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Futures Flat As War Threat Fades

Futures Flat As War Threat Fades

US equity futures were flat, having traded in a narrow range on either side of unchanged, as investors braced…

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Futures Flat As War Threat Fades

US equity futures were flat, having traded in a narrow range on either side of unchanged, as investors braced for the latest retail sales data, assessed the easing path of inflation and remained calm in the face of rising geopolitical concerns resulting from a NATO attempt to paint rocket a Ukraine strike on a Polish village as Russian, in hopes of dramatically escalating the war.

Luckily, video evidence refuted the false flag, and overnight NATO was forced to admit that the ":Explosion in Poland was Likely Due to Ukraine Air Defense" Even so, the Western pro-war alliance still blamed Russia with  NATO's Secretary General saying the blast in Poland was likely caused by a Ukrainian air defence missile but that Russia was ultimately responsible because it started the war. "They are responsible for the war that has caused this situation.” Propaganda aside, fears of an immediate spillover from the conflict were soothed, knocking the yen and dollar lower, as demand for safe-haven assets gradually faded.  

“It’s a reminder that the risk of escalation is in the background. It’s something we need to watch for, because any escalation of military action and additional impact on energy supply could seriously disrupt markets,” said Kiran Ganesh, managing director at UBS Global Wealth Management.

Failed Gulf of Tonkin 2.0 aside, contracts on the Nasdaq 100 were down 0.1% and the S&P 500 was flat as of 7:30 a.m. in New York, erasing modest earlier losses and gains; the dollar dropped and the euro and the Polish zloty recouped earlier knee-jerk losses. 10Y yields traded near session lows at 3.758%. 

In premarket trading, stocks linked to Donald Trump, including blank check company Digital World Acquisition Corp., surged after the former president officially entered the 2024 presidential race. Meanwhile, suppliers to Apple could be active, following a report about the iPhone maker preparing to begin sourcing chips for its devices from a plant under construction in Arizona. Here are the other notable premarket movers:

  • Carnival (CCL US) shares fall 13% after a private offering of $1 billion of convertible senior notes.
  • Ginkgo Bioworks (DNA US) shares dropped as much as 7.5% after the cell-programming platform provider launched a share sale, with the company planning to use the net proceeds to offset the cash used to finance the acquisition of assets and liabilities of Bayer CropScience, and for other general corporate purposes.
  • Tattooed Chef (TTCF US) slides as much as 15% after the plant-based food company said it intends to raise additional debt or equity capital in the “near future.”
  • Advance Auto (AAP US) shares dive as much as 14% set for its biggest drop since March 2020, with analysts saying that the car parts retailer’s results were underwhelming and a surprise with earnings per share missing estimates and the firm nudging down its guidance. Analysts also flagged a negative impact from currency and higher expenses.
  • Lulu’s Fashion Lounge (LVLU US) fell 26% after its revenue forecast for 2022 fell short of the average analyst estimate. The company also said Chief Financial Officer Crystal Landsem will succeed David McCreight as chief executive officer, effective March 6.

US stocks rose Tuesday as fresh data added to evidence that inflation may have peaked, strengthening the case for the Federal Reserve to moderate the pace of interest-rate hikes. “Investors’ euphoria is understandable given the first small signs of easing on the inflation front, but we wonder whether it isn’t also a bit overdone,” said Marko Behring, head of asset management at Fuerst Fugger Privatbank. “The current recovery moves, which are overshooting a bit, could trigger exactly what many market participants no longer have on their radar: a US central bank that might have to act more aggressively again, precisely because of the burgeoning euphoria.”

Colin Asher, senior economist at Mizuho Bank Ltd. sees the moves as overdone, and predicted more volatility ahead. US retail sales and housing market data due later on Wednesday may offer more clues on the state of the US economy.

“I am more in the dollar-plateau versus the dollar-peak camp,” he said. “Inflation may have peaked but that doesn’t mean it’s coming down rapidly. We have probably seen the peak for the dollar but it wouldn’t surprise me if we go back into a period of softer equities.”

In Europe, the Stoxx Europe 600 Index dropped as geopolitical developments weigh on sentiment; risk was dragged down by real estate, autos and retail. Energy outperformed. The FTSE 100 outperforms, adding 0.2%, IBEX lags, dropping 0.9%. There were signs of overheating in the region after a 19% rally since Sept. 29 for euro-area blue chips, which reached their most overbought level in nearly 23 years. UK inflation data for October was higher than expected, increasing pressure on the Bank of England to keep raising interest rates. Here are the biggest European movers:

  • Siemens Energy rises as much as 7.8% to its highest since Aug. 31 after the energy development company reported a “solid finish” to FY22 with the growth and margin outlook looking strong, according to Jefferies.
  • Sage Group jumps as much as 7.1%, with analysts saying the software maker’s annualized recurring revenue growth of 12% and FY23 outlook are bright spots of its full-year results.
  • Alstom climbs as much as 6.3% after the French rail equipment maker reported first-half results, with orders beating expectations.
  • Prosus gains as much as 4.8% after Chinese online giant Tencent reported better-than-expected profit and said it will distribute the majority of its shares in food delivery firm Meituan to investors.
  • Swedish landlord Balder falls as much as 8.1% on reports it may face a credit downgrade by S&P, pulling local peers lower.
  • Mercedes-Benz falls as much as 6.2%, the most intraday since Sept. 5 and the worst performer in the Stoxx 600 Automobiles & Parts Index; the German carmaker cut prices on two EV models in China, with Oddo saying the move is “new evidence of tough competition” in the country.
  • Evotec falls as much as 6.2% after Deutsche Bank downgrades to hold from buy, with the broker seeing risks to the German pharma firm’s 2022 guidance and saying its ability to meet 2023 consensus estimates is “ambitious.”
  • SGS shares drop as much as 5.9%, the most since March 2020, after an unscheduled trading update from the Swiss industrial that Morgan Stanley said could drive downgrades in the mid single-digits.

Asian stocks fell as traders weighed rising geopolitical tensions and surging Covid cases in China. The MSCI Asia Pacific Index fell as much as 1.1% before paring to 0.4%. Key gauges in China and Hong Kong led declines, with most national benchmarks in the red. Risk-off sentiment returned after a Russian-made missile struck Poland, though US President Joe Biden said it was unlikely to have been fired from Russia. A jump in China’s daily virus tally further fueled investor caution, casting doubt over a potential exit from its Covid Zero policy. Signs that the Federal Reserve is slowing its pace of monetary tightening have lifted markets this month, with a slew of Fed speakers indicating a readiness to moderate the size of their rates hikes. The Asian stock benchmark is up 13% so far in November, poised for its best monthly performance since 1998. “The Fed has garnered more catalysts to slow its pace of hikes, which also provides further support to the equity market rally,” said Jessica Amir, market strategist at Saxo Capital Markets. The next important data sets the Fed will be watching are due early next month, including US jobs and CPI, she added.

Japanese stocks closed mixed as US President Joe Biden and key European leaders urged caution after a rocket struck a Polish village just over the border from Ukraine. The Topix closed little changed at 1,963.29, while the Nikkei advanced 0.1% to 28,028.30. The yen weakened against the dollar, erasing earlier gains. Out of 2,165 stocks in the index, 1,076 rose and 966 fell, while 123 were unchanged. “There is a bit of a risk-off mood after news that a Russian missile landed in Poland,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management. “In an extreme case, if NATO were to move, the market would become more risk averse in general.”

In FX, the Bloomberg dollar spot index falls 0.2%. JPY and GBP are the weakest performers in G-10 FX, EUR and DKK outperform.

  • The euro led G-10 gains and rose for a second day versus the dollar, but remained within yesterday’s range. The common currency’s volatility skew shifted lower this week, urging caution to those long the euro in the spot market.
  • The pound held its ground against a broadly weaker dollar, but underperformed most major currencies after data showed UK inflation rose; UK CPI rose to 11.1% from a year ago in October, the highest in 41-years. That was more than the central bank’s peak forecast for 10.9% and the 10.7% median that economists had expected. Focus turns to Bank of England officials’ testimony to lawmakers later and then the fiscal statement Thursday. Gilt yields were 1bp lower to 2bps higher.
  • The Aussie trades near its strongest level in more than two months as the nation’s relationship with China appears to be stabilizing and on the back of a weaker greenback from easing concerns over geopolitical tensions in eastern Europe. The nation’s wages climbed 1% in the three months through September from the prior quarter, the fastest pace since early 2012, for an annual gain of 3.1%

In rates, Treasuries were narrowly mixed after paring losses, with 2s10s curve flatter; bunds and gilts outperformed during London morning. 20-year new-issue auction is a focal point of US session, along with retail sales and three scheduled Fed speakers. 10-year TSY yields dropped to 3.76% vs day’s high 3.84%, lagging bunds and gilts in the sector by ~3bp; front-end underperformance flattens 2s10s by ~1bp to -59bp, within 3bp of cycle low reached Nov. 4. There is a $15 billion 20-year TSY bond auction at 1pm which has a WI yield ~4.160%, around 23.5bp richer than October’s result, a 2.5bp tail. In Europe, Bunds were steady, while Italian bonds advanced, led by the long end, and outperforming euro-area peers.

In commodities, crude benchmarks began the session a touch softer, with participants digesting the multiple updates around the Poland missile incident and the Druzhba pipeline. However, the complex then spiked on the below reports of an oil tanker being attacked near Oman; sending WTI and Brent to USD 87.51/bbl and USD 94.79/bbl peaks. Defense Official says that an oil tanker has been struck in an exploding drone attack off Oman, amid heightened tensions with Iran, via AP's Miller. The attack happened Tuesday night off the coast of Oman, according to the official. Spot gold is modestly firmer given the aforementioned geopolitical concerns and as the DXY languishes below 106.00; albeit, the yellow metal is yet to surpass Tuesday's USD 1786/oz peak.

To the day ahead now, and data releases include UK and Canadian CPI for October, as well as US retail sales, industrial production and capacity utilisation for October, and the NAHB housing market index for November. Central bank speakers include BoE Governor Bailey, ECB President Lagarde, the ECB’s Muller, Centeno, Villeroy and Panetta, and the Fed’s Williams, Barr and Waller. Finally, earnings releases include Nvidia, Cisco Systems, Lowe’s, TJX Companies and Target.

Market Snapshot

  • S&P 500 futures up 0.2% to 4,006.50
  • STOXX Europe 600 down 0.7% to 431.49
  • German 10Y yield up 0.3% to 2.11%
  • Euro up 0.6% to $1.0411
  • MXAP down 0.4% to 154.12
  • MXAPJ down 0.4% to 500.16
  • Nikkei up 0.1% to 28,028.30
  • Topix little changed at 1,963.29
  • Hang Seng Index down 0.5% to 18,256.48
  • Shanghai Composite down 0.4% to 3,119.98
  • Sensex up 0.2% to 62,005.19
  • Australia S&P/ASX 200 down 0.3% to 7,122.24
  • Kospi down 0.1% to 2,477.45
  • Brent Futures up 0.8% to $94.57/bbl
  • Gold spot up 0.1% to $1,780.53
  • U.S. Dollar Index down 0.23% to 106.16

Top Overnight News from Bloomberg

  • US President Joe Biden said a rocket that struck a village in Poland near the Ukraine border was unlikely to have been fired from Russia, comments that may limit the risk of a major escalation in tensions over the incident.
  • The cost-of-living squeeze is hurting people’s ability to service debts, while Europe’s worsening growth prospects threaten corporate profits, the ECB said Wednesday in its Financial Stability Review
  • Things are finally looking up for China’s economy, and with that traders are ditching government bonds for riskier bets. Yields on benchmark 10-year debt jumped as much as four basis points to 2.85% on Wednesday, the highest since December
  • A world-beating rally across Asian markets is starting to look precarious as some analysts caution China reopening euphoria will give way to the sober reality of a looming global recession

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded lower throughout the session but climbed off session lows as markets juggled the US PPI data with the latest geopolitical development. ASX 200 was pressured by its heavyweight Financials sector, with losses also seen across gold miners. Nikkei 225 briefly fell back under the 28k mark but losses were cushioned by the weaker JPY, whilst machinery names were after the Japanese government cutting its machinery orders assessment. KOSPI conformed to the downbeat tone across the region with the heaviest losses seen across the electronics and construction sectors.

Top Asian News

  • China's state planner said growth stabilisation policies will take effect in Q4, will actively expand effective investment and speed up consumption recovery in key sectors, via Reuters.
  • China reported 1,623 (prev. 1,661) new coronavirus cases in the mainland for Nov 15
  • China's Beijing reported 197 new local symptomatic cases (vs 303 the prior day)
  • Shanghai Disney said parts of the resort will resume operations on Nov 17th; Disneyland Park will remain closed until further notice, via Reuters.
  • Xinjiang's Yining announced on Tue life & production will return to normal, after successfully curbing the latest COVID 19 spread, according to Global Times.
  • PBoC injected CNY 71bln via 7-day reverse repos at a maintained rate of 2.00% for a CNY 63bln net injection.
  • PBoC Governor Yi said talks with US Treasury Secretary Yellen were candid and constructive, via Bloomberg.
  •    US Treasury Secretary Yellen and PBoC Governor Yi discussed macroeconomic and financial developments, high and volatile commodity prices, the sides exchanged macroeconomic views outlooks of US and China. Yellen noted that she looks forward to future engagements with the Chinese side, according to the Treasury Department.

European bourses have spent much of the morning fairly contained but with a gradually increasing negative bias, Euro Stoxx 50 -0.5%, as the recent rally pauses amid numerous geopolitical developments. US futures are marginally firmer, ES +0.1%, but similarly contained as the ES clings onto the 4k mark ahead of numerous metrics and more Fed speak. Amazon's (AMZN) retail business is reportedly bracing for a tough holiday season by "sellers for lump sums of cash and limiting inventory", according to Business Insider. Lowe's Companies Inc (LOW) Q3 2023 (USD): Adj. EPS 3.27 (exp. 3.10), Revenue 23.5bln (exp. 23.13bln); raises FY22 outlook

Top European News

  • UK Inflation Hits 41-Year High on Soaring Energy Prices
  • Carnival Drops After $1b Convertible Senior Notes Offering
  • Air France-KLM Falls on Convertible Bond Offer, Strike Plans
  • Inflation Is Peaking ‘Right Now,’ World’s Top Cement Maker Says
  • Druzhba Pipe May Resume Soon as Market on Edge: Energy Latest
  • UK Braces for ‘Austerity on Steroids’ With Little Left to Cut

Central Banks

  • Fed's George (voter) says Fed should continue raising rates, but Fed should slow pace of hikes, WSJ reports. Bringing inflation down without a recession might not be feasible. Inflation is at risk of growing entrenched in the economy due to an overheated job market, and that will make it increasingly difficult for the Federal Reserve to bring inflation down without a recession.
  • ECB's Muller says both 50bps and 75bps rate hikes are 'substantial', adding that he favours a 'substantial' rate hike in December.
  • ECB's Visco says price growth could return to target by the end of 2024; ECB needs to continue with restrictive policy.
  • ECB's de Guindos says it is difficult to have financial stability without price stability.
  • ECB Euro Zone Financial Stability Review: Risks are increasing and banks may need to build up provisions.

FX

  • DXY once again on the backfoot and sub-106.00 to the modest benefit of peers, ex-JPY.
  • EUR/USD is the current outperformer given the soft USD with specific developments limited aside from numerous ECB speakers though largely on financial stability; currently, holding above 1.04.
  • Cable briefly spiked on the hot UK CPI release, to a 1.1942 high; however, this proved shortlived given the overarching headwind of a bleak domestic outlook.
  • As mentioned, JPY is the G10 laggard, with USD/JPY briefly rising as high as 140.29 though it has since managed to move back below 140.00.
  • PBoC sets USD/CNY mid-point at 7.0363 vs exp. 7.0409 (prev. 7.0421)

Commodities

  • Crude benchmarks began the session a touch softer, with participants digesting the multiple updates around the Poland missile incident and the Druzhba pipeline.
  • However, the complex then spiked on the below reports of an oil tanker being attacked near Oman; sending WTI and Brent to USD 87.51/bbl and USD 94.79/bbl peaks.
  • Defense Official says that an oil tanker has been struck in an exploding drone attack off Oman, amid heightened tensions with Iran, via AP's Miller. The attack happened Tuesday night off the coast of Oman, according to the official.
  • US Private Energy Inventories (bbls): Crude -5.8mln (exp. -0.4mln), Cushing -0.8mln, Gasoline +1.69mln (exp. +0.3mln), and Distillate +0.9mln (exp. -0.5mln).
  • Russian Kremlin says hard work continues on reviving the grain deal, if necessary President Putin and Turkish President Erdogan will coordinate within hours; Russian Finance Minister says supported an extension of the grain deal at the G20 summit, via Reuters.
  • Spot gold is modestly firmer given the aforementioned geopolitical concerns and as the DXY languishes below 106.00; albeit, the yellow metal is yet to surpass Tuesday's USD 1786/oz peak.

Central Banks

  • Fed's George (voter) says Fed should continue raising rates, but Fed should slow pace of hikes, WSJ reports. Bringing inflation down without a recession might not be feasible. Inflation is at risk of growing entrenched in the economy due to an overheated job market, and that will make it increasingly difficult for the Federal Reserve to bring inflation down without a recession.
  • ECB's Muller says both 50bps and 75bps rate hikes are 'substantial', adding that he favours a 'substantial' rate hike in December.
  • ECB's Visco says price growth could return to target by the end of 2024; ECB needs to continue with restrictive policy.
  • ECB's de Guindos says it is difficult to have financial stability without price stability.
  • ECB Euro Zone Financial Stability Review: Risks are increasing and banks may need to build up provisions.

Geopolitics

  • Polish Foreign Ministry said a "Russian-made" rocket landed in a Polish village at 15:40 local time; Poland has summoned the Russian ambassador, via Reuters.
  • US officials said initial findings suggest the missile that hit Poland was fired by Ukrainian forces at an incoming Russian missile, according to AP
  • US President Biden said the missile that hit a Polish village near the border with Ukraine was probably not launched from Russian territory, citing information on the rocket's trajectory, via dpa.
  • US President Biden said leaders will determine the next steps after finding out what happened in Poland, and added that Russia continues to escalate its attacks in Ukraine.
  • Polish President said there is no definitive evidence of who fired the rocket that fell onto the village, and added that what happened was a one-off incident and there are no indications that it will happen again, via Reuters.
  • Local Polish media reports citing sources said what hit Przewowo is most likely the remains of a rocket shot down by the Armed Forces of Ukraine, via Radio Zet.
  • Polish PM said they are working to establish the cause of the explosion in the village near the border with Ukraine, and decided to increase monitoring of air space, according to Reuters.
  • Kremlin spokesperson said he has no information on the incident in Poland, via Reuters.
  • Ukraine's President Zelenskiy said Russian missiles have struck Poland; strikes on NATO territory a significant escalation and action is required, via Reuters.
  • Polish President said it is very likely that Poland will activate Article 4 of the NATO Treaty on Wednesday at the NATO meeting, via Reuters. Subsequently, reports via local press indicate that Poland will not request the Article 4 activation. A view the Polish PM has since intimated as well.
  • NATO ambassadors to meet on Wednesday at Poland's request on the alliance's Article 4, according to European diplomats cited by Reuters. NATO SecGen to brief at 11:30GMT/06:30ET.
  • US President Biden told the G7/NATO that the Poland blast was caused by Ukrainian air defence missile, via Reuters citing a NATO source.

US Event Calendar

 

DB's Jim Reid concludes the overnight wrap

The good news for markets has continued over the last 24 hours, despite headlines after Europe closed of Russian rockets landing in Poland injecting a fresh bout of uncertainty and intraday volatility. This dented sentiment but we recovered around half of the earlier gains by the US close as the general conclusion was that it was more likely to be accidental than an enormous escalation. As we go to press an AP reporter has suggested that US officials’ initial investigations suggest it was in fact a Ukrainian rocket fired at incoming Russian missles. This follows Biden's earlier overnight remarks that it was unlikely the rocket was fired from Russia.

More on that later, but all told, bonds and equities managed to hold onto their post-data surge after US producer price inflation eased by more than expected. That follows on the heels of last Thursday’s downside surprise in consumer price inflation, and added to the narrative that we’re past the worst on inflation and that the Fed will soon be able to slow down its rate hikes. The S&P 500 (+0.87%) just about erased the previous day’s losses even though they came off their +1.80% highs earlier in the session. The index did briefly go negative on the Poland headlines. The S&P’s gains over the last 4 sessions now stand at +6.49%, just shy of the largest 4-day gain for the index in over two years.

In terms of the details of that PPI release, monthly headline inflation surprised to the downside with a +0.2% reading (vs. +0.4% expected). And as with the CPI reading, core PPI also came in beneath expectations with an unchanged reading (vs. +0.3% expected), thus cementing the idea that this downshift could prove more durable. In turn, those weaker-than-expected inflation readings took the year-on-year numbers to their lowest in some time, with headline PPI down to +8.0% (vs. +8.3% expected), which is the lowest since July 2021. The big test now will be whether these very positive numbers from October can be sustained, or whether it’s a repeat of July’s downside surprise that was then followed by more negative prints once again.

More on the Poland story now and the spike down in risk occurred as reports indicated Russian rockets landed in Poland, a NATO member, and killing two people. The initial reaction was understandable given that any deliberate strike on a NATO member would mark an enormous escalatory step. It soon became apparent that this was highly unlikely to be a direct attack, and the overnight comments mentioned at the top suggest a rapid deescation.

As such markets can go back to focusing on the positives, which was given further momentum by some decent corporate news from Walmart (+6.66%). The company raised their full-year outlook, and now see adjusted EPS declining by 6-7% rather than 9-11% as previously suggested, and also approved a new $20bn share buyback plan. This collection of good news meant that there was a very broad-based advance for equities, with every sector group bar two rising on the day, and even those two sectors just missed, with health care down -0.07% and materials -0.11% lower. Tech stocks saw a particular outperformance, with the NASDAQ up +1.45%, which brings its own 4-day rally to an even bigger +9.71%.

This strength was echoed among sovereign bonds, with 10yr Treasury yields down -8.4bps yesterday to a new one-month low of 3.77%. However, the declines were smaller at the front end of the curve, which led the 2s10s curve to flatten another -3.3bps to -57.5bps, making it the most inverted the curve has been since 1982, which is alarming when you consider its record as a recessionary indicator, having inverted prior to all of the last 10 US recessions. The 3m10yr curve also moved even deeper into inversion, falling another -15.7bps to -45.5bps, which is something we haven’t seen since September 2019. While the Fed’s preferred yield curve measure (18m3m – 3m) fell deeper into inflationary territory, falling -8.7bps to -11.4bps. Meanwhile, this morning in Asia, yields on 10yr USTs (+5bps) have pushed back up, trading at 3.82% as we go to press. 2yr yields are +3bps. Watch out for UK CPI just after we hit your email boxes.

Over in Europe, sovereign bonds also rallied yesterday with trading done before the stray rocket news, with yields on 10yr bunds (-3.8bps), OATs (-5.7bps) and BTPs (-12.2bps) all moving lower. And that came in spite of a further uptick in natural gas prices yesterday, which gained +6.9% to €122 per megawatt-hour. Meanwhile, equities similarly rallied in line with their US counterparts, with the STOXX 600 (+0.37%) advancing for the 7th time in the last 8 sessions, taking it to its highest level in nearly 3 months.

This morning equity markets in Asia are mixed but with China risk weaker again after a very strong run. Across the region, the Hang Seng (-1.4%) is leading losses, with the Shanghai Composite (-0.47%) also lower. Elsewhere the KOSPI (-0.2%) is also lower but the Nikkei 225 (+0.14%) is trading up, reversing its opening losses. Markets have got a small spike since the AP report mentioned in the first paragraph. US stock futures are flat but European futures are still down around half a percent.

Early morning data showed that Japan’s core machine orders in September unexpectedly slid -4.6% m/m (v/s +0.7% expected) following the -5.8% contraction in August.

Moving to China, Covid cases continue to climb with cases surging to almost 20,000 yesterday, the highest level since late-April when Shanghai (the country’s financial hub) was in the middle of a two-month lockdown. The outbreaks are a major test for authorities after the country’s leaders relaxed some of its strict Covid Zero measures.

Overnight we also heard from former US President Donald Trump, who has confirmed he’s running in the 2024 presidential election. So far he’s the only major contender from either party to announce his candidacy, with the election still almost two years away. His hope will be that this effectively clears the Republican primary field and the party coalesces behind him over the months ahead. If he succeeds, he would become just the second president to serve non-consecutive terms in the White House, after Grover Cleveland in the 19th century. In other news yesterday, the Republicans remain just one seat away from winning control of the House of Representative. The latest count from the Associated Press gives the Republicans 217 seats, with the Democrats on 205. So it would require the Democrats to sweep every outstanding seat now in order to keep the House, including a number in which they’re behind in the current vote count.

Here in the UK, attention is turning towards tomorrow’s Autumn Statement from the government, but ahead of that we had a mixed set of data releases on the labour market. On the one hand there was some positive news, with the number of payrolled employees up by +74k in October (vs. +44k expected), with positive revisions to the previous month as well. However, the unemployment rate in the three months to September unexpectedly picked up a tenth to 3.6%, and the economic inactivity rate among the working-age population also rose by two-tenths to 21.6% over the same period. All eyes will be on the October CPI release this morning, where our economist is expecting it to rise to a fresh 40-year high of +10.9%. In the meantime though, sterling (+0.93%) strengthened to $1.187 yesterday, marking its strongest level since mid-August. The dollar index rebounded from its morning lows when it appeared that the pivot was gaining steam following the rocket news. It ultimately finished just -0.24% lower.

Looking at yesterday’s other data, there were some positive developments in the German ZEW survey for November, where the expectations component rose to -36.7 (vs. -51.0 expected), and the current situation reading rose to -64.5 (vs. -69.3 expected). Otherwise, the US Empire State manufacturing survey rose to 4.5 in November (vs. -6.0 expected), which is its highest level since July.

To the day ahead now, and data releases include UK and Canadian CPI for October, as well as US retail sales, industrial production and capacity utilisation for October, and the NAHB housing market index for November. Central bank speakers include BoE Governor Bailey, ECB President Lagarde, the ECB’s Muller, Centeno, Villeroy and Panetta, and the Fed’s Williams, Barr and Waller. Finally, earnings releases include Nvidia, Cisco Systems, Lowe’s, TJX Companies and Target.

Tyler Durden Wed, 11/16/2022 - 08:05

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Government

Federal Food Stamps Program Hits Record Costs In 2022

Federal Food Stamps Program Hits Record Costs In 2022

In early January, The Wall Street Journal Editorial Board warned that one peril of a…

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Federal Food Stamps Program Hits Record Costs In 2022

In early January, The Wall Street Journal Editorial Board warned that one peril of a large administrative state is the mischief agencies can get up to when no one is watching.

Specifically, they highlight the overreach of the Agriculture Department, which expanded food-stamp benefits by evading the process for determining benefits and end-running Congressional review.

Exhibit A in the over-reach is the fact that the cost of the federal food stamps program known as the Supplemental Nutrition Assistance Program (SNAP) increased to a record $119.5 billion in 2022, according to data released by the U.S. Department of Agriculture...

Food Stamp costs have literally exploded from $60.3 billion in 2019, the last year before the pandemic, to the record-setting $119.5 billion in 2022.

In 2019, the average monthly per person benefit was $129.83 in 2019, according to the U.S. Department of Agriculture. That increased by 78 percent to $230.88 in 2022.

Even more intriguing is the fact that the number of participants had increased from 35.7 million in 2019 to 41.2 million in 2022...

All of which is a little odd - the number of people on food stamps remains at record highs while the post-COVID-lockdown employment picture has improved dramatically...

Source: Bloomberg

If any of this surprises you, it really shouldn't given that 'you, the people' voted for the welfare state. However, as WSJ chided: "abuse of process doesn’t get much clearer than that."

In its first review of USDA, the GAO skewered Agriculture’s process for having violated the Congressional Review Act, noting that the “2021 [Thrifty Food Plan] meets the definition of a rule under the [Congressional Review Act] and no CRA exception applies. Therefore, the 2021 TFP is subject to the requirement that it be submitted to Congress.” GAO’s second report says “officials made this update without key project management and quality assurance practices in place.”

Abuse of process doesn’t get much clearer than that. The GAO review won’t unwind the increase, which requires action by the USDA. But the GAO report should resonate with taxpayers who don’t like to see the politicization of a process meant to provide nutrition to those in need, not act as a vehicle for partisan agency staffers to impose their agenda without Congressional approval.

All of this undermines transparency and accountability for a program that provided food stamps to some 41 million people in 2021. The Biden Administration is using the cover of the pandemic to expand the entitlement state beyond what Congress authorized.

The question now is, will House Republicans draw attention to this lawlessness and use their power of the purse to stop it to the extent possible with a Democratic Senate.

And don't forget, the US economy is "strong as hell."

Tyler Durden Sat, 01/28/2023 - 09:55

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Government

Week Ahead Alchemy: Can Powell Turn a Quarter-Point Move into a Hawkish Hike?

The new year is still young, but the week ahead may be one of the most important weeks of the year. The divergence that the market has been anticipating…

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The new year is still young, but the week ahead may be one of the most important weeks of the year. The divergence that the market has been anticipating will materialize. The Federal Reserve will most likely hike by 25 bp on Wednesday, followed by half-point moves by the European Central Bank and the Bank of England the following day. On Friday, February 3, the US will report its January employment situation. It could be the slowest job creation since the end of 2020. The Bureau of Labor Statistics also will release the preliminary estimate of its annual benchmark revisions. 

The markets' reaction may be less a function of what is done than what is communicated. The challenge for Fed Chair Powell is to slow the pace of hiking while pushing against the premature easing of financial conditions. In December, ECB President Lagarde pre-committed to a 50 bp hike in February and hinted that another half-point move was possible in March. With the hawks showing their talons in recent days, will she pre-commit again? Amid a historic cost-of-living squeeze that has already kneecapped households, can Bank of England Governor Bailey deliver another 50 bp rate hike and sell the idea that it is for the good of Britain, for which the central bank does not expect growth to return until next year?

United States: The Federal Reserve has a nuanced message to convey. It wants to slow the pace of hikes, as even the hawkish Governor Waller endorsed, but at the same time, persuade the market that tighter financial conditions are necessary to ensure a times convergence of price pressures to the target. Indeed, Fed Chair Powell may warn investors that if it continues to undo the Fed's work, more tightening may be necessary. The market has heard this essentially before and is not impressed. Financial conditions have eased. Consider that the 2-year yield is down 20 bp this year, and the 10-year yield has fallen twice as much. The trade-weighted dollar is off by more than 1.5%. The S&P 500 is up 4.6% after a 7% rally in Q4 22. The Russell 200 has gained nearly 7% this month, on top of the 5.8% in the last three months of 2022.  

Last year, Powell drew attention to the 18-month forward of the three-month T-bill yield compared to the cash 3-month bill as a recession tell. It has been inverted for over two months and traded below -100 bp last week, the most inverted since the tech bubble popped over two decades ago. The market seems more convinced that inflation will fall sharply in the coming months. The monetary variables and real economy data, including retail sales, industrial production, and the leading economic indicators, suggest a dramatic weakening of the economy. Yet just like most looked through the contraction in H1 22, seeing it as primarily a quirk of inventory and trade, the 2.9% growth reported in Q4 22 does not change many minds that the US economy is still headed for weaker growth, leaving aside the fuzzy definition of a recession.

The median forecast in Bloomberg's survey is for a 188k rise in January nonfarm payrolls. If accurate, it would be seen as concrete evidence that the jobs market is slowing. This is also clear by looking at averages for this volatile series. For example, in the last three months of 2022, the US created an average of 247k jobs a month. In the first nine months of the year, nonfarm payrolls rose by an average of 418k a month. Average hourly earnings growth also is moderating. A 0.3% rise on the month will see the year-over-year pace slow to 4.3%. That matches the slowest since June 2021. The decline in the work week in December to 34.3 hours spurred narratives about how businesses, hoarding labor, would cut hours before headcount. Yet, we suspect it was partly weather-related, and that the average work week returned to 34.4 hours, which is around where it was pre-Covid. 

Benchmark revisions are usually of more interest to economists than the market, but last month's report by the Philadelphia Fed raised the stakes.  It looked more closely at the April-June 2022 jobs data. After adjusting for updated data from the Quarterly Census on Employment and Wages, it concluded that job growth was nearly flat in Q2 22. It estimated that only 10,500 net new jobs were created, a far cry from the 1.05 mln jobs estimated by the Bureau of Labor Statistics. The Business Employment Dynamics Summary (released last week) was starker still. It points to a job loss of nearly 290k. Lastly, we note that US auto sales are expected to have recovered from the unexpected almost 6% decline (SAAR) in December. However, the 14.1 mln unit pace would still represent a 6% decline from January 2022, when sales spiked to 15.04 mln.  

The Dollar Index continues to hover around 102, corresponding to the (50%) retracement of the rally recorded from January 2021 through September 2022. It has not closed above the 20-day moving average (now ~102.80) since January 3. It remains in the range set on January 18, when it was reported that December retail sales and manufacturing output fell by more than 1%. That range was about 101.50-102.90. Although we are more inclined to see it as a base, the prolonged sideways movement last month saw new lows this month. That said, the next retracement target (61.8%) is near 99.00.

Eurozone:  The ECB rarely pre-commits to a policy move, precisely what ECB President Lagarde did last month. Apparently, as part of the compromise with members who at first advocated another 75 bp hike in December, an agreement to raise rates by 50 bp was accompanied by an agreement to hike by another 50 on February 2 and explicitly not rule out another half-point move in March. There was a weak effort to soften the March forward guidance, but the hawks pushed back firmly. The swaps market has about a 70% chance of a 50 bp hike in March rather than a 25 bp move. 

The ECB's deposit rate stands at 2.00%, and the swaps market is pricing 125 bp of hikes in the first half of the year. In contrast, the Fed is expected to raise the Fed funds target range by 50 bp. This has been reflected in the two-year interest rate differential between the US and Germany, falling from about 275 bp last August to around 160 bp now. We had anticipated the US premium would peak before the dollar, and there is a lag of almost two months. The direction and change of the interest rate differential often seem more important than the level. In late 2019, before Covid struck, the US premium was near 220 bp, and the euro was a little below $1.12.

There has been a significant shift in sentiment toward the eurozone. The downside risks that seemed so dominant have been reduced. A milder-than-anticipated winter, the drop in natural gas prices, and successful conservation and conversion (to other energy sources) lifted the outlook. Some hopeful economists now think that the recession that seemed inevitable may be avoided. The preliminary January CPI will be published a day before the ECB meets. The monthly pace fell in both November and December. The year-over-year rate is expected to ease to 5.1% from 5.2%, while the core rate slips to 5.1% from 5.2%. The base effect suggests a sharp decline is likely here in Q1, but divergences may become more evident in the euro area. This could see a reversal of the narrowing of core-periphery interest rate spreads. 

The EU's ban on refined Russian oil products (e.g., diesel and fuel oil) will be implemented on February 5. It is considering imposing a price cap as it did with crude oil. Diesel trades at a premium to crude, while fuel oil sells at a discount. There have been reports of European utilities boosting purchases from Russia ahead of the embargo. Separately, reports suggest that the EU was still the largest importer of Russian oil in December when pipeline and oil products were included. However, at the end of December, Germany stopped importing Russia's oil delivered through pipelines. This does not count oil and refined producers that first go to a third country, such as India, before being shipped to Europe.  

Pullbacks in the euro have been shallow and brief. Most pullbacks since the low was recorded last September, except the first, have mostly been less than two cents. That would suggest a pullback toward the $1.0730 area, but buyers may re-emerge in front of that, maybe around $1.0775. On the top side, the $1.0940 is the (50%) retracement of the euro's losses since January 2021. The euro rose marginally last week, even though it slipped by around 0.2% in the last two session. It has risen in eight of the past 10 weeks.   

UK: Without some forward guidance that stopped short of a pre-commitment, the market is nearly as confident that the Bank of England will deliver another half-point hike in the cycle to lift the base rate to 4.0%. The BOE was among the first of the G10 countries to begin the interest rate normalization process and raised the base rate in December 2021 from the 0.10% it had been reduced to during the pandemic. The swaps market projects the peak between 4.25% and 4.50%, with the lower rate seen as slightly more likely.

High inflation readings and strong wage growth appear to outweigh the economic slump. The BOE's forecasts see the economy contracting 1.5% year-over-year this year and output falling another 1% in 2024. The market is not as pessimistic. The monthly Bloomberg survey (51 economists) founds a median forecast for a 0.9% contraction this year and an expansion of the same magnitude next year. The survey now sees only a 0.2% quarterly contraction in Q4 22 rather than -0.4% in the previous survey. The median forecast for the current quarter was unchanged at -0.4%. 

Sterling continues to encounter resistance in front of $1.2450, which it first approached in mid-December. Although marginal new highs have been recorded, like the euro, it has been mainly confined to the range set on January 18 (~$1.2255-$1.2435). We are inclined to see this sideways movement as a topping pattern rather than a base, but it likely requires a break of the 1.2225 area to confirm.

Japan:  After contracting in Q3 22, the Japanese economy is expected to have rebounded in Q4 (~3.0% annualized pace). Reports on last month's labor market, retail sales, and industrial production will help fine-tune expectations. This month's rise in the flash composite PMI moved back above 50, pointing to some momentum. Still, Tokyo's higher-than-expected January CPI warns of upside risk to the national figure due offers good insight into the national figure, which may draw the most attention. We expect Japanese inflation to peak soon. The combination of government subsidies, the decline in energy prices, including the natural gas it gets from Russia, and the stronger yen (which bottomed in October) will help dampen price pressures. We look for a peak here in Q1 23. 

Last week, the dollar moved broadly sideways against the yen as it continued to straddle the JPY130 area. It repeatedly toyed with the 20-day moving average (~130.40) last week but has yet to close above this moving average for more than two months. Rising US and European yields may encourage the market to challenge the 50 bp cap on Japan's 10-year bond. A break of the JPY128.80 area may spur a test on the JPY128.00 area. However, the market seems to lack near-term conviction.

China:   Mainland markets re-open after the week-long Lunar New Year holiday. There may be two drivers. The first is catch-up. Equity markets in the region rose. The MSCI Asia Pacific Index rose every session last week and moved higher for the fifth consecutive week. The JP Morgan Emerging Market Currency Index rose about 0.40% last week and is trading near its best level since mid-2022. The euro and yen were little changed last week (+/- <0.20%). The second driver is new news--about Covid and holiday consumption. The PMI is due on January 31, and the median forecast in the Bloomberg survey is for improvement. It has the manufacturing PMI rising to 49.9 from 47.0 and the service PMI jumping to 51.5 from 41.6.  The offshore yuan edged up 0.3% last week, suggesting an upside bias to the onshore yuan, against which the dollar settled at CNY6.7845 ahead of the holiday. 

Canada:  After the Bank of Canada's decision last week, the FOMC meeting, and US employment data in the days ahead, Canada is out of the limelight. It reports November GDP figures and the January manufacturing PMI. Neither are likely to be market movers. The Bank of Canada is the first of the G7 central banks to announce a pause (conditional on the economy evolving like the central bank anticipates) with a target rate of 4.50%. The central bank sees the economy expanding by 1% this year and 1.8% next. It suggests that the underlying inflation rate has peaked and, by the end of the year, may slow to around 2.6%. The swaps market has 50 bp of cut discounted in the second half of the year. 

The Canadian dollar held its own last week, rising by about 0.5%, which was second only to the high-flying Australian dollar. The greenback approached CAD1.3300, its lowest level since last November when it traded around CAD1.3225. Quietly, the Canadian dollar has strung together a six-week advance, and since its start in mid-December, it has been the third-best performer in the G10 behind the yen (~6.2%) and the Australian dollar (~6.1%). We are more inclined to see the greenback bounce toward CAD1.3400 before those November lows are re-tested. 

Australia:  The market's optimism about China recovering from the Covid surge, with the help of government support and attempts to help the property market, has been reflected in the strength of the Australian dollar, which leads the G10 currencies with around a 4.4% gain this year. Yet, changes in the exchange rate and Chinese stocks are not highly correlated in the short- or medium-term. The surge of inflation at the end of last year, reported last week, lent greater credence to our view that the Reserve Bank of Australia will lift the cash target rate by 25 bp when it meets on February 7. In the week ahead, Australia reports December retail sales, private sector credit, and some housing sector data, along with the final PMI readings. The momentum indicators are stretched after a 2.5-cent rally from the low on January 19. It is at risk of a pullback and suggests a break of $0.7080 may be the first indication that it is at hand. We see potential initially toward $0.7000-$0.7040.

Mexico:  After falling by nearly 5.25% in the first part of the month against the Mexican peso, the dollar is consolidating. The underlying case for peso exposure remains, but there are two mitigating conditions. First, surveys of real money accounts suggest many are already overweight. Second, the dollar met key target levels in it late-2019 (~MXN18.80), even if not to the February 2020 low (slightly below MXN18.53). On January 31, Mexico reports Q4 GDP. The economy is expected to have expanded by 0.5% after 0.9% quarter-over-quarter growth in Q3 22. Growth is expected to slow further in Q1 23 before grinding to a halt in the middle two quarters. The following day, Mexico reports December worker remittances. These have been a strong source of capital inflows in Mexico. Remittances have a strong seasonal pattern of rising in December from November, which sees remittances slow. However, after surging for the last couple of years, they appear to have begun stabilizing. Also, the optimism around China is understood to be more supportive of Brazil and Chile, for example, than Mexico.  

We do not have a very satisfying explanation for the two-day jump in the dollar from about MXN18.5670 to MXN19.11 (January 18-19) outside of market positioning and the possibility of some large hedge working its way through. Still, it seemed like a transaction-related flow rather than a change in the underlying situation. The greenback has trended lower since then and has fallen in five of the last six sessions. It fell to nearly MXN18.7165 ahead of the weekend. Latam currencies, in general, did well, with the top two emerging market currencies coming from there (Brazil and Chile). The Mexican peso rose about 0.4% last week.   Last week, the Argentine peso's loss of almost 1.2% gave it the dubious honor of the worst performer among emerging market currencies. It is now off nearly 4.6% for this month. Mexican stocks and bonds extended their rallies. A firmer dollar ahead of the February 1 conclusion of the FOMC meeting may see the peso consolidate its recent gains.

 


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How far could UK property prices drop and should investors be concerned?

The more pessimistic analysts believe that UK house prices could drop by as much as 30% over the next couple of years.…
The post How far could UK property…

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The more pessimistic analysts believe that UK house prices could drop by as much as 30% over the next couple of years. Property prices leapt alongside most other asset classes over the long bull market that ran relatively uninterrupted over the 13 year period from the start of the recovery from the international financial crisis in 2009 and last year.

Average prices across the country almost doubled from £154,500 in March 2009 to just under £296,000 in October last year, when the market hit its most recent record high. Global stock markets had been in a downward spiral for almost a year while property prices kept climbing.

Source: PropertyData

However, a combination of rising interest rates, up from 0.1% in late 2021 to 3.5% in January 2023 and further hikes expected this year, soaring inflation putting pressure on household budgets and nerves around a recession has seen house prices ease. There still not far off their record highs of late 2022 but the trend is downward.

chart

Source: BankofEngland

The big question for homeowners and property investors is just how far could UK residential property prices drop over the next couple of years? How long prices might take to recover from a drop is another important unknown.

First time buyers struggling to get onto the property ladder may welcome a significant drop in UK house prices. Even if higher interest rates mean monthly mortgage costs don’t change much, lower sales prices should reduce the minimum deposits required to secure a mortgage.

However, for anyone who currently owns a home, especially if purchased in the past couple of years towards the top of the market, a significant drop in valuation would be extremely unwelcome. That is particularly the case for home owners at risk of falling into negative equity, which means the market value of their property is lower than the outstanding sum due on the mortgage.

Falling house prices, if the decline is steep, could also create a wider economic crisis and spill over into other parts of the economy and financial markets.

But not everyone agrees UK house prices will drop by anywhere near 30%. Let’s explore the factors that would affect the residential property market over 2023 and beyond and different opinions on how serious a market slump could be. As well as the wider potential consequences that could result if the dive in home valuations turns out to be in line with more negative forecasts.

How much will UK house prices fall by?

The short answer to that question is that we don’t know but the most pessimistic outlook is for drops of up to 30% over the next couple of years. However, there are a number of factors that mean there is a high chance valuations will slide by less. But let’s look at the negative scenario first.

A 30% drop in home valuations sounds like a lot and it is. However, against the backdrop of the last couple of years that kind of fall looks a little less extreme. Prices are up 28% since April 2019 and a 30% fall would take the average price of a home in the UK to around £210,000, where it was in 2016. A less severe 20% drop in prices would see the average price settle at around £235,000, where it was just before the onset of the Covid-19 pandemic and the Bank of England dropping interest rates to just 0.1%.

Mid-term interest rates are likely to have the biggest influence on house prices. At the BoE’s current 3.5% base rate, the best mortgage deals available are 2 years fixed at 4.8% compared to 1% deals available until recently. At an LTV of 60% on a £400,000 mortgage, that would push the monthly rate up to £2300 a month from £1500 a month.

For some borrowers, that is likely to prove problematic. It is also likely to mean lower demand for properties from buyers who might have otherwise decided to move up the property ladder and first time buyers. A drop in demand at higher price brackets due to affordability thresholds being passed will see property prices fall.

Will demand drop enough to lead to a 30% fall? That depends on factors that are currently unknown. How high interest rates go will have a huge influence and that will depend on inflation. There are signs inflation is easing and today the Fed’s preferred gauge for inflation, the personal consumption expenditures (PCE) price index, rose 5.0% in December from a year earlier. That was slower than the 5.5% 12-month gain as of November and the lowest level since September 2021.

In the UK, inflation has also eased from 11.1% year-on-year in October to 10.5% in December. It’s still much higher than in the USA but will hopefully now maintain a consistent downward trend helped by easing energy prices.

There are hopes the Fed will pull back on further interest rate rises from March and that would set a tone that the Bank of England may well follow with a slight delay. The Fed’s base rate is also already higher than in the UK at 4.25% to 4.5%.

If interest rates and, more importantly, mortgage rates do not rise by more than 1% from where they are today it is unlikely valuation drops of as much as 30% eventuate. But if they did what would the consequences be?

What happens if UK house prices fall 30%?

The good news is that even a house price fall as extreme as 30% would be unlikely to lead to systematic issues in the UK’s financial services sector. More people own their homes outright than have a mortgage – 8.8 million to 6.8 million homes. Lloyds Bank, one of the UK’s biggest mortgage lenders recently reported the average LTV of its mortgage portfolio is just 40%.

Even if average LTV is a little higher for other banks, a wave of defaults is unlikely to threaten their stability and infect other areas of financial markets or the wider economy. Mortgage lenders are also reluctant to repossess homes they’ve lent against as it’s an expensive process for them. They will do as much as they can to work with borrowers who are struggling to meet increased mortgage payments.

What does falling property prices mean for investors?

For property investors, it’s really a case of if rental income will continue to cover mortgage payments, or get close enough to mean the investment still adds up. If mortgage payments are likely to exceed realistic rental income over the next few years investors may consider selling up. Unless the property was purchased in the last 2-3 years, that could still mean walking away with a reasonable return.

For investors in the wider financial markets, it seems unlikely that falling property prices, even if up to 30% is knocked off valuations, will see serious contagion spread and spark a crisis.

It’s not impossible that UK property prices could fall by as much as 30% over the next couple of years as a result of higher interest rates and tighter household budgets but the likelihood is the average drop will be less. And in the worst case scenario, wider fallout should be limited. A repeat of the systemic crash that led to the 2008 financial crisis does not seem like a real prospect. Lenders are well capitalised and the system looks strong enough to cope.

The post How far could UK property prices drop and should investors be concerned? first appeared on Trading and Investment News.

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