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Futures Fall Ahead Of Another Disappointing Retail Sales Number

Futures Fall Ahead Of Another Disappointing Retail Sales Number

US equity futures slid, fading Wednesday’s torried one-day rally, as investors awaited data on jobless claims and retail sales which are expected to show another decline as US…

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Futures Fall Ahead Of Another Disappointing Retail Sales Number

US equity futures slid, fading Wednesday's torried one-day rally, as investors awaited data on jobless claims and retail sales which are expected to show another decline as US consumers retrench.  European markets were solidly in the green while Asian stocks fell after the ongoing debt crisis at Evergrande - which halted all bond trades for the day - and China's latest push to rein in private industries hurt sentiment. The dollar gained as Treasuries dipped while Bitcoin was little changed as gold and oil fell. S&P 500 E-minis were down 8.75 points, or 0.19% at 730 am ET, Dow E-minis were down 14 points, or 0.04%, while Nasdaq 100 E-minis were down 34.25 points, or 0.22%.

Once again, US-listed Chinese stocks extended losses in the premarket with Beijing’s regulatory overhaul of gambling in Macau coming as the latest source of consternation for a sector already hurt by crackdowns on technology and education services. Casino operators such as Las Vegas Sands, Wynn and MGM Resorts again fell 1-3% before the opening bell, extending this week’s declines following an announcement from Macau officials seeking tighter restrictions on operators. Among other movers, videogame publisher EA rose nearly 2%, as it maintained its guidance despite delaying the launch of its widely anticipated “Battlefield 2042” title by a month. Here are some of the other notable movers today:

  • IronNet (IRNT US) shares rise 34% in U.S. premarket trading, adding to the past two sessions of gains for the stock amid retail-trader touts for the cyber-security company.
  • Electronic Arts (EA US) rises 2.2% in premarket trading, on track to recoup some of Wednesday’s losses after co. confirmed delaying the launch of Battlefield 2042 to Nov. 19, which some analysts said wouldn’t be a surprise.
  • MedAvail Holdings (MDVL US) rose 21% in Wednesday postmarket trading after signing a pact with IMA Medical Group to roll out four new SpotRx locations this year in central Florida
  • Beyond Meat (BYND US) shares off 2.6% in premarket trading after Piper Sandler says retail trends are running below levels needed to support consensus shipment expectations for 3Q21, and potentially 4Q21, downgrading to underweight
  • Travere Therapeutics (TVTX US) slipped 5.4% in extended trading from Wednesday after it reported a joint collaboration and licensing agreement with Vifor Pharma for the commercialization of sparsentan in Europe, Australia and New Zealand
  • Aerie Pharmaceuticals (AERI US) shares dropped 18% in postmarket trading on Wednesday, after a Phase 2b study of the company’s experimental treatment for dry eye disease failed to meet the main goal of the trial
  • Atyr Pharma (LIFE US) slid 7.3% postmarket Wednesday before recovering some ground following a discounted share offering, the move comes on the back of 76% jump in the last one month
  • ION Geophysical Corp. (IO US) shares soared 27% in extended trading after it said its board had initiated a process to evaluate a range of strategic alternatives
  • Ashford Hospitality Trust (AHT US) falls 0.7% in extended trading after the hotel REIT said revenue per available room (RevPAR) fell 11% in August compared to July
  • Carver (CARV US) fell 12% postmarket after registering a mix of securities for potential sale

Wall Street indexes enjoyed strong gains on Wednesday on the back of Microsoft's $60 billion stock buyback, with economically sensitive cyclical stocks benefiting the most from a rally in oil prices and data suggesting that factory activity growth remained steady in the country. Data also showed a dip in import prices, which coupled with a recent reading that showed consumer prices were slowing, implied that inflation had likely peaked and would fall to more manageable levels eventually.

"We have an unusual situation where the overall market is sideways to lower but with a risk-on trend underneath and that's down to signs the Delta variant may be peaking in the U.S., which is driving people into reflation and recovery plays," said Kiran Ganesh, head of cross asset at UBS Global Wealth Management. "At the same time there are concerns about fiscal consolidation and worries about China moving to lockdowns. We'll need 3-4 months of quiet before people start moving back (to buy Chinese stocks). Big tech companies more exposed to social issues - whether property or education - are subject to regulatory risks."

Focus is now on U.S. data on weekly jobless claims and August retail sales, both of which are due at 8:30 AM ET.

"Retail sales figures are expected to have fallen in August," Saxo Bank’s chief investment officer, Steen Jakobsen, wrote in a note to clients. "Although the drop is largely priced in the market, it could still support US Treasuries pushing yields down by a couple of basis points. Yet, we expect yields to remain rangebound between 1.25% and 1.35% until next week’s FOMC meeting."

Europe's STOXX 600 was up 0.8% on the day, reversing all the previous day losses, having fallen 0.8% on Wednesday and gained 0.2% so far this week; FTSE MIB outperforms, rising as much as 1.3%. Travel is the best performing sector, up as much as 3.25%. Miners, utilities and autos underperform. Energy companies also advanced as crude oil hovered near a six-week high. Here are some of the biggest European movers today:

  • Ryanair shares jump as much as 6.7% after it lifted its growth target to 50% over the next five years, planning expansion at European airports
  • CNH shares gain as much as 4.1% after analysts note new details on plan for On-Highway spinoff reported by Il Sole 24 Ore
  • Inditex shares rise as much as 3.6% after Kepler Cheuvreux upgrades stock to buy, citing a V-shaped earnings recovery and rich cash position
  • Acciona shares lose as much 5.6% as Spain announces a gas clawback that risks the legal certainty of renewables development in the country, RBC says in a note
  • Games Workshop shares fall as much as 4% after it said it’s seen pressure on freight costs and currency exchange rates
  • THG shares decline as much as 3.8% after the e-commerce company reported 1H results in which sales and Ebitda both missed consensus estimates

Earlier in the session, Asian stocks dropped, as a sell-off in technology shares across the region more than offset gains in energy names with oil prices hovering near a six-week high. The MSCI Asia Pacific Index dropped as much as 0.8%, with TSMC, Alibaba Group and Keyence being the biggest contributors to the declines. Hong Kong’s Hang Seng Index led losses among the region’s stock gauges, while Japanese equities extended their drop from a peak of more than three decades into a second day. Fear that China Evergrande Group’s debt woes may spill over into Chinese property sector, combined with Beijing’s move to tighten grips on Macau casino operators, has pulled down Asian stocks this week. The real estate sector was the second-worst performer in the region on Thursday as Evergrande’s onshore property unit suspended bond trading for a day. Evergrande Market Fallout Grows as Local Unit Halts Bond Trading “The ongoing issues surrounding Evergrande could be weighing on investor sentiment” and impacting broadly in the region, said Hajime Sakai, chief fund manager at Mito Securities Co. in Tokyo. “It will loom over investors’ minds, especially if the problem bleeds into Chinese real estate market overall.” Asia’s benchmark stock gauge has fallen 1.8% so far this week, on pace to snap a three-week winning streak. It is lagging behind S&P 500, which has gained 0.5% in the same period. Elsewhere, Korean stock benchmark declined 0.7% as tech names like Samsung SDI dragged the Kospi Index. Philippine stocks were the region’s best performer of the day, gaining as virus restrictions were eased in the Manila capital region. Australia’s S&P/ASX 200 Index advanced despite the country’s disappointing employment data.

Japanese stocks declined, erasing earlier gains, as the yen headed for a three-day advance against the dollar.  The Topix fell 0.3% to 2,090.16 at the 3 p.m. close in Tokyo, while the Nikkei 225 slid 0.6% to 30,323.34. Out of 2,184 shares in the index, 891 rose and 1,183 fell, while 110 were unchanged. The yen rose 0.1% to 109.31 per dollar. Stocks also dropped after a finance ministry report showed gains in Japanese exports slowed for a third month in August as a delta-driven wave of the coronavirus weighed on the global trade recovery. “Japanese stocks may be in a corrective mood for a while,” said Hajime Sakai, the chief fund manager at Mito Securities Co. in Tokyo.

In rates, Treasuries were marginally cheaper across the curve following muted price action during Asia and early European sessions. 10-year TSYs yield 1.3124% is ~1bp cheaper vs Wednesday’s close with curves marginally steeper; gilts cheapen further vs Treasuries -- 10-year spread approaching YTD low 51bp -- as Goldman Sachs predicts BOE will lift rates to 1% by end of 2023. Gilts underperformed, in a continuation of Wednesday’s strong U.K. inflation data, while bunds marginally outperform Treasuries.

In FX, the Bloomberg Dollar Spot Index advanced and the dollar was steady or higher against all of its Group-of-10 peers apart from the New Zealand dollar. The kiwi rallied after New Zealand GDP data exceeded all estimates. The economy expanded 2.8% in the second quarter from the first, compared to economists forecast for a 1.1% rise. Overnight indexed swaps are now pricing a 44% probability of a 50-basis-point hike next month, up from around 10% on Wednesday. Australia’s dollar dropped toward a two-week low after jobs data showed that Australian employment dived in August as coronavirus lockdowns in Sydney and Melbourne forced businesses to lay off workers and slash hours.

The yen stayed near a one- month high as a weak risk sentiment supported demand for havens. Bonds fell after a lukewarm 20-year debt sale. The offshore yuan weakened the most in nearly a month as concern on China Evergrande Group’s debt crisis and Beijing’s latest push to rein in private industries hurt market sentiment.

In commodities, gas and power prices pared losses in Europe as supply concerns remain ahead of the winter season and worries grow that costs will pressure profit marginsfor companies. The world is facing high energy prices for the foreseeable future, Chevron Corp.’s top executive said in a Bloomberg interview on Wednesday. Iron ore headed for its longest run of losses in more than three years as declining Chinese steel output threatened to push futures back below $100 a ton. WTI is little changed near $72.67, Brent drifts near $75.60. Spot gold trades poorly, dropping ~$12 to the worst levels this week near $1,781/oz. Base metals are also under pressure with LME copper and nickel the worst performers.

Looking at the day ahead now, and data releases include US retail sales for August, the Philadelphia Fed’s business outlook for September, and the weekly initial jobless claims. Otherwise from central banks, we’ll hear from ECB President Lagarde and the ECB’s Rehn.

Market Snapshot

  • S&P 500 futures little changed at 4,483.00
  • STOXX Europe 600 up 0.64% to 466.86
  • MXAP down 0.6% to 203.16
  • MXAPJ down 0.7% to 649.46
  • Nikkei down 0.6% to 30,323.34
  • Topix down 0.3% to 2,090.16
  • Hang Seng Index down 1.5% to 24,667.85
  • Shanghai Composite down 1.3% to 3,607.09
  • Sensex up 0.5% to 59,044.46
  • Australia S&P/ASX 200 up 0.6% to 7,460.21
  • Kospi down 0.7% to 3,130.09
  • Brent Futures down 0.12% to $75.37/bbl
  • Gold spot down 0.53% to $1,784.58
  • U.S. Dollar Index up 0.18% to 92.72
  • German 10Y yield little changed at -0.307%
  • Euro down 0.3% to $1.1775

Top Overnight News from Bloomberg

  • China slammed a move by the U.S. and U.K. to help Australia build nuclear submarines, saying the new partnership will stoke an “arms race” as tensions heat up in Asia-Pacific waters
  • The economic outlook of the euro area is overshadowed by production bottlenecks and the prospect of a worsening pandemic, European Central Bank Governing Council Member Olli Rehn says
  • A new Japanese prime minister due to be installed in the coming weeks is unlikely to change fiscal or other policies sufficiently to force the central bank to amend its monetary settings, a Bloomberg survey showed
  • Rallying energy prices are stoking concerns about a challenging stagflation-like environment for markets of elevated price pressures and a slowing economic recovery
  • Europe’s energy crunch has forced a major fertilizer maker to shut down two U.K. plants, the first sign that a record rally in gas and power prices is threatening to slow the region’s economic recovery
  • Winter blackouts are now a real possibility after a fire took out a key cable that ships electricity to the U.K. from France. Electricity is now so scarce in Britain that any more grid mishaps or unexpected plant outages could leave millions without power
  • About 40% of respondents said their living costs have increased since the onset of the pandemic, according to a YouGov survey of 18,983 people conducted in 17 countries. That proportion was closer to half in the U.K. and U.S., compared to just a fifth of Danes and Swedes
  • An outbreak of Covid-19 inside the Kremlin has sickened dozens of people working close to Vladimir Putin, the Russian president said Thursday, highlighting the scale of the outbreak in one of the country’s most carefully guarded areas
  • India’s monetary policy makers cannot cut interest rates further because of elevated inflation, but there’s a need to keep borrowing costs low and liquidity ample to help the economy as it recovers from the pandemic’s fallout, a central banker said

A more detailed look at global markets courtesy of newsquaw

Asian equity markets traded mostly lower as the region failed to sustain the momentum from Wall St where all major indices finished higher after risk appetite was spurred by stronger than expected NY Fed Manufacturing data and with plenty of attention on a bullish note from JPMorgan which expects the SPX to reach 4,700 by the end of 2021 and surpass 5,000 in 2022 on better-than-expected earnings. The ASX 200 (+0.6%) was led higher by the energy sector following similar outperformance stateside after oil prices surged by more than 3% during the prior session amid the constructive mood across risk assets and recent bullish inventory data, with Australian defence contractor Austal among the biggest gainers in the local benchmark after the US, UK and Australia announced a new security partnership for the Indo-Pacific region in which the US will provide Australia with the capability to deploy nuclear-powered submarines in an effort to counter China. The Nikkei 225 (-0.6%) failed to hold on to early gains with sentiment dampened by recent currency strength and weaker than expected Exports data, while the KOSPI (-0.7%) was pressured following hawkish rhetoric from North Korea concerning the recent missile launch which was from a new railway-borne missile system and reportedly serves as an efficient counter strike weapon to threatening forces. The Hang Seng (-1.5%) and Shanghai Comp. (-1.3%) declined with Hong Kong pressured by underperformance in the property sector and with several casino names extending on yesterday’s slump amid regulatory concerns. Sentiment was also clouded by the recent ‘AUKUS’ partnership to counter China and ongoing Evergrande default woes with Co. shares at decade lows and its onshore bonds suspended after Chinese authorities told lenders not to expect any interest payments due next week and following the credit rating downgrade by S&P due to depleted liquidity. Finally, 10yr JGBs were kept rangebound as headwinds from the selling in USTs were offset by the lacklustre risk appetite in Asia and with demand also sapped by weaker metrics from this month's 20yr JGB auction.

Top Asian News

  • China Has Fully Vaccinated More Than 1 Billion People
  • Credit Suisse Rejigs Asia Investment Bank, Veterans Step Aside
  • Battery- Swapping Startup Gogoro to Go Public in SPAC Merger
  • Evergrande Market Fallout Grows as Local Unit Halts Bond Trading

Stocks in Europe have conformed to a more constructive risk mood (Euro Stoxx 50 +0.7%; Stoxx 600 +0.6%) after experiencing a mixed open, which followed on from a varied APAC session that saw Mainland China and Hong Kong under pressure. US equity futures, meanwhile, have seen a divergence from Europe and trade modestly softer ahead of US retail sales. Back to Europe, bourses experience broad-based gains with marginal underperformance in the FTSE 100 (+0.5%) – weighed on by the underperforming Basic Resources sector (the only sector in the red) as base metals remain pressured. On the flip side, Travel & Leisure stands as the outperformer amid tailwinds from a Ryanair (+6.3%) traffic growth guidance update, alongside reports that UK ministers are to announce that vaccinated travellers will no longer be required to take a COVID test before entering England under new proposals – also supporting the likes of easyJet (+3.3%) and IAG (+2.7%). Banks are bolstered by the higher yield environment whilst Oil & Gas continue to cheer oil prices north of USD 70/bbl. Overall, the sectors do portray somewhat of an anti-defensive bias. In terms of individual movers, Continental (-11%) listed its drive division, Vitesco Technologies, on the Dax 30 today. Vitesco will be listed as an additional value on the Dax for today only, after which it will not be eligible for a regular place in the bourse and will be demoted accordingly. Elsewhere, Thales (+1.3%) and Safran (+2.6%) have shrugged reports that Australia terminated its submarine programme with France.

Top European News

  • Swedish IPO Rush Intensifies With Storskogen’s Listing Plan
  • U.K. Faces Winter Blackouts Risk After Fire Knocks Out Cable
  • Stagflation Fears Cast Longer Shadow on Markets as Energy Surges
  • Atlantic Sapphire Plunges 29% After Fire at Denmark Facility

In FX, bears have been prowling and knocking hard on the door for a while in Eur/Usd following a couple of dead cat bounces, but no material recovery rallies beyond 1.1850 and the pressure has finally told as underlying bids around 1.1800 are filled or pulled. Moreover, the headline pair has breached technical support just shy of the round number in the form of 21 and 50 DMAs that align at 1.1798 today and is now probing new post-ECB lows around 1.1766 amidst almost all round Euro weakness that has pushed Eur/Gbp down towards a double bottom around 0.8510 and Eur/Jpy through 129.00. Conversely, the Buck has regrouped and recharged after another retreat below 92.500 in the index, albeit shallower in wake of Wednesday’s strong NY Fed manufacturing survey that helped to erase post-CPI losses and more. Indeed, the DXY has rebounded further towards Monday’s current w-t-d peak (92.887) to 92.794 and cleared a couple of chart hurdles along the way, including its 50 and 21 DMAs, at 92.635 and 92.694 respectively. Ahead, jobless claims, retail sales and the Philly Fed.

  • CHF - The major casualty or loser in the face of the Greenback revival, as Usd/Chf retests recent 0.9240+ highs, but the Franc is not benefiting from Euro weakness given that the Eur/Chf cross is holding firmly above 1.0850, and this could be a sign of official intervention or simply caution ahead of next Thursday’s Quarterly SNB policy review.
  • AUD/GBP/CAD - All unable to evade the clutches of their US counterpart, and the Aussie also labouring within a 0.7347-09 range in wake of a disappointing jobs report that only beat consensus in unemployment rate terms due to a fall in labour market participation caused by COVID-19 lockdowns. Meanwhile, Sterling is back under the 200 DMA and hovering near 1.3800 irrespective of the aforementioned outperformance against the Euro and another bank revising its BoE rate outlook to forecast an earlier hike on the back of yesterday’s hot UK inflation data (GS now seeing tightening in May 2022). Elsewhere, the Loonie has stalled on approach to 1.2600 alongside a pull-back in crude and now eyeing Canadian housing starts before wholesale trade following similarly frothy CPI prints on Wednesday.
  • NZD/JPY - The Kiwi is bucking the overall trend and still clinging to the 0.7100 handle, while consolidating gains vs its Antipodean peer around 1.0300 with bullish impetus from NZ Q2 GDP surpassing expectations significantly to ensure the domestic economy entered pandemic restrictions on a very solid footing. Conversely, the Yen has broadly overlooked a much wider than anticipated Japanese trade deficit impacted by exports missing the mark by some distance, as Usd/Jpy meanders between 109.46-21 parameters, albeit off midweek lows closer to 109.00.

In commodities, WTI and Brent front month futures are choppy and essentially flat intraday at the time of writing, with the former around USD 72.50/bbl (72.34-99 range) and the latter around USD 75.50/bbl (75.21-87). News flow for the sector has been relatively light, but prices remain elevated near recent highs. The morning saw constructive commentary from Ryanair, which feeds into jet fuel demand. On the flip side, Libya's NOC announced the resumption of crude exports from the Sidra and Ras Lanuf ports following protests. It's also worth being cognizant of potential Chinese intervention at these levels via the release of state reserves, as Chinese PPI last month remained elevated partially on crude prices – and Beijing also pledged continued efforts to stabilise prices if needed. On that note, China announced the release of another batch of copper, aluminium and zinc from state reserves to guide prices gradually lower to a reasonable range. As such, LME metals are mostly lower but off worst levels, although copper remains under USD 9,500/t. Turning to precious metals, spot gold and silver are on the backfoot as they fall victim to the firmer Dollar, with the former losing further ground under USD 1,800/oz (1,796-81 range) and the latter back to levels around USD 23.50/oz (23.96-54 range).

US Event Calendar

  • 8:30am: Sept. Initial Jobless Claims, est. 322,000, prior 310,000
  • 8:30am: Sept. Continuing Claims, est. 2.74m, prior 2.78m
  • 8:30am: Aug. Retail Sales Advance MoM, est. -0.7%, prior -1.1%
  • 8:30am: Aug. Retail Sales Ex Auto MoM, est. 0%, prior -0.4%
  • 8:30am: Aug. Retail Sales Control Group, est. 0%, prior -1.0%
  • 8:30am: Sept. Philadelphia Fed Business Outl, est. 18.9, prior 19.4
  • 9:45am: Sept. Langer Consumer Comfort, prior 57.9
  • 10am: July Business Inventories, est. 0.5%, prior 0.8%
  • 4pm: July Total Net TIC Flows, prior $31.5b

DB's Jim Reid concludes the overnight wrap

It’s my daughter7s 6th birthday today. How am I celebrating? By having major knee surgery and possibly not being back from the hospital in time to see her. It’s been a grave oversight on my behalf dates wise (he has little other operating space over the next few weeks) so I’ll be sweet talking the surgeon this morning to get me near the top of the list to ensure that I’m not late home. It’ll be crutches and no weight bearing for me for the next 6 weeks which again is going to make me very unpopular at home with three hyperactive kids and one wayward dog. In terms of before and after see the front cover of “Fiat, fifty and frail” for how I look now (right) and how I intend to look by November (left).

Markets were also a little bit frail for most of yesterday in European hours but a rally in the US after Europe went home turned the day around. Indeed the S&P 500 (+0.85%) rose by its most in nearly 3 weeks as cyclical industries and technology stocks combined to take the index back to within 1.3% of its all-time highs. Energy stocks were the best performers (+3.81%), which came amidst a further sharp rise in commodities. Indeed by the close of trade, Bloomberg’s Commodity Spot index was up +1.76% at a fresh high for the decade, which just emphasises how there are still inflationary pressures in the pipeline, even if a few specific commodities have moved lower in recent months. Looking at the moves, Brent Crude (+2.53%) rose to $75.46/bbl, having now bounced back by more than $10 since its closing low of $65.18/bbl less than a month ago, whilst WTI (+3.05%) was also up to $72.61/bbl.

Staying on energy, yesterday witnessed even further advances for natural gas prices, with European futures up another +7.52% as they marked their 8th consecutive rise. And there were also growing concerns in the UK as a cable bringing power in from France was knocked out by a fire, which will put it out of action until at least October 13, possibly into 2022 for full capacity. Indeed, I looked at this issue in my chart of the day yesterday (link here), which demonstrates the astonishing surge we’ve seen over recent weeks and months. Tight supplies that haven’t been replenished as much as expected after a cold winter are partly responsible, but there’s also a lack of coal options as increasing numbers of plants are phased out, and Russia has sent less supplies to Europe than expected. We also speculate that this might be a dress rehearsal for ESG issues further down the line.

While we’re on the topic of inflation, there may have been a weaker-than-expected reading from the US on Tuesday, but yesterday saw fresh support for those believing in higher inflation thanks to upside surprises from the UK and Canada. Here in the UK, headline CPI rose to +3.2% (vs. +2.9% expected), which is also above the BoE’s staff estimate of +3.0% back in their August monetary policy report. That saw investors bring forward their expectations for future BoE rate hikes, which in turn sent short-dated gilt yields to their highest levels in over a year. By the close, the 2yr yield (+3.2bps) had hit a post-pandemic high of 0.263%, whilst the 5yr yield (+3.4bps) was similarly at a post-pandemic high of 0.453%. For Canada, with just 4 days left until their federal election on Monday, CPI rose to +4.1% (vs. +3.9% expected), marking the highest reading since 2003.

Given that inflation concerns were resurfacing again, sovereign bonds lost ground on both sides of the Atlantic yesterday, with 10yr US Treasury yields up +1.5bps to 1.299%, mostly thanks to higher inflation breakevens (+1.5bps). Europe saw more prominent moves, with yields on 10yr bunds up +3.4bps to -0.31%, their highest level in 2 months, as German 10yr breakevens rose (+1.6bps) for the ninth time in the last ten sessions and ended just off their 8 year highs. Meanwhile, yields on 10yr OATs (+4.3bps) and BTPs (+5.5bps) also moved higher.

Before the US rally, European indices lost ground as the session went on, as the STOXX 600 (-0.80%) fell to its lowest closing level since late July. Nearly 80% of constituents and every major sector in the index moved lower with the exception of energy, with bourses underperforming their US counterparts across the continent. As mentioned at the top, the S&P 500 (+0.85%) rallied later in the session and turned positive on the week. The rise was led by energy as discussed but other cyclicals such as banks (+1.31%) and capital goods (+1.29%) also rallied. However, the equity gains were broad based as software (+1.21%) and media (+0.78%) caused the NASDAQ (+0.82%) to finish higher for the first time in six sessions.

Sentiment is weak in Asia with the Nikkei (-0.81%), Hang Seng (-1.97%), CSI (-0.75%), Shanghai Comp (-0.68%) and Kospi (-0.66%) all losing ground. There are no new drivers behind the move besides the risks associated with China’s ongoing regulatory crackdown, the recent spike in covid cases there, and the indebtedness of China’s Evergrande group’s which has led to one of its onshore real estate unit suspending bond trading. Futures on the S&P 500 are only a touch lower at -0.08% but those on the Stoxx 50 are up +0.13% as they catch up with yesterday’s late move in US markets.

On the pandemic, Pfizer announced that data from the US and Israel point to waning efficacy of its vaccine over time, and that the additional booster shot was both safe and effective. The data will be submitted to outside advisers to the US FDA on Friday. Overnight, the New England Journal of Medicine published research based on data from short-term analysis in Israel stating that a third dose of the Pfizer/ BioNTech’s Covid vaccine can dramatically reduce rates of Covid-related illness in people 60 and older. The analysis stated that starting 12 days after the extra dose, confirmed infection rates were 11 times lower in the booster group compared with a group that got the standard two doses and added that rates of severe illness were almost 20 times lower in the booster group.

Winding up now and back to yesterday, on the data front, US industrial production rose by +0.4% in August (vs. +0.5% expected), with the Fed estimating that shutdowns related to Hurricane Ida held down the reading by 0.3 percentage points.

To the day ahead now, and data releases include US retail sales for August, the Philadelphia Fed’s business outlook for September, and the weekly initial jobless claims. Otherwise from central banks, we’ll hear from ECB President Lagarde and the ECB’s Rehn.

Tyler Durden Thu, 09/16/2021 - 08:06

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Apartment permits are back to recession lows. Will mortgage rates follow?

If housing leads us into a recession in the near future, that means mortgage rates have stayed too high for too long.

Published

2 hours ago

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March 19, 2024

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In Tuesday’s report, the 5-unit housing permits data hit the same levels we saw in the COVID-19 recession. Once the backlog of apartments is finished, those jobs will be at risk, which traditionally means mortgage rates would fall soon after, as they have in previous economic cycles.

However, this is happening while single-family permits are still rising as the rate of builder buy-downs and the backlog of single-family homes push single-family permits and starts higher. It is a tale of two markets — something I brought up on CNBC earlier this year to explain why this trend matters with housing starts data because the two marketplaces are heading in opposite directions.

The question is: Will the uptick in single-family permits keep mortgage rates higher than usual? As long as jobless claims stay low, the falling 5-unit apartment permit data might not lead to lower mortgage rates as it has in previous cycles.

From Census: Building Permits: Privately‐owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1,518,000. This is 1.9 percent above the revised January rate of 1,489,000 and 2.4 percent above the February 2023 rate of 1,482,000.

When people say housing leads us in and out of a recession, it is a valid premise and that is why people carefully track housing permits. However, this housing cycle has been unique. Unfortunately, many people who have tracked this housing cycle are still stuck on 2008, believing that what happened during COVID-19 was rampant demand speculation that would lead to a massive supply of homes once home sales crashed. This would mean the builders couldn’t sell more new homes or have housing permits rise.

Housing permits, starts and new home sales were falling for a while, and in 2022, the data looked recessionary. However, new home sales were never near the 2005 peak, and the builders found a workable bottom in sales by paying down mortgage rates to boost demand. The first level of job loss recessionary data has been averted for now. Below is the chart of the building permits.



On the other hand, the apartment boom and bust has already happened. Permits are already back to the levels of the COVID-19 recession and have legs to move lower. Traditionally, when this data line gets this negative, a recession isn’t far off. But, as you can see in the chart below, there’s a big gap between the housing permit data for single-family and five units. Looking at this chart, the recession would only happen after single-family and 5-unit permits fall together, not when we have a gap like we see today.

From Census: Housing completions: Privately‐owned housing completions in February were at a seasonally adjusted annual rate of 1,729,000.

As we can see in the chart below, we had a solid month of housing completions. This was driven by 5-unit completions, which have been in the works for a while now. Also, this month’s report show a weather impact as progress in building was held up due to bad weather. However, the good news is that more supply of rental units will mean the fight against rent inflation will be positive as more supply is the best way to deal with inflation. In time, that is also good news for mortgage rates.



Housing Starts: Privately‐owned housing starts in February were at a seasonally adjusted annual rate of 1,521,000. This is 10.7 percent (±14.2 percent)* above the revised January estimate of 1,374,000 and is 5.9 percent (±10.0 percent)* above the February 2023 rate of 1,436,000.

Housing starts data beat to the upside, but the real story is that the marketplace has diverged into two different directions. The apartment boom is over and permits are heading below the COVID-19 recession, but as long as the builders can keep rates low enough to sell more new homes, single-family permits and starts can slowly move forward.

If we lose the single-family marketplace, expect the chart below to look like it always does before a recession — meaning residential construction workers lose their jobs. For now, the apartment construction workers are at the most risk once they finish the backlog of apartments under construction.

Overall, the housing starts beat to the upside. Still, the report’s internals show a marketplace with early recessionary data lines, which traditionally mean mortgage rates should go lower soon. If housing leads us into a recession in the near future, that means mortgage rates have stayed too high for too long and restrictive policy by the Fed created a recession as we have seen in previous economic cycles.

The builders have been paying down rates to keep construction workers employed, but if rates go higher, it will get more and more challenging to do this because not all builders have the capacity to buy down rates. Last year, we saw what 8% mortgage rates did to new home sales; they dropped before rates fell. So, this is something to keep track of, especially with a critical Federal Reserve meeting this week.

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Young People Aren’t Nearly Angry Enough About Government Debt

Young People Aren’t Nearly Angry Enough About Government Debt

Authored by The American Institute for Economic Research,

Young people sometimes…

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4 hours ago

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March 19, 2024

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Young People Aren't Nearly Angry Enough About Government Debt

Authored by The American Institute for Economic Research,

Young people sometimes seem to wake up in the morning in search of something to be outraged about. We are among the wealthiest and most educated humans in history. But we’re increasingly convinced that we’re worse off than our parents were, that the planet is in crisis, and that it’s probably not worth having kids.

I’ll generalize here about my own cohort (people born after 1981 but before 2010), commonly referred to as Millennials and Gen Z, as that shorthand corresponds to survey and demographic data. Millennials and Gen Z have valid economic complaints, and the conditions of our young adulthood perceptibly weakened traditional bridges to economic independence. We graduated with record amounts of student debt after President Obama nationalized that lending. Housing prices doubled during our household formation years due to zoning impediments and chronic underbuilding. Young Americans say economic issues are important to us, and candidates are courting our votes by promising student debt relief and cheaper housing (which they will never be able to deliver).

Young people, in our idealism and our rational ignorance of the actual appropriations process, typically support more government intervention, more spending programs, and more of every other burden that has landed us in such untenable economic circumstances to begin with. Perhaps not coincidentally, young people who’ve spent the most years in the increasingly partisan bubble of higher education are also the most likely to favor expanded government programs as a “solution” to those complaints.

It’s Your Debt, Boomer 

What most young people don’t yet understand is that we are sacrificing our young adulthood and our financial security to pay for debts run up by Baby Boomers. Part of every Millennial and Gen-Z paycheck is payable to people the same age as the members of Congress currently milking this system and miring us further in debt.

Our government spends more than it can extract from taxpayers. Social Security, which represents 20 percent of government spending, has run an annual deficit for 15 years. Last year Social Security alone overspent by $22.1 billion. To keep sending out checks to retirees, Social Security goes begging to the Treasury Department, and the Treasury borrows from the public by issuing bonds. Bonds allow investors (who are often also taxpayers) to pay for some retirees’ benefits now, and be paid back later. But investors only volunteer to lend Social Security the money it needs to cover its bills because the (younger) taxpayers will eventually repay the debt — with interest.

In other words, both Social Security and Medicare, along with various smaller federal entitlement programs, together comprising almost half of the federal budget, have been operating for a decade on the principle of “give us the money now, and stick the next generation with the check.” We saddle future generations with debt for present-day consumption.

The second largest item in the budget after Social Security is interest on the national debt — largely on Social Security and other entitlements that have already been spent. These mandatory benefits now consume three quarters of the federal budget: even Congress is not answerable for these programs. We never had the chance for our votes to impact that spending (not that older generations were much better represented) and it’s unclear if we ever will.

Young Americans probably don’t think much about the budget deficit (each year’s overspending) or the national debt (many years’ deficits put together, plus interest) much at all. And why should we? For our entire political memory, the federal government, as well as most of our state governments, have been steadily piling “public” debt upon our individual and collective heads. That’s just how it is. We are the frogs trying to make our way in the watery world as the temperature ticks imperceptibly higher. We have been swimming in debt forever, unaware that we’re being economically boiled alive.

Millennials have somewhat modest non-mortgage debt of around $27,000 (some self-reports say twice that much), including car notes, student loans, and credit cards. But we each owe more than $100,000 as a share of the national debt. And we don’t even know it.

When Millennials finally do have babies (and we are!) that infant born in 2024 will enter the world with a newly minted Social Security Number and $78,089 credit card bill for Granddad’s heart surgery and the interest on a benefit check that was mailed when her parents were in middle school. 

Headlines and comments sections love to sneer at “snowflakes” who’ve just hit the “real world,” and can’t figure out how to make ends meet, but the kids are onto something. A full 15 percent of our earnings are confiscated to pay into retirement and healthcare programs that will be insolvent by the time we’re old enough to enjoy them. The Federal Reserve and government debt are eating the economy. The same interest rates that are pushing mortgages out of reach are driving up the cost of interest to maintain the debt going forward. As we learn to save and invest, our dollars are slowly devalued. We’re right to feel trapped.  

Sure, if we’re alive and own a smartphone, we’re among the one percent of the wealthiest humans who’ve ever lived. Older generations could argue (persuasively!) that we have no idea what “poverty” is anymore. But with the state of government spending and debt…we are likely to find out. 

Despite being richer than Rockefeller, Millennials are right to say that the previous ways of building income security have been pushed out of reach. Our earning years are subsidizing not our own economic coming-of-age, but bank bailouts, wars abroad, and retirement and medical benefits for people who navigated a less-challenging wealth-building landscape. 

Redistribution goes both ways. Boomers are expected to pass on tens of trillions in unprecedented wealth to their children (if it isn’t eaten up by medical costs, despite heavy federal subsidies) and older generations’ financial support of the younger has had palpable lifting effects. Half of college costs are paid by families, and the trope of young people moving back home is only possible if mom and dad have the spare room and groceries to make that feasible.

Government “help” during COVID-19 resulted in the worst inflation in 40 years, as the federal government spent $42,000 per citizen on “stimulus” efforts, right around a Millennial’s average salary at that time. An absurd amount of fraud was perpetrated in the stimulus to save an economy from the lockdown that nearly ruined it. Trillions in earmarked goodies were rubber stamped, carelessly added to young people’s growing bill. Government lenders deliberately removed fraud controls, fearing they couldn’t hand out $800 billion in young people’s future wages away fast enough. Important lessons were taught by those programs. The importance of self-sufficiency and the dignity of hard work weren’t top of the list.

Boomer Benefits are Stagnating Hiring, Wages, and Investment for Young People

Even if our workplace engagement suffered under government distortions, Millennials continue to work more hours than other generations and invest in side hustles and self employment at higher rates. Working hard and winning higher wages almost doesn’t matter, though, when our purchasing power is eaten from the other side. Buying power has dropped 20 percent in just five years. Life is $11,400/year more expensive than it was two years ago and deficit spending is the reason why. 

We’re having trouble getting hired for what we’re worth, because it costs employers 30 percent more than just our wages to employ us. The federal tax code both requires and incentivizes our employers to transfer a bunch of what we earned directly to insurance companies and those same Boomer-busted federal benefits, via tax-deductible benefits and payroll taxes. And the regulatory compliance costs of ravenous bureaucratic state. The price paid by each employer to keep each employee continues to rise — but Congress says your boss has to give most of the increase to someone other than you. 

Federal spending programs that many people consider good government, including Social Security, Medicare, Medicaid, and health insurance for children (CHIP) aren’t a small amount of the federal budget. Government spends on these programs because people support and demand them, and because cutting those benefits would be a re-election death sentence. That’s why they call cutting Social Security the “third rail of politics.” If you touch those benefits, you die. Congress is held hostage by Baby Boomers who are running up the bill with no sign of slowing down. 

Young people generally support Social Security and the public health insurance programs, even though a 2021 poll by Nationwide Financial found 47 percent of Millennials agree with the statement “I will not get a dime of the Social Security benefits I have earned.”

In the same survey, Millennials were the most likely of any generation to believe that Social Security benefits should be enough to live on as a sole income, and guessed the retirement age was 52 (it’s 67 for anyone born after 1959 — and that’s likely to rise). Young people are the most likely to see government guarantees as a valid way to live — even though we seem to understand that those promises aren’t guarantees at all.

Healthcare costs tied to an aging population and wonderful-but-expensive growth in medical technologies and medications will balloon over the next few years, and so will the deficits in Boomer benefit programs. Newly developed obesity drugs alone are expected to add $13.6 billion to Medicare spending. By 2030, every single Baby Boomer will be 65, eligible for publicly funded healthcare.

The first Millennial will be eligible to claim Medicare (assuming the program exists and the qualifying age is still 65, both of which are improbable) in 2046. As it happens, that’s also the year that the Boomer benefits programs (which will then be bloated with Gen Xers) and the interest payments we’re incurring to provide those benefits now, are projected to consume 100 percent of federal tax revenue.

Government spending is being transferred to bureaucrats and then to the beneficiaries of government spending who are, in some sense, your diabetic grandma who needs a Medicare-paid dialysis treatment, but in a much more immediate sense, are the insurance companies, pharma giants, and hospital corporations who wrote the healthcare legislation. Some percentage of every college graduate’s paycheck buys bullets that get fired at nothing and inflating the private investment portfolios of government contractors, with dubious, wasteful outcomes from the prison-industrial complex to the perpetual war machine.

No bank or nation in the world can lend the kind of money the American government needs to borrow to fulfill its obligations to citizens. Someone will have to bite the bullet. Even some of the co-authors of the current disaster are wrestling with the truth. 

Forget avocado toast and streaming subscriptions. We’re already sensing it, but we haven’t yet seen it. Young people are not well-informed, and often actively misled, about what’s rotten in this economic system. But we are seeing the consequences on store shelves and mortgage contracts and we can sense disaster is coming. We’re about to get stuck with the bill.

Tyler Durden Tue, 03/19/2024 - 20:20

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Spread & Containment

There Goes The Fed’s Inflation Target: Goldman Sees Terminal Rate 100bps Higher At 3.5%

There Goes The Fed’s Inflation Target: Goldman Sees Terminal Rate 100bps Higher At 3.5%

Two years ago, we first said that it’s only a matter…

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9 hours ago

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March 19, 2024

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There Goes The Fed's Inflation Target: Goldman Sees Terminal Rate 100bps Higher At 3.5%

Two years ago, we first said that it's only a matter of time before the Fed admits it is unable to rsolve the so-called "last mile" of inflation and that as a result, the old inflation target of 2% is no longer viable.

Then one year ago, we correctly said that while everyone was paying attention elsewhere, the inflation target had already been hiked to 2.8%... on the way to even more increases.

And while the Fed still pretends it can one day lower inflation to 2% even as it prepares to cut rates as soon as June, moments ago Goldman published a note from its economics team which had to balls to finally call a spade a spade, and concluded that - as party of the Fed's next big debate, i.e., rethinking the Neutral rate - both the neutral and terminal rate, a polite euphemism for the inflation target, are much higher than conventional wisdom believes, and that as a result Goldman is "penciling in a terminal rate of 3.25-3.5% this cycle, 100bp above the peak reached last cycle."

There is more in the full Goldman note, but below we excerpt the key fragments:

We argued last cycle that the long-run neutral rate was not as low as widely thought, perhaps closer to 3-3.5% in nominal terms than to 2-2.5%. We have also argued this cycle that the short-run neutral rate could be higher still because the fiscal deficit is much larger than usual—in fact, estimates of the elasticity of the neutral rate to the deficit suggest that the wider deficit might boost the short-term neutral rate by 1-1.5%. Fed economists have also offered another reason why the short-term neutral rate might be elevated, namely that broad financial conditions have not tightened commensurately with the rise in the funds rate, limiting transmission to the economy.

Over the coming year, Fed officials are likely to debate whether the neutral rate is still as low as they assumed last cycle and as the dot plot implies....

...Translation: raising the neutral rate estimate is also the first step to admitting that the traditional 2% inflation target is higher than previously expected. And once the Fed officially crosses that particular Rubicon, all bets are off.

... Their thinking is likely to be influenced by distant forward market rates, which have risen 1-2pp since the pre-pandemic years to about 4%; by model-based estimates of neutral, whose earlier real-time values have been revised up by roughly 0.5pp on average to about 3.5% nominal and whose latest values are little changed; and by their perception of how well the economy is performing at the current level of the funds rate.

The bank's conclusion:

We expect Fed officials to raise their estimates of neutral over time both by raising their long-run neutral rate dots somewhat and by concluding that short-run neutral is currently higher than long-run neutral. While we are fairly confident that Fed officials will not be comfortable leaving the funds rate above 5% indefinitely once inflation approaches 2% and that they will not go all the way back to 2.5% purely in the name of normalization, we are quite uncertain about where in between they will ultimately land.

Because the economy is not sensitive enough to small changes in the funds rate to make it glaringly obvious when neutral has been reached, the terminal or equilibrium rate where the FOMC decides to leave the funds rate is partly a matter of the true neutral rate and partly a matter of the perceived neutral rate. For now, we are penciling in a terminal rate of 3.25-3.5% this cycle, 100bps above the peak reached last cycle. This reflects both our view that neutral is higher than Fed officials think and our expectation that their thinking will evolve.

Not that this should come as a surprise: as a reminder, with the US now $35.5 trillion in debt and rising by $1 trillion every 100 days, we are fast approaching the Minsky Moment, which means the US has just a handful of options left: losing the reserve currency status, QEing the deficit and every new dollar in debt, or - the only viable alternative - inflating it all away. The only question we had before is when do "serious" economists make the same admission.

They now have.

And while we have discussed the staggering consequences of raising the inflation target by just 1% from 2% to 3% on everything from markets, to economic growth (instead of doubling every 35 years at 2% inflation target, prices would double every 23 years at 3%), and social cohesion, we will soon rerun the analysis again as the implications are profound. For now all you need to know is that with the US about to implicitly hit the overdrive of dollar devaluation, anything that is non-fiat will be much more preferable over fiat alternatives.

Much more in the full Goldman note available to pro subs in the usual place.

Tyler Durden Tue, 03/19/2024 - 15:45

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