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Gratuitously Impatient (For a) Rebound

Gratuitously Impatient (For a) Rebound

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Jay Powell’s 2018 case for his economic “boom”, the one which was presumably behind his hawkish aggression, rested largely upon the unemployment rate alone. A curiously thin roster for a period of purported economic acceleration, one of the few sets joining that particular headline statistic in its optimism resides in the lower tiers of all statistics. The sentiment contained within the ISM’s PMI’s were at least in the same area as the unemployment rate, and therefore they were upgraded and then relentlessly highlighted as if comprehensively irrefutable.

With the unemployment rate, you could at least see why there was such an error. The participation problem left the denominator improperly stripped of a large multitude of formerly American workers. Decried by Economists as merely lazy, it has been Economics (and its media) which was lazy in failing to seek out legitimate and reasonable answers for the ratio’s deficiency.

But how do we explain the ISM? To my knowledge, it’s never been properly characterized nor opened up sufficiently to illuminate this clear and quite obvious upward bias in both sets (below). Furthermore, this is a more recent development. For the non-manufacturing version, it dates back to mid-2015 or so, just in time to overhype Reflation #3 as perhaps globally synchronized growth.



The ISM Manufacturing PMI’s discrepancy goes back a little further, perhaps suggesting an answer for both of the organization’s indices. You may recall that on first estimation, before the data from the 2012 Economic Census was absorbed and added to the government’s economic statistics concerning manufacturing, the rebound during 2013-14 (Reflation #2) was more robust in a broad range of accounts (durable goods, factory orders, imports, etc.)

It wasn’t until subsequent benchmark revisions that the upturn in those years was whittled down practically to nothing, or what we see of it today (long after the public’s attention had moved on). While the ISM undergoes seasonal revisions, it does not substantially revise its prior readings.

Therefore, when comparing the Manufacturing PMI to manufacturing-related accounts this underlying bias becomes quite noticeable. Not just in that specific revision-heavy period of Reflation #2, but even more so with Reflation #3 as if the words globally synchronized growth meant something to ISM respondents they sure didn’t in terms of hard data.



Here in 2020, as the domestic and global economy reopens the paramount question isn’t one of the bottom, a rebound, or even some upside; it’s recovery and only recovery. PMI’s are already ill-suited for this job, especially since they are viewed and interpreted like they display economic levels. Not all 50’s are the same (nor 60’s, for that matter).

After a substantial decline, we would expect a substantial increase. That doesn’t mean recovery, necessarily, only suggesting that an inflection point has been reached. As I wrote last week:

All PMI’s tell us is whether there are more (>50), less (<50), or the same number (50) of respondents reporting growth. That’s it. So, if very few purchasing managers are telling the government they are seeing growth, then that’s consistent with a sizable economic decline.

Once that decline has finished, for whatever reasons, we should expect meaningful acceleration – what we (used to) call recovery. First, though, the economy has to bottom out, which in the PMI’s means a transition from sub-50 to more than 50. That by itself, however, does not mean anything more.

What separates the bottoming out process from the transition to recovery in PMI terms is higher levels being sustained for a significant period. The lower the trough, the higher the rebound. Symmetry counts.

But even more than that, corroboration.

If the economy is actually undertaking an actual recovery, it would be clear across a majority of accounts and statistics. A true upswing is powerful enough on its own to register clearly and widely, not the feverish upselling and overhyping of a few minor points.

To begin with, examining the ISM, this shouldn’t have been the outlier in its own category. IHS Markit’s similar PMI indices, for example, never did climb aboard with the globally synchronized growth pandemic. These other sentiment indicators were far more consistent with Reflation #3 and nothing better; so, they were downgraded in the mainstream view despite being far more in line with practically every other measure including GDP.

For June 2020, the ISM’s bias is back on display again. Last week, the group said its manufacturing PMI climbed up to 52.6 from 43.1 in May – after having been no lower than 41.5 at the trough in April.

Services, meanwhile, the ISM Non-manufacturing PMI today was reported to have leapt up as far as 57.1 last month from 45.4 the month before (and no worse than 41.8 in April). While that level would be consistent with only the bottoming out process, it’s not even consistent across PMI’s.

According to IHS Markit, on the other hand, its Services PMI remained firmly below 50 (47.9) even as it was upgraded significantly from its flash reading (46.7) released late last month. This latter number also suggests a bottoming out, but well behind in the process (still shrinking, though now at a substantially lesser rate) from where the ISM apparently sees it (no longer shrinking, instead already moving back upward again at a relatively decent, but so far insufficient, pace).

Therefore, take your pick while being mindful that neither set of numbers are equal to recovery. That’s the part the ISM proponents are leaving out, alongside any notion of this obvious upward bias. Further along in the rebound process isn’t the same thing at all.

In fact, I’d have expected much better by now; given the size of the decline and the fact that the bottom had been reached several months ago, where are the 60s maybe even 70s? Since we are following behind China’s reopening, I’ll end here with what I wrote in March about that:

When the index falls to something like 35.7 or 29.6, what that meant was a near complete drop across the whole range of businesses in both economic segments. If the rebound was as instantaneous as people seem to be interpreting from these figures, then the PMI’s should have been something like 60 or even 70.

All a 52 suggests when it follows a 35 is that it might not have gotten worse…To immediately jump to the conclusion that it must be getting better is being impatient.

Same with 57.1 – and that would have been with corroboration. Without it, as Markit proposes, people are being gratuitously impatient.

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Strategic Ambiguity Leaves Intervention Question Unanswered, but US Dollar has Steadied

Overview: Dramatic yen price action around the JOLTS
report yesterday after the dollar pierced the JPY150 level spurred speculation
of BOJ intervention….

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Overview: Dramatic yen price action around the JOLTS report yesterday after the dollar pierced the JPY150 level spurred speculation of BOJ intervention. Although there has been no confirmation, the strategic ambiguity is helping steady the yen and the dollar more broadly today, even though US yields remain firm. Final PMI readings were a better than the flash estimates and this may also be facilitating the consolidative tone. Most promising, from a technical point of view, is the recovery in sterling, which after taking out yesterday's low is now trading above yesterday's high. Among the G10, only the yen and New Zealand dollar (RBNZ held as widely expected) are slightly softer. Most emerging market currencies are also firmer, including the Polish zloty, where the central bank may cut rates later today. 

Asia-Pacific equities fell sharply, with Japan and South Korea off more than 2% (which may help explain the won leading the losing emerging market currencies, off more than 1%). It is the third consecutive losing session for the MSCI Asia Pacific Index. Europe's Stoxx 600 is slightly firmer after losing more than 1% on Monday and again yesterday. US index futures are straddling little changed levels. Benchmark 10-year yields are higher. The 10-year JGB is at new highs, slightly above 0.80%, while European yields are mostly 2-3 bp higher. The 10-year US Treasury yield is pushing above 4.80%. Gold is consolidating after falling to almost $1815 yesterday, the lowest level since March. November WTI could not sustain yesterday's modest upticks and has come back heavier today. It is holding above yesterday's low near $87.75. Demand destruction concerns is offsetting OPEC+ expected confirmation of current output.

Asia Pacific

Neither Japan nor Australia's final service and composite PMIs change the fundamental picture, though they were better than the initial projections. At 53.8 rather than 53.3 flash reading (down from 54.3 in August), Japan's service PMI matches the lowest since January. The composite reading is at 52.1 rather than the preliminary estimate of 51.8 (52.6 in August). It averaged 52.3 in Q3 after 53.1 in Q2. Australia's services and composite PMI rose back above 50 in September after spending July and August below the boom/bust level. September services PMI stands at 51.8 (50.5 flash estimate and 47.8 in August). The final composite estimate was 51.5 up from preliminary estimate of 50.2 and 48.0 in August. It is the best since May. It averaged 49.2 in Q3 after 51.6 in Q2. 

Japanese officials have pushed back against idea that there is an "intervention level" and instead have encouraged the market to focus on volatility. Still, despite yesterday's dramatic swing there still is not confirmation of material intervention, One-week yen vol embedded in the options market jumped to 9.4% yesterday and almost 9.8% today before pulling back to below 9%. It reached the lowest level in around 18 months last week around 6.5%. It was near 22% when the BOJ last intervened in Oct 2022. Three-month implied vol is near 9.9%. The low last week was close to 9%. The year's low was set in mid-June near 8.8%. It was closer to 13.4% in September 2022 and spiked to 14.8% October 21, 2022, when the BOJ intervened.

The dollar pushed above JPY150, where options for almost $800 mln expire today and $1.5 bln expire on Friday. After spiking to JPY150.15, the highest close from 2022, the dollar dropped to about JPY147.45 and many suspect intervention. It may not be known for sure until the end of the month report is released. Last year, the BOJ did not intervene outside of Japan's time zone. It may have checked rates, though there are no reports that it did. With US yields making new highs and the BOJ buying JGBs today, it still does not seem like an opportune time to intervene and the relatively modest vol suggests intervention would not receive much sympathy within the G7 and the EBS volume at time of the "intervention" seemed light. Still, the market has been spooked and the greenback is in a narrow range of about 30 pips on either side of JPY149.00. The Australian dollar was sold a little through $0.6290 yesterday to draw near last November's low near $0.6270. Yesterday's low is holding today, and the Aussie is hovering around $0.6325 in quiet dealings. But it is barely entering the Bollinger Band, where the lower end is found around $0.6320. A break could signal another 1% loss on the way to last October's low around $0.6170. Surprising no one, the Reserve Bank of New Zealand maintained its overnight cash rate target at 5.50% where it has been since May. The New Zealand dollar peaked at the end of last week near $0.6050, the highest since mid-August but sold off Monday and Tuesday to briefly trade below $0.5900. Follow-through selling today took it to almost $0.5870. The year's low was set in early September near $0.5860. The US dollar remains firm against the offshore yuan. It reached CNH7.33 yesterday and is holding below it today. It is trading near CNH7.3150. It was near CNH7.2950 when the mainland holiday began. 

Europe

The final September EMU services PMI confirmed the first improvement since April. The pace of contraction in services slowed to 48.7 (48.4 flash estimate) from 47.9 in August. Last September it was at 48.8. The same is true of the composite PMI. It now stands at 47.2, rather than 47.1 initial estimate and 48.1 in September 2022. The new news was not so much about the minor revisions to the German (where the services PMI rose above 50 after dipping below it in August) and French flash estimate (44.1 composite from 43.5 preliminary estimate and 46.0 in August), but modest improvement in Italy (composite at 49.2 vs. 48.2) and Spain (50.1 composite, up from 48.6). Separately, the Eurostat reported that retail sales fell by a dramatic 1.2% (volume terms) in the eurozone in August, the biggest decline this year and more than twice what the median forecast in Bloomberg's survey projected.

The UK's final services PMI is at 49.3 rather than the initial estimate of 47.2 and 49.5 in August. It has not risen since April. The composite PMI stands at 48.5 (46.8 flash and 48.6 in August). It averaged 49.3 in Q3, down from a 53.9 average in Q2 and 51.3 average in Q1. The UK economy seemed to have hit an inflection point. The composite moved above the 50 boom/bust level in February and peaked at 54.9 in April and has fallen since and pushed back below 50 in August. Recall that the economy contracted by 0.5% in July, more than twice the decline expected (median forecast in Bloomberg's survey was -0.2%). August's monthly GDP estimate will be reported next week (October 12) amid renewed recession fears. 

The euro found support after the US JOLTS report slightly below $1.0450. It found support slightly above it today. Since pushing below $1.05 in the US afternoon on Monday, the euro has not been able rise back above it. A move above the $1.0550 area may be needed to stabilize the tone. The $1.04 area is the next technical objective. There are options for nearly 2 bln euros that expire Friday at $1.0450. Sterling's drop yesterday to almost $1.2050 met the (38.2%) retracement objective of sterling's recovery from September 2022 record low near $1.0350 to the mid-July high around $1.3140. That retracement was $1.2075. The next important technical area is $1.20, which also corresponds to the measuring objective of the head and shoulders pattern. Sterling made a marginal new low today near $1.2035 before bouncing back and trading above yesterday's high (~$1.2100). A potential bullish key reversal is unfolding but the close is critical. To confirm the one-day reversal pattern, sterling must close above yesterday's high. Lastly, after cutting the reference rate by 75 bp last month (to 6.0%), Poland's central bank is expected to deliver another quarter-point cut today. Since last month's rate cut, the Polish zloty has been among the worst performing emerging market currencies, falling by about 3.7% against the dollar and around 1.3% against the euro. 

America

Although many observers have downplayed the JOLTS report, its unexpected strength reported yesterday, helped lift US interest rates and the greenback. Job openings jumped by 7.7% in August, the largest increase since July 2021, to 9.61 mln. The median forecast in Bloomberg's survey was for a small decline. Moreover, the July series was revised higher (to 8.92 mln from 8.83 mln). The focus stays on the US labor market with the ADP estimate due today, Challenger lay-offs tomorrow, and the monthly payroll report on Friday. The median forecast in Bloomberg's survey has crept up to 170k (187k in August). A slowing of job growth was supported to herald the pullback in the US consumer and slow the economy in Q4. August factory orders and another look at durable goods orders are also on tap, but they will likely be overshadowed by the ISM services, which has been running stronger than the services PMI, where the final reading is also due today (50.2 vs 50.5 in August, the lowest since January.

We argued in our monthly outlook that the weak link may not be the US economy or dis-inflation but the financial sector. Remember when banks complained that the low rates squeezed interest income. Since February and March, the increase in rates has weakened bank shares. KBW's two bank share indices (one for large banks and one for regional banks) have been trending lower since late July. Yesterday, they both gapped lower. The regional bank index fell to its lowest level since late June, while the large bank index is at its lowest level since mid-May. Last week's Fed report (H.4.1) showed a small increase in both discount window borrowings ($3.193 bln vs. $3.078 bln) and the Bank Term Funding Program to a new record ($107.715 bln vs. $107.599 bln). 

The US dollar's surge against the Canadian dollar extended to CAD1.3735 yesterday, which is about where the trendline off the 2020, 2022 and 2023 highs intersected yesterday. Last week's low was set before Canada's July GDP (flat vs. median forecast in Bloomberg's survey for 0.1% after -0.2% in June) and before US income, consumption and deflator was almost CAD1.3415. The greenback's surge has carried it to its highest level since March and through the upper Bollinger Band (~CAD1.3710). It is consolidating in a narrow range of about CAD1.3695-CAD1.3725 today. A close below CAD1.3660 would confirm the greenback's upside momentum has stalled. That said, the next important chart area is CAD1.3800-15 and then the year's high set on March 10 near CAD1.3860. The greenback's surge and risk-off has overwhelmed the Mexican peso too. The greenback pushed above MXN18.00 for the first time since early May and closed above the 200-day moving average (~MXN17.8245) for the first time since September 2022. Follow-through buying today lifted the US dollar a little above MXN18.2150 before the reversing lower to approached MXN18.00. A break of MXN17.80 would stabilize the technical tone. One take away is that this is not a peso move but a dollar move. For example, the peso and Brazilian real fell by roughly the same amount (-1.6%). Latam currencies, which have been the market's darlings this year, accounted for the five of the six weakest emerging market currencies yesterday, with the South African rand joining them.

 


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Kezar Life Sciences changes CEOs, lays off 41% of staff and halts preclinical R&D to extend cash runway

Kezar Life Sciences, a 2015 spinout from Amgen, is laying off 41% of its workforce and pausing all preclinical R&amp;D in a bid to extend its cash runway…

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Kezar Life Sciences, a 2015 spinout from Amgen, is laying off 41% of its workforce and pausing all preclinical R&D in a bid to extend its cash runway into late 2026 and move select clinical programs forward, the biotech said Tuesday.

There are also several executive shakeups: Kezar said co-founder John Fowler will resign as CEO on Nov. 7 and former president and CSO Christopher Kirk will take over as CEO. CMO Noreen Henig is resigning on Oct. 6 and Zung To, the senior VP of clinical development operations, will take over trial execution and development operations.

The freed-up cash will be used to get data readouts for its candidates. This includes PALIZADE, Kezar’s Phase IIb trial in lupus nephritis with its drug zetomipzomib, as well as Phase I data for KZR-261 in solid tumors that is expected in 2024.

The company added that it is looking for ways to reduce the number of planned expansion cohorts to conserve cash resources.

Kezar previously expected its cash runway to last through the beginning of 2026, according to William Blair analysts. Its stock $KZR was trading down nearly 10% in premarket trading at $1.04.

Topline data for its Phase IIa PORTOLA trial with zetomipzomib for autoimmune hepatitis is expected in mid-2025 and topline data from PALIZADE is expected in mid-2026.

Kezar’s preclinical efforts, like its protein secretion platform and candidate KZR-540, are halted for now, though Kezar said it is looking to partner or license on its protein platform.

John Fowler

“These difficult but necessary decisions to streamline our operations and align resources around our clinical programs should put us on a path to long-term success, extending our runway past key data points, particularly the readout for our PALIZADE trial,” Fowler said in a statement.

TD Cowen analysts called the move to focus on clinical programs “necessary” and “makes much more strategic sense” in a note on Wednesday morning. The analysts added that investors had been concerned about the company’s ability to fund operations through the release of Phase IIb data for zetomipzomib, “and therefore we expect the restructuring to remove the financing overhang on the stock. We think the cash runway extension and previously announced collaboration with Everest Medicines will help set Kezar up for success” in zetomipzomib’s “potentially pivotal” Phase IIb trial in lupus nephritis, which the analysts called the “major value-driver” for Kezar.

Kezar announced its licensing agreement with China-based Everest Medicines in late September. Everest is licensing zetomipzomib in Greater China, South Korea and some Southeast Asian countries with a $7 million upfront payout and up to $125 million in clinical and commercial milestone payments as well as royalties. Everest will help Kezar with a Phase IIb zetomipzomib trial in patients with active lupus nephritis that began earlier this year.

In Kezar’s latest SEC financial filing in August, the company said it had $236.6 million in cash, cash equivalents and marketable securities as of June 30, though the company added it had operating losses and negative cash flows since its inception and anticipated that it will “continue to incur losses for at least the foreseeable future.” Kezar’s net loss was $46.5 million for the six months ended June 30, with an accumulated deficit of $295.4 million.

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Graphene oxide reduces the toxicity of Alzheimer’s proteins

A probable early driver of Alzheimer’s disease is the accumulation of molecules called amyloid peptides. These cause cell death, and are commonly found…

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A probable early driver of Alzheimer’s disease is the accumulation of molecules called amyloid peptides. These cause cell death, and are commonly found in the brains of Alzheimer’s patients. Researchers at Chalmers University of Technology, Sweden, have now shown that yeast cells that accumulate these misfolded amyloid peptides can recover after being treated with graphene oxide nanoflakes.

Credit: Illustration: Chalmers University of Technology / Katharina Merl

A probable early driver of Alzheimer’s disease is the accumulation of molecules called amyloid peptides. These cause cell death, and are commonly found in the brains of Alzheimer’s patients. Researchers at Chalmers University of Technology, Sweden, have now shown that yeast cells that accumulate these misfolded amyloid peptides can recover after being treated with graphene oxide nanoflakes.

Alzheimer’s disease is an incurable brain disease, leading to dementia and death, that causes suffering for both the patients and their families. It is estimated that over 40 million people worldwide are living with the disease or a related form of dementia. According to Alzheimer’s News Today, the estimated global cost of these diseases is one percent of the global gross domestic product.

Misfolded amyloid-beta peptides, Aβ peptides, that accumulate and aggregate in the brain, are believed to be the underlying cause of Alzheimer’s disease. They trigger a series of harmful processes in the neurons (brain cells) – causing the loss of many vital cell functions or cell death, and thus a loss of brain function in the affected area. To date, there are no effective strategies to treat amyloid accumulation in the brain.

Researchers at Chalmers University of Technology have now shown that treatment with graphene oxide leads to reduced levels of aggregated amyloid peptides in a yeast cell model.

“This effect of graphene oxide has recently also been shown by other researchers, but not in yeast cells”, says Xin Chen, Researcher in Systems Biology at Chalmers and first author of the study. “Our study also explains the mechanism behind the effect. Graphene oxide affects the metabolism of the cells, in a way that increases their resistance to misfolded proteins and oxidative stress. This has not been previously reported.”

Investigating the mechanisms using baker’s yeast affected by Alzheimer’s disease
In Alzheimer’s disease, the amyloid aggregates exert their neurotoxic effects by causing various cellular metabolic disorders, such as stress in the endoplasmic reticulum – a major part of the cell, in which many of its proteins are produced. This can reduce cells’ ability to handle misfolded proteins, and consequently increase the accumulation of these proteins.

The aggregates also affect the function of the mitochondria, the cells’ powerhouses. Therefore, the neurons are exposed to increased oxidative stress (reactive molecules called oxygen radicals, which damage other molecules); something to which brain cells are particularly sensitive.

The Chalmers researchers have conducted the study by a combination of protein analysis (proteomics) and follow-up experiments. They have used baker’s yeast, Saccharomyces cerevisiae, as an in vivo model for human cells. Both cell types have very similar systems for controlling protein quality. This yeast cell model was previously established by the research group to mimic human neurons affected by Alzheimer’s disease.

“The yeast cells in our model resemble neurons affected by the accumulation of amyloid-beta42, which is the form of amyloid peptide most prone to aggregate formation”, says Xin Chen. “These cells age faster than normal, show endoplasmic reticulum stress and mitochondrial dysfunction, and have elevated production of harmful reactive oxygen radicals.”

High hopes for graphene oxide nanoflakes
Graphene oxide nanoflakes are two-dimensional carbon nanomaterials with unique properties, including outstanding conductivity and high biocompatibility. They are used extensively in various research projects, including the development of cancer treatments, drug delivery systems and biosensors.

The nanoflakes are hydrophilic (water soluble) and interact well with biomolecules such as proteins. When graphene oxide enters living cells, it is able to interfere with the self-assembly processes of proteins.

“As a result, it can hinder the formation of protein aggregates and promote the disintegration of existing aggregates”, says Santosh Pandit, Researcher in Systems Biology at Chalmers and co-author of the study. “We believe that the nanoflakes act via two independent pathways to mitigate the toxic effects of amyloid-beta42 in the yeast cells.”

In one pathway, graphene oxide acts directly to prevent amyloid-beta42 accumulation. In the other, graphene oxide acts indirectly by a (currently unknown) mechanism, in which specific genes for stress response are activated. This increases the cell’s ability to handle misfolded proteins and oxidative stress.

How to treat Alzheimer’s patients is still a question for the future. However, according to the research group at Chalmers, graphene oxide holds great potential for future research in the field of neurodegenerative diseases. The research group has already been able to show that treatment with graphene oxide also reduces the toxic effects of protein aggregates specific to Huntington’s disease in a yeast model.

“The next step is to investigate whether it is possible to develop a drug delivery system based on graphene oxide for Alzheimer’s disease.” says Xin Chen. “We also want to test whether graphene oxide has beneficial effects in additional models of neurodegenerative diseases, such as Parkinson’s disease.”

More about: proteins and peptides
Proteins and peptides are fundamentally the same type of molecule and are made up of amino acids. Peptide molecules are smaller – typically containing less than 50 amino acids – and have a less complicated structure. Proteins and peptides can both become deformed if they fold in the wrong way during formation in the cell. When many amyloid-beta peptides accumulate in the brain, the aggregates are classified as proteins.


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