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Futures Slide As Hawkish Fed Halts Global Risk Rally

Futures Slide As Hawkish Fed Halts Global Risk Rally

US futures extended declines on Thursday following hawkish signs from the Federal Reserve…



Futures Slide As Hawkish Fed Halts Global Risk Rally

US futures extended declines on Thursday following hawkish signs from the Federal Reserve that it would keep rates higher for longer even as it pushed the US economy into a stagflationary recession. Contracts on the technology heavy Nasdaq 100 were down 1.3% by 7:45 a.m. in New York, while S&P 500 futures fell 0.9% after dropping as much as 1.1% earlier. Both underlying indexes dropped yesterday after Fed Chair Jerome Powell delivered a 50-basis-point rate hike, as expected, and said the central bank had more work to do - and will push the terminal rate to 5.1% or higher - in taming inflation despite ebbing price pressures and mounting fears of job losses.

Demand for haven assets sent the dollar and Swiss franc higher amid a wave of rate hikes from Taiwan to Norway. Britain’s pound extended losses after an expected half-point rate hike by the Bank of England, while the euro fell before the European Central Bank’s decision.

A global rally sparked by softer-than-forecast US inflation came to a sudden end on Wednesday after policymakers signaled a peak rate that was far above market expectations and sought to dispel hopes for a rate cut next year. Chair Jerome Powell reaffirmed the central bank won’t back away from its fight against inflation despite mounting fears of job losses and a recession.

“The Fed was more hawkish than markets had expected,” Jack McIntyre, a money manager at Brandywine Global Investment Management, wrote in a note. “They seemingly still want financial markets to tighten further, which essentially means they want lower equity prices.”

Ronald Temple, chief market strategist at Lazard Asset Management, said that although the Fed has started to slow the pace of rate hikes, “that doesn’t mean smooth sailing ahead” for markets. “The effects of the tightening in 2022 will continue to be felt in 2023 through a weaker labor market, recession in Europe and potentially a recession in the US. The earnings hit from a recession is not priced into equity markets,” he said. And while prevailing post-FOMC sentiment among the skeleton crew of traders on Thursday was grim, Paul Kim, chief executive officer at Simplify ETFs, said a “vacuum of catalysts until the next Fed meeting in February” could also help markets continue their rebound over the next few weeks.

The Swiss franc held its gain after the nation’s central bank doubled the policy rate to 1% as forecast. China’s yuan fell as poor economic data and a surge in Covid cases weighed.

In premarket trading Tesla slumped again after CEO Elon Musk sold shares for the fourth time this year. Musk sold almost 22 million shares for $3.58 billion, according to filing late Wednesday. Bitcoin miner Core Scientific surged after one of its largest creditors B. Riley Financial issued an open letter Wednesday laying out a proposal for the company to avoid bankruptcy. Here are some other notable premarket movers:

  • Novavax shares drop 10% after the biotechnology firm offered $125m of shares and $125m of convertible bonds, and said its agreement to supply Covid vaccines to the UK had been halved.
  • Verizon stock rises 0.6% as Morgan Stanley upgrades it to overweight and downgrades AT&T (T US) to equal-weight, saying in a note that North American telecom services sector faces a balanced outlook heading into next year.
  • Keep an eye on Nvidia as it was initiated with a reduce recommendation at HSBC, which says the near-term chip inventory correction and demand uncertainty will overshadow the company’s potential in autos and artificial intelligence segments.
  • Watch Madison Square Garden Entertainment as Morgan Stanley upgrades the stock to equal-weight based on recent underperformance and proposed spin of traditional live entertainment business.
  • Defense stocks may be in focus after Morgan Stanley upgraded L3Harris (LHX US) to overweight, downgraded Lockheed Martin to equal-weight and maintained overweight and top pick status on Northrop Grumman (NOC US).

Across the Atlantic, investors were gearing up for another day of central bank meetings with the European Central Bank set to announce its rate decisions later on Thursday.  Europe’s equity benchmark, the Stoxx 600, fell the most since Oct. 7 on a closing basis; the Stoxx 50 slumped 1.3%. FTSE 100 outperforms peers, dropping 0.5% ahead of a decision by the ECB which hiked rates by 50bps, to the highest since 2008; the BOE is also on deck. Consumer products, tech and retailers are the worst performing sectors. Here are some of the most notable European movers:

  • Juventus shares gain as much as 8.1% in Milan to lead gains on the FTSE Italia All-Share Index. Equita notes a report saying that Exor would be thinking of a delisting of the football club, adding that it doesn’t rule out this “could be a viable option.”
  • Ackermans & van Haaren rises as much as 4.2% after Kepler Cheuvreux analyst Andre Mulder raised the recommendation to buy from hold.
  • Zotefoams climbs as much as 7.7% after the UK foam-maker said pretax profit for 2022 is likely to come in ahead of market expectations.
  • European luxury stocks underperform as new economic data from China disappointed and Bryan Garnier cut its price target for Kering on an expected double-digit drop in fourth-quarter sales for key brand Gucci. Kering falls as much as 5.6%, LVMH as much as 2.4%
  • H&M drops as much as 4.7% after the apparel retailer reported quarterly sales which analysts said were in line with expectations, noting the lack of margin commentary. Focus has shifted to next month’s results, when there’ll be more clarity on margins.
  • Currys falls as much as 10% to the lowest since Oct. 13 after the UK electronics retailer cut its profit guidance for the year. The stock may see further short-term pressure, according to Liberum, which lowered its price target.
  • Ceconomy sinks as much as 11%, most since July, after the electronics retailer’s earnings. Analysts flag a vague outlook and potential margin pressure.

Earlier in the session, Asian stocks declined as the Federal Reserve signaled higher interest rates, while a disappointing set of economic data from China soured sentiment. The MSCI Asia Pacific Index dropped as much as 1.4%, led by consumer discretionary and technology shares. Most markets in the region were in the red, with Hong Kong and South Korea among the worst performers. A surprisingly hawkish tone by the Fed after an expected half-point hike fueled risk-off mood across Asia. Chair Jerome Powell said the Fed had a “ways to go” in its campaign to rein in inflation. Policymakers projected rates would end next year at 5.1%, higher than previously indicated. 

Chinese benchmarks fell, with Hong Kong’s Hang Seng Index dropping more than 1%, as the nation’s economic activity worsened in November. There will likely be more disruption to growth as infections surge after the government abruptly dropped its Zero-Covid policy.  “A broad-based miss in activity data could be attributed to the pre-Zero-Covid relaxation days, but challenges lie ahead as well with full reopening likely to be delayed by a large chunk of workers calling in sick as infections spread,” said Charu Chanana, market strategist at Saxo Capital Markets. The Asian stock benchmark may halt a six-week gaining streak if losses extend into Friday. The region’s shares had rallied since November following China’s Covid pivot and amid hopes of a more dovish Fed — with the latter getting a rude awakening from Wednesday’s meeting.

Japanese stocks followed US shares lower after the Federal Reserve signaled interest rates will climb higher than anticipated next year. The Topix Index fell 0.2% to 1,973.90 as of the market close in Tokyo, while the Nikkei declined 0.4% to 28,051.70. Keyence Corp. contributed the most to the Topix Index decline, decreasing 1.8%. Out of 2,163 stocks in the index, 1,082 rose and 935 fell, while 146 were unchanged. “Although it was hawkish, in a sense the content of the press conference gave the impression of a flexible stance,” said Hitoshi Asaoka, strategist at Asset Management One. “They would look to inflation data rather than just raising interest rates as they have done in the past.” 

In FX, Bloomberg dollar spot index rose by as much as 0.7% as the greenback advanced versus all of its Group-of-10 peers. Risk- sensitive Antipodean and Scandinavian currencies were the worst performers.

  • The euro fell for the first day in three but held above the $1.06 handle. Bunds twist-flattened while Italian bonds bear flattened as money markets added somewhat to ECB peak-rate wagers after the Fed’s policy tightening yesterday
  • Norway’s krone held losses against the dollar and the euro after Norges Bank raised the deposit rate to 2.75%, in line with estimates, and kept its rate projection steady for next year
  • The Swiss franc swung to a loss against the dollar after the SNB hiked its interest rate by 50bps, to 1%, matching the median estimate
  • The pound slid amid broad-based dollar strength. The BOE hiked by the expected half-point; cable was generally flat after the decision.
  • Australian dollar declined amid poor Chinese data that showed economic activity worsened in November before the government abruptly dropped its Covid Zero policy. Bonds fell after data showed the economy added 64,000 roles, trumping a forecast 19,000 gain
  • New Zealand’s 10-year yield surged after GDP expanded more than twice as much as expected
  • Japan’s bonds fell after a 20-year debt auction met tepid investor demand. The yen weakened amid broad strength in the dollar

In rates, all 2s10s yield curves flatten as Treasury yields rose, led by the belly, with the exception of the 30-year segment. Bund curve bull flattens with 2s10s narrowing 3.2bps. Peripheral spreads widen to Germany with 10y BTP/Bund adding 3.0bps to 195.2bps. Elsewhere, Bank of England hiked rates 50bp as expected, in a three-way vote. US yields edge lower after Bank of England decision across long- end, following wider gains across gilts where 10-year UK outperforms Treasuries by 6bp on the day; 10-year yields around 3.47%, slightly richer on day on outright basis. Long-end outperformance in US curve sees 2s10s, 5s30s spreads extend flatter by 1.7bp and 2.2bp on the day. Dollar issuance slate remains light, with up to $5b expected for this week; Fed decision day saw a blank slate Wednesday. Packed data slate for the US session includes retail sales and industrial production.   

In commodities, oil fluctuated between gains and losses after rallying almost 9% over the previous three sessions as TC Energy restarted a section of the Keystone pipeline, allowing for some flows to resume on the major conduit. Crude futures were steady, having pared a bulk of the Asian losses with the move coming in spite of the downside seen across the equity complex and a firmer USD. WTI trades within Wednesday’s range near $77.21. TC Energy announced it communicated with regulators and customers about the restart of the Keystone pipeline system sections unaffected by the leak but noted that the affected segment remains isolated and will not be restarted until it is safe and they receive approval to do so, according to Reuters. Spot gold falls roughly $29 to trade near $1,778/oz

To the day ahead now, and the main highlight will be the monetary policy decisions from the ECB and the Bank of England. There are also a number of US data releases, including November’s retail sales and industrial production, December’s Empire state manufacturing survey and the Philadelphia Fed business outlook, as well as the weekly initial jobless claims. Finally, earnings releases today include Adobe.

Market Snapshot

  • S&P 500 futures down 1.0% to 3,957.25
  • STOXX Europe 600 down 1.2% to 437.27
  • MXAP down 1.6% to 157.70
  • MXAPJ down 1.6% to 511.73
  • Nikkei down 0.4% to 28,051.70
  • Topix down 0.2% to 1,973.90
  • Hang Seng Index down 1.5% to 19,368.59
  • Shanghai Composite down 0.2% to 3,168.65
  • Sensex down 1.3% to 61,888.02
  • Australia S&P/ASX 200 down 0.6% to 7,204.78
  • Kospi down 1.6% to 2,360.97
  • German 10Y yield little changed at 1.94%
  • Euro down 0.6% to $1.0613
  • Brent Futures down 0.8% to $82.02/bbl
  • Brent Futures down 0.8% to $82.06/bbl
  • Gold spot down 1.5% to $1,780.77
  • U.S. Dollar Index up 0.53% to 104.32

Top Overnight News from Bloomberg

  • The ECB is poised to slow the recent pace of interest-rate increases and outline plans to shrink its almost €5 trillion ($5.3 trillion) stash of bonds, broadening efforts to curb inflation that’s still five times the target
  • UK bond traders seeking shelter from this year’s turmoil are piling into 10-year securities, a section of the market that’s been relatively insulated from central bank action
  • Nurses have begun a round of historic strikes as Britain faces the prospect of heightened industrial action extending into next year
  • Almost 1 million people in China may die from Covid-19 as the government rapidly abandons pandemic curbs, according to a new study by researchers in Hong Kong
  • Expectations for long-term inflation rates in Sweden rose slightly in the latest Prospera survey, after a string of inflation outcomes that show price increases soaring far above the Riksbank’s 2% target
  • Turkish President Recep Tayyip Erdogan said he wants a three-way meeting with Syria’s Bashar Al-Assad and Russia’s Vladimir Putin, signaling a thaw with Damascus that could help end the war in Syria

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks were subdued in the aftermath of the FOMC. ASX 200 was dragged lower by weakness in nearly all sectors but with losses cushioned by strong jobs data. Nikkei 225 declined but just about remained above the 28K level following strong trade numbers in which the value of both exports and imports reached a record for the month of November. Hang Seng and Shanghai Comp were negative after disappointing Chinese Industrial Production and Retail Sales data, while property and tech stocks were driving the underperformance in Hong Kong after the HKMA raised rates in lockstep with the Fed, while attention was also on the PBoC which conducted a CNY 650bln 1-Year MLF operation vs. CNY 500bln maturing but maintained the rate at 2.75%.

Top Asian News

  • PBoC conducted CNY 650bln of 1-year MLF vs. CNY 500bln maturing with the rate kept at 2.75%.
  • HKMA raised its base rate by 50bps to 4.75%, as expected, following the Fed rate hike, while Macau's Monetary Authority raised its base rate for the discount window by 50bps to 4.75%.
  • China's stats bureau said China's economy maintained its recovery trend in November despite multiple pressures but added that the foundation of the economic recovery is still not solid, according to Reuters.
  • US Senate passes bill to ban federal employees from using TikTok on government devices.

European bourses and US futures under pressure, seemingly in a second wave of the post-FOMC price action after action stabilised a touch overnight. Currently, Euro Stoxx 50 -1.3% and ES -1.0%, with non-Central Bank updates relatively thin ahead of key US data and more Policy Announcements. Foxconn (2317 TT) has ended most closed-loop restrictions in 'iPhone city' ( Zhengzhou) , via Bloomberg.

Top European News

  • UK PM Sunak eyes anti-strike laws which he vows would protect lives and livelihoods, according to Daily Mail.
  • European Gas Prices Rise With Focus on Cold Snap and LNG Supply
  • Norway Raises Key Rate and Signals It’s Nearing a Peak
  • Kering Leads European Luxury Lower on Disappointing China Data
  • Rebel European Soccer League Gets Setback in EU Court Opinion
  • VW Sees Growing Challenges Next Year on Inflation, Downturn
  • Hungary Says May Need to Amend Gazprom Contract on EU Price Cap

Central Banks

  • Swiss SNB Policy Rate (Q4) 1.00% vs. Exp. 1.00% (Prev. 0.50%); cannot be ruled out that further hikes will be necessary. Willing to intervene in FX as necessary. Inflation forecasts cut, implying Switzerland is at the peak level. Click here for full details & analysis.
  • SNB's Jordan (press conference) says we have sold foreign currency in recent months to ensure appropriate monetary conditions. Willing to buy/sell foreign currency as necessary.
  • Norges Bank Policy Announcement (Dec): 2.75% vs. Exp. 2.75% (Prev. 2.50%); policy rate will most likely be raised further in Q1 2023. Inflation forecasts lifted, Repo Path forecasts tweaked but little changed, implying another 25bp move with some optionality for further tightening, if needed. Click here for full details & analysis.


  • USD has continued to climb throughout the morning, DXY above 104.40 at best.
  • Action which has weighed on peers across the board, with EUR/USD and Cable testing 1.06 and 1.23 to the downside ahead of ECB & BoE.
  • Antipodeans are at the bottom of the G10 pile irrespective of upbeat macro news.
  • NOK undermined post-Norges Bank despite initial fleeting upside as the Bank guides towards further tightening, despite the domestic headwind.
  • CHF similarly dented in a 'buy the rumour, sell the fact' style following the as-expected SNB and as the inflation forecasts show the economy at the peak, perhaps limited the need for further tightening.
  • PBoC set USD/CNY mid-point at 6.9343 vs exp. 6.9325 (prev. 6.9535)

Fixed Income

  • Gilts continue to outperform and lead the complex's revival, with Bunds and USTs lifting in turn though are comparably more contained and yet to make any real foray into positive territory.
  • USTs appear to be guided by the risk tone and ongoing curve flattening post-Fed, with Central Bank activity since essentially in-line with expectations.


  • Crude benchmarks are flat, having pared a bulk of the APAC losses with the move coming in spite of the downside seen across the equity complex and a firmer USD.
  • TC Energy announced it communicated with regulators and customers about the restart of the Keystone pipeline system sections unaffected by the leak but noted that the affected segment remains isolated and will not be restarted until it is safe and they receive approval to do so, according to Reuters.
  • Canada said it decided to revoke the time-limited Nord Stream sanctions waiver that was granted to allow turbines to be repaired in Montreal for return to Germany with the decision made working closely with Ukrainian, German and other European allies, according to Reuters.
  • Spot gold and silver are unable to benefit from any traditional haven allure as the USD continues to ramp up; pressure in the yellow metal has brought it below the 10- & 200-DMAs to a test of the 21-DMA, at USD 1788/oz. 1787/oz and 1771/oz respectively.


  • US is planning to send Ukraine advanced electronic equipment that converts unguided aerial munitions into "smart bombs", according to officials cited by Washington Post.
  • US defence firms are in talks with Vietnam to sell helicopters and drones, while military deals with the US would signal a shift away from Vietnam's reliance on Russia, according to Reuters.
  • Russia's Washington embassy has warned that a transfer of the Patriot System to Ukraine would result in "unpredictable consequences", via Walla News' Elster.


US Event Calendar

  • 08:30: Nov. Retail Sales Advance MoM, est. -0.2%, prior 1.3%
    • Nov. Retail Sales Ex Auto and Gas, est. 0%, prior 0.9%
    • Nov. Retail Sales Ex Auto MoM, est. 0.1%, prior 1.3%
    • Nov. Retail Sales Control Group, est. 0.1%, prior 0.7%
  • 08:30: Dec. Initial Jobless Claims, est. 232,000, prior 230,000
    • Dec. Continuing Claims, est. 1.67m, prior 1.67m
  • 08:30: Dec. Empire Manufacturing, est. -1.0, prior 4.5
  • 08:30: Dec. Philadelphia Fed Business Outl, est. -10.0, prior -19.4
  • 09:15: Nov. Industrial Production MoM, est. 0%, prior -0.1%
    • Nov. Capacity Utilization, est. 79.8%, prior 79.9%
    • Nov. Manufacturing (SIC) Production, est. -0.2%, prior 0.1%
  • 10:00: Oct. Business Inventories, est. 0.4%, prior 0.4%
  • 16:00: Oct. Total Net TIC Flows, prior $30.9b
    • Oct. Net Foreign Security Purchases, prior $118b

DB's Jim Reid concludes the overnight wrap

If you wanted to briefly sum up the FOMC meeting last night you would probably say that the Fed were hawkish but that the market doesn’t believe they will be. Going through the details (our full US econ review, here), they did hike +50bps as expected, downshifting from four successive +75bps hikes. This brings the upper bound of the fed funds target range to 4.5%, around 360bps above where the markets thought it would be at this point last December. Last night’s meeting also brought a fresh round of projections from the Committee, where the median participant projected policy rates to rise to 5.1% by the end of next year, with core PCE expected to be 3.5%, still plenty above target. The distribution of dots was hawkish as well, as only 2 out of 19 participants pencilled in a policy rate below 5% by the end of 2023, so a strong rebuke to any investors expecting Fed cuts next year.

Indeed, that proved to be a key tenet of the press conference as well. After two optimistic CPI reports, Chair Powell tried to talk financial conditions back from getting too optimistic and easy, saying that even with today’s hikes the Fed still had a “ways to go” to make sure the fight against inflation was well and truly won. Much like the November FOMC, the Chair noted that the step down to smaller hiking increments makes sense as the Committee approaches terminal, and that the pace of rate increases was not nearly as important as the ultimate level of terminal or time spent there, pointing to the dots showing policy above 5% in a year’s time. In that vein, he also opened up the door for a 25bp hike at the Fed’s next meeting in February which may have helped markets reverse some of the immediate sell-off. Powell did note that core goods and housing services inflation was rolling over, in line with the Fed’s expectations, but that core services would remain above target so long as the labour market remained historically tight, as wages are a larger cost input in those sectors.

Markets sold off a touch in the hour following the hawkish dots and communications from the Chair, but the strong messaging was already anticipated by many following the last two CPI prints, as the Fed tries to avoid yet another counterproductive pricing pivot. Therefore, the net price action following the meeting was relatively modest, albeit with a decent sized range in the aftermath. 2yr Treasury yields ended the day -0.9bps lower having been -4.9bps lower heading into the meeting but +10bps 35mins after the decision. Meanwhile 10yr yields were -2.4bps lower after being roughly flat heading into the meeting, and c.+5bps 10 mins after the decision. The terminal rate priced for May increased a modest +1.2bps to 4.87%, still well below the Fed’s own projection of terminal. So something will have to give in the first few weeks of 2023. This morning in Asia, yields on 10yr USTs (+1.82 bps) have moved upwards, trading at 3.50%.

The S&P 500 was +0.71% higher immediately before the meeting but ended -0.61% lower after bouncing around between gains and losses throughout the press conference. So it seems the equity market took the hawkish bias more to heart than fixed income markets.

Asian equity markets are trading in negative territory this morning following the overnight negative lead from Wall Street. The KOSPI (-1.21%) and Hang Seng (-1.14%) are the biggest underperformers while the Nikkei (-0.33%), the Shanghai Composite (-0.28%) and the CSI (-0.23%) are also sliding in early trading. In overnight trading, US stock futures are rangebound with contracts on the S&P 500 (-0.01%) just below flat and the NASDAQ 100 (-0.11%) trading slightly lower.

The big news overnight was data from China showing the toll that widespread Covid restrictions took on growth last month before the government announced that it would ease its policy. Industrial production slowed to +2.2% y/y (v/s +3.5% expected) in November from the +5.0% rise recorded in October. This marked the slowest growth since May when Shanghai was put under a two-month lockdown. At the same time, retail sales (-5.9% y/y) had their biggest contraction since May, underperforming expectations for a decline of -4.0% and greater than a -0.5% drop recorded in October.

Other economic data showed that Australia’s unemployment rate for November remained at 3.4%, in line with market expectations.

Elsewhere in Asia, the Japanese Yen was pretty flat against the USD yesterday even following a Bloomberg report that officials at the Bank of Japan were considering a policy review next year. Historically, reviews have led to policy changes, so it’ll be interesting to see if this ends up happening and whether that might mark a shift away from the ultra-loose monetary policy of recent years, which has increasingly made the BoJ an outlier internationally. Japan reported that exports rose +20.0% y/y in November (v/s +19.7% expected) compared to an increase of +25.3% in October and were outpaced by imports (up +30.3%). The trade deficit swelled more than expected to -2.03 trillion yen in November versus a revised shortfall of -2.17 trillion yen in October. This morning the Yen (+0.13%) is slightly higher, trading at $135.65.

Now that the Fed is out of the way, attention will turn to central banks in Europe today, with the ECB’s decision coming up at 13:15 London time. As with the Fed yesterday, it’s widely expected that the ECB will shift away from the 75bp hikes at the last couple of meetings in favour of a 50bp move today, which would take the deposit rate up to 2%. But even as they slow down their hikes, Mark Wall and our European economists write in their preview (link here) that they’ll maintain a hawkish communications strategy, since the ECB doesn’t want the market to interpret smaller hikes as meaning a lower terminal rate or earlier rate cuts. This hawkishness is likely to come through a number of channels, including upwardly revised staff inflation forecasts, which our economists expect will show stronger inflation in 2023 and 2024 relative to September.

If the ECB wasn’t enough, today will also bring the Bank of England’s decision just over an hour beforehand at 12:00 London time. In terms of what to expect, investors and economists are widely anticipating that the BoE will echo the pattern elsewhere and slow their hikes from 75bps last time to 50bps today. That would take the Bank Rate up to 3.5%, but unlike the ECB, our UK economist expects the MPC to strike another dovish tone this month, and sound more cautious around the risks of over-tightening. The decision today also follows the latest CPI data for November yesterday, which fell back by more than expected to +10.7% (vs. +10.9% expected). See our economist’s full preview here.

With all that to look forward to, European markets put in a pretty subdued performance yesterday, having closed ahead of the Fed decision. The main equity indices all lost modest ground, with the STOXX 600 (-0.02%), the DAX (-0.26%) and the FTSE 100 (-0.09%) posting declines. And for sovereign bonds it was a similar story, with yields on 10yr bunds (+1.7bps), OATs (+3.1bps) and BTPs (+6.7bps) all moving higher on the day. That said, some of the moves at the front-end were more positive, with the German 2yr yield actually falling -0.9bps on the day.

To the day ahead now, and the main highlight will be the monetary policy decisions from the ECB and the Bank of England. There are also a number of US data releases, including November’s retail sales and industrial production, December’s Empire state manufacturing survey and the Philadelphia Fed business outlook, as well as the weekly initial jobless claims. Finally, earnings releases today include Adobe.

Tyler Durden Thu, 12/15/2022 - 07:56

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Lower mortgage rates fueling existing home sales

To understand why we had such a beat in sales, you only need to go back to Nov. 9, when mortgage rates started to fall from 7.37% to 5.99%.



Existing home sales had a huge beat of estimates on Tuesday. This wasn’t shocking for people who follow how I track housing data. To understand why we had such a beat in sales, you only need to go back to Nov. 9, when mortgage rates started to fall from 7.37% to 5.99%.

During November, December and January, purchase application data trended positive, meaning we had many weeks of better-looking data. The weekly growth in purchase application data during those months stabilized housing sales to a historically low level.

For many years I have talked about how rare it is that existing home sales trend below 4 million. That is why the historic collapse in demand in 2022 was one for the record books. We understood why sales collapsed during COVID-19. However, that was primarily due to behavior changes, which meant sales were poised to return higher once behavior returned to normal.

In 2022, it was all about affordability as mortgage rates had a historical rise. Many people just didn’t want to sell their homes and move with a much higher total cost for housing, while first-time homebuyers had to deal with affordability issues.

Even though mortgage rates were falling in November and December, positive purchase application data takes 30-90 days to hit the sales data. So, as sales collapsed from 6.5 million to 4 million in the monthly sales data, it set a low bar for sales to grow. This is something I talked about yesterday on CNBC, to take this home sale in context to what happened before it. 

Because housing data and all economics are so violent lately, we created the weekly Housing Market Tracker, which is designed to look forward, not backward.

From NAR: Total existing-home sales – completed transactions that include single-family homes, townhomes, condominiums and co-ops – vaulted 14.5% from January to a seasonally adjusted annual rate of 4.58 million in February. Year-over-year, sales fell 22.6% (down from 5.92 million in February 2022).

As we can see in the chart above, the bounce is very noticeable, but this is different than the COVID-19 lows and massive rebound in sales. Mortgage rates spiked from 5.99% to 7.10% this year, and that produced one month of negative forward-looking purchase application data, which takes about 30-90 days to hit the sales data.

So this report is too old and slow, but if you follow the tracker, you’re not slow. This is the wild housing action I have talked about for some time and why the Housing Market Tracker becomes helpful in understanding this data.

The last two weeks have had positive purchase application data as mortgage rates fell from 7.10% down to 6.55%; tomorrow, we will see if we can make a third positive week. One thing to remember about purchase application data since Nov. 9, 2022 is that it’s had a lot more positive data than harmful data. 

However, the one-month decline in purchase application data did bring us back to levels last seen in 1995 recently. So, the bar is so low we can trip over.

One of the reasons I took off the savagely unhealthy housing market label was that the days on the market are now above 30 days. I am not endorsing, nor will I ever, a housing market that has days on the market at teenager levels. A teenager level means one of two bad things are happening:

1. We have a massive credit boom in housing which will blow up in time because demand is booming, similar to the run-up in the housing bubble years.

2. We simply don’t have enough products for homebuyers, creating forced bidding in a low-inventory environment. 

Guess which one we had post 2020? Look at the purchase application data above — we never had a credit boom. Look at the Inventory data below. Even with the collapse in home sales and the first real rebound, total active listings are still below 1 million.

From NAR: Total housing inventory registered at the end of February was 980,000 units, identical to January & up 15.3% from one year ago (850,000). Unsold inventory sits at a 2.6-month supply at the current sales pace, down 10.3% from January but up from 1.7 months in February ’22. #NAREHS

However, with that said, the one data line that I love, love, love, the days on the market, is over 30 days again, and no longer a teenager like last year, when the housing market was savagely unhealthy.

From NAR: First-time buyers were responsible for 27% of sales in January; Individual investors purchased 18% of homes; All-cash sales accounted for 28% of transactions; Distressed sales represented 2% of sales; Properties typically remained on the market for 34 days.

Today’s existing home sales report was good: we saw a bounce in sales, as to be expected, and the days on the market are still over 30 days. When the Federal Reserve talks about a housing reset, they’re saying they did not like the bidding wars they saw last year, so the fact that price growth looks nothing like it was a year ago is a good thing.

Also, the days on market are on a level they might feel more comfortable in. And, in this report, we saw no signs of forced selling. I’ve always believed we would never see the forced selling we saw from 2005-2008, which was the worst part of the housing bubble crash years. The Federal Reserve also believes this to be the case because of the better credit standards we have in place since 2010. 

Case in point, the MBA‘s recent forbearance data shows that instead of forbearance skyrocketing higher, it’s collapsed. Remember, if you see a forbearance crash bro, hug them, they need it.

Today’s existing home sales report is backward looking as purchase application data did take a hit this year when mortgage rates spiked up to 7.10%. We all can agree now that even with a massive collapse in sales, the inventory data didn’t explode higher like many have predicted for over a decade now.

I have stressed that to understand the housing market, you need to understand how credit channels work post-2010. The 2005 bankruptcy reform laws and 2010 QM laws changed the landscape for housing economics in a way that even today I don’t believe people understand.

However, the housing market took its biggest shot ever in terms of affordability in 2022 and so far in 2023, and the American homeowner didn’t panic once. Even though this data is old, it shows the solid footing homeowners in America have, and how badly wrong the extremely bearish people in this country were about the state of the financial condition of the American homeowner.

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SVB contagion: Australia purportedly asks banks to report on crypto

Australia’s prudential regulator has purportedly told banks to improve reporting on crypto assets and provide daily updates.



Australia’s prudential regulator has purportedly told banks to improve reporting on crypto assets and provide daily updates.

Australia’s prudential regulator has purportedly asked local banks to report on cryptocurrency transactions amid the ongoing contagion of Silicon Valley Bank’s (SVB) collapse.

The Australian Prudential Regulation Authority (APRA) has started requesting banks to declare their exposures to startups and crypto-related companies, the Australian Financial Review reported on March 21.

The regulator has ordered banks to improve their reporting on crypto assets and provide daily updates to the APRA, the Financial Review notes, citing three people familiar with the matter. The agency is aiming to obtain more information and insight into banking exposures into crypto as well as associated risks, the sources said.

The new measures are apparently part of the APRA’s increased supervision of the banking sector in the aftermath of recent massive collapses in the global banking system. On March 19, UBS Group agreed to buy its ailing competitor Credit Suisse for $3.2 billion after the latter collapsed over the weekend. The takeover became one of the latest failures in the banking industry following the collapses of SVB and Silvergate.

Barrenjoey analyst Jonathan Mott reportedly told clients in a note that the situation “remains stable” for Australian banks but warned confidence could be quickly disrupted, putting pressure on bank margins.

Related: Silvergate, SBV collapse ‘definitely good’ for Bitcoin, Trezor exec says

“Our channel checks indicate deposits are not being withdrawn from smaller institutions in any size, and capital and liquidity buffers are strong,” Mott said, adding:

“But this is a crisis of confidence and credit spreads and cost of capital will continue to rise. At a minimum, this will add to the margin pressure the banks are facing, while credit quality will continue to deteriorate.”

The news comes soon after the Australian Banking Association launched a cost of living inquiry to study the impact of the COVID-19 pandemic and geopolitical tensions on Australians. The inquiry followed an analysis of the rising inflation suggesting that more than 186 banks in the United States are at risk of a similar shutdown if depositors decide to withdraw all funds.

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Delta Move Is Bad News For Southwest, United Airlines Passengers

Passengers won’t be happy about this, but there’s nothing they can do about it.



Passengers won't be happy about this, but there's nothing they can do about it.

Airfare prices move up and down based on two major things -- passenger demand and the cost of actually flying the plane. In recent months, with covid rules and mask mandates a thing of the past, demand has been very heavy.

Domestic air travel traffic for 2022 rose 10.9% compared to the prior year. The nation's air traffic in 2022 was at 79.6% of the full-year 2019 level. December 2022 domestic traffic was up 2.6% over the year-earlier period and was at 79.9% of December 2019 traffic, according to The International Air Transport Association (IATA).

“The industry left 2022 in far stronger shape than it entered, as most governments lifted COVID-19 travel restrictions during the year and people took advantage of the restoration of their freedom to travel. This momentum is expected to continue in the New Year,” said IATA Director General Willie Walsh.

And, while that's not a full recovery to 2019 levels, overall capacity has also not recovered. Total airline seats available actually sits "around 18% below the 2019 level," according to a report from industry analyst OAG.

So, basically, the drop in passengers equals the drop in capacity meaning that planes are flying full. That's one half of the equation that keeps airfare prices high and the second one looks bad for anyone planning to fly in the coming years.

Image source: Getty Images.

Airlines Face One Key Rising Cost

While airlines face some variable costs like fuel, they also must account for fixed costs when setting airfares. Personnel are a major piece of that and the pandemic has accelerated a pilot shortage. That has given the unions that represent pilots the upper hand when it comes to making deals with the airlines.

The first domino in that process fell when Delta Airlines (DAL) - Get Free Report pilots agreed to a contract in early March that gave them an immediate 18% increase with a total of a 34% raise over the four-year term of the deal.

"The Delta contract is now the industry standard, and we expect United to also offer their pilots a similar contract," investment analyst Helane Becker of Cowen wrote in a March 10 commentary, Travel Weekly reported.

US airfare prices have been climbing. They were 8.3% above pre-pandemic levels in February, according to Consumer Price Index, but they're actually below historical highs.

Southwest and United Airlines Pilots Are Next

Airlines have very little negotiating power when it comes to pilots. You can't fly a plane without pilots and the overall shortage of qualified people to fill those roles means that, within reason, United (UAL) - Get Free Report and Southwest Airlines  (LUV) - Get Free Report, both of which are negotiating new deals with their pilot unions, more or less have to equal (or improve on) the Delta deal.

The actual specifics don't matter much to consumers, but the takeaway is that the cost of hiring pilots is about to go up in a very meaningful way at both United and Southwest. That will create a situation where all major U.S. airlines have a higher cost basis going forward.

Lower fuel prices could offset that somewhat, but raises are not going to be unique to pilots. Southwest also has to make a deal with its flight attendants and, although they don't have the same leverage as the pilots, they have taken a hard line.   

The union, which represents Southwest’s 18,000 flight attendants, has been working without a contract for four years. It shared a statement on its Facebook page detailing its position Feb. 20.

"TWU Local 556 believes strongly in making this airline successful and is working to ensure this company we love isn’t run into the ground by leadership more concerned about shareholders than about workers and customers. Management’s methodology of choosing profits at the expense of the operation and its workforce has to change, because the flying public is also tired of the empty apologies that flight attendants have endured for years."

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