
  • Solutions 30 shares rise as much as 4.1% after BNP Paribas Exane resumes coverage with an outperform rating, citing new profitable growth cycle and a potential buyout.
  • Miners’ shares underperform the broader equity gauge in Europe as iron ore and copper decline after weak Chinese property data and a jobs warning from Premier Li Keqiang.
  • Rio Tinto falls as much as 4.5%, Anglo American -4.2%, Glencore -5.4%, ArcelorMittal -5%, SSAB -6%
  • Crypto-exposed shares decline as Bitcoin falls toward levels last seen in July 2021, part of a wider retreat in digital tokens
  • Argo Blockchain -12%, Safello -6.8%, Northern Data -9.4% and On-Line Blockchain -10%
  • Grifols falls as much as 9%, giving back all of Friday’s gains that were fueled by 1Q earnings from the Spanish maker of pharmaceutical products.
  • Rightmove drops as much as 7.2% after the company said its chief executive officer Peter Brooks-Johnson will step down in 2023.

In the latest Russia-related developments, the G7 most-industrialized countries pledged to ban the import of Russian oil. The European Union is working on a similar plan but Hungary remains a holdout and the bloc’s talks are set to continue.

Earlier in the session, Asian stocks headed for a sixth day of declines as investors shunned risk assets fretting over the economic fallout from China’s lockdowns, rising global inflation and higher U.S. interest rates. The MSCI Asia Pacific Index slid as much as 1.8% in a broad rout that saw all major country benchmarks in the red, led by Indonesia. Materials and industrials were the worst-performing index groups, while tech names like TSMC and Sony were among the biggest drags in terms of individual stocks. A stronger dollar added to woes for Asian investors, who have already seen rising input costs and supply chain disruptions eating into company profits. The MSCI Asia gauge is down more than 17% this year and at its lowest levels since July 2020. Traders are keenly awaiting the U.S. consumer inflation data due Wednesday, given its implications for the Federal Reserve’s policy. “We are not getting any reprieve” as markets are possibly pricing peak Fed hawkishness and uncertainty from China’s lockdowns and the Russia-Ukraine war, Stefanie Holtze-Jen, Asia-Pacific chief investment officer at Deutsche Bank International Private Bank. told Bloomberg Television. Indonesia’s equity benchmark plunged 4.4% as the market reopened after a week-long holiday. Japan’s Nikkei 225 lost more than 2.5% as Prime Minister Fumio Kishida joined other G-7 leaders to impose a ban on crude over the Kremlin’s invasion of Ukraine. Chinese stocks edged lower -- though faring better than the Asian benchmark index -- after Premier Li Keqiang warned of a grave employment situation over the weekend amid shutdowns in Beijing and Shanghai. Hong Kong was closed for a holiday, as was the Philippines where a presidential election is under way.

In rates, the Treasuries curve continued to aggressively steepen with front-end yields richer on the day while long-end cheapens by up to 7bp and global stocks falling after Chinese Premier Li’s jobs warning. Treasuries curve steeper with 2s10s, 5s30s spreads wider by ~10bp and ~6bp on the day; on outright basis 2-year yields are richer by 4bp while 10s are at 3.18%, cheaper by 5.5bp but outperforming gilts ~by 2.5bp U.S. session has few scheduled events, although this week’s Treasury auctions and expected busy issuance slate could keep yields moving higher. Dollar issuance slate empty; some desks are expecting a busy week with as much as $40b in new deals coming if market conditions allow. Three-month dollar Libor -0.33bp at 1.39857%.

In FX, the big mover was the China yuan, whose selloff accelerated after breaking 6.7 per dollar for the first time since 2020, as Chinese exports grew at their slowest pace in nearly two years and amid the absence of support from state banks. The USDCNY rose as much as 1% to 6.7321, the highest since November 2020; USD/CNH jumps 0.9% to 6.7763.

Export growth in April slowed to 3.9% in dollar terms from a year earlier, compared to an increase in March of 14.7%. That’s the weakest pace since June 2020 but faster than the median estimate of a 2.7% gain in a Bloomberg survey of economists
Despite demand from some exporters, it was not enough to stop yuan from weakening, according to three traders who requested anonymity discussing confidential matters. The lack of notable dollar selling from state-owned banks also weighs on sentiment, they added.

Elsewhere in FX, Australia’s currency fell below 70 U.S. cents for the first time since January, and India’s rupee hit a record low against the dollar, with the central bank said to be intervening to defend the currency. The dollar rose against all of its Group-of-10 peers, with the Bloomberg Dollar Spot Index trading at its highest level in two years. China’s export growth in April in dollar terms slowed to 3.9% from a year earlier, compared to an increase in March of 14.7%, customs data showed Monday. That’s the weakest pace since June 2020 but faster than the median estimate of a 2.7% gain in a Bloomberg survey of economists. The Japanese yen fell to a fresh 20-year low against the dollar; USD/JPY rose as much as 0.6% to 131.35.

Bitcoin came under noted pressure over the weekend and has continued to decline during the European session, dropping to a low just above the USD 33k mark.

In commodities, oil fell, surrendering half of last week’s gains. Crude is being buffeted by the demand hit from China’s outbreak and supply risks linked to Russia’s war in Ukraine. WTI trades within Friday’s range, falling 1.1% to around $108. Spot gold falls roughly $18 to trade above $1,865/oz. Most base metals are in the red with much of the complex down over 2% on LME.

Looking at today's calendar we get US March wholesale trade sales. Simon property group, BioNTech, Infineon, Palantir, AMC are among the companies reporting earnings.

Market Snapshot

  • S&P 500 futures down 1.4% to 4,061.75
  • MXAP down 1.7% to 161.32
  • MXAPJ down 1.4% to 529.60
  • Nikkei down 2.5% to 26,319.34
  • Topix down 2.0% to 1,878.39
  • Hang Seng Index down 3.8% to 20,001.96
  • Shanghai Composite little changed at 3,004.14
  • Sensex down 0.8% to 54,395.62
  • Australia S&P/ASX 200 down 1.2% to 7,120.65
  • Kospi down 1.3% to 2,610.81
  • STOXX Europe 600 down 1.3% to 424.33
  • German 10Y yield little changed at 1.14%
  • Euro down 0.4% to $1.0512
  • Brent Futures down 0.8% to $111.50/bbl
  • Gold spot down 0.8% to $1,869.61
  • U.S. Dollar Index up 0.35% to 104.03

Top Overnight News from Bloomberg

  • Russian President Vladimir Putin justified his faltering 10-week- old invasion of Ukraine as a battle comparable to the fight against Nazi Germany
  • Leaders of the Group of Seven most industrialized countries pledged to ban the import of Russian oil in response to President Vladimir Putin’s war in Ukraine
  • Hungary continued to block a European Union proposal that would ban Russian oil imports, holding up the bloc’s entire package of sanctions meant to target President Vladimir Putin over his war in Ukraine, according to people familiar with the talks
  • Saudi Arabia cut oil prices for buyers in Asia as coronavirus lockdowns in China weigh on demand, countering uncertainty around Russia’s supplies as the Ukraine war drags on
  • Chinese Premier Li Keqiang warned of a “complicated and grave” employment situation as Beijing and Shanghai tightened curbs on residents in a bid to contain Covid outbreaks in the country’s most important cities
  • Bill Gates said interest rates are likely to rise enough to cause a global economic slowdown, triggered by Russia’s invasion of Ukraine and fallout from the Covid-19 pandemic
  • The European Central Bank should start raising borrowing costs in July to prevent inflation expectations becoming de- anchored, said Governing Council member Olli Rehn.

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks declined amid recent upside in yields and as participants digested a slowdown in Chinese trade data. ASX 200 was dragged lower amid underperformance in the real estate and tech sectors. Nikkei 225 underperformed with a weaker currency and higher than expected wages doing little to offset the losses. Shanghai Comp was indecisive with initial pressure seen after reports of tighter COVID controls in China’s two largest cities and as Hong Kong remained closed for holiday, while the latest Chinese trade data was mostly better than expected but showed a significant slowdown in Exports amid the ongoing COVID-19 woes and curbs.

Top Asian News

  • China’s Imports From Russia Hit Record on Energy Price Rises
  • BP to Buy Stake in $36 Billion Hydrogen Hub, Australian Says
  • Miners Fall With Iron Ore and Metals on China Property Fears
  • Thailand Sees Foreign Arrivals Jumping to 1m a Month

European bourses are lower across the board, Euro Stoxx 50 -1.4%, in a continuation of the APAC handover amid multiple fundamental narratives. Stateside, US futures are similarly hindered, ES -1.7%, with the NQ marginally lagging given yield upside; Fed speak remains in focus and inflation metrics are due for the region and China later in the week. European sectors feature Tech underperforming given yields and following Infineon earnings in-spite of them raising guidance again, defensive names are the relative outperformers.

Top European News

  • European Gas Drops as Russia Tries to Calm Clients Over Payments
  • BBVA Gains as Deutsche Bank Upgrades on Robust Performance
  • Siemens Breakup Would Reap $60 Billion in Value: Bernstein
  • Cost of Default Hedges in Europe Tops Level Last Seen in 2020

FX

  • Buck continues bull run on combination of risk, further upside in Treasury yields and curve steepening plus other positive factors. DXY extends beyond 104.000 to test or take out multiple technical, key and psychological levels.
  • Aussie and Kiwi underperform as high beta and commodity currencies, AUD/USD probes 0.7000 and NZD/USD hovers around 0.6350.
  • Franc and Yen suffering more adverse consequences of carry; USD/CHF approached 0.9950 and USD/JPY climbs to new YTD high of circa. 131.35.
  • Pound politically challenged after UK local elections and Sinn Fein success at Northern Ireland assembly, Cable under 1.2300 and closer to June 2020 base at 1.2252.
  • Euro soft awaiting further talks on Russian oil embargo and following worse than forecast Eurozone Sentix index, EUR/USD in low 1.0500 area and briefly under.
  • Loonie undermined by pullback in crude ahead of Canadian building permits, USD/CAD hits 1.2950 before paring back a bit.
  • Yuan slides after mixed Chinese trade data and tighter COVID restrictions in two largest cities, USD/CNY settles above 6.7200 and USD/CNH over chart resistance towards 6.7800.

Fixed income

  • Bonds whippy and multi-directional with Bunds holding above par within 151.37-150.75 range, but Gilts and 10 year T-note mostly softer between 117.64-14 and 117-27/11 parameters.
  • BTPs also weak awaiting mid-month Italian auction details.
  • UST curve steeper before Quarterly Refunding and CPI data.
  • UK debt eyeing a speech from one hawkish BoE dissenter as Saunders is scheduled later.

Commodities

  • WTI and Brent are pressured amid broader risk sentiment though Russian President Putin's Victory Day speech was relatively uneventful.
  • Currently, the benchmarks are lower by around USD 2.00/bbl; familiar catalysts incl. China-COVID, EU Russian oil import embargo, remain in focus among other drivers.
  • Saudi Arabia lowered June Arab light oil prices to Asia to a premium of USD 4.40/bbl vs Oman/Dubai from a premium of USD 9.35/bbl, while it lowered the price to Europe to a premium of USD 2.10/bbl vs ICE brent from a premium of USD 4.60/bbl and kept the price premium to the US at USD 5.65/bbl vs ASCI, according to Reuters.
  • Saudi Energy Minister says the difference between crude prices and fuel mobility prices is around 60% due to refining capacity, via Reuters.
  • Russian Deputy PM Novak says Russian oil output was up in early May vs April; situation with Russian oil has stabilised, via Ria; considering expanding capacity of oil-exporting ports.
  • Spot gold is hindered amid USD and yield dynamics, moving further away from the 100DMA

DB's Jim Reid concludes the overnight wrap

Last week was another tough one for risk parity or 60/40 type strategies as equities and bonds fell around the world. The S&P 500 was actually one of the outperformers and 'only' fell -0.21% but this still made it the fifth successive weekly decline - the worse run since 2011. Meanwhile 10yr US yields were up +19.9bps, most of it after the Fed. The relatively small move in US equities masked huge volatility though and losses in both assets intensified as the dust settled after the "dovish" Fed where they effectively ruled out 75bps hikes in the foreseeable future. I spent some time over the weekend (whilst twiddling my thumbs at a 5 year old's birthday party) trying to work out whether markets would have been calmer or even worse had the Fed kept 75bps firmly on the table. How did I conclude this epic debate with myself? Well I ended up having no idea. Sticking to 50bps increments over the next couple of meetings provides a level of perceived control and shows no panic whilst 75bps suggests a level of panic but if inflation is as sticky as we expect it to be, it might ultimately be the best thing to do medium term. Regardless of this debate, it's fairly obvious that the "Fed Put" is going to be difficult to rely on for this cycle.

We won't have to wait too long for the next blockbuster event to help shape the debate as US CPI on Wednesday takes center stage this week with PPI the following day. There are lots of Fed speakers too to put some nuance to last week's FOMC announcement. Outside of this geopolitics will be key. Today marks the annual "Victory Day" in Russia where there will be a parade and a speech from Putin. It's anyone's guess what tone the President will take in this landmark speech but it could shape the next phase of the war. Staying with geopolitics, Finland may decide whether to apply for NATO membership this week and Sweden is due to publish its security policy assessment before Friday.

We will also get a pulse check on economic sentiment in May from the ZEW survey for the Eurozone and Germany (tomorrow) and, for the US, the University of Michigan survey on Friday. China inflation data on Wednesday will be interesting. In an otherwise quiet week for economic data, the UK will be an exception with a data-packed Thursday. It will be a slow week for corporate earnings too now as the bulk of US/European companies have reported and we will instead focus on Japan's corporate giants. As well as Fed speakers there are a number of ECB equivalents, with all comments pertaining to a possible July hike watched out for.

In terms of US CPI midweek, DB’s US economists are expecting a +7.9% reading, down from the four-decade-high 8.5% print in March, not least due to base effects. From here it should all be about the pace of the declines as things like the extreme YoY prices in used cars roll out of the data. However on the other side it is important to see how prolonged the rise in rents are. Remember that rents make up a third of the CPI basket and 40% of core. Used cars only make up a few percentage points. A reminder that the day by day calendar of events is at the end as usual.

Just a few words on earnings with around 90% and 75% having reported in the US and Europe. According to our equity strategist Binky Chadha (report link here), the season has been pretty strong, especially in Europe which benefits from a better sector mix (eg Energy and Materials concentration and limited Tech which held the US back). One consistent theme in both regions is that margins remained strong suggesting that firms are for now still able to pass on inflationary pressures. On the macro front this makes it harder for the rate of inflation to fall sharply as price rises are being embedded into the economies for now. It won't last forever as excess savings/liquidity will be run down but seems to be holding for now.

Asian stock markets opened sharply lower this morning following the broadly negative cues from Wall Street on Friday along with the ongoing impact of China’s Covid lockdown policies. The Nikkei (-2.08%) is leading losses across the region with the Kospi (-0.96%) also trading in negative territory. Mainland Chinese stocks are showing a mixed performance with the Shanghai Composite (+0.08%) marginally higher while the CSI (-0.65%) is moving lower after the release of China’s trade data. China’s exports grew +3.9% y/y in April, exceeding market estimates of a +2.7% increase but slowing from a +14.7% growth recorded in the preceding month. Meanwhile, the nation’s trade surplus increased less than expected to +$51.12bn in April (v/s +$53.45bn Bloomberg estimates). It followed a surplus of +$47.38bn in March. Elsewhere, markets in Hong Kong are closed today for a holiday. Outside of Asia, equity futures in the US point to further losses with contracts on the S&P 500 (-0.97%) and NASDAQ 100 (-0.79%) in the red. 10-yr USTs are around +1bps higher at 3.136% as I type with the 2s10s +2bps higher and above +40bps again.

In other economic news, real wages in Japan shrank -0.2% y/y in March, its first decline since December but compared to market estimates of a -0.6% drop. Meanwhile, the nominal cash earnings increased +1.2% y/y in March as against the same rate in February and compared to market expectations of a +0.9% gain.

Overnight, G7 nations committed to ban or phase out imports of Russian oil with the US unveiling sanctions against Gazprombank executives and other businesses as part of a new package of sanctions designed to further punish Moscow for its war in Ukraine.

A quick rewind to last week now. A few major central bank decisions injected yet more cross-asset volatility into markets. First, the Fed hiked rates by +50bps for the first time in two decades, announced the beginning of its balance sheet rundown, and seemingly ruled out hikes of larger magnitude in the near-term. Then, the BoE hiked Bank Rate by +25bps, coupled with 3 dissenting opinions who favoured a larger hike, and 2 members who wanted to signal no more hikes were forthcoming. They’re also starting to consider gilt sales, and released a forecast that show UK growth tipping negative next year. Adding the to mix, the RBA hiked their policy benchmark +25bps as well.

All told, 10yr Treasuries gained +17.9bps (+2.1bps Friday) concentrated all in real yields which climbed +27.7bps (+5.3bps) as the market appeared to start coming around to our view that the Fed has much more tightening to do. 10yr bunds were +17.3bps (+6.4bps Friday) higher, while Gilts picked up +6.5bps (+0.7bps Friday). Italian spreads widened all week to bunds, with 10yr BTPs increasing +36.2bps (+9.7bps Friday), to reach a spread of 200bps over bunds, their widest since June 2020. Money markets closed the week pricing year-end policy rates of 2.83% for the Fed, 0.33% for the ECB, and 2.16% for the UK. That marked a decline in the UK, so the 2s10s gilts curve climbed +14.7bps (+4.5bps Friday). Not to be outdone, the 2s10s Treasury curve also steepened with the aggressive back end sell off, climbing +17.7bps (+3.2bps Friday).

The S&P 500 managed its fifth weekly loss in a row for the first time since 2011, falling -0.21% (-0.57% Friday), after a particularly wild ride following the FOMC. Tech and mega cap shares fared even worse given the selloff in duration, with the Nasdaq falling -1.54% (-1.40% Friday) and the FANG+ down -2.21% (-2.02% Friday). The Vix closed the week above 30 at 30.19 given the renewed volatility. European shares fared worse (partly catch up to a weak US close the previous week), as the Stoxx 600 fell -4.55% over the week (-1.91% Friday), with the DAX moving -2.73% (-1.36% Friday) lower, and the CAC falling -4.06% (-1.57% Friday).

EU President Von der Leyen’s proposed gradual ban of Russian oil imports drove brent futures +3.55% higher over the week (+1.34% Friday) to $112.39/bbl. This morning, oil prices maintained their upward trajectory with Brent futures +0.16% higher as I go to press.

Finally, on data Friday, the American economy added +428k jobs to nonfarm payrolls in April, a little ahead of consensus forecasts, while the unemployment rate remained stable at +3.6%. Average hourly earnings decelerated slightly to +0.3% on a month-over-month basis.

Tyler Durden Mon, 05/09/2022 - 07:50

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Economics

What Is Quantitative Tightening? How Does It Work?

What Is Quantitative Tightening?The main job of a central bank, like the Federal Reserve, is to keep the economy strong through maximum employment and…

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Quantitative tightening is not the opposite of quantitative easing—they are distinctly different activities.

Ballun from Getty Images Signature; Canva

What Is Quantitative Tightening?

The main job of a central bank, like the Federal Reserve, is to keep the economy strong through maximum employment and stable prices. It does this by managing the Fed Funds Rate, which it sets at its Federal Open Market Committee meetings. This effectively raises or lowers the interest rates that banks offer companies and consumers for things like mortgages, student loans, and credit cards.

But when the economy needs help and interest rates are already low, the Fed must turn to other tools in its arsenal. This includes practices like quantitative easing and quantitative tightening; the former expands the shares of Treasury bonds, mortgage-backed securities, and even stocks on the government’s balance sheets, while the latter tightens the monetary supply. Both have a profound effect on liquidity in the financial markets.

The Fed came to the rescue with trillions of dollar’s worth of quantitative easing at the end of the 2007–2008 Financial Crisis, and again during the global Coronavirus pandemic.

But the Fed can’t go on printing money forever. Whenever it employs quantitative easing, the Fed must eventually turn to its counterpart, which is known as quantitative tightening, in order to limit some of the negative outcomes of the former, such as inflation.

How Does Quantitative Tightening Work? What Is an Example of Quantitative Tightening?

Through quantitative tightening, the Federal Reserve reduces its supply of monetary reserves in order to tighten its balance sheet—and it does so simply by letting the bonds and other securities it has purchased reach maturity. When this happens, the Treasury department removes them from its cash balances, and thus the money it has “created” effectively disappears.

Does the Fed know exactly when to ease the gas pedal on quantitative easing? According to the Fed, timing is everything. Remember how the Fed’s main job is to create a strong economy through stable prices and high employment? As it carefully monitors the effects interest rates are having on the economy, it also keeps a close eye on the overall measure of inflation. It’s both a constant battle and a juggle. 

Take the period following the Financial Crisis as an example. The 2007–2008 crisis stemmed in large part from the implosion of collateralized debt obligations, and so the Fed kept the Fed Funds Rate at virtually 0% for almost a decade in order to spur growth and maintain stable rates of employment.

During this period, it also undertook a series of quantitative easing measures, watching its balance sheet balloon from $870 billion in August 2007 to $4.5 trillion in September 2017.

The FRED graph below illustrates how the Fed Funds rate, in blue, remained at nearly zero for the period while the total size of the Fed’s balance sheet, in red, grew. The shaded areas indicate recession.

Federal Reserve Bank of New York, Effective Federal Funds Rate [EFFR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EFFR, May 16, 2022.

The Fed believed that as soon as employment became stable, it needed to turn its attention to meeting its 2% inflation target, which it accomplished by raising interest rates. And so, in October 2015, it began gradually increasing the Fed Funds Rate in 25 basis point increments. Over the next several years, rates went up from 0.0%–0.25% levels to 2.25%–2.5% in 2018. This course of action, in the Fed’s words, was known as liftoff.

After raising rates a few times with no disastrous consequences, in 2017 the Fed next embarked on an effort to reduce its balance sheet through quantitative tightening. This was also known as unwinding its balance sheet, because it was taking action in a slow and gradual way.

Between 2017 and 2019, the Fed let about $6 billion of Treasury securities mature and $4 billion of mortgage-backed securities “run off” per month, increasing that amount every quarter until it hit a maximum of $30 billion Treasuries and $20 billion mortgage-backed securities per month. By July 2019, the Fed announced that its unwinding was complete.

The Fed published a blog post detailing these efforts, categorizing them as its “balance sheet normalization program,” since it sought to “return the policy rate to more neutral levels.”

What Effect Does Quantitative Tightening Have on the Economy?

While the goal of quantitative easing is to spur growth, quantitative tightening doesn’t hinder it; in fact, many Governors of the Federal Reserve believe quantitative tightening doesn’t have much effect on the economy at all.

“Quantitative tightening does not have equal and opposite effects from quantitative easing,” said St. Louis Fed President Jim Bullard, “Indeed, one may view the effects of unwinding the balance sheet as relatively minor.”

Former Fed Chair Janet Yellen famously described quantitative tightening as “something that will just run quietly in the background over a number of years,” and that “it’ll be like watching paint dry.”

St. Louis Fed Research Director Chris Waller compared quantitative tightening with “slowly opening the stopper in a drain and letting the water run out,” and by doing so, they were “letting the supply of U.S. Treasuries in the hands of the private sector grow.”

But critics have argued that the excess reserves the Fed creates by “printing money” through quantitative easing have negative consequences on the overall economy. For example, these reserves can lead to currency devaluation and higher inflation, which is defined as when prices rise faster than wages. Inflation can have disastrous effects on an economy, resulting in asset bubbles and even recessions.

Even the Fed admitted as much when St. Louis Vice President Chris Neely noted that between 2008–13, the Fed’s asset purchases led to a decrease in 10-Year Treasury yields by 100–200 basis points. He said, “this reduction modestly raised prices and real activity.”

Just remember that the Fed’s principal aims are to generate stable prices and high employment. So while the Fed hasn’t explicitly said so, reducing its balance sheet might be one of its methods to combat inflation.

Why Is Quantitative Tightening on the Fed’s Agenda Again?

In 2022, inflation reached decades’ high, stemming from a number of factors, including fallout from the global Coronavirus pandemic, which increased labor prices, and Russia’s invasion of Ukraine, which affected energy and commodities. In March, 2020, the Fed slashed the Fed Funds rate to 0.00%–0.25% in response to the pandemic. In May, 2022 it raised rates again by 0.5%.

What Is the Schedule for Quantitative Tightening?

On May 4, 2022, the Fed announced it would be undertaking a “phased approach” of quantitative tightening measures beginning with a 3-month period of unwinding $30 billion of Treasuries and $17.5 billion mortgage-backed securities beginning on June 1, 2022. By September, 2022 these caps would increase to $60 billion and $35 billion, respectively.

Is Quantitative Tightening Really So Frightening?

TheStreet’s Ellen Chang says that, according to economists, inflation is on a downward trend, most likely to decline to 3% by the end of the year, and that higher interest rates as well as quantitative tightening should do what they’re supposed to, and reduce pricing pressure. 

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Economics

What is Stagflation?

Today we’ll look at what stagflation is, as well as how it impacts you and the broader economy. Keep reading to get started.
The post What is Stagflation?…

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Stagflation seems to be a word that we’ve been hearing a lot of recently. With the CPI report showing that inflation had slowed less than expected, stagflation concerns became even louder. However, for the average person, the term probably has never been defined. So, what is stagflation? Today we’ll look at what stagflation is, as well as how it impacts you and the broader economy.

Inflation

First things first, we should probably define what inflation is. The simplest way to define inflation is as the erosion of a currency’s purchasing power. Those moments where it feels like your dollar buys less than it used to  are examples of inflation. Under economic theory, inflation primarily occurs when the growth of the money supply outpaces economic growth. For this reason, when inflation becomes an issue, central banks will attempt to limit the money supply. Essentially if more money is introduced to an economy, without an equal introduction of goods and/or services, inflation occurs. Other contributing factors include rising cost(s) of goods, wages and labor. The U.S. Federal Reserve aims for an inflation rate of 2%, and has averaged that since 2011.

Stagflation Defined

So, now that we know what inflation is, we can address what stagflation is. If inflation alone has the power to impact markets and basic economies, what impacts can stagflation have? To simply define stagflation, allow me to present it as an equation or two:

  1. Stagflation = High Inflation + Slow Economic Growth + High Unemployment
  2. Stagflation = High Inflation + Decreasing GDP

Under the first equation, we aren’t yet in a period of stagflation. While inflation is high, the official unemployment rate is 3.6%. That level reasonably mirrors the level that we were at prior to the onset of Covid back in 2020. However, the labor participation rate is still below pre-pandemic levels by a full percentage point. While that may not sound like a lot, remember that equates to hundreds of thousands of people not participating in the labor force.

With that being said, based on the second equation, we are already experiencing a period of stagflation. The U.S. GDP declined by 1.4% in Q1 of 2022, when it was expected to grow by 1%.

An example of stagflation in the U.S. would be the America of the early to mid 1970s. During this time, the United States experienced two, separate, recessions. There were also four separate years of negative GDP growth, two of which being consecutive. Inflation skyrocketed from 3.6% in 1973 to 8.3%, incidentally, where we are now, to 1974. The closest unemployment was to the 3.6% we have now was 1970 and 1973, when it was 4.9%. In 1975, unemployment was 8.5%.

Impacts and Concerns

So, how does stagflation impact you? Well, first, through the basic inflationary impacts. Let’s say your investments are down 5% this year, better than the broader markets. Tack on 8.3% in inflationary costs, and your money is actually worth 13.3% less. Inflation and bonds have a well-defined history as well. Inflationary risks and different securities have well defined relationships such as the relationship with bonds and the inflation rate. If your bond pays 3%, but inflation rises from 2% to 6%, you are losing money on the investment. Let’s look at your paycheck too. If you got a 5% raise, but inflation went up from the 2% average to 8.5%, your real earnings went down 1.5%. In sum, high inflation hits you at every angle. You effectively make less, your investments return less/negative, and things get more expensive.

Second, looking at the other variable(s) in the equation. What do all of unemployment being high, GDP decreasing, and economic growth slowing mean? Essentially, it means that the average person is at risk of losing their job. Adding the increased costs of goods and services to a loss of income can cause incredible financial strife. Now, apply that on a national level. If more people are out of work, you would also expect less spending. If the average person is unable to stimulate the economy, via spending, it is hard to reverse poor economic growth.

There is also a less direct impact, though perhaps one even more impactful. With the national debt burgeoning in the last two years, financing that debt also becomes more difficult. Discussing the national debt in its current context is an issue deserving its own space. Thankfully, others have already attempted to broach the subject.

Solutions

There is no surefire way to solve or fix stagflation. The general consensus is to first engage in the policies that address inflation. Examples of that would be printing less money and increasing interest rates, as to make borrowing more expensive. Other, less popular, examples would be cutting different government programs/expenditures. Next would be efforts to stimulate the economy, with the simplest being lowering taxes. That is also a complex suggestion to make, and agreeing to a proper execution is usually quite difficult. In addition, without the aforementioned spending cuts, the potential impact is greatly reduced.

Conclusions on Stagflation

There is no question that inflation is currently negatively impacting people. Concerns about global conflicts, and potential recessions, do nothing to assuage the average person’s concerns. Depending on how we look at it, America is already experiencing a period of stagflation. On the inflationary front, the Fed has begun increasing interest rates. Whether or not tax breaks and spending cuts follow are unclear, though admittedly a more accurate term might be unlikely.

In times like these, having a financial plan is important. While you cannot control the rate of inflation, you can control things like your spending and your investments. Even if it doesn’t eliminate it, proper financial planning should help minimize the detrimental impacts of stagflation.

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Futures Slide After China’s “Huge” Data Miss Sparks “Broad-Based Recession Talk”

Futures Slide After China’s "Huge" Data Miss Sparks "Broad-Based Recession Talk"

Friday’s bear market rally dead-cat bounce appears to be…

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Futures Slide After China's "Huge" Data Miss Sparks "Broad-Based Recession Talk"

Friday's bear market rally dead-cat bounce appears to be over, and global stocks have started the new week in the red with US equity futures lower after a "huge miss", as Bloomberg put it, in Chinese data fueled concerns over the impact of a slowdown in the world’s second-largest economy. As reported last night, China’s industrial output and consumer spending hit the worst levels since the pandemic began, hurt by Covid lockdowns.

And even though officials took another round of measured steps to help the economy by cutting the interest rate for new mortgages over the weekend to bolster an ailing housing market, even as they left the one-year policy loan rate was left unchanged Monday, few believe that any of these actions will have a tangible impact and most continue to expect much more from Beijing. 

As such, after a weekend that saw even Goldman's perpetually optimistic equity strategists slash their S&P target (again) from 4,700 to 4,300, and amid growing fears that a recession is now inevitable, Nasdaq 100 futures slid as much as 1.2%, before paring losses to 0.4% as of 730 a.m. in New York. S&P 500 futures were down 0.3%. 10Y Treasury yields were flat at 2.91% and the dollar dipped modestly while bitcoin traded just above $30,000 dropping from $31,000 earlier in the session.

Among notable moves in premarket trading, Spirit Airlines jumped as much as 21% following a report that JetBlue Airways is planning a tender offer at $30 a share in cash. Major US technology and internet stocks were down after rebounding on Friday, while Tesla shares dropped, with the electric-vehicle maker set to recall 107,293 cars in China over a potential safety risk. Twitter shares fall 3.4% in premarket trading on Monday, on course to wipe out all the gains the stock has made since billionaire Elon Musk disclosed his stake in the social media platform. Twitter fell to as low as $37.86 -- below the the April 1 close of $39.31, before Musk disclosed his stake.

US stocks have been roiled this year, with the S&P 500 on tick away from a bear market as recently as last Thursday, on worries of an aggressive pace of rate hikes by the Federal Reserve at a time when macroeconomic data showed a slowdown in growth. Data from China on Monday highlighted a massive toll on the economy from Covid-19 lockdowns, with retail sales and industrial output both contracting.

Although lower valuations sparked a rally in stocks on Friday, strategists including Morgan Stanley’s Michael Wilson warned of more losses ahead as equity markets also price in slower corporate earnings growth. Goldman Sachs strategists led by David Kostin cut their year-end target for the S&P 500 on Friday to 4,300 points from 4,700. 

"The broad-based recession talk is the major catalyzer this Monday,” Ipek Ozkardeskaya, a senior analyst at Swissquote, wrote in a note. “Activity in US futures hint that Friday’s rebound was certainly nothing more than a dead cat bounce” just as we said at the time

The risk of an economic downturn amid price pressures and rising borrowing costs remains the major worry for markets. Goldman Sachs Group Senior Chairman Lloyd Blankfein urged companies and consumers to gird for a US recession, saying it’s a “very, very high risk.” Traders remain wary of calling a bottom for equities despite a 17% drop in global shares this year, with Morgan Stanley warning that any bounce in US stocks would be a bear-market rally and more declines lie ahead.

In Europe, the Stoxx Europe 600 index fell as much as 0.8% before paring losses, with declines for tech and travel stocks offsetting gains for basic resources as industrial metals rallied. The Euro Stoxx 50 falls 0.4%. IBEX outperforms, adding 0.3%. Tech, personal care and consumer products are the worst performing sectors. Here are some of the biggest European movers today:

  • Basic Resources stocks outperformed with broad gains among mining and steel companies; ArcelorMittal +3.5%; SSAB +2.6%; Glencore +2.1%; Voestalpine +3.1%.
  • Sartorius AG and Sartorius Stedim shares gain as UBS upgrades both stocks to buy following a “significant de-rating” for the lab-equipment companies, seeing supportive global trends.
  • Carl Zeiss Meditec gains as much as 4.9% after HSBC raised its recommendation to buy from hold, saying the medical optical manufacturer is “well-equipped to deal with supply chain challenges.”
  • Interpump rises as much as 7.6%, extending winning streak to five days, as Banca Akros upgrades the stock to buy from accumulate following Friday’s 1Q results.
  • Casino shares jump as much 5.8% after the French grocer said it’s started a process to sell its GreenYellow renewable energy arm, confirming a Bloomberg News report from Friday.
  • Ryanair shares decline as much as 4.3% on FY results, with analysts focusing on the low-budget carrier’s recovery outlook. They note management is cautiously optimistic about summer travel.
  • Vantage Towers shares decline after the company posted FY23 adjusted Ebitda after leases and recurring free cash flow forecasts that missed analyst estimates at mid- points.
  • Unilever falls after a 13-F filing from Nelson Peltz’s Trian shows no position in the company, according to Jefferies, damping speculation after press reports earlier this year that the fund had built a stake.
  • Michelin shares fall as much as 3.7% after being downgraded to neutral from overweight at JPMorgan, which says it writes off any chance of seeing a recovery in volume production growth in FY22.

Earlier in the session, Asian stocks eked out modest gains as surprisingly weak Chinese economic data spurred volatility and caused traders to reassess their outlook on the region. The MSCI Asia-Pacific Index was up 0.1%, paring an earlier advance of as much as 0.9%  on stimulus hopes. The region’s information technology index rose as much as 1.5%, with TMSC giving the biggest boost. A sub-gauge on materials shares fell the most.

Equities in China led losses, as Beijing’s moves to cut the mortgage rate for first-time home buyers and ease lockdown restrictions in Shanghai failed to reverse the downbeat mood. Asian stocks were trading higher early Monday, building on Friday’s rally, only to trim or reverse gains as data showed a sharper-than-expected contraction in Chinese activity in April. Signs of an earnings recovery in China are needed for investors to come back, Arnout van Rijn, chief investment officer for APAC at Robeco Hong Kong Ltd., said on Bloomberg Television.

“It looks like China is not going to meet the 15% earnings growth that people were looking for just a couple of months ago. So now we’re looking for five, 10, maybe it’s even going to fall to zero.”   Meanwhile, JPMorgan analysts, who had called China tech “uninvestable” in March, upgraded some tech heavyweights including Alibaba in a Monday report, citing less regulatory uncertainties. Benchmarks in Japan, Australia, India and Taiwan maintained gains while Hong Kong also recovered some ground later in the day. Markets in Singapore, Thailand, Malaysia and Indonesia were closed for holidays.     

Japanese equities were mixed, with the Topix closing slightly lower after worse-than-expected Chinese economic data amid the impact from virus-related lockdowns. The Topix fell 0.1% to close at 1,863.26, with Honda Motor contributing the most to the decline after its forecast for the current year missed analyst expectations. The Nikkei advanced 0.5% to 26,547.05, with KDDI among the biggest boosts after announcing its results and a 200 billion yen buyback. “Though the lockdowns in China are pushing down the economy and causing supply chain difficulties, there’s a positive outlook since the weekend that there could be a gradual easing of the lockdowns as it seems that virus cases have peaked out,” said Masashi Akutsu, chief strategist at SMBC Nikko Securities.

In Australia, the S&P/ASX 200 index rose 0.3% to 7,093.00, trimming an earlier advance of as much as 1.1% after soft Chinese economic data stoked concerns about global growth. Read: Aussie, Kiwi Slump After Weak China Data: Inside Australia/NZ Brambles was the top performer after confirming it’s in talks with private equity firm CVC Capital Partners on a takeover proposal. Qube also climbed after completing a A$400 million share buyback.  In New Zealand, the S&P/NZX 50 index fell 0.1% to 11,157.66.

In rates, Treasuries were steady with yields within 1bp of Friday’s close. US 10-year yield near flat ~2.91% with bunds cheaper by ~5bp, gilts ~3.5bp amid heavy. German 10-year yield up 5 bps, trading narrowly below 1%. Italian 10-year bonds underperform, with the 10-year yield up 8 bps to 2.93%. Peripheral spreads are mixed to Germany; Italy and Spain widen and Portugal tightens. The Italy 10-year was cheaper by more than 6bp on the day amid renewed ECB jawboning. Core European rates are higher, pricing in ECB policy tightening. During Asia session, Chinese data showed industrial output and consumer spending at worst levels since the pandemic began. The dollar issuance slate includes CBA 3T covered SOFR; $30b expected for this week as syndicate desks seek opportunities for pent-up supply. Three-month dollar Libor +1.13bp at 1.45500%.

In FX, the Bloomberg Dollar Spot Index was little changed while the greenback advanced against most of its Group-of-10 peers. Treasuries inched lower, led by the front end, and outperformed European bonds. The euro inched up against the dollar. Italian bonds dropped, leading peripheral underperformance against euro- area peers, while money markets showed increased ECB tightening wagers after policy maker Francois Villeroy de Galhau said a consensus is “clearly emerging” at the central bank on normalizing monetary policy and that June’s meeting will be “decisive.” He also signaled that the weakness of the euro is focusing the minds of ECB policy makers at a time when the currency is heading toward parity with the dollar. The euro may resume its rally versus the pound in the spot market as options traders pile up bullish wagers. The pound fell against both the dollar and euro, staying under selling pressure on concerns that high UK inflation will weigh on the economy. Markets await testimony from Bank of England Governor Andrew Bailey and other central bank officials later in the day, ahead of a reading of April inflation later in the week. Australian and New Zealand dollars fell after Chinese industrial and consumer data fanned concerns of a further slowdown in the world’s second-largest economy.

In commodities, WTI drifts 0.4% lower to trade above $110. Spot gold pares some declines, down some $6, but still around $1,800/oz. Most base metals trade in the green; LME tin rises 3.4%, outperforming peers. Bitcoin falls 4.6% to trade below $30,000

Looking ahead, we get the US May Empire manufacturing index, Canada April housing starts, March manufacturing, wholesale trade sales. Central bank speakers include the Fed's Williams, ECB's Lane, Villeroy and Panetta, BOE's Bailey, Ramsden, Haskel and Saunders. We get earnings from Ryanair, Take-Two Interactive.

Market Snapshot

  • S&P 500 futures down 0.3% to 4,008.75
  • STOXX Europe 600 little changed at 433.33
  • MXAP up 0.2% to 160.34
  • MXAPJ up 0.2% to 523.32
  • Nikkei up 0.5% to 26,547.05
  • Topix little changed at 1,863.26
  • Hang Seng Index up 0.3% to 19,950.21
  • Shanghai Composite down 0.3% to 3,073.75
  • Sensex up 0.6% to 53,119.79
  • Australia S&P/ASX 200 up 0.3% to 7,093.03
  • Kospi down 0.3% to 2,596.58
  • German 10Y yield little changed at 0.98%
  • Euro up 0.1% to $1.0424
  • Brent Futures down 1.4% to $109.98/bbl
  • Gold spot down 0.8% to $1,797.30
  • US Dollar Index little changed at 104.46

Top Overnight News from Bloomberg

  • NATO members rallied around Finland and Sweden on Sunday after they announced plans to join the alliance, marking another dramatic change in Europe’s security architecture triggered by Russia’s war in Ukraine
  • The euro area’s pandemic recovery would almost grind to a halt, while prices would surge even more quickly if there are serious disruptions to natural-gas supplies from Russia, according to new projections from the European Commission
  • UK energy regulator Ofgem plans to adjust its price cap every three months instead of every six. Changing the level more often would help consumers to take advantage of falling wholesale prices more quickly, it said in a statement Monday. This would also mean higher prices filter through bills quicker
  • Boris Johnson has warned Brussels that the UK government will press ahead with unilateral changes to parts of the Brexit agreement if it does not engage in “genuine dialogue”
  • While debt bulls on Wall Street have been crushed all year, market sentiment has shifted markedly over the past week from inflation fears to growth. That theme gathered more strength Monday, when data showing China’s economy contracted sharply in April set off fresh gains for Treasuries
  • China’s economy is paying the price for the government’s Covid Zero policy, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery. Industrial output unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than a projected 6.6% drop
  • Japanese manufacturers are increasingly looking to move offshore operations to their home market, according to a Tokyo Steel Manufacturing Co. executive. The rapidly weakening yen, global supply-chain constraints, geopolitical risks and shifting wages patterns are prompting the switch, Kiyoshi Imamura, a managing director of the steelmaker, said in an interview in Tokyo last week

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mixed after disappointing Chinese activity data clouded over the early momentum from Friday’s rally on Wall St. ASX 200 was higher as tech stocks were inspired by US counterparts and amid M&A related newsflow with Brambles enjoying a double-digit percentage gain after it confirmed it had talks with CVC regarding a potential takeover by the latter. Nikkei 225 kept afloat as earnings releases provided the catalysts for individual stocks but with gains capped by a choppy currency. Hang Seng and Shanghai Comp initially gained with property names underpinned after China permitted a further reduction in mortgage loan interest rates for first-time home purchases and with casino stocks also firmer in the hope of a tax reduction on gaming revenue. However, the mood was then spoiled by weak Chinese data and after the PBoC maintained its 1-year MLF rate.

Top Asian News

  • PBoC conducted a CNY 100bln in 1-year MLF with the rate kept unchanged at 2.85% and stated the MLF and Reverse Repo aim to keep liquidity reasonably ample, according to Bloomberg.
  • Beijing extended work from home guidance in several districts and announced three additional rounds of mass COVID-19 testing in most districts including its largest district Chaoyang, according to Reuters.
  • Shanghai will gradually start reopening businesses including shopping malls and hair salons in China's financial and manufacturing hub beginning on Monday following weeks of a strict lockdown, according to Reuters.
  • Shanghai city official said 15 out of the 16 districts achieved zero-COVID outside quarantine areas and the city's epidemic is under control but added that risks of a rebound remain and they will need to continue to stick to controls. The official said the focus until May 21st will be to prevent risks of a rebound and many movement restrictions are to remain, while they will look to allow normal life to resume in Shanghai from June 1st and will begin to reopen supermarkets, convenience stores and pharmacies from today, according to Reuters.
  • Chinese financial authorities permitted a further reduction in mortgage loan interest rates for some home buyers whereby commercial banks can lower the lower limit of interest rates on home loans by 20bps based on the corresponding tenor of benchmark Loan Prime Rates for purchases of first homes, according to Reuters.
  • China's stats bureau spokesman said economic operations are expected to improve in May and that China is steadily pushing forward production resumption in COVID-hit areas, while they expect China's economic recovery and rebound in consumption to quicken but noted that exports face some pressure as the global economy slows, according to Reuters.
  • Macau is reportedly considering a tax cut for casinos amid a decline in gaming revenue in which a cut could be as much as 5% off the current 40% levied on casino gaming revenue, according to Bloomberg.

European bourses are mixed, Euro Stoxx 50 -0.6%, following a similar APAC session with impetus from Shanghai's reopening offset by activity data and geopolitics. Stateside, futures are lower across the board, ES -0.4%, with the NQ marginally lagging as yields lift; Fed's Williams due later before Powell on Tuesday. US players are focused on whether the end-week bounce is a turnaround from technical bear-market levels or not. China's market regulator says Tesla (TSLA) has recalled 107.3k Model 3 & Y vehicles, which were made in China. JetBlue (JBLU) is to launch a tender offer for Spirit Airlines (SAVE); JetBlue is to offer USD 30/shr, but prepared to pay USD 33/shr if Spirit provides JetBlue with requested data, WSJ sources say. Elon Musk tweeted that Twitter’s (TWTR) legal team called to complain that he violated their NDA by revealing the bot check sample size and he also tweeted there is some chance that over 90% of Twitter’s daily active users might be bots.

Top European News

  • UK PM Johnson is reportedly set to give the green light for a bill on the Northern Ireland protocol, according to the Guardian.
  • UK PM Johnson said he hopes the EU changes its position on the Northern Ireland protocol and if not, he must act, while he sees a sensible landing spot for a protocol deal and will set out the next steps on the protocol in the coming days, according to Reuters.
  • UK PM Johnson is expected to visit Northern Ireland on Monday for talks with party leaders in an effort to break the political deadlock at Stormont, according to Sky News.
  • Irish Foreign Minister Coveney says the EU is prepared to move on reducing checks on goods coming into the region from Britain, via Politico.
  • UK Cabinet ministers have turned on the BoE regarding rising inflation, whereby one minister warned that the Bank was failing to "get things right" and another suggested that it had failed a "big test", according to The Telegraph.
  • Group of over 50 economists warned that the UK's post-Brexit plans to boost the competitiveness of its finance industry risk creating the sort of problems that resulted in the GFC, according to Reuters.
  • European Commission Spring Economic Forecasts: cuts 2022 GDP forecast to 2.7% from the 4.0% projected in February. Click here for more detail.

Central Banks

  • ECB's Villeroy expects a decisive June meeting and an active summer meeting, pace of further steps will account for actual activity/inflation data with some optionality and gradualism; but, should at least move towards the neutral rate. Will carefully monitor developments in the effective FX rate, as a significant driver of imported inflation; EUR that is too weak would go against the objective of price stability.
  •  
  • ECB’s de Cos said the central bank will likely decide at the next meeting to end its stimulus program in July and raise rates very soon after that, while he added that they are not seeing second-round effects and are monitoring it, according to Reuters.

FX

  • Euro firmer following verbal intervention from ECB’s Villeroy and spike in EGB yields EUR/USD rebounds from sub-1.0400 to 1.0435 at best.
  • Dollar up elsewhere as DXY pivots 104.500, but Yen resilient on risk grounds as Chinese data misses consensus by some distance; USD/JPY capped into 129.50.
  • Franc falls across the board after IMM specs raise short bets and Swiss sight deposits show SNB remaining on the sidelines; USD/CHF above 1.0050 at one stage.
  • However, HKMA continues to defend HKD peg amidst CNY, CNH weakness in wake of disappointing Chinese industrial production and retail sales releases.
  • Norwegian Crown undermined by pullback in Brent and narrower trade surplus, EUR/NOK over 10.2100.
  • SA Rand soft as Gold retreats to test support around and under Usd 1800/oz.
  • Loonie slips with WTI ahead of Canadian housing starts, manufacturing sales and wholesale trade, Sterling dips before BoE testimony; USD/CAD 1.2900+, Cable sub-1.2250.

Fixed income

  • EGBs rattled by ECB rhetoric inferring key policy meetings kicking off in June and extending through summer.
  • Bunds down towards 153.00 and 10 year yield back up around 1%, Gilts almost 1/2 point adrift and T-note erasing gains from 12/32+ above par at best.
  • Eurozone periphery underperforming with added risk-off angst following much weaker than expected Chinese data.

In commodities

  • WTI and Brent are pressured, but well off lows, and torn between China's lockdown easing and poor activity data amid numerous other catalysts
  • Specifically, the benchmarks are around USD 110/bbl and USD 111/bbl respectively,
  • Saudi Aramco Q1 net income rose 82% Y/Y to INR 39.5bln for its highest quarterly profit since listing, according to Sky News.
  • Saudi Energy Minister says they are going to get to 13.2-13.4mln BPD, subject to what is done in the divided zone, by end-2026/start-2027; can maintain production when there, if the market demands this.
  • OPEC+ to continue with monthly output increases, according to Bahrain's oil minister via Reuters.
  • Iraqi state-run North Oil Company said Kurdish armed forces took control of some oil wells in northern Kirkuk, according to Reuters.
  • Iraq oil minister says they aim to increase oil production to 6mln BPD by end-2027, OPEC is targeting a energy market balance not a price; adding, current production capacity is 4.9mln BPD, will reach 5mln BPD before the end of 2022.
  • China is to increase fuel prices from Tuesday, according to China's NDRC; gasoline by CNY 285/t and diesel by CNY 270/t.

US Event Calendar

  • 08:30: May Empire Manufacturing, est. 15.0, prior 24.6
  • 16:00: March Total Net TIC Flows, prior $162.6b

DB's Jim Reid concludes the overnight wrap

Markets managed a big bounce on Friday but the mood has soured again in the Asian session after a weak slew of data from China as covid lockdowns had an even worse impact than expected. Industrial production (-2.9% vs +0.5% expected), retail sales (-11.1% vs -6.6% expected) and property investment (-2.7% vs -1.5% expected) all crashed through estimates by a large margin. The slump in retail sales and industrial production was the weakest since March 2020. The latter also had the lowest print on record, with the worst decline coming from auto manufacturing (-31.8%). The surveyed jobless rate (6.1% vs estimates of 6.0%) also ticked up by more than expected from 5.8% in March and is now close to the high of 6.2% in February 2020. Although the 1-year policy loan rate was left unchanged today, the PBoC did ease the rate on new mortgages this weekend. In other data releases, Japan’s April PPI (+10.0%) came in above estimates of +9.4%, the highest since 1980.

Amid this, the Shanghai Composite (-0.51%) and the Hang Seng (-0.43%) are in the red, and outperformed by the KOSPI (-0.21%) and the Nikkei (+0.46%). The sentiment has soured in American markets too, with S&P 500 futures also trading lower (-0.68%) and the US 10y yield declining by -2.2bps. Oil (-1.48%) is edging lower too on growth concerns.

After last week’s meltdown in crypto markets, Bitcoin is back at above $30k this morning – a jump since the lows of nearly $26k last Thursday but way short of the $38k it traded at in the beginning of the month and $68k early last November. The infamous TerraUSD, the stablecoin that fuelled the crypto slide, is at $0.18. It is supposed to trade at $1 at all times.

Looking forward now and there's not a standout event to focus on this week but they'll be plenty to keep us all occupied. US retail sales (tomorrow) looks like the highlight alongside Powell's speech the same day. There will also be US housing data smattered across the week and UK and Japanese inflation on Wednesday and Friday respectively.

Let's start with US retail sales as it will be a good early guide for Q2 GDP. Our US economists are anticipating a +1.7% print, up from +0.7% in March. Rebounding auto sales should help the headline number. For more on the consumer, Brett Ryan put out this chartbook last week on the US consumer (link here). US industrial production is out the same day.

We have a long list of central bank speakers this week headed by Powell and Lagarde (tomorrow) and BoE Bailey today. There are many more spread across the week and you can see the list in the day by day event list at the end. We do have the last ECB meeting minutes on Thursday but the subsequent push towards a July hike might make these quite dated.

US housing will be a big focus next week. It's probably too early for the highest mortgage rates since 2009 to kick in but with these rates around 220bps higher YTD, some damage will surely soon be done after the highest YoY price appreciation outside of an immediate post WWII bounce, in our 120 year plus housing database. On this we will see the NAHB housing market index (tomorrow), April’s US building permits and housing starts (Wednesday), and existing home sales (Thursday).

Turning to corporate earnings, it will be another quiet week after 457 of the S&P 500 companies and 368 of the STOXX 600 companies have reported earnings this season so far. Yet, it will be an important one to gauge how the US consumer is faring amid inflation at multi-decade highs, including reports such as Walmart, Home Depot (tomorrow), Target and TJX (Wednesday). Results will also be due from China's key tech and ecommerce companies like JD.com (tomorrow), Tencent (Wednesday) and Xiaomi (Thursday). Other notable corporate reporters will include Cisco (Wednesday), Applied Materials, Palo Alto Networks (Thursday) and Deere (Friday).

A quick recap of last week’s markets now. Fears that global growth would slow due to the tightening task at hand for central banks sent ripples across markets, without a clear specific catalyst. Equities declined, credit spreads widened, the dollar rallied, and sovereign yields declined.

The S&P 500 fell for the sixth consecutive week for the first time since 2011, falling -13.0% over that time. Even with a +2.39% rally on Friday, it fell -2.41% last week. Large cap technology firms underperformed, with the NASDAQ falling -2.80% (+3.82% Friday), while the FANG+ index fell -3.48% (+5.45% Friday). Volatility was elevated, with the Vix closing above 30 for 6 straight days for the first time since immediately following the invasion, narrowly avoiding a 7th straight day above 30 by closing the week at 28.8. European equities outperformed, with the STOXX 600 climbing +0.83% after a banner +2.14% gain Friday. The Itraxx crossover ended the week at 446bps, its widest level since June 2020. Crypto assets sharply declined, with Bitcoin down -12.51% and Coinbase -34.58% over the week, with a number of so-called ‘stablecoins’ breaking their pledged parity, forcing some to stop trading.

The growth fears drove a flight to quality. The dollar index increased +0.87% (-0.27% Friday) to its highest levels since 2002. Only the yen outperformed the US dollar in the G10 space. Sovereign yields rallied significantly, with 10yr Treasuries, bunds, and gilts falling -19.3bps (+8.5bps Friday), -23.0bps (+6.2bps Friday), and -28.7bps (+4.7bps Friday), respectively.

Reports that the EU was considering softening their oil-related sanctions due to member resistance combined with growth fears to send oil prices much lower at the beginning of the week, with Brent crude futures almost breaking $100/bbl. When all was said and done, a gradual rally over the back half of the week saw Brent merely -1.04% lower (+3.82% Friday). On the back of disappointing data from China it is down -1.48% this morning.

There was a lot of high-profile central bank speak to work through, as there will be this week. The main takeaways included Fed officials aligning behind a series of +50bp hikes the next few meetings, downplaying the chances of +75bp hikes until September at the earliest. Meanwhile, momentum in the ECB is growing toward a July policy rate hike, with policy rates breaching positive territory by the end of the year.

In terms of data Friday, the University of Michigan survey of inflation expectations for the next five years was unchanged at 3 percent, though inflation has weighed on consumers’ perception of the current situation.

Tyler Durden Mon, 05/16/2022 - 08:02

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