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Futures Slump As Fed’s Rate Hiking, QT-ing Meeting Begins

Futures Slump As Fed’s Rate Hiking, QT-ing Meeting Begins

After initially trading higher, extending the momentum of yesterday’s last-hour…

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Futures Slump As Fed's Rate Hiking, QT-ing Meeting Begins

After initially trading higher, extending the momentum of yesterday's last-hour meltup which saw US stocks close near session highs after plunging earlier, on Tuesday US futures hit an air pocket shortly after the European open, and slumped 0.5% at 715am EDT, as investors braced for more hawkish shocks from the Federal Reserve whose two-day meeting start today and is expected to announce its biggest rate hike since 2000. Tightening turmoil slammed bond markets: 10Y TSYs traded just below 3% after hitting the 4-year old milestone on Monday. Germany’s benchmark rate rose above 1% for the first time since 2015, while the corresponding yield on U.K. bonds climbed above 2% earlier on Tuesday. Australian bonds slid, and the currency jumped, after the nation’s central bank hiked rates costs by more than all economists had expected. The US dollar dipped, oil was lower while cryptos and gold traded flat.

In premarket, NXP Semiconductors rose with analysts lauding the company’s strong results and second- quarter revenue forecast driven by robust demand through a difficult three months, while Kellogg and Tyson were cut to underweight from neutral by Piper Sandler. Pfizer and Starbucks are among the many companies reporting earnings Tuesday. Here are some other notable premarket movers:

  • Pfizer (PFE) dropped 3% after the company reported Paxlovid revenue for the first quarter that missed the average analyst estimate. The company's covid-19 vaccine revenue $13.23 billion, estimate $10.6 billion
  • Nvidia (NVDA US) could be active after Morgan Stanley resumed coverage with a recommendation of equal- weight, citing concerns about deceleration in gaming and the company’s high valuation compared to peers.
  • Kellogg (K US) and Tyson (TSN US) were cut to underweight from neutral by Piper Sandler analyst Michael S. Lavery, who cites shifting consumer habits caused by inflation pressures and valuations that are ahead of their historical averages.
  • MGM Resorts International (MGM US) rose 1.3% in extended trading after reporting adjusted earnings per share for the first quarter that beat the consensus estimate. Analysts had been expecting the company to report an adjusted loss per share for the period, according to the average of projections compiled by Bloomberg.
  • Chegg (CHGG US) slumped 32% in extended trading after the online education company lowered its revenue and adjusted Ebitda guidance for the full year.
  • Clorox Co. (CLX US) declined 2% in postmarket trading after the company lowered its outlook for full-year earnings amid stubbornly rising costs while reporting profit in its latest quarter that exceeded market expectations.
  • Expedia (EXPE US) shares gained 1.5% in extended trading, after the online travel agency reported its first-quarter results. Adjusted Ebitda came in ahead of expectations, and the company said it sees positive indicators for a strong recovery in leisure travel.
  • Alibaba (BABA) briefly dipped as much as 9.4% in Hong Kong, wiping off about $26 billion of market value, after a state broadcaster reported that authorities had imposed curbs on an individual surnamed Ma. Shares erased the majority of the losses after police reports indicated the accused person’s name was spelled differently to Alibaba co-founder Jack Ma

US stocks have started off May flattish after slumping in April as investors were worried about the Fed pursuing overly aggressive tightening to curb surging inflation. Morgan Stanley’s Michael Wilson has warned that the S&P 500 will sink to at least 3,800 in the near term and may fall as low as 3,460, a drop of over 16% from Monday’s close. In contrast, JPMorgan Chase & Co. strategists say that the negativity in the U.S. stock market has become so overwhelming that a rebound may not be far off.

Markets are getting whipsawed between concerns around persistent inflationary spirals and risks to global growth from rising yields, China’s Covid lockdowns and Russia’s war in Ukraine. The Federal Reserve’s plans to raise rates and reduce its balance sheet have ended an era of cheap money and forced money managers to reassess valuations.

“The right strategy right now is to position for inflation -- a clear and present fact -- rather than recession, which is still only a possibility,” Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, wrote clearly unwilling to admit the writing on the wall.

“Investors are already welcoming the prospect of new monetary measures from central banks to combat inflation,” said Pierre Veyret, technical analyst at ActivTrades, adding that “bull traders are buying the recent dips on stocks this morning after most markets fell back to their weekly low, with many betting on the anticipation of tightening monetary conditions to mitigate rising prices. It is likely that most investors have already priced in tomorrow’s FOMC meeting where a record half-point rate hike is widely expected.”

In Europe, the Stoxx Europe 600 Index was little changed, erasing an earlier advance of as much as 0.8% which saw stocks bounce after a flash crash sent shares tumbling on Monday. Europe tracked declines for U.S. futures. Basic resources stocks lled the retreat in Europe, down 1.4%, real estate -1.2%; Energy outperforms, +1.9%; autos +1%, banks +0.9%. Here are the biggest European market movers:

  • BP shares rise as much as 3.7% after reporting first-quarter results that were received positively by analysts, who highlight the expanded share buyback and overall strong results.
  • BNP Paribas shares climbed Tuesday after the French lender reported what Jefferies called a “massive earnings beat” on strong revenue, with all subdivisions outpacing expectations.
  • Stellantis gains as much as 3.2% after the company said it will acquire the Share Now car-sharing joint venture formed by BMW and Mercedes- Benz, to tap new revenue streams.
  • ISS rises as much as 8%, the day’s biggest winner on the Stoxx Europe 600 Index, after the cleaning company reported 1Q earnings that beat estimates and raised its FY outlook.
  • Electrolux rise the most in a month, after Kepler Cheuvreux raised its recommendation to buy from reduce, seeing a “buying opportunity” in a share where most negatives are already priced in.
  • Bayer climbs after Citi re-opens a positive catalyst watch on Bayer ahead of its 1Q earnings, which the broker expects to be ahead of guidance and consensus expectations.
  • Alstom also rises as much after Citi opens a positive catalyst watch ahead of the company’s full-year results on May 11, expecting Alstom to generate positive cash flow in 2H22.
  • Wizz Air gains as much as 4.4% in London after reporting monthly data traffic for April, with Goodbody noting the airline carried 3.62m passengers last month, up 6 times vs a year ago.

Earlier in the session, Asian stocks were mixed amid holiday-thinned trading, as investors braced for a potential increase in U.S. interest rates later this week. The MSCI Asia Pacific Index dipped as much as 0.5%, with markets including China, Japan, Singapore and India closed for holidays. Australian shares retreated after the Reserve Bank increased interest rates by more than economists anticipated and signaled further hikes. RBA Governor Lowe said he expects further interest rate increases will be necessary in the months ahead; does not preclude a bigger or smaller rate move in the future, and has an open mind on how fast rates need to increase, a more normal level of interest rate would be 2.50%.

“Once again the RBA has proven its ability to quickly pivot the policy direction,” wrote Kerry Craig, global market strategist at JPMorgan Asset Management, in a note. “A material slow-down in economic activity could see a reassessment of the path for policy normalization and there is a high degree of uncertainty.”

Hong Kong’s benchmark eked out a small gain as the city accelerated its reopening plans after Covid cases dropped. Hong Kong Chief Executive Lam said they will reopen bars in the second phase of easing COVID-19 restrictions on May 19th. Shares of Alibaba Group Holding pared losses after a brief bout of concern over the status of its co-founder Jack Ma triggered wild price swings, underscoring continued investor anxiety toward China’s tech sector. Investors are waiting for what could be the U.S. Federal Reserve’s biggest rate hike Wednesday since 2000, one of many central bank decisions this week. The 10-year Treasury yield has climbed above 3% before the decision.

In FX, the Bloomberg Dollar Spot Index eased 0.1% to trim Monday’s gain as the greenback traded mixed versus its Group-of-10 peers. The Australian dollar led gains over G-10 pairs after the Reserve Bank raised rates 25 basis points, to 0.35%, defying expectations for a hike of 15 basis points and signaled more hikes to come to rein in inflation. The nation’s bonds tumbled and the 3-year yield rose above 3% for the first time since 2014. The euro fluctuated around $1.05 and European bonds underperformed Treasuries and peripheral spreads widened. German 10-year yields touched 1% for the first time since 2015, as markets brace for a faster pace of tightening from the ECB.The pound advanced while gilts tumbled, sending the 10-year yield surging above 2% for the first time since April 22 as they catch up with Monday’s bund and Treasury declines when U.K. markets were closed for a holiday.

In rates, the global bond rout deepened as traders take cues from Australia’s hawkish pivot ahead of the Federal Reserve and Bank of England meetings later this week. German 10-year yield rose above 1% for the first time since 2015, subsequently drifting off the highs. U.S. 10-year yields stall again near 3% and 10-year gilts briefly rose to 2%.

Treasuries extended declines as trading kicked off Tuesday, driving the 10-year yield above 3% as investors braced for the Fed’s biggest interest-rate hike since 2000.  The Treasury curve unwound Monday’s 2s10s steepening move with front-end yields cheaper on the day and belly to long-end yields slightly richer, following similar flattening in German curve.  Treasury yields are cheaper by ~1bp at front-end of the curve, richer by 1bp-2bp from belly out to long-end, flattening 2s10s by ~3bp, 5s30s by ~1bp; 10-year around 2.96%, outperforming comparable bunds by 1bp, gilts by 8bp. Gilts reopen after Monday holiday, underperforming in catch-up to Monday’s Treasuries and bund declines. The Dollar issuance slate empty so far; five names priced $5b Monday with as many as seven others electing to stand down as conditions deteriorated.

In commodities, WTI and Brent were pressured on demand-side concerns as the COVID situation in China remains in focus and Beijing has asked residents not to leave the are unnecessarily. Currently, the benchmarks are holding marginally above session troughs of USD 103.41/bbl and USD 105.62/bbl respectively.  Spot gold falls roughly $7 to trade above $1,855/oz. Most base metals are in the red.

Bitcoin is little changed in European trade, pivoting narrow parameters above the USD 38k mark.

Looking at today's calendar, we’ll get PPI data from the Eurozone, German unemployment figures, and JOLTS and durable goods data from the US. It’s a heavy slate for earnings, with results due from Pfizer, Norsk Hydro, AMD, S&P Global, Airbnb, Estee Lauder, Starbucks, BP, BNP Paribas, Eaton, Deutsche Post, Marathon Petroleum, AIG, KKR, Hilton, DuPont, Teva, and Lyft.

Market Snapshot

  • S&P 500 futures down 0.2% to 4,138.5
  • STOXX Europe 600 up 0.7% to 446.83
  • MXAP down 0.1% to 167.81
  • MXAPJ down 0.2% to 556.12
  • Nikkei down 0.1% to 26,818.53
  • Topix little changed at 1,898.35
  • Hang Seng Index little changed at 21,101.89
  • Shanghai Composite up 2.4% to 3,047.06
  • Sensex down 0.1% to 56,975.99
  • Australia S&P/ASX 200 down 0.4% to 7,316.19
  • Kospi down 0.3% to 2,680.46
  • Brent Futures down 1.3% to $106.13/bbl
  • Gold spot down 0.5% to $1,852.78
  • U.S. Dollar Index down 0.22% to 103.51
  • German 10Y yield little changed at 0.99%
  • Euro little changed at $1.0512

Top Overnight News from Bloomberg

  • Citigroup Inc.’s London trading desk was a behind a flash crash that sent shares across Europe tumbling on Monday, dealing a fresh setback to the bank’s years-long efforts to improve controls
  • Russia’s closely watched dollar payments on two bonds are moving ever closer to creditors as the country races to unblock the transfers and avoid a default. At least one international clearinghouse has received and processed payments for eurobonds due in 2022 and 2042, according to a person familiar with the transaction who wasn’t authorized to speak publicly on the matter
  • The RBA’s shift is a blow to Australia’s center-right government that’s trailing in opinion polls as campaigning intensifies for a May 21 ballot
  • South Korea’s inflation accelerated to the fastest pace since 2008 in April, prompting the central bank to issue a statement as pressure intensifies for it to raise interest rates further at this month’s policy meeting

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mixed and lacked direction amid key market closures and looming risk events. ASX 200 was subdued heading into the RBA meeting and was pressured after the central bank delivered a larger than expected hike to the Cash Rate Target which was lifted by 25bps to 0.35%. Hang Seng initially declined on return from an extended weekend amid heavy losses in tech including Alibaba on speculation its founder Jack Ma could be the individual mentioned in Chinese press surnamed Ma who was subjected to compulsory measures for collusion with anti-China hostile forces However, sources later denied that the person was Jack Ma which helped pare some of the losses, while the announcement of looser COVID restrictions in Hong Kong from May 19th also provided encouragement.

Top Asian News

  • Shares Up on Support Vow, Sales Slump Deepens: Evergrande Update
  • HSBC Shares Rise in Hong Kong as Top Holder Supports Split
  • Another Kakao Company Is Working on a Seoul Listing: ECM Watch
  • Hong Kong Wealth Fund Hit by $7 Billion Quarterly Loss

European bourses are firmer across the board, Euro Stoxx 50 +0.6%, following late-door Wall St. upside; though, the FTSE 100 -0.5% lags as it catches up from Monday's holiday.Stateside, futures are modestly firmer/flat on the session but have been rangebound throughout the European morning ahead of Wednesday's FOMC. In Europe, sectors are primarily positive with Energy outperforming post-BP earnings and Banks supported on yield upside. US Securities and Exchange Commission (SEC) will boost the size of its special unit devoted to investigating cryptocurrency frauds, according to WSJ.

 

Top European News

  • Ukraine Latest: Pope Francis Pushing for Direct Talks With Putin
  • Covestro Shares Plunge After Company Cuts Forecast
  • Morgan Stanley Overtakes Goldman to Lead in EMEA Equity Sales
  • Electrolux Up as Kepler Upgrades, Sees Negatives Priced In

FX:

  • RBA hikes in front of Fed to give Aussie a leg up vs Greenback and advantage over Kiwi that is labouring ahead of NZ jobs data; AUD/USD hovers around 0.7100, AUD/NZD probes 1.1050 from lows circa 100 pips below and NZD/USD pivots 0.6450.
  • DXY firm around 103.500 awaiting FOMC, with passing interest provided by US factory orders 103.930 is near term resistance, with some charts also citing 103.807 as a long term hurdle.
  • Sterling rebounds on return from long UK holiday weekend and in anticipation of another 25bp rate hike on super Thursday, Cable back above 1.2500 and EUR/GBP retreats from 0.8400+ again.
  • Euro clinging to 1.0500 against Buck with aid of higher EGB yields and some technical support, 10 year German cash touches 1% and EUR/USD underpinned by 1.0494 ascending trendline.
  • Yuan fends off another attack on 6.7000 vs Dollar and Won looking for boost from BoK following strong SK inflation data.

Fixed Income

  • Debt futures bounce from new long term lows in some cases; Bunds back over 153.00 vs 152.66, Gilts 117.75 from 117.39 and 10 year T-note 118-12+ vs 118-04+.
  • Benchmark yields touch or top psychological levels at 1%, 2% and 3% respectively before retracement.
  • Treasury curve re-flattens marginally on the eve of the Fed, 2/10 year -4 bp and 2/30 year in -5 bp.

Commodities:

  • WTI and Brent are pressured on demand-side concerns as the COVID situation in China remains in focus and Beijing has asked residents not to leave the are unnecessarily.
  • Currently, the benchmarks are holding marginally above session troughs of USD 103.41/bbl and USD 105.62/bbl respectively.
  • Spot gold is softer as yields continue to climb, but remains above USD 1950/oz as the USD struggles to derive traction.
  • Similarly to crude, base metals are impacted on demand-side concerns re. China's COVID backdrop.

US Event Calendar

  • April Wards Total Vehicle Sales, est. 14.1m, prior 13.3m
  • 10:00: March JOLTs Job Openings, est. 11.2m, prior 11.3m
  • 10:00: March Factory Orders, est. 1.2%, prior -0.5%; Factory Orders Ex Trans, prior 0.4%
    • Durable Goods Orders, est. 0.8%, prior 0.8%; -Less Transportation, est. 1.1%, prior 1.1%
    • Cap Goods Orders Nondef Ex Air, est. 1.0%, prior 1.0%
    • Cap Goods Ship Nondef Ex Air, prior 0.2%

DB's Jim Reid concludes the overnight wrap

We had a bank holiday here in the UK yesterday and for once an extra round of golf didn't make me a pariah as when the twins were out all afternoon with mum on Sunday I did a surprise recording session with 6-year-old Maisie, putting her first ever self-penned song on record. She keeps on making up little songs in the car and l'd spotted a loop or two that I thought were quite good so I created a backing track and got her to sing it into my studio mic and then mixed it together with a video. We then surprised mum when she got home. Mum cried with joy, and I quickly booked in a season of golf competitions in the diary whilst she was overcome with emotion. In the unlikely event you'd like to see and hear it please see the link on my Bloomberg header or email me and I'll send it to you.

Talking of the bank holiday, for those missing yesterday here are the brief highlights of what's left in a busy week ahead. Tomorrow sees the FOMC decision, where a +50bp hike and the start of QT are expected. The Fed is followed on Thursday by the BoE who are expected to lift rates (+29.3bps are priced in). We also have US payrolls on Friday and 161 S&P 500 companies reporting through the week. On that, our equity team published their Q1 earnings takeaways so far late last week, link here. While the season has been noisy so far, the median beat has been solid at 6.2% despite some notable outliers dragging the average down to 2.6%, below historical average. However 81% of companies have beat consensus. Earnings growth is in line with historical norms at 11.3% YoY. Margins have remained near record highs despite input price pressures.

Price action on the first day of May rhymed with what we saw over April. US Treasury yields continued their march higher, with yields increasing above 3% on benchmarks from 5 to 30 years intraday during the New York session, ahead of tomorrow’s FOMC. Ten-year yields gained +4.7bps, closing at 2.98%, but as mentioned managed to breach 3% for the first time since 2018 at one point. Similar to the price action last week, the nominal figure masked divergence in the decomposition. Real yields gained +15.6bps ahead of the Fed’s anticipated QT announcement tomorrow, punching through to positive territory for the first time since March 2020’s whipsawing price action, closing at +0.15%. 10yr breakevens, thus narrowed -10.9bps to 2.83%. European sovereign yields trended in a similar direction, with bunds (+2.7bps) and OATs (+3.2bps) picking up ground at the 10yr point, with 10yr BTPs continuing their recent run of spread widening, climbing +5.8bps over bunds yesterday, to 189bps, their widest level in two years. This comes following fears on global growth taking hold, but also with the market revising its expectation toward an earlier exit of ECB accommodation. Indeed, our Europe economists changed their call last week, now expecting APP net purchases to finish in June, with liftoff following in July, with 100bps of hikes in 2022 now pencilled in. See the link for more details.

Stocks were broadly lower in Europe, catching down with a very poor US close on Friday, with the STOXX 600 pulling back -1.46% and every sector lower on the day. The DAX (-1.13%) managed to slightly outperform, while the CAC (-1.66%) fared slightly worse. Europe did survive a morning flash crash though caused by an erroneous trader entry. American stocks were saved from starting May the way they ended April with a late rally in New York, leaving the S&P 500 +0.57% higher. There was a clear divergence between underperforming defensives and outperforming cyclical stocks, as real estate (-2.55%), staples (-1.29%), utilities (-1.04%), and health care (-0.68%) were the four worst performing sectors, while communications (+2.43%), tech (+1.56%) and energy (+1.37%) led the rebound. The large intraday swing ensured the Vix stayed above 30 for another session, closing the day at 32.34pts.

Despite the strong showing from US energy stocks, brent crude oil also started the month lower, falling -1.61%. Again, the dollar index marched to its highest level since 2002, gaining +0.76% yesterday, meaning the index has gained at least +.50% in 6 of the last 7 sessions, and cleared +0.6% in 4 of those.

Overnight in Asia, the biggest news is just coming through as I type with the RBA hiking rates by 25bps, a bit more than expected. 2yr Aussie notes are up +11bps in the immediate aftermath and the Aussie Dollar is soaring. Elsewhere news of upcoming covid rules easing in Hong Kong is lifting the Hang Seng (+0.12%) with the KOSPI (+0.0%) unchanged while exchanges in Japan and China are closed for holidays. S&P 500 futures (+0.38%) are trading in positive territory.

On data yesterday, US ISM Manufacturing surprised to the downside in April, with the index realising at 55.4 versus expectations of 57.6. The survey responses were replete with examples of supply chain pressures still plaguing industry. The US PMI figure came in at 59.2, just missing the 59.7 expectations.

To the day ahead, we’ll get PPI data from the Eurozone, German unemployment figures, and JOLTS and durable goods data from the US. It’s a heavy slate for earnings, with results due from Pfizer, Norsk Hydro, AMD, S&P Global, Airbnb, Estee Lauder, Starbucks, BP, BNP Paribas, Eaton, Deutsche Post, Marathon Petroleum, AIG, KKR, Hilton, DuPont, Teva, and Lyft.

Tyler Durden Tue, 05/03/2022 - 07:51

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Bonds

Fed reverse repo reaches $2.3T, but what does it mean for crypto investors?

Investors avoid risk assets during a crisis, but excessive cash sitting in financial institutions could also be good for the cryptocurrencies.

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Investors avoid risk assets during a crisis, but excessive cash sitting in financial institutions could also be good for the cryptocurrencies.

The U.S. Federal Reserve (FED) recently initiated an attempt to reduce its $8.9 trillion balance sheet by halting billions of dollars worth of treasuries and bond purchases. The measures were implemented in June 2022 and coincided with the total crypto market capitalization falling below $1.2 trillion, the lowest level seen since January 2021. 

A similar movement happened to the Russell 2000, which reached 1,650 points on June 16, levels unseen since November 2020. Since this drop, the index has gained 16.5%, while the total crypto market capitalization has not been able to reclaim the $1.2 trillion level.

This apparent disconnection between crypto and stock markets has caused investors to question whether the Federal Reserve’s growing balance sheet could lead to a longer than expected crypto winter.

The FED will do whatever it takes to combat inflation

To subdue the economic downturn caused by restrictive government-imposed measures during the Covid-19 pandemic, the Federal Reserve added $4.7 trillion to bonds and mortgage-backed securities from January 2020 to February 2022.

The unexpected result of these efforts was 40-year high inflation and in June, U.S. consumer prices jumped by 9.1% versus 2021. On July 13, President Joe Biden said that the June inflation data was "unacceptably high." Furthermore, Federal Reserve chair Jerome Powell stated on July 27:

“It is essential that we bring inflation down to our 2 percent goal if we are to have a sustained period of strong labor market conditions that benefit all.”

That is the core reason the central bank is withdrawing its stimulus activities at an unprecedented speed.

Financial institutions have a cash abundance issue

A "repurchase agreement," or repo, is a short-term transaction with a repurchase guarantee. Similar to a collateralized loan, a borrower sells securities in exchange for an overnight funding rate under this contractual arrangement.

In a "reverse repo," market participants lend cash to the U.S. Federal Reserve in exchange for U.S. Treasuries and agency-backed securities. The lending side comprises hedge funds, financial institutions and pension funds.

If these money managers are unwilling to allocate capital to lending products or even offer credit to their counterparties, then having so much cash at disposal is not inherently positive because they must provide returns to depositors.

Federal Reserve overnight reverse repurchase agreements, USD. Source: St. Louis FED

On July 29, the Federal Reserve's Overnight Reverse Repo Facility hit $2.3 trillion, nearing its all-time high. However, holding this much cash in short-term fixed income assets will cause investors to bleed in the long term considering the current high inflation. One thing that is possible is that this excessive liquidity will eventually move into risk markets and assets.

While the record-high demand for parking cash might signal a lack of trust in counterparty credit or even a sluggish economy, for risk assets, there is the possibility of increased inflow.

Sure, if one thinks the economy will tank, cryptocurrencies and volatile assets are the last places on earth to seek shelter. However, at some point, these investors will not take further losses by relying on short-term debt instruments that do not cover inflation.

Think of the Reverse Repo as a "safety tax," a loss someone is willing to incur for the lowest risk possible — the Federal Reserve. At some point, investors will either regain confidence in the economy, which positively impacts risk assets or they will no longer accept returns below the inflation level.

In short, all this cash is waiting on the sidelines for an entry point, whether real estate, bonds, equities, currencies, commodities or crypto. Unless runaway inflation magically goes away, a portion of this $2.3 trillion will eventually flow to other assets.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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Government

There Is A Giant Illusion For The Majority Of Market Commentators Choosing Not To See It

There Is A Giant Illusion For The Majority Of Market Commentators Choosing Not To See It

By Michael Every of Rabobank

Holy Illusions

Hands…

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There Is A Giant Illusion For The Majority Of Market Commentators Choosing Not To See It

By Michael Every of Rabobank

Holy Illusions

Hands up how many of you had 528K down as your US payrolls guess? Nobody, because the Bloomberg survey low was 50K and the high 325K. While there are question marks over these data given Covid --nearly 3m people weren’t/couldn’t work due to it-- and the “birth/death” model, the household survey saw jobs +179K; backwards payroll revisions were +28K; total employment was back to pre-pandemic levels, albeit with reallocation away from sectors such as leisure and hospitality (-1,214K) towards others, such as transport (+745K); the participation rate edged down to 62.1%, so the jobless rate fell to 3.5%, but even using pre-Covid participation rates unemployment would have been 5.4%, down from 5.5%; and average hourly earnings rose much faster than expected at 0.5% m-o-m, 5.2% y-o-y (and 6.0% annualized).

If it’s an illusion, and look at full-time vs. part-time and multiple jobs as a clue...

... it still convinced Larry Summers to warn that if US CPI falls back this week, the Fed must not pivot, and Krugman to add it’d be “no justification for a pivot toward easier money.” Indeed, it now seems the Fed may go another 75bps in September, and Bowman implies afterwards as well perhaps, and the Wall Street Journal underlines, “Witness the small army of Fed officials who have fanned out to warn markets that the Chairman didn’t mean what he supposedly wasn’t saying last week.” In short, the illusion of a Fed dovish pivot is dispelled, with 2-year Treasury yields up 16bp to 3.23% Friday, and 10s up 14bp to 2.83%. More to come: or record yield curve inversion.

Add a Fed pivot to “transitory” inflation on the list of illusions fading for the same underlying reason: the global system is crumbling. They join EU energy, economic, and foreign policy, as the German regulator calls for 20% cuts in household gas usage, and the West’s ‘Great Illusion’ that war just can’t happen (to it) in the modern world.

On which, Ukraine just got another $1bn in US arms as a new phase of the war looms around Kherson: a counter-attack appears imminent. However, don’t be under the illusion that the US can keep up that pace of arms supply - and its stocks can’t be replaced quickly once depleted. The same is true for Russia, and in terms of men, but their media says North Korea might strike a deal to send 100,000 soldiers to fight in Ukraine in exchange for food and energy(!) If so, the war escalates further, and the EU energy outlook darkens further. NATO member Turkey on Friday also struck a deal with Russia to deepen economic ties: that is a terribly muddied picture for the EU and US as they try to isolate Moscow. However, illusions abound on all sides: Russia just released a video aimed at attracting people to move there due to its ‘hospitality, vodka, and an economy that can withstand thousands of sanctions’.

Elsewhere, Reuters warns Chinese military exercises around Taiwan could disrupt key shipping lanes, and Taipei states they “simulate an attack” on its main island, drawing condemnation from the G7, but Russian support. China has now halted: communication with US military theatre leaders; defence meetings; maritime security dialogue; and co-operation over illegal migration, criminal justice, transnational crime, narcotics, and the climate - the US says this “punishes the world." The White House is now leaning on Congress to delay the bipartisan Taiwan Policy Act of 2022, which designates it a major non-NATO ally, provides $4.5bn in military aid, upgrades its international status, and allows the imposition of sanctions, including SWIFT bans, on major Chinese financial institutions. As the Carnegie Endowment think-tank notes, “The US and China are seriously talking past each other…That disconnect will lead to a very unstable new baseline.”

Linking back to today’s title, Friday saw the release of ‘Holy Illusions’, a report from a key think-tank backing UK PM candidate Truss. It argues, “Just as in the 1970s, the country faces many interconnected, serious but superficially very different problems.” True.

Controversially, it diagnoses that “The most significant underlying economic problem… is the malign consequences of low to negative interest rates over a prolonged period.”  Artificially low rates, it says, have “gradually prevented the normal mechanisms of a market economy from working properly… there has been a greater and greater search for yield on riskier and riskier assets, with everything that follows upon that, notably, market instability, huge asset price inflation, and inequality. The lack of rewards to enterprise and the ease with which fundamentally unproductive “zombie” companies can be maintained have made it difficult to generate those normal improvement mechanisms of a market economy which drive productivity and growth.” It’s hard to disagree with that Austrian and Marxist assessment.

The report then says other UK problems are manifold: “Implausible energy policies”; over-regulation, antipathy to risk; “Unsustainable” welfare; a shrinking labour force; a declining birth-rate (an issue in all major economies, except one); “Education systems that don’t educate”; and, it claims, high immigration. It warns that if current UK growth rates continue --and this was presumably before the BOE’s latest awful assessment-- then by 2035 the likes of Poland will “overtake” the UK: will they then import British plumbers?

It unsurprisingly argues Brexit is not an issue, even if it means short-term costs (and clearly more immigration is not on the cards). It says the UK isn’t willing or able to do anything with the “full democracy” Brexit grants it, as “Our governing class seems to have forgotten how to govern, how to guide a state, and how to set a goal and direction of travel.”

Then --perhaps contradicting itself for some readers-- it argues, “Given this set of daunting problems… there really ought to be strong political movements… to analyse and begin to deal with them. That is not the case. Instead we see the reverse - a refusal to get to grips with the problems or even to acknowledge them. It is easier to ignore the most pressing economic and societal issues of the day, pretend they don’t exist, or claim they will be solved automatically as normal conditions return. We are, it seems, studiously pretending to be asleep.” Again, no arguments here. To show it is not like the others, it dares to ask,What is to be done? - and it tells us government must:

Convince the public that change is needed. The public must come to feel that we have taken a wrong path and to react against it.” They are already there! Just as we have mortgage strikes in China, we may see energy strikes in the UK; and some warn of a looming ‘winter of discontent. (And don’t think Putin doesn’t see this too, and won’t act accordingly.)

Show the electorate an alternative,” which is “to increase the productive capacity of our economy (because without that other problems simply cannot be solved)”. They are with you! But here comes the rub. What does that mean on energy? Silence. Moreover, the government must “persuade the public… that collectivist, socialist solutions are incapable of achieving that.”

But how do you get the private sector to invest productively when other governments will? See ‘how the US gave away a breakthrough battery technology to China’, because the inventor “talked to almost all major investment banks; none of them [wanted to] invest in batteries," as they “wanted a return on their investments faster than the batteries would turn a profit.” Will higher rates, lower taxes, and deregulation force banks to make loans to productive rather than “fictitious capital”? Austrians say yes: Marxists say not, and with the better track record; and they add that even productive loans will just be made abroad, where it is cheaper to invest.

That gaping theoretical/policy hole is more evident when we are then told the government must “persuade the public that this alternative route is actually possible; that [it] has a plan to get the country onto it; that continuing on the current path will simply make the inevitable correction measures more painful; and that failure to take such measures will mean a materially worse outcome. [It must] make this alternative politically feasible and hence potentially attractive.”

--But what alternative?!--

Its conclusion avoids the answer in saying that: “A successful nation state needs market economics to create prosperity, and requires solidarity and a clear sense of identity to sustain itself. A reform programme must be similarly broad-based. It should reject the artificial polarity between the “market”  --“right wing” economics and economic globalisation-- and “society” --“left wing” statism and solidarity-- but recognise instead that running a successful country involves elements of both.”

It just doesn’t say how beyond rates, taxes, and fostering ‘national unity’: yet the latter alone was *wrongly* presumed by Smith and Ricardo to stop capitalists investing abroad at all, which we just edit out of our textbooks! If only we could edit it out of our financial flows so easily.

Ironically, the report also says, ”the political difficulty is that governments and politicians have not for many years set out the reality of how economies work and how prosperity is created. Levels of understanding are low.” Yes, they are: if it was as simple as ‘getting the state out of the way’, China would not be an economic superpower and Afghanistan might be.

Yet the underlying message that we been ‘getting GDP wrong’, and we can’t get it right by only focusing on GDP is arguably very valid, as is the criticism of relying on low rates policy. We *do* need a higher common purpose, and higher rates, and others are saying similar things: here is an example arguing, “Without that, any aspiring state is just a gated community for the working wealthy, much like the ones for old retirees in South Florida.” It’s just that we need *more* than that structurally to boot, and ‘Holy Illusions’ still seems to cling to its own in avoiding that conclusion.

It *could* be seen as backing a neo-Hamiltonian free market behind high tariff barriers, with industrial policy, which was how the US (and China) developed. Yet that mercantilist model is also an illusion for the UK and others not large enough for economies of scale and a modern army, especially as large rivals *are* state-backed and have one; and as high debt levels logically require MMT and higher interest rates, if just to pay for that military. The flurry of legislation coming out of the US is not a million miles away from some of those ideas and developments.

But if we need ‘Hamilton’ in blocs, the UK still just rejected being a member of one. Does that mean it will end up in a new Holy Anglosphere? Some say that’s no illusion, other that it is. Regardless, the above still implies global national-security/commodity/supply-chain/tech/values fragmentation ahead; and higher interest rates; and lower asset prices; and more productive, higher-wage investment - as we had already projected as a 2030 scenario. Unless that’s just my own holy illusion.

What isn’t is that if you don’t keep track of these seemingly-esoteric developments, you won’t be in a position to call where rates are going - which is why nobody in markets called three (or four?) back-to-back 75bps Fed hikes this year. That was “not how the political economy works”. But the political economy had changed. To paraphrase Keynes, “When the facts change, I change my forecast. What do you do?”

That is what you should be focused on: not the illusion of the relevance/positivity of Chinese July trade data released Sunday, which showed exports up 18% y-o-y and imports only 2.3%, for a staggering trade surplus of $101.3bn. Does anyone think this $1.2 trillion annualised figure is good news for anyone: not China (where it means no demand); not globally (where it means no local supply). There is a giant illusion for the majority of market commentators choosing not to see it.

Tyler Durden Mon, 08/08/2022 - 09:04

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Futures Storm Higher To Start The Week As “Most Hated Rally” Steamrolls Bears

Futures Storm Higher To Start The Week As "Most Hated Rally" Steamrolls Bears

US equity futures rose to start the week as the "most hated…

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Futures Storm Higher To Start The Week As "Most Hated Rally" Steamrolls Bears

US equity futures rose to start the week as the "most hated meltup" continued just as we said it would over the weekend as stubborn bears are forced to cover and start chasing higher out of FOMO, while Treasury yields fell while investors assessed the path of monetary policy ahead of this week's critical CPI data. Nasdaq 100 futures rose 0.7% while S&P 500 futures gained 0.5% by 7:30 a.m. in New York after the underlying benchmarks dropped on Friday following news that US job growth soared beyond expectations. Meanwhile, the yield on the 10-year Treasury dropped to 2.79% after soaring at the end of last week, while the dollar dipped and bitcoin jumped above $24K.

In premarket trading, stocks tied to renewable energy, such as Tesla, rose after the Senate passed a key bill that Democrats called the largest investment in fighting climate change ever made in the country. Meanwhile, cryptocurrency-exposed companies like Coinbase Global Inc. and Riot Blockchain Inc. climbed as Bitcoin breached $24,000. Bank stocks are also higher in premarket trading as the broader equity market rises. In corporate news, Avalara is being acquired by Vista Equity Partners for $93.50 a share in a deal that values the tax software maker at roughly $8.4 billion. Meanwhile, Robinhood is set to pay $9.9 million to resolve lawsuits over crashes on its trading platform in 2020.

“The sentiment will mostly depend on this week’s inflation data,” said Ipek Ozkardeskaya, senior analyst at Swissquote. “If US inflation starts easing, the Fed could rethink about smaller rate hikes, which could give another positive swing to the stocks.”

Friday's "stellar" jobs data eased fears of a recession while increasing the chances that the Federal Reserve will be more aggressive in its fight to tame inflation. Over the weekend, San Fran Fed President Mary Daly said the central bank is “far from done yet” in bringing down prices and suggested a 50 basis-point rate increase isn’t the only option on the table for the next meeting.

The Friday payrolls data surprise “was large enough to re-ignite the inflation debate and renew focus on US CPI prints,” said Peter McCallum, a strategist at Mizuho. “Indeed, a very unexpected move lower in US CPI is needed for the market to stop thinking about the Fed having to do more. And with more tightening, the probability of a hard landing rises.”

Meanwhile, as Bloomberg notes, the S&P 500 climbed more than 6% over the past four weeks, approaching the level of two standard deviations for data going back 30 years.

That’s unusual in the absence of a clearly event-driven market such as during the global financial crisis or the start of the Covid-19 pandemic. However, The advance in equities could face another test from a likely contraction in corporate margins next year as costs remain high, according to strategists at Morgan Stanley and Goldman Sachs.

"We think it’s premature to sound the all-clear simply because inflation has peaked,” Morgan Stanley strategists led by Michael Wilson said. “The next leg lower may have to wait until September” as the negative effects of falling inflation on company profits become more reflected in earnings.

Looking at the week's key data, the closely watched CPI is seen rising 0.2% in July from a month earlier, which would be the smallest advance since the start of 2021. However, the so-called core measure, which strips out energy and food, probably climbed a concerning 0.5%, based on the median estimate in a Bloomberg survey of economists.

European stocks tracked US futures higher, with the Euro Stoxx 50 is up 0.5%. IBEX outperforms peers, adding 0.6%, FTSE MIB is flat but underperforms peers. Real estate, tech and financial services are the strongest-performing sectors.

Earlier in the session, Asian stocks edged lower as concerns about more aggressive interest-rate hikes by the Federal Reserve and fresh Covid lockdowns on the Chinese resort island of Hainan weighed on sentiment. The MSCI Asia Pacific Index dropped as much as 0.5% before paring, with losses in technology and consumer discretionary shares offsetting gains in materials firms. Hong Kong stocks led declines around the region, even as the government cut the hotel quarantine for inbound travelers to three days from seven. A better-than-expected July jobs report in the US fueled expectations of faster Fed monetary tightening, with investors monitoring this week’s inflation data for further clues. Meanwhile, the lockdowns in China’s Hainan province have stranded tens of thousands of tourists, dealing a blow to its duty-free retail industry.

Asian equities capped their third-straight weekly gain last Friday as the region shrugged off rising geopolitical risks in the Taiwan Strait. Investors also continue to assess the ongoing corporate-earnings season. “We believe markets have discounted a fair bit of the earnings cuts to come, partly driven by the tech inventory de-stocking cycle in the coming months,” said Soo Hai Lim, head of Asia ex-China equities, at Barings. “Improving fundamentals, more attractive valuations and relatively looser monetary conditions in Asia can help deliver relative equity outperformance for the region in the coming months.”

Japanese stocks reversed earlier losses with the Nikkei 225 Index closing at its highest since March 29, as investors assessed a slew of earnings reports from local firms. The Topix Index rose 0.2% to 1,951.41 as of market close Tokyo time, while the Nikkei advanced 0.3% to 28,249.24. Suzuki Motor Corp. was among the top performers on the Nikkei, jumping more than 10% after an earnings beat. Bandai Namco also advanced after its outlook was raised.   Daiichi Sankyo Co. contributed the most to the Topix Index gain, increasing 5.2%. Out of 2,170 shares in the index, 1,033 rose and 1,030 fell, while 107 were unchanged. “Today’s Japan stocks are moving over micro factors such as the earnings results,” said Hiroshi Matsumoto, a senior client portfolio manager at Pictet Asset Management. “Some Japanese companies are reporting good results.”

India’s equity index climbed to its highest level in nearly four months, boosted by gains in HDFC Bank and Reliance Industries.   The S&P BSE Sensex rose 0.8% to close at 58,853.07 in Mumbai, after falling by as much as 0.2% at the start of the session. The NSE Nifty 50 Index gained 0.7%. Of the 30 members on the Sensex, 20 rose and 10 fell. All but one of 19 sectoral indexes compiled by BSE Ltd. advanced, led by a gauge of capital goods companies. The market is shut on Tuesday for a local holiday.  HDFC Bank advanced to its highest level since April 13 as the Economic Times newspaper reported that the private sector lender raised $300 million in deposits from expat Indians, quoting unnamed people familiar with the matter.  Reliance Industries climbed most in a week as the oil-to-retail conglomerate said it will begin investing across the green-energy value chain. State Bank of India dropped after its quarterly report showed net income below analysts’ estimates.

Bloomberg dollar spot index flat after paring earlier decline. JPY and EUR are the weakest performers in G-10 FX, AUD and NZD outperform.

In rates, Treasuries held gains amassed during European session, led by bigger gains across core European bonds and unwinding a portion of Friday’s jobs-report selloff. US long-end yields richer by ~4bp, flattening 2s10s by ~2bp, 5s30s by less than 1bp; 10-year around 2.79% trails comparable bunds and gilts by 2bp-3bp. Treasuries 2s10s curve inversion deepens to as much as 42.3bps, the lowest since 2000. No US data or Fed speakers are slated for Monday; refunding auctions begin Tuesday, July CPI scheduled for Wednesday.short-end yields underperform bunds by about 4 bps. Peripheral spreads widen to Germany with 10y BTP/Bund adding ~7bps to 212.8bps after Italy’s outlook was cut to negative by Moody’s on political risk.

In commodities, WTI trades within Friday’s range, falling 0.3% to around $88. Base metals are mixed; LME nickel falls 2.4% while LME lead gains 1.9%. Spot gold is little changed at $1,775/oz. 

In crypto, noted upside for the space amid thin newsflow elsewhere, with Bitcoin surpassing USD 24k at best and thus marginally eclipsing last week's USD 23.9k peak.

It's a quiet start to the week in econ data with nothing scheduled on the economic slate and no Fed speakers either; refunding auctions begin Tuesday, July CPI scheduled for Wednesday.

Market Snapshot

  • S&P 500 futures up 0.3% to 4,157.75
  • STOXX Europe 600 up 0.6% to 438.13
  • MXAP down 0.1% to 160.53
  • MXAPJ down 0.4% to 524.35
  • Nikkei up 0.3% to 28,249.24
  • Topix up 0.2% to 1,951.41
  • Hang Seng Index down 0.8% to 20,045.77
  • Shanghai Composite up 0.3% to 3,236.93
  • Sensex up 0.8% to 58,862.37
  • Australia S&P/ASX 200 little changed at 7,020.62
  • Kospi little changed at 2,493.10
  • German 10Y yield little changed at 0.89%
  • Euro little changed at $1.0187
  • Gold spot down 0.1% to $1,773.21
  • U.S. Dollar Index down 0.11% to 106.50

Top Overnight News from Bloomberg

  • China Extends Military Exercises Near Taiwan With New Drill
  • Ships Resume Taiwan Routes Even as China Continues to Drill
  • Oil Endures Choppy Start to Week With Demand Concern to the Fore
  • Senate Passes Democrats’ Landmark Tax, Climate, Drugs Bill
  • Yen Shorts Crumble as 2022’s Hottest FX Trade Comes to an End
  • ‘Most Vulnerable’ Emerging Markets Now Face Euro Recession Risk
  • Jack Dorsey Tweets ‘End the CCP’ After China Covid Report
  • Carlyle CEO Resigns in Sudden Reversal of Generational Shift
  • SoftBank Reports Record $23.4 Billion Loss as Holdings Fall
  • India Seeks To Oust China Firms From Sub-$150 Phone Market
  • Five States Risk Undoing Legitimacy of 2024 Election
  • CVS Health Is Mulling a Bid for Signify Health, WSJ Reports
  • Winners and Losers in Democrats’ Signature Tax and Energy Bill
  • NYC Mayor Greets New Bus of Migrants Sent by Texas Governor
  • Daly Says Fed Is ‘Far From Done Yet’ on Bringing Inflation Down
  • Buffett’s Berkshire Pounces on Market Slump to Scoop Up Equities
  • Bitcoin Believers Are Back to Watching Stocks After Crypto Crash

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks traded mixed with price action choppy as participants reflected on the encouraging Chinese trade data and post-NFP hawkish pricing of Fed rate hike expectations, with sentiment also clouded by geopolitical risks related to China’s military drills near Taiwan and renewed shelling of Ukraine's Zaporizhzhia nuclear plant. ASX 200 traded indecisively around the 7,000 level as weakness in the consumer-related sectors was offset by a strong mining industry, with OZ Minerals the biggest gainer after it rejected an indicative proposal from BHP. Nikkei 225 pared opening losses although the upside was capped amid the ongoing deluge of earnings including SoftBank which is scheduled to announce its results later today and with a cabinet reshuffle set for later this week. Hang Seng and Shanghai Comp were varied with the mainland indecisive as mostly stronger than expected Chinese trade data, including a record surplus in July, was counterbalanced by COVID woes after Sanya in the Hainan province was placed on lockdown which has trapped tens of thousands of tourists.

Top Asian News

  • Chinese authorities locked down the southern coastal city of Sanya during the weekend after a highly infectious Omicron strain was detected in the Hainan province, according to FT.
  • China’s aviation regulator shortened the suspension time for inbound flights on routes found to have COVID-19 cases in which flights on a route with an identified COVID case will be suspended for a week if 4% of passengers test positive and will be suspended for two weeks if 8% of passengers test positive, according to Reuters.
  • Hong Kong Chief Executive John Lee announced that the hotel quarantine will be reduced to 3 days from 7, with arrivals to be subject to a 3 + 4 format in which the 4 days will be home monitoring.
  • Japanese PM Kishida said he will reshuffle the cabinet in the week ahead to address issues including COVID-19, inflation and Taiwan affairs, according to Reuters.

European bourses are firmer across the board after shrugging off mixed APAC trade, Euro Stoxx 50 +0.8%. Similar directional performance in US futures, though magnitudes are more contained amid limited newsflow with little scheduled ahead, ES +0.3%. Sectors are firmer with no overall theme emerging though Tech, Real Estate and Utilities are among the best performers.

Top European News

  • UK Tory party leadership frontrunner Truss is under pressure to promise more to poor households facing a cost of living crisis this autumn after she expressed her preference to reduce taxes over ‘handouts’, according to FT.
  • UK government plan to cut as many as 91k civil servant jobs over 3 years will require deep cuts to public services and cost at least GBP 1bln in redundancy payments, according to a Whitehall review cited by FT.
  • UK government is to conduct a review of the foreign takeover of the National Grid’s gas transmission business amid increased concerns regarding energy security, according to FT.
  • Italy’s centrist Azione party is to abandon the centre-left alliance with the Democratic Party just days after agreeing to an alliance to join forces in an effort to prevent a right-wing landslide, according to Bloomberg.
  • Moody’s has cut its outlook on Italy to Negative from Stable, affirms BAA3 rating; risks to credit profile have been accumulating more recently due to the economic impact of Russia/Ukraine and domestic politics. Under baseline scenario, Italian debt to continue declining in 2022.

FX

  • The USD index has pulled back further from Friday’s post-NFP 106.93 before seeing a bounce at its 10 DMA (106.25).
  • Non-Dollar G10s are gaining momentum against peers, and vs the Buck; AUD holds the top spot.
  • EUR/USD and GBP/USD trimmed earlier upside to trade back under 1.0200 and 1.2100.
  • The Yen is the current G10 laggard amid broader risk and as the FOMC-BOJ pricing once again widens.

Fixed Income

  • Core debt modestly firmer, experiencing some respite from Friday's post-NFP pressure amid pronounced Fed repricing and yield upside.
  • Albeit, in the context of recent session the circa. 70 tick upside in Bunds is limited.
  • BTPs pressured as Moody's cuts their outlook for Italy while further political developments seemingly strengthen the chances of the right.

Commodities

  • WTI and Brent front-month futures saw upside momentum fade alongside a Dollar-rebound off lows.
  • Spot gold is trading sideways around USD 1,775/oz amid a lack of drivers.
  • Overnight, Chinese base metal futures opened firmer with added impetus from the Chinese trade data, whilst LME contracts trade somewhat mixed.
  • Tesla (TSLA) has reportedly signed a contract worth circa. USD 5bln to purchase battery materials from nickel processing companies in Indonesia, via Reuters citing CNBC Indonesia.
  • Russian oil product exports from Black Sea port of Tuapse planned at 1.443mln in Aug (vs 1.388mln in July), according to traders cited by Reuters.
  • China is poised to begin another round of tax inspections on independent refiners, according to Reuters sources. Inspections are to last months, commencing later this month.

US Event Calendar

  • Nothing major scheduled

DB's Jim Reid concludes the overnight wrap

August has been fascinating so far with US recession talk pushed back with a string of better than expected data last week. The US economy simply cannot be deemed to be in a recession in a month when +528k jobs have just been added as payrolls showed on Friday.

This still feels to me like a classic (albeit compressed), old fashioned boom bust cycle. The Fed has been aggressively behind the curve with monetary policy amazingly loose versus history. The Fed have tightened a bit but monetary policy operates with a lag and monetary policy was and is still very loose. Remember we’ve only been hiking since March and real Fed Funds are still c.-7%. I still think recession by around the middle of 2023 is a slam dunk and that risk assets will go well below their June 2022 lows when we’re in it but I'm still not convinced the official recession happens over the next few months. As a related aside, the 2s10s yield curve first inverted at the end of March. A recession always eventually follows this in the US but the shortest gap between that and a recession is c.9 months over the last 70 years of data covering 10 recessions. The fact that the yield curve is getting more inverted just cements the likely recessionary signal from the yield curve but it always takes time. Ultimately I think a recession will be a lagged response to the necessary tighter policy put in place since March and the hikes still to come.

If payrolls was a bit of a shock, next up will be US CPI on Wednesday which we will review below. Staying with US inflation we will also see PPI on Thursday and the inflation expectations in the University of Michigan consumer survey on Friday. Staying with prices China (CPI, PPI) and Japan (PPI) get in on the act on Wednesday too. A monthly dump of UK data including GDP will be out Friday and will attract attention after the BoE’s forecast of a 5 quarter upcoming recession last week. Elsewhere US earnings are 85% complete so the newsflow will slow down on this front. The full day by day week ahead is at the end but we’ll focus most attention on US CPI here today.

Our economists expect the headline YoY rate to finally dip after energy prices have fallen of late. They are looking for 8.8% (from 9.1%) with consensus a tenth lower. Core however is expected to increase two tenths to 6.1% YoY. If we see such an outcome it’ll be interesting if the market cheers what could be the start of a decline from the peak in the headline rate or remains concerned that core continues to edge up. Core should be more important to the Fed but the market has been known to take the dovish interpretation to events of late, payrolls notwithstanding.

On US PPI on Thursday, most of our economist’s attention will be on the healthcare component as this feeds directly into core PCE, the Fed preferred measure. So far the wedge between core CPI and PCE has been biased in CPI’s favour (i.e. higher) as CPI has a big bias to rents vs healthcare for PCE. Last month healthcare surged after 4 soft months. Our economists have detailed why they think it will continue to be strong in this note (Link here).

Across the Atlantic, this week's UK GDP print is expected to be -0.2% QoQ, the first quarterly contraction since Q1 of 2021. The June figure is expected to contract by -1.2% MoM. Elsewhere earnings season is winding down after 423 S&P 500 and 403 Stoxx 600 companies have now reported. Our equity strategists have reviewed global earnings so far here, noting that while beats are roughly at the historical average in the US, they're exceeding it elsewhere. Yet, bar energy stocks, consensus estimates for Q3 have been declining across regions. Looking at the line up for this week, notable reporters include Disney (Wednesday), Porsche (today), Deutsche Telekom, RWE, Orsted and Siemens (Thursday).

Asian equity markets are mostly on the softer side as we start the week. As I type, the Hang Seng (-0.73%) is lagging despite Hong Kong’s move to cut mandatory hotel quarantine from seven days to three. Additionally, the Kospi (-0.10%) is also trading lower in early trade whilst Chinese stocks are mixed with the Shanghai Composite (+0.19%) higher and the CSI (-0.33%) lower. Elsewhere, the Nikkei (+0.25%) is holding on to its gains this morning.

Moving ahead, US stock futures point to a slightly negative opening with contracts on the S&P 500 (-0.16%) and NASDAQ 100 (-0.11%) dipping in overnight trading.

Early morning data showed that Japan recorded its first current account deficit (-132.4 billion yen) in five months in June (v/s -706.2 billion yen expected) and reversing a +128.4 billion yen surplus in the preceding month as surging imports eclipsed exports.

Over the weekend, data revealed that China’s export growth unexpectedly picked up (+18.0% y/y) in July, the fastest pace this year, against a +17.9% increase in June and beating market expectations of a +14.1% gain, thereby offering an encouraging boost to the economy as its struggles to recover from a Covid-induced slump.

In overnight news, the US Senate approved a $739 billion climate and healthcare spending package ahead of crucial midterm elections in November. When signed into law, the bill, formally known as the Inflation Reduction Act, would allocate $369bn for climate action - the largest investment in US history. At the same time, it would increase corporate taxes and lower healthcare costs as part of the package.

Reviewing last week now and it was a pretty volatile start to August on the back of Pelosi’s visit to Taiwan, the better than expected ISM prints, hawkish Fed speak, and finally the monster payrolls report on Friday which finally got the message through that the narrative of a dovish Fed pivot the week before was exceptionally premature.

Quickly recapping Friday’s data, nonfarm payrolls came in at +528k – more than double the final estimate of +260k with a further boost from the upwardly revised June reading of +398k (vs +372k previously). It was also the highest reading since February’s +714k. The July payrolls gains also ensured that the US has now recovered the 22m of job losses in the aftermath of covid outbreak. Other indicators reinforced the risks to inflation - unemployment was down to 3.5% (3.6% previously) and average hourly earnings surprised to the upside at 0.5% or 5.2% YoY (vs consensus of 0.3% and 4.9%, respectively). Slight softness came from a -0.1ppt drop in the participation rate (62.1% vs 62.2% estimates) but this was mostly in the young and not the prime-age cohort which makes it less worrying. Upward beats in employment indices also came from ISM indices earlier in the week, with headline gauges for both beating economists’ estimates as well.

The payrolls beat led to the US 2yr and 10yr jumping by +18.3bps and +13.9bps on Friday bringing the total weekly yield gains to +34.1bps and +17.8bps, respectively. These gyrations also inverted the 2s10s further, with the slope touching a low of around -43bps intraday, before finishing the day at -40.3bps, a -4.0bps move, -16bps on the week and to the most inverted since 2000.

Fed futures now price in +69bps at the September meeting, so a roughly 76% probability of another +75bps hike in September (up from Thursday’s +59bps, 36%). There’s still along way to go before the next FOMC though with another set of payrolls and two CPI prints before the next meeting.

For the S&P 500 it was a week with a few ups and downs (including -1% immediately after payrolls) but ultimately the market rose +0.36% (Friday -0.16%). Higher yields on Friday also drove divergences between benchmarks, with the Nasdaq (-0.50%) struggling a bit but still +2.50% on the week amid decent earnings results. For small caps, though, better economic data than feared overpowered the effect of rates, sending the Russell 2000 up by +0.81% on Friday and +1.94% on the week.

Oil moved higher after payrolls (WTI +0.53% and Brent +0.85%), but were still down a significant -9.74% and -13.72% on the week.

In Europe, sovereign bonds were also hammered after the payrolls report although the steady march higher started early in the morning and continued until the end of the session. Unlike in the US, however, the curves mainly steepened, with 10yr bund yields +15.2bps (+21bps on the week) edging ahead of the 2yr ones +13.5bps (+19bps on week).

Friday also saw yields sell-off further in the UK, with the 2yr yield (+11.1bps) slightly less extreme than the 10yr (+16.0bps). But in part thanks to the BoE, the UK’s front end gained +25.5bps on the week relative to +28bps on the 10yr. The periphery was quiet last week with 10yr Italian spreads declining -6.5bps on Friday and -13.6bps on the week. The market has been more relaxed after the far-right populists (riding high in the polls) suggested they won't abandon EU budget rules if they win the elections.

Finally, European stocks dipped as the STOXX 600 closed -0.76% on Friday, and -0.59% for the week. Financials (+0.16%) and energy (+0.54%) were the sole outperformers sector-wise on Friday after the robust payrolls.

Tyler Durden Mon, 08/08/2022 - 08:03

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