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Is a 0.3% Miss on Headline CPI Really Worth a 77 bp Rise in the December Fed Funds Yield?

Overview: Better than expected Chinese data and an unscheduled ECB meeting are the highlights ahead of the North American session that features the May…

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Overview: Better than expected Chinese data and an unscheduled ECB meeting are the highlights ahead of the North American session that features the May US retail sales report and other high frequency data before the outcome of the FOMC meeting. Asia Pacific equities outside of Hong Kong and China fell. Europe’s Stoxx 600 is up almost 1% as it tries to snap a six-day slide. US futures are posting modest gains. Bond markets in Europe and the US are rallying. The ECB meeting has spurred a dramatic narrowing of the peripheral premium. The 10-year US yield is off 8 bp to about 3.4%. The dollar is weaker against all the major currencies. The Australian dollar leads with almost a 1% gain. Most emerging market currencies are also firmer. The Hong Kong Monetary Authority intervened selling about $1.2 bln to defend the HKD peg. Gold found support ahead of $1800 yesterday and is near $1825 in Europe. July WTI peaked yesterday near $123.70 and is offered below $117.50 now. US natgas has stabilized after falling 16.5% yesterday. Europe’s benchmark is up almost 2.6% to extend yesterday’s 15.5% surge. Better than expected Chinese industrial output figures failed to provide much support of iron ore prices, which fell around 2.8% to extend the losing streak to the fifth consecutive session. Copper is slightly higher for the first time in five sessions. July wheat is off about 0.5% after a 2% fall yesterday.

 

Asia Pacific

Today's data dump showed that the Chinese economy began recovering last month from the disruption caused by the zero-Covid policy. Industrial output rose 0.7% year-over-year rather than contract by 0.9% as economists (median forecast in Bloomberg' survey) expected. In April, it had fallen by 2.9%. Retail sales were off 6.7% year-over-year in May after dropping 11.1% in April. This was also better than expected. Surveyed unemployment eased to 5.9% from 6.1%. Economists had expected an unchanged report. Fixed asset investment and property investment disappointed. Fixed asset investment rose 6.2% this year through May compared to a year ago, slowing from the 6.8% rise in April. Property investment was off 4% in May after falling 2.7% in the first four months.

China also left its one-year medium-term lending facility at 2.85%, where it has stood since the 10 bp cut in January. Some observers looked for a small cut on ideas that consumer price pressure is low and producer prices have continued to ease, while the economy looks off course to reach 5.5% growth target. Still, the PBOC has been reluctant to use monetary policy much so far preferring instead to use regulatory power, fiscal incentives, guidance, and suasion. The PBOC also rolled over in full CNY200 bln (~$30 bln) in maturing loans.

Australia's 10-year bond yield soared 24.5 bp today to almost 4.2%. The new government made good on its campaign promise to hike the minimum wage. During the campaign, Prime Minister Albanese advocated matching the 5.1% increase in consumer prices in the first quarter. The President of the Fair Work Commission announced a 5.2% increase starting next month. The minimum wage will increase by A$40 to A$812.6 a week. The new hourly rate is A$21.38. The 5.2% rise is twice the annual wage price index of Q1 (2.4%). The decision came after a hawkish speech by RBA Governor Lowe, who warned that inflation could hit 7% this year. Lowe said it was "reasonable" to expect rates will rise to 2.5% from 0.85% now. The cash rate futures see it reaching that in three meetings (July, August, and September). The futures market has 56 bp hike next month (July 5), while the swaps market is closer to 75 bp.

The dollar edged up to a new multi-year high late yesterday to reach almost JPY135.50. The upticks were extended marginally to JPY135.60 in early Asia turnover before sellers emerged. The greenback was driven to nearly JPY134.50 where is stabilized. Yesterday's low was slightly below JPY133.90. The dollar has not taken out the previous day's lows since May 26. The Australian dollar is recovered from the $0.6850 area approached yesterday. Recall that the two-year low set in mid-May was near $0.6830. The session highs ae being recorded in the European morning near $0.6940. Yesterday's higher was around $0.6970. A move above $0.7000 would stabilize the technical tone. The greenback slipped to a three-day low against the Chinese yuan by CNY6.7115. It peaked yesterday closer to CNY6.7610. The dollar's reference rate was set at CNY6.7518. The median projection in Bloomberg's survey was CNY6.7524. In four of the past five sessions, the dollar's reference rate was below the survey median.

Europe

The ECB is holding an unscheduled meeting to ostensibly talk about market developments. The key market development was not the euro's dip below $1.04 yesterday, but the dramatic increase in rates, and more importantly the widening of the peripheral spreads over the Germany. The "fragmentation" dilutes the effectiveness of the ECB's monetary policy. While the ECB ostensibly has a single mandate, to achieve it the ECB recognizes it must contain the divergence of interest rates among its members. The Italian premium over Germany widened to a two-year high near 225 bp yesterday, but to be sure, it is not just Italy. Spain's premium rose to 136 bp yesterday, also its highest level since the chaos when the pandemic struck.

It is not clear what the ECB can do. We noted that as a compromise last year when some advocated a new mechanism to contain the "fragmentation." It was to give the ECB greater flexibility to reinvest maturing proceeds. We have also argued that a tool already exists (European Stabilization Mechanism) but it the support is tied to conditionality. Market talk suggest a more formal agreement on reinvestment of the maturing issues under the Pandemic Emergency Purchase Program can be forthcoming. However, if that is all it is, the markets will likely be disappointed and unwind the euro and bond market gains. ECB's Schnabel, who oversees the central bank's market operations says commitment to resist fragmentation has no limits. A disappointed market may be tempted test the resolve.

There are a few other developments to note. First, the EMU aggregate April industrial production figures were in line with expectations. The 0.4% rise follows an upward revision to the March series to show a 1.4% contraction rather than loss of 1.8%. Second, the eurozone reported a record trade deficit of 31.7 bln euros in April, more than twice what economists (median, Bloomberg survey) anticipated. Rising energy prices seemed like the major driver. Third, much to the chagrin of the UK government, the European Court of Human Rights blocked the first flight that was going to deport refugees to Rwanda.

News of the emergency ECB meeting helped lift the euro, which for the third session found bids near $1.04. The euro traded above $1.05 in the European morning, though was unable to take out the week's high set on Monday slightly shy of $1.0525. The (38.2%) retracement of the euro's decline since the US CPI figures is closer to $1.0540. There are options for almost 610 mln euro that expire today at $1.05. We suspect that if the high is not in place on the ECB news it is close, and we are concerned that the market's may be disappointed with the results. Sterling closed below $1.20 for the first time since March 2020. It is firmer today and did not take out yesterday's low (~$1.1935). It rose to almost $1.21 but this too looks like the extent of the move of nearly so. The Bank of England meets tomorrow, and swaps market has a little less than a 1-in-3 chance of a 50 bp move discounted. 

America

The market's reaction to a 0.3% miss on the headline CPI (vs. Bloomberg survey median forecast) and 0.1% on the core rate (which still eased by 0.2% to 6.0%) was violent, triggering dislocations throughout the credit market. The implied yield of the December Fed funds futures was around 2.75% before the CPI report. The implied yield has risen 77 bp in the past three sessions and settled yesterday at about 3.55%. The increase expectation for the overnight rate can account for the 45 bp increase in the 10-year yield. Doesn't this seem a bit much?  The core rate did ease for the second consecutive month, and reason the core is discussed is not simply because it excludes volatile components, or that it is widely recognized that monetary policy has little impact on food or energy prices, but because over time, headline inflation converges to core inflation, not the other way around.

Before entering the quiet period ahead of this week's FOMC meeting, a solid consensus appeared to emerge for a 50 bp hike in June and July, with the usual caveats the preserved ultimate flexibility. The Fed funds futures market has nearly fully discounted a 75 bp hike today and in July before another 50 bp move in September. The swaps market has the terminal Fed funds rate at 4.17% now, up nearly 70 bp since the CPI report. Monetary policy impacts come with the famous variable lags and leads. Should we really be convinced that one high frequency measure of inflation that it does not target would so dramatically change the course of monetary policy?  Arguably a 75 bp hike that the market has discounted risks injecting more volatility into the disrupted Treasury market may altering is reaction function.

Mr. Market is trying to deliver a fait accompli to the central bank, which there seems to be universal recognition that it is behind the inflation curve. It has hiked market rates sharply and the precipitous drop in equities points to the tightening of financial conditions, as if the Fed has already tightened. If the Fed were to hike by only 50 today, would the financial conditions ease. A 50 bp cut could almost seem dovish especially for a market that tends to see Powell as dovish even though between the rate hikes and the balance sheet, the Fed has launched the most aggressive tightening cycle in a generation. Many observers begin with an unspoken premise that the Fed has lost its anti-inflation credibility, but maybe this is a prejudice. The jump in rates is expecting what the Fed will do, and that is to stabilize prices even if it boosts the chances of a recession. Is this anti-inflation cred? The FOMC statement, the up-dated economic projections (the dot plot), and press conference offer many channels through which the Fed could underscore its commitment to its stable price mandate,

We say that that Fed will tighten policy until something breaks. The University of Michigan's preliminary June results showed a rise in inflations but also sentiment readings that have been associated with a recession in the past. With 30-year mortgage rates rising about 6%, it is reasonable to expect some slowing in the housing market. Before the FOMC meeting concludes, investors and policy makers will see the weekly mortgage market activity index, which has fallen for the past four week. The NAHB Housing Market Index, the Empire State manufacturing survey, and import/export prices may draw some interest, but the real focus is elsewhere. May retail sales will have been held back by disappointing auto sales, though a broad slowing is expected. The components which GDP models picked up from different time series, like auto sales, gasoline, food services, and building materials, can be excluded. The remaining "core" retail sales measure rose 1.1% in March and 1.0% in April. It is expected (median Bloomberg survey) seen at 0.3% last month. Remember retail sales is reported in nominal terms, which means that rising prices inflate the numbers.

Over the last five sessions, the US dollar jumped about a little more than 3.6% against the Canadian dollar to reached CAD1.2975 yesterday. It was the highest level in a month. Today is the first session in five that the greenback may not take out the previous day's high, but do not bet on it. The flattish consolidation is not inspiring, and the Loonie is the poorest performing major currency through the European morning with a gain of less than 0.05%. The general risk environment is the most important near-term driver, so watch the S&P 500. The Canadian two-year premium, which fell from 30 bp last week to less than 3 bp yesterday has widened back to around 12 bp today. In the four sessions through yesterday, the greenback rose almost 6% against the Mexican peso to reach MXN20.69. It too is consolidating today in a narrow range mostly above MXN20.53. The central bank is seen hiking 75 bp next week, but there is a risk of a 100 bp move. Brazil's central bank is expected to hike the Selic rate 50 bp to 13.25% later today. The central bank is getting close to the peak, but the swaps market sees the risk of another 100 bp before it is over. The next meeting is August 3. Year-to-date, the Brazilian real has appreciated almost 9% against the US dollar, the best performing EM currency (excluding Russia). However, so far in June, the real has been the worst performer, falling about 7.5%. 


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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…

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To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….

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Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 

 

About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. www.insilico.com 


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Another country is getting ready to launch a visa for digital nomads

Early reports are saying Japan will soon have a digital nomad visa for high-earning foreigners.

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Over the last decade, the explosion of remote work that came as a result of improved technology and the pandemic has allowed an increasing number of people to become digital nomads. 

When looked at more broadly as anyone not required to come into a fixed office but instead moves between different locations such as the home and the coffee shop, the latest estimate shows that there were more than 35 million such workers in the world by the end of 2023 while over half of those come from the United States.

Related: There is a new list of cities that are best for digital nomads

While remote work has also allowed many to move to cheaper places and travel around the world while still bringing in income, working outside of one's home country requires either dual citizenship or work authorization — the global shift toward remote work has pushed many countries to launch specific digital nomad visas to boost their economies and bring in new residents.

Japan is a very popular destination for U.S. tourists. 

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This popular vacation destination will soon have a nomad visa

Spain, Portugal, Indonesia, Malaysia, Costa Rica, Brazil, Latvia and Malta are some of the countries currently offering specific visas for foreigners who want to live there while bringing in income from abroad.

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With the exception of a few, Asian countries generally have stricter immigration laws and were much slower to launch these types of visas that some of the countries with weaker economies had as far back as 2015. As first reported by the Japan Times, the country's Immigration Services Agency ended up making the leap toward a visa for those who can earn more than ¥10 million ($68,300 USD) with income from another country.

The Japanese government has not yet worked out the specifics of how long the visa will be valid for or how much it will cost — public comment on the proposal is being accepted throughout next week. 

That said, early reports say the visa will be shorter than the typical digital nomad option that allows foreigners to live in a country for several years. The visa will reportedly be valid for six months or slightly longer but still no more than a year — along with the ability to work, this allows some to stay beyond the 90-day tourist period typically afforded to those from countries with visa-free agreements.

'Not be given a residence card of residence certificate'

While one will be able to reapply for the visa after the time runs out, this can only be done by exiting the country and being away for six months before coming back again — becoming a permanent resident on the pathway to citizenship is an entirely different process with much more strict requirements.

"Those living in Japan with the digital nomad visa will not be given a residence card or a residence certificate, which provide access to certain government benefits," reports the news outlet. "The visa cannot be renewed and must be reapplied for, with this only possible six months after leaving the countr

The visa will reportedly start in March and also allow holders to bring their spouses and families with them. To start using the visa, holders will also need to purchase private health insurance from their home country while taxes on any money one earns will also need to be paid through one's home country.

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