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Slow-Motion Crash Drags Futures Below 3,900; Yields, Cryptos Tumble

Slow-Motion Crash Drags Futures Below 3,900; Yields, Cryptos Tumble

The relentless slow-motion crash sparked by the Biden Fed (which is hoping…

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Slow-Motion Crash Drags Futures Below 3,900; Yields, Cryptos Tumble

The relentless slow-motion crash sparked by the Biden Fed (which is hoping that a market collapse will halt inflation) that has sent stocks lower for the past 6 weeks continued overnight, and Wall Street’s main equity indexes were set for more declines after losing $6.3 trillion in value since their late-March high as stubborn inflation in the world’s biggest economy bolstered the case for more aggressive monetary tightening by the Federal Reserve.

Nasdaq 100 futures were down 0.7% at 730am in New York, a day after the underlying gauge sank to its lowest since November 2020 on concerns that higher-than-expected inflation in April would lead to an even more aggressive pace of policy tightening by the Fed. S&P 500 were last down -1% and dropping below 3,900, the level. And with eminis trading around 3,900 means that stocks are now at bearish Morgan Stanley's year-end base case price target of 3900, and 100 points away from Michael Hartnett's Fed put of 3,800.

The dollar continues its relentless ascent, sending the euro to a five-year low while the yen also perked up, as investors took a cue from a rally in bonds and ploughed into “safe-haven” currencies on concerns about inflation risks to global economic growth. Meanwhile, bonds around the globe are surging as fears mount over an economic slowdown and traders start pricing in the next recession, sending the yield on 10-year German bunds and US Treasuries down more than 10 basis points to about 2.82%.

Among notable premarket moves, Disney shares dropped after the media giant said growth in the second half of the year may not be as fast as previously expected, while Beyond Meat slumped 24% as Barclays downgraded the stock and analysts slashed their price targets following underwhelming results. Bank stocks slump in premarket trading Thursday, set for a sixth straight day of losses. In corporate news, Carlyle Group is set to buy Chinese packaging firm HCP for about $1 billion. Meanwhile, Brookfield Asset Management said it plans to list 25% of its asset-management business in a transaction that would value the new entity at $80 billion. Economic data due late today include initial jobless claims. Here are all the notable premarket movers:

  • Disney (DIS US) shares drop 4.8% in premarket trading after the media giant said growth in the second half of the year may not be as fast as previously expected.
  • Apple (AAPL US) shares fall as much as 1.4% in premarket trading Thursday, putting them on course to open more than 20% below their January peak.
  • Beyond Meat (BYND US) shares slump 24% in US premarket trading as analysts slashed their targets on the plant-based food company following underwhelming results.
  • Riot Blockchain (RIOT US) -6.1% in premarket trading, Marathon Digital (MARA US) -5.8%, MicroStrategy (MSTR US)-10% and Coinbase (COIN US) -7.3%
  • Zoom (ZM US) shares decline as much as 4.5% in US premarket as Piper Sandler analyst James Fish cut the recommendation on the stock to neutral as he sees limited upside to paid video service.
  • Dutch Bros (BROS US) slumps 42% in premarket trading after the drive-thru coffee chain’s guidance lagged analyst estimates, though some analysts see the dip in shares as a buying opportunity.
  • Lordstown Motors (RIDE US) shares jump as much as 27% in U.S. premarket trading after the electric truck maker completed the sale of its factory to Foxconn.
  • Rivian (RIVN US) gains 2.9% in premarket trading after the electric vehicle startup reaffirmed its annual production guidance, even as it navigates through supply chain snarls.
  • Coupang (CPNG US) shares jump as much as 18% in US premarket trading after the Korean e- commerce firm reported a first-quarter loss per share that was narrower than analysts’ expectations.
  • Bumble (BMBL US) shares rise 8.3% in premarket after the company reported first-quarter results that beat expectations, despite currency risks and those related to the war in Ukraine.

Cryptocurrency-exposed stocks also fell as digital tokens resumed declines after the collapse of the TerraUSD stablecoin, overnight the largest stablecoin, Tether, broke the buck spooking markets further that the contagion is spreading.

The hotter-than-expected inflation reading for April raised concern the Fed’s hikes aren’t bringing down prices fast enough and policy makers may have to resort to a 75bps move, rather than the half-point pace markets have come to grips with. Worries such a shift would crimp economic growth, combined with Russia’s war in Ukraine and China’s struggles with Covid, are battering risk assets.

The data halted a minor rebound in US equities, which are set for their longest weekly streak of losses since 2011, as investors worried that hawkish moves by central banks at a time of surging commodity prices and slowing earnings growth would spark a recession. While some strategists have said the rout has now made stock valuations attractive, others including Michael Wilson at Morgan Stanley warned of a bigger selloff.

“What these wild market moves are telling us is that investors have very little idea of whether we’re near a short-term base, or whether we’ve got further to fall,” said Michael Hewson, chief market analyst at CMC Markets UK.

The higher-than-expected CPI figure may further fuel fears that the Fed will take policy higher than expected for longer than expected, draining precious liquidity from markets, which have until late been awash with it,” said Russ Mould, investment director at AJ Bell.  “Until we get a meaningful move lower in inflation, not only one print, but a consistent two, three, four prints moving in the right direction, this market may remain range bound,” Mona Mahajan, senior investment strategist at Edward Jones & Co., said on Bloomberg Television.

Citigroup Inc. strategists said growth stocks, including the battered tech sector, will likely remain under pressure as central banks tighten monetary policy, driving yields higher.  “Now that central banks are unwinding monetary support, growth stocks’ valuations have further to fall,” strategists including Robert Buckland wrote in a note. They are especially wary of growth stocks in the US, where the Nasdaq 100 is down 27% this year.

In Europe, the Stoxx 600 was down 2.2% with mining and consumer-products stocks leading declines. The Euro Stoxx 50 drops as much as 2.8%, Haven currencies perform well. The Stoxx 600 Basic Resources sub-index erased all YTD gains as a slide in metal prices and concerns about inflation fueled a selloff in the sector. Miners are the biggest laggard in the broader European equity benchmark on Thursday as major miners and steelmakers slip along with copper and iron ore prices. The basic resources sector (the sector is still second-best performing in Europe this year so far) fell as much as 5.6%, briefly erasing all YTD losses, and down to the lowest since January 3. Morgan Stanley strategists had downgraded miners to neutral on Wednesday, saying it’s time to take profits in the sector amid concerns inflation will lead to demand destruction. Here are the biggest movers:

  • Telefonica shares rise as much as 4.5% after the Spanish carrier reported what analysts said was a solid set of quarterly earnings.
  • STMicroelectronics gains as much as 4.1% as the chipmaker projects annual revenue of more than $20 billion for 2025-2027 period.
  • Compass Group climbs as much as 2.5%, adding to Wednesday’s 7.4% advance, with Morgan Stanley lifting its price target to a Street-high.
  • JD Sports rises as much as 3% after the UK sportswear chain said like-for-like sales for the 14-week period to May 7 were more than 5% higher than a year earlier.
  • AS Roma advances as much as 15% after US billionaire Dan Friedkin made a tender offer for the roughly 13% of the Italian football team he doesn’t already own.
  • The Stoxx 600 Basic Resources sub- index erases all YTD gains as a slide in metal prices and concerns about inflation fuel a selloff.
  • Rio Tinto declines as much as 6%, Glencore -7.3%, Anglo American -6.9%, ArcelorMittal -4.8%, Antofagasta -7.9%
  • Luxury stocks resume their declines after high US inflation bolstered the case for aggressive monetary tightening, deepening fears of an economic slowdown.
  • Kering slides as much as 5.6%, Hermes -5.5% and Swatch -3.7%
  • SalMar falls as much as 8.2% after the Norwegian salmon farmer published its latest quarterly earnings, which included a miss on operating Ebit.

Earlier in the session, Asian stocks resumed their slide after Wednesday’s modest gains, as US inflation topped estimates and new Covid-19 community cases in Shanghai damped prospects for a reopening.  The MSCI Asia Pacific Index fell as much as 2%, with tech giants Alibaba and TSMC weighing the most on the gauge. Chinese shares snapped a two-day advance after Shanghai found two infections outside of isolation centers, pushing back the timeline for a relaxation of growth-sapping lockdowns.  US inflation remained above 8% in April, keeping the Federal Reserve on the path of aggressive tightening. That prospect weighed on shares in Asia, as investors also factored in growth implications from continued lockdowns in the world’s second-largest economy. Markets appeared to be unimpressed by China’s Premier Li Keqiang’s comments urging officials to use fiscal and monetary policies to stabilize employment and the economy. Valuations for the MSCI Asia Pacific Index are hurtling toward pandemic lows as the index records a 29% decline from its 2021 peak, posting declines in all but one of the trading sessions so far this month.

“We’ve seen nearly the same amount of foreign investor selling in Asia as we saw during the global financial crisis, even though operating conditions aren’t as bad,” Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs, told Bloomberg Television. “On our expected conditions over the next year, somewhere around 13 times should be a fair and appropriate valuation for Asian markets,” he added. Benchmarks in Indonesia and Taiwan were among the biggest decliners in the region, with the Jakarta Composite Index on the cusp of erasing gains for the year. Hong Kong shares also fell as the city intervened to defend its currency for the first time since 2019

In FX, the Bloomberg Dollar Spot Index rose to a fresh two-year high as the greenback climbed versus all of its Group-of-10 peers apart from the yen. The demand for havens sent the yield on 10-year German bunds and US Treasuries down more than 10 basis points. Stops were triggered in the euro below $1.0490 and 1.0450, weighed by EUR/CHF selling and yen buying across the board, according to traders. The yen rose by as much as 1.2% against the greenback as selling in stocks hurt risk sentiment. The BOJ indicated its lack of appetite for changing policy to help address a slide in the yen to a two-decade low during discussions at a meeting last month, according to a summary of opinions from the gathering. The Australian and New Zealand dollars fell on concern that lockdowns in China’s financial capital will extend, dragging economic growth in the world’s biggest buyer of commodities.

In rates, Treasuries extended Wednesday’s rally with yields richer by 6bp to 9bp across the curve, supported by risk-aversion as stocks extend losses. US 10-year yields around 2.82%, down 10bps on the session, and trailing gilts and bunds by 2.2bp and 3bp in the sector; intermediates lead the US curve, richening the 2s5s30s fly by 4bp on the day to tightest levels since March 23. Eurodollars are bid as well with the strip flattening out to early 2024 as rate-hike premium continues to erode. European fixed income extends gains. German and US curves bull-steepen; bunds outperform, richening ~12bps across the belly. Gilts bull-flatten, focusing on soft March GDP data over hawkish comments from BOE’s Ramsden.  STIRs are similarly well bid with red pack euribor, eurodollar and sonia futures all up over 10 ticks. The US auction cycle concludes with $22b 30-year bond sale at 1pm ET; Wednesday’s 10-year is trading more than 10bp lower in yield after 1.4bp auction tail. WI 30-year around 2.965% is above auction stops since March 2019 and ~15bp cheaper than April stop-out. Super-long sectors led gains in Japanese bonds even as the 30-year sale was seen sluggish.

In commodities, base metals were under pressure; LME tin slumps over 8%, zinc down over 3.5%. European natural gas surged as much as 13% on supply concerns. Crude futures drop, fading roughly half of Wednesday’s rally. WTI is down over 2% near $103.50. Spot gold trades a narrow range near $1,850/oz. European natural gas prices jumped as disruptions to a key transit route through Ukraine and a move by Moscow to retaliate against sanctions ramped up the risk of supply cuts. Shanghai found two Covid cases outside government-run isolation centers on Wednesday, according to state-run CCTV, dampening prospects for potential easing of lockdowns. Prices of iron ore, the biggest commodity export from Australia, also fell on the news.

Looking at the day, data releases include the US PPI reading for April, the weekly initial jobless claims, and UK GDP for Q1. Central bank speakers include the ECB’s De Cos and Makhlouf. And in the political sphere, US President Biden will be hosting ASEAN leaders at the White House, whilst G7 foreign ministers are meeting in Germany.

Market Snapshot

  • S&P 500 futures down 0.6% to 3,907.50
  • STOXX Europe 600 down 1.9% to 419.41
  • MXAP down 1.7% to 157.21
  • MXAPJ down 2.5% to 512.05
  • Nikkei down 1.8% to 25,748.72
  • Topix down 1.2% to 1,829.18
  • Hang Seng Index down 2.2% to 19,380.34
  • Shanghai Composite down 0.1% to 3,054.99
  • Sensex down 2.1% to 52,935.64
  • Australia S&P/ASX 200 down 1.8% to 6,941.03
  • Kospi down 1.6% to 2,550.08
  • Gold spot down 0.1% to $1,849.85
  • U.S. Dollar Index up 0.48% to 104.34
  • German 10Y yield little changed at 0.89%
  • Euro down 0.6% to $1.0449
  • Brent Futures down 2.0% to $105.32/bbl

Top Overnight News from Bloomberg

  • The EU is looking at creating bond futures and repurchase agreements to bolster its pandemic-era debt program
  • The BOE will have to raise interest rates further to control surging prices, and there’s a risk that the UK’s worst inflation crisis in decades will take longer to ease fully, according to Deputy Governor Dave Ramsden
  • The UK economy unexpectedly contracted in March. Gross domestic product fell 0.1% from February, when growth was flat. It meant the economy expanded just 0.8% in the first quarter, less than the 1% forecast by economists
  • UK Prime Minister Boris Johnson will spend the next few days considering whether the UK will introduce legislation to override its post- Brexit settlement with the EU, a move that risks sparking a trade war
  • A massive sell-off in cryptocurrencies wiped over $200 billion of wealth from the market in just 24 hours, according to estimates from price-tracking website CoinMarketCap
  • Finland’s highest-ranking policy makers President Sauli Niinisto and Prime Minister Sanna Marin threw their weight behind an application and Sweden’s government is likely to do so in the coming days
  • Sweden’s Riksbank’s target measure, CPIF, accelerated to 6.4% on an annual basis in April, the highest level since 1991, according to data released on Thursday. Economists surveyed by Bloomberg expected prices to rise by 6.2%

A more detailed look at global markets courtesy of Newsquawk

Asia-Pc stocks were pressured after the losses on Wall St where the major indices whipsawed in the aftermath of the firmer than expected CPI data and the DJIA posted a fifth consecutive losing streak. ASX 200 was lower amid heavy losses in tech and with financials subdued after flat earnings from Australia’s largest lender CBA. Nikkei 225 weakened with attention on earnings updates and with SoftBank amongst the worst performers ahead of its results later with the Co. anticipated to have suffered a record quarterly loss. Hang Seng and Shanghai Comp were subdued with early pressure from default concerns after developer Sunac China missed its grace period deadline and warned there was no assurance that the group will be able to meet financial obligations, although the mainland bourse recovered its earlier losses after further policy support pledges by Chinese authorities. SoftBank (9984 JT) - FY revenue JPY 6.2trln (prev. 5.6trln Y/Y). FY net profits -1.7trln (prev. +4.99trln). Foxconn (2317 TT) Q1 net profit TWD 29.45bln (exp. 29.76bln); sees Q2 revenue flat Y/Y, sees smart consumer electronics slightly declining Y/Y.

Top Asian News

  • Rupee Tumbles to a Record Low, Stocks Slump on Inflation Woes
  • SoftBank Vision Fund Posts a Record Loss as Son’s Bets Fail
  • Yen Rebound Tipped as Recession Fears Push Down Treasury Yields
  • More Defaults Seen Following Sunac’s Failure: Evergrande Update

European bourses are pressured as overnight risk sentiment reverberated into the region, in a continuation of the post-CPI Wall St. move; Euro Stoxx 50 -2.5%. US futures are lower across the board though the magnitude is less extreme, ES -0.6%; NQ fails to benefit from the yield pullback as participants focus on the normalisation's impact on tech. Walt Disney Co (DIS) - Q2 2022 (USD): Adj. EPS 1.08 (exp. 1.19), Revenue 19.25bln (exp. 20.03bln). Disney+ subscribers 137.7mln (exp. 134.4mln). ESPN+ subscribers 22.3mln (exp. 22.5mln) -5.0% in the pre-market.

Top European News

  • UK Retailers Sue Truckmakers Over Alleged Price Fixing
  • Rokos Raising $1 Billion as He Joins Macro Hedge Fund Surge
  • Siemens Abandons Russian Market After 170-Year Relationship
  • Hargreaves Tumbles as Peel Notes Macro, Geopolitical Impacts

FX

  • DXY tops 104.500 to set new 2022 peak as risk aversion intensifies.
  • Yen regains safe haven premium to buck broadly weak trend vs Dollar, USD/JPY sub-128.50 vs top just over 130.00.
  • Aussie and Kiwi flounder as commodities tumble on demand dynamics'; AUD/USD under 0.6900 and NZD/USD below 0.6250.
  • Euro and Sterling give up big figure levels with the Pound also undermined by worse than forecast UK data; EUR/USD down through 1.0500 then 1.0450, Cable beneath 1.2200 and eyeing 1.2150 next.
  • Swedish Crown holds up in wake of stronger than expected CPI and CPIF metrics; EUR/SEK straddles 10.6000.
  • Yuan crushed as PBoC and Chinese Government reaffirm commitment to provide economic support; USD/CNY 6.7900+, USD/CNH just shy of 6.8300.
  • Forint falls as NBH Deputy Governor contends that aggressive tightening period is over and future hikes likely more incremental.
  • HKMA picks up pace of intervention to defend HKD peg, CNB steps in to support CZK.

Fixed Income

  • Debt revival gathers pace amidst risk-off positioning elsewhere.
  • Bunds probe 155.00, Gilts reach 120.71 and 10 year T-note nudges 120-00.
  • BTP supply encounters few demand issues, unlike second US Quarterly Refunding leg ahead of USD 22bln long bond auction.

Commodities

  • WTI and Brent are pressured in what has been a grinding move lower during European hours; however, benchmarks were lifted amid Kremlin/N. Korea updates.
  • Currently, the benchmarks are lower by around USD 1.50/bbl.
  • IEA OMR: Revises down oil demand growth projections for 2022 by 70k BPD, amid China lockdowns and elevated prices. Overall decline of Russian supply by 1.6mln BPD in May and 2mln BPD in June; could expand to circa. 3mln BPD from July onwards. Click here for more detail.
  • OPEC MOMR to be released at 13:00BST/08:00EDT.
  • Indian refineries purchased 25-30mln barrels of Russian oil at a discount for delivery in May-June, according to Interfax.
  • Spot gold/silver are pressured amid the USD's revival, but, the yellow metal remains in relatively contained parameters around USD 1850/oz.

US Event Calendar

  • 08:30: May Initial Jobless Claims, est. 192,000, prior 200,000
  • 08:30: April Continuing Claims, est. 1.37m, prior 1.38m
  • 08:30: April PPI Final Demand MoM, est. 0.5%, prior 1.4%; YoY, est. 10.7%, prior 11.2%
  • 08:30: April PPI Ex Food and Energy MoM, est. 0.6%, prior 1.0%; YoY, est. 8.9%, prior 9.2%

DB's Jim Reid concludes the overnight wrap

It was all about the higher than expected US CPI report yesterday which added to Fed rate expectations, as well as hard landing expectations as revealed through the curve flattening that took place through the rest of the day. Longer dated Treasury yields fell (after initially spiking much higher) and equities fell sharply (S&P 500 -1.65%) after actually being higher for the first half of the US session. So a topsy-turvy day that kept the Vix above 30 for a fifth straight session.

In terms of the details of that report, headline monthly CPI surprised to the upside with a +0.3% gain (vs. +0.2% expected), whilst monthly core CPI also surprised to the upside at +0.6% (vs. +0.4% expected). Thanks to base effects from last year, the year-on-year numbers managed to decline in spite of the upside monthly surprises, but they were also higher than expected with headline CPI at +8.3% (vs. +8.1% expected), and core CPI at +6.2% (vs. +6.0% expected).

Looking at the components, what will concern the Fed is that there are plenty of signs that inflation pressures remain broad and can’t be pinned on transitory shocks like the spike in energy prices of late. For instance, owners’ equivalent rent (which makes up nearly a quarter of the inflation basket) was up +0.45%, which is its fastest monthly pace since June 2006. Rents also remained strong with a +0.56% increase, which is just shy of its February increase and still the second-highest since December 1987. Food prices (+0.9%) also continued to move higher in April, bringing their year-on-year gain to a 41-year high of +9.4%. One consolation might be that the Cleveland Fed’s trimmed mean (which removes the outliers in either direction) saw its smallest monthly increase since last August at +0.45%, even if it’s still increasing well above rates seen throughout the 2010s.

The fact the release surprised on the upside saw an immediate reaction across asset classes, with 10yr Treasury yields bouncing by more than +14bps intraday during the half hour following the report to 3.07%, before reversing all of this to end the day down -7.0bps to 2.92%. Ultimately the decline in real rates (-14.7bps) offset expectations of higher inflation (+8.1bps), but it was a different story at the front-end of the curve, where 2yr yields rose +2.5bps since the report was seen to raise the likelihood of larger hikes at the coming meetings, with the futures-implied rate for the December meeting rising +4.5bps on the day. In Asia, US 10 year yields are another -3.3bps lower with 2yrs flats. This has left the 2s10s curve at 24.3bps after trading as high as 48.5bps on Monday.

In terms of the reaction from Fed officials themselves, Atlanta Fed President Bostic said he would support +50bp hikes until policy reaches neutral, which suggests more +50bp hikes than just the next two meetings, which has been the common line from Fed speakers of late. Markets are placing a 58% chance on a +50bp hike at September, up from 49% the day before. Markets also increased the chance they place on the Fed being forced into a +75bp hike even at the June meeting, pricing a 14% chance versus 10% yesterday. We will also get the May CPI release ahead of the next FOMC meeting in June, but by that point they’ll be in their blackout period, so this is the last print they’ll be able to comment on ahead of their next decision, and will frame the chatter around whether 75bps might be back on the table at some point given inflation looks to be proving stickier than many had expected.

For equities, the CPI print drove indices lower at the open, but they bounced around all day as volatility remained elevated, ultimately closing near the lows. The S&P 500 fell -1.65%, led by tech and mega cap shares, while the Vix ended above 30 for the fifth straight session for the first time since the post-invasion bout of volatility gripped equity markets. As mentioned, tech stocks were the main underperformer, with the NASDAQ down by -3.18% as investors priced in faster hikes from the Fed this year. Separately in Europe, equities outperformed their US counterparts for a 3rd consecutive day, with the STOXX 600 posting a +1.74% advance but closing well before the US slump.

Whilst the main focus yesterday was on the US CPI report, there was significant central bank news in Europe as well after ECB President Lagarde put out a strong signal that July would be when the ECB starts hiking rates for the first time in over a decade. In her remarks, she said that the first hike “will take place some time after the end of net asset purchases”, and that “this could mean a period of only a few weeks”. A July hike would be in line with the call from our own European economists here at DB (link here), who see four consecutive quarter point hikes from July, taking the deposit rate up to +0.50% by year-end. That was then echoed by a separate Bloomberg report later in the session, which said that ECB officials were “increasingly embracing a scenario” where interest rates moved into positive territory by year-end. ECB policy pricing by the end of the year actually fell -1.3bps to 26.5bps, as a broader sovereign bond rally overpowered this.

With other ECB speakers having already been signalling their openness to a July hike, European sovereign bonds reacted more to the US CPI report than Lagarde’s remarks. So we ended up with a similar pattern to Treasuries, whereby yields surged following the US release before falling back to end the day lower on growth fears. Ultimately, that meant yields on 10yr bunds were down -1.5bps at 0.98%, and there was a significant narrowing in peripheral spreads too, with the gap between 10yr Italian yields and bunds down -9.9bps.

Asian equity markets are weaker overnight. The Hang Seng (-0.94%) is the largest underperformer across the region this morning after the Hong Kong Monetary Authority (HKMA) intervened into the currency markets for the first time since 2019 to defend the local dollar from capital outflows. The authority bought about HK$1.589 billion from the market to bolster the exchange rate in order to bring it back within the trading band i.e., between 7.75 and 7.85 versus the US dollar. Elsewhere, the Nikkei (-0.84%), Kospi (-0.56%) are also trading lower. Mainland Chinese stocks are showing a more mixed performance with the Shanghai Composite (+0.17%) higher while the CSI 300 (-0.07%) is a tad lower. Outside of Asia, US stock futures are flat but Euro Stoxx futures are catching down with the late US move last night and are around -2%.

According to the BOJ’s summary of opinions from the April 27-28 meeting, the board brushed aside the idea of countering sharp yen falls with interest rate hikes with several board members arguing in favour of maintaining the central bank’s massive stimulus programme.

Oil prices are lower in early Asian trade, taking a pause after Brent crude futures closed +4.93% higher last night. This morning, the contract is -1.15% down at $106.27/bbl as I type.

Elsewhere in markets, a significant story over the last 24 hours has been the significant price declines in a number of major cryptocurrencies. Bitcoin is at $27,617 as I type, a level not seen since December 2020. Coinbase’s share price was down a further -26.40% yesterday, bringing its losses over the last week alone to almost -60%.

A few other headlines worth highlighting. The Dallas Fed announced that Lorie Logan, the current manager of the Fed’s portfolio, would assume the role of President, which makes her a voter on the FOMC next year. Given her remit has been to manage the balance sheet, little is known about her views about monetary policy as of yet.

Finally on the Brexit front, there was a further ratcheting up in the comments between the UK and the EU over the Northern Ireland Protocol yesterday. UK PM Johnson said that “we need to sort it out”, and Levelling Up Secretary Gove said that “no option is off the table”. From the EU side however, Irish Foreign Minister Coveney said that the EU would need to react if the UK breached international law, and Bloomberg reported that the EU would likely suspend their trade deal with the UK if the UK were to revoke its commitments.

To the day ahead now, and data releases include the US PPI reading for April, the weekly initial jobless claims, and UK GDP for Q1. Central bank speakers include the ECB’s De Cos and Makhlouf. And in the political sphere, US President Biden will be hosting ASEAN leaders at the White House, whilst G7 foreign ministers are meeting in Germany.

Tyler Durden Thu, 05/12/2022 - 07:57

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Economics

What Is Quantitative Tightening? How Does It Work?

What Is Quantitative Tightening?The main job of a central bank, like the Federal Reserve, is to keep the economy strong through maximum employment and…

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Quantitative tightening is not the opposite of quantitative easing—they are distinctly different activities.

Ballun from Getty Images Signature; Canva

What Is Quantitative Tightening?

The main job of a central bank, like the Federal Reserve, is to keep the economy strong through maximum employment and stable prices. It does this by managing the Fed Funds Rate, which it sets at its Federal Open Market Committee meetings. This effectively raises or lowers the interest rates that banks offer companies and consumers for things like mortgages, student loans, and credit cards.

But when the economy needs help and interest rates are already low, the Fed must turn to other tools in its arsenal. This includes practices like quantitative easing and quantitative tightening; the former expands the shares of Treasury bonds, mortgage-backed securities, and even stocks on the government’s balance sheets, while the latter tightens the monetary supply. Both have a profound effect on liquidity in the financial markets.

The Fed came to the rescue with trillions of dollar’s worth of quantitative easing at the end of the 2007–2008 Financial Crisis, and again during the global Coronavirus pandemic.

But the Fed can’t go on printing money forever. Whenever it employs quantitative easing, the Fed must eventually turn to its counterpart, which is known as quantitative tightening, in order to limit some of the negative outcomes of the former, such as inflation.

How Does Quantitative Tightening Work? What Is an Example of Quantitative Tightening?

Through quantitative tightening, the Federal Reserve reduces its supply of monetary reserves in order to tighten its balance sheet—and it does so simply by letting the bonds and other securities it has purchased reach maturity. When this happens, the Treasury department removes them from its cash balances, and thus the money it has “created” effectively disappears.

Does the Fed know exactly when to ease the gas pedal on quantitative easing? According to the Fed, timing is everything. Remember how the Fed’s main job is to create a strong economy through stable prices and high employment? As it carefully monitors the effects interest rates are having on the economy, it also keeps a close eye on the overall measure of inflation. It’s both a constant battle and a juggle. 

Take the period following the Financial Crisis as an example. The 2007–2008 crisis stemmed in large part from the implosion of collateralized debt obligations, and so the Fed kept the Fed Funds Rate at virtually 0% for almost a decade in order to spur growth and maintain stable rates of employment.

During this period, it also undertook a series of quantitative easing measures, watching its balance sheet balloon from $870 billion in August 2007 to $4.5 trillion in September 2017.

The FRED graph below illustrates how the Fed Funds rate, in blue, remained at nearly zero for the period while the total size of the Fed’s balance sheet, in red, grew. The shaded areas indicate recession.

Federal Reserve Bank of New York, Effective Federal Funds Rate [EFFR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EFFR, May 16, 2022.

The Fed believed that as soon as employment became stable, it needed to turn its attention to meeting its 2% inflation target, which it accomplished by raising interest rates. And so, in October 2015, it began gradually increasing the Fed Funds Rate in 25 basis point increments. Over the next several years, rates went up from 0.0%–0.25% levels to 2.25%–2.5% in 2018. This course of action, in the Fed’s words, was known as liftoff.

After raising rates a few times with no disastrous consequences, in 2017 the Fed next embarked on an effort to reduce its balance sheet through quantitative tightening. This was also known as unwinding its balance sheet, because it was taking action in a slow and gradual way.

Between 2017 and 2019, the Fed let about $6 billion of Treasury securities mature and $4 billion of mortgage-backed securities “run off” per month, increasing that amount every quarter until it hit a maximum of $30 billion Treasuries and $20 billion mortgage-backed securities per month. By July 2019, the Fed announced that its unwinding was complete.

The Fed published a blog post detailing these efforts, categorizing them as its “balance sheet normalization program,” since it sought to “return the policy rate to more neutral levels.”

What Effect Does Quantitative Tightening Have on the Economy?

While the goal of quantitative easing is to spur growth, quantitative tightening doesn’t hinder it; in fact, many Governors of the Federal Reserve believe quantitative tightening doesn’t have much effect on the economy at all.

“Quantitative tightening does not have equal and opposite effects from quantitative easing,” said St. Louis Fed President Jim Bullard, “Indeed, one may view the effects of unwinding the balance sheet as relatively minor.”

Former Fed Chair Janet Yellen famously described quantitative tightening as “something that will just run quietly in the background over a number of years,” and that “it’ll be like watching paint dry.”

St. Louis Fed Research Director Chris Waller compared quantitative tightening with “slowly opening the stopper in a drain and letting the water run out,” and by doing so, they were “letting the supply of U.S. Treasuries in the hands of the private sector grow.”

But critics have argued that the excess reserves the Fed creates by “printing money” through quantitative easing have negative consequences on the overall economy. For example, these reserves can lead to currency devaluation and higher inflation, which is defined as when prices rise faster than wages. Inflation can have disastrous effects on an economy, resulting in asset bubbles and even recessions.

Even the Fed admitted as much when St. Louis Vice President Chris Neely noted that between 2008–13, the Fed’s asset purchases led to a decrease in 10-Year Treasury yields by 100–200 basis points. He said, “this reduction modestly raised prices and real activity.”

Just remember that the Fed’s principal aims are to generate stable prices and high employment. So while the Fed hasn’t explicitly said so, reducing its balance sheet might be one of its methods to combat inflation.

Why Is Quantitative Tightening on the Fed’s Agenda Again?

In 2022, inflation reached decades’ high, stemming from a number of factors, including fallout from the global Coronavirus pandemic, which increased labor prices, and Russia’s invasion of Ukraine, which affected energy and commodities. In March, 2020, the Fed slashed the Fed Funds rate to 0.00%–0.25% in response to the pandemic. In May, 2022 it raised rates again by 0.5%.

What Is the Schedule for Quantitative Tightening?

On May 4, 2022, the Fed announced it would be undertaking a “phased approach” of quantitative tightening measures beginning with a 3-month period of unwinding $30 billion of Treasuries and $17.5 billion mortgage-backed securities beginning on June 1, 2022. By September, 2022 these caps would increase to $60 billion and $35 billion, respectively.

Is Quantitative Tightening Really So Frightening?

TheStreet’s Ellen Chang says that, according to economists, inflation is on a downward trend, most likely to decline to 3% by the end of the year, and that higher interest rates as well as quantitative tightening should do what they’re supposed to, and reduce pricing pressure. 

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What is Stagflation?

Today we’ll look at what stagflation is, as well as how it impacts you and the broader economy. Keep reading to get started.
The post What is Stagflation?…

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Stagflation seems to be a word that we’ve been hearing a lot of recently. With the CPI report showing that inflation had slowed less than expected, stagflation concerns became even louder. However, for the average person, the term probably has never been defined. So, what is stagflation? Today we’ll look at what stagflation is, as well as how it impacts you and the broader economy.

Inflation

First things first, we should probably define what inflation is. The simplest way to define inflation is as the erosion of a currency’s purchasing power. Those moments where it feels like your dollar buys less than it used to  are examples of inflation. Under economic theory, inflation primarily occurs when the growth of the money supply outpaces economic growth. For this reason, when inflation becomes an issue, central banks will attempt to limit the money supply. Essentially if more money is introduced to an economy, without an equal introduction of goods and/or services, inflation occurs. Other contributing factors include rising cost(s) of goods, wages and labor. The U.S. Federal Reserve aims for an inflation rate of 2%, and has averaged that since 2011.

Stagflation Defined

So, now that we know what inflation is, we can address what stagflation is. If inflation alone has the power to impact markets and basic economies, what impacts can stagflation have? To simply define stagflation, allow me to present it as an equation or two:

  1. Stagflation = High Inflation + Slow Economic Growth + High Unemployment
  2. Stagflation = High Inflation + Decreasing GDP

Under the first equation, we aren’t yet in a period of stagflation. While inflation is high, the official unemployment rate is 3.6%. That level reasonably mirrors the level that we were at prior to the onset of Covid back in 2020. However, the labor participation rate is still below pre-pandemic levels by a full percentage point. While that may not sound like a lot, remember that equates to hundreds of thousands of people not participating in the labor force.

With that being said, based on the second equation, we are already experiencing a period of stagflation. The U.S. GDP declined by 1.4% in Q1 of 2022, when it was expected to grow by 1%.

An example of stagflation in the U.S. would be the America of the early to mid 1970s. During this time, the United States experienced two, separate, recessions. There were also four separate years of negative GDP growth, two of which being consecutive. Inflation skyrocketed from 3.6% in 1973 to 8.3%, incidentally, where we are now, to 1974. The closest unemployment was to the 3.6% we have now was 1970 and 1973, when it was 4.9%. In 1975, unemployment was 8.5%.

Impacts and Concerns

So, how does stagflation impact you? Well, first, through the basic inflationary impacts. Let’s say your investments are down 5% this year, better than the broader markets. Tack on 8.3% in inflationary costs, and your money is actually worth 13.3% less. Inflation and bonds have a well-defined history as well. Inflationary risks and different securities have well defined relationships such as the relationship with bonds and the inflation rate. If your bond pays 3%, but inflation rises from 2% to 6%, you are losing money on the investment. Let’s look at your paycheck too. If you got a 5% raise, but inflation went up from the 2% average to 8.5%, your real earnings went down 1.5%. In sum, high inflation hits you at every angle. You effectively make less, your investments return less/negative, and things get more expensive.

Second, looking at the other variable(s) in the equation. What do all of unemployment being high, GDP decreasing, and economic growth slowing mean? Essentially, it means that the average person is at risk of losing their job. Adding the increased costs of goods and services to a loss of income can cause incredible financial strife. Now, apply that on a national level. If more people are out of work, you would also expect less spending. If the average person is unable to stimulate the economy, via spending, it is hard to reverse poor economic growth.

There is also a less direct impact, though perhaps one even more impactful. With the national debt burgeoning in the last two years, financing that debt also becomes more difficult. Discussing the national debt in its current context is an issue deserving its own space. Thankfully, others have already attempted to broach the subject.

Solutions

There is no surefire way to solve or fix stagflation. The general consensus is to first engage in the policies that address inflation. Examples of that would be printing less money and increasing interest rates, as to make borrowing more expensive. Other, less popular, examples would be cutting different government programs/expenditures. Next would be efforts to stimulate the economy, with the simplest being lowering taxes. That is also a complex suggestion to make, and agreeing to a proper execution is usually quite difficult. In addition, without the aforementioned spending cuts, the potential impact is greatly reduced.

Conclusions on Stagflation

There is no question that inflation is currently negatively impacting people. Concerns about global conflicts, and potential recessions, do nothing to assuage the average person’s concerns. Depending on how we look at it, America is already experiencing a period of stagflation. On the inflationary front, the Fed has begun increasing interest rates. Whether or not tax breaks and spending cuts follow are unclear, though admittedly a more accurate term might be unlikely.

In times like these, having a financial plan is important. While you cannot control the rate of inflation, you can control things like your spending and your investments. Even if it doesn’t eliminate it, proper financial planning should help minimize the detrimental impacts of stagflation.

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Futures Slide After China’s “Huge” Data Miss Sparks “Broad-Based Recession Talk”

Futures Slide After China’s "Huge" Data Miss Sparks "Broad-Based Recession Talk"

Friday’s bear market rally dead-cat bounce appears to be…

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Futures Slide After China's "Huge" Data Miss Sparks "Broad-Based Recession Talk"

Friday's bear market rally dead-cat bounce appears to be over, and global stocks have started the new week in the red with US equity futures lower after a "huge miss", as Bloomberg put it, in Chinese data fueled concerns over the impact of a slowdown in the world’s second-largest economy. As reported last night, China’s industrial output and consumer spending hit the worst levels since the pandemic began, hurt by Covid lockdowns.

And even though officials took another round of measured steps to help the economy by cutting the interest rate for new mortgages over the weekend to bolster an ailing housing market, even as they left the one-year policy loan rate was left unchanged Monday, few believe that any of these actions will have a tangible impact and most continue to expect much more from Beijing. 

As such, after a weekend that saw even Goldman's perpetually optimistic equity strategists slash their S&P target (again) from 4,700 to 4,300, and amid growing fears that a recession is now inevitable, Nasdaq 100 futures slid as much as 1.2%, before paring losses to 0.4% as of 730 a.m. in New York. S&P 500 futures were down 0.3%. 10Y Treasury yields were flat at 2.91% and the dollar dipped modestly while bitcoin traded just above $30,000 dropping from $31,000 earlier in the session.

Among notable moves in premarket trading, Spirit Airlines jumped as much as 21% following a report that JetBlue Airways is planning a tender offer at $30 a share in cash. Major US technology and internet stocks were down after rebounding on Friday, while Tesla shares dropped, with the electric-vehicle maker set to recall 107,293 cars in China over a potential safety risk. Twitter shares fall 3.4% in premarket trading on Monday, on course to wipe out all the gains the stock has made since billionaire Elon Musk disclosed his stake in the social media platform. Twitter fell to as low as $37.86 -- below the the April 1 close of $39.31, before Musk disclosed his stake.

US stocks have been roiled this year, with the S&P 500 on tick away from a bear market as recently as last Thursday, on worries of an aggressive pace of rate hikes by the Federal Reserve at a time when macroeconomic data showed a slowdown in growth. Data from China on Monday highlighted a massive toll on the economy from Covid-19 lockdowns, with retail sales and industrial output both contracting.

Although lower valuations sparked a rally in stocks on Friday, strategists including Morgan Stanley’s Michael Wilson warned of more losses ahead as equity markets also price in slower corporate earnings growth. Goldman Sachs strategists led by David Kostin cut their year-end target for the S&P 500 on Friday to 4,300 points from 4,700. 

"The broad-based recession talk is the major catalyzer this Monday,” Ipek Ozkardeskaya, a senior analyst at Swissquote, wrote in a note. “Activity in US futures hint that Friday’s rebound was certainly nothing more than a dead cat bounce” just as we said at the time

The risk of an economic downturn amid price pressures and rising borrowing costs remains the major worry for markets. Goldman Sachs Group Senior Chairman Lloyd Blankfein urged companies and consumers to gird for a US recession, saying it’s a “very, very high risk.” Traders remain wary of calling a bottom for equities despite a 17% drop in global shares this year, with Morgan Stanley warning that any bounce in US stocks would be a bear-market rally and more declines lie ahead.

In Europe, the Stoxx Europe 600 index fell as much as 0.8% before paring losses, with declines for tech and travel stocks offsetting gains for basic resources as industrial metals rallied. The Euro Stoxx 50 falls 0.4%. IBEX outperforms, adding 0.3%. Tech, personal care and consumer products are the worst performing sectors. Here are some of the biggest European movers today:

  • Basic Resources stocks outperformed with broad gains among mining and steel companies; ArcelorMittal +3.5%; SSAB +2.6%; Glencore +2.1%; Voestalpine +3.1%.
  • Sartorius AG and Sartorius Stedim shares gain as UBS upgrades both stocks to buy following a “significant de-rating” for the lab-equipment companies, seeing supportive global trends.
  • Carl Zeiss Meditec gains as much as 4.9% after HSBC raised its recommendation to buy from hold, saying the medical optical manufacturer is “well-equipped to deal with supply chain challenges.”
  • Interpump rises as much as 7.6%, extending winning streak to five days, as Banca Akros upgrades the stock to buy from accumulate following Friday’s 1Q results.
  • Casino shares jump as much 5.8% after the French grocer said it’s started a process to sell its GreenYellow renewable energy arm, confirming a Bloomberg News report from Friday.
  • Ryanair shares decline as much as 4.3% on FY results, with analysts focusing on the low-budget carrier’s recovery outlook. They note management is cautiously optimistic about summer travel.
  • Vantage Towers shares decline after the company posted FY23 adjusted Ebitda after leases and recurring free cash flow forecasts that missed analyst estimates at mid- points.
  • Unilever falls after a 13-F filing from Nelson Peltz’s Trian shows no position in the company, according to Jefferies, damping speculation after press reports earlier this year that the fund had built a stake.
  • Michelin shares fall as much as 3.7% after being downgraded to neutral from overweight at JPMorgan, which says it writes off any chance of seeing a recovery in volume production growth in FY22.

Earlier in the session, Asian stocks eked out modest gains as surprisingly weak Chinese economic data spurred volatility and caused traders to reassess their outlook on the region. The MSCI Asia-Pacific Index was up 0.1%, paring an earlier advance of as much as 0.9%  on stimulus hopes. The region’s information technology index rose as much as 1.5%, with TMSC giving the biggest boost. A sub-gauge on materials shares fell the most.

Equities in China led losses, as Beijing’s moves to cut the mortgage rate for first-time home buyers and ease lockdown restrictions in Shanghai failed to reverse the downbeat mood. Asian stocks were trading higher early Monday, building on Friday’s rally, only to trim or reverse gains as data showed a sharper-than-expected contraction in Chinese activity in April. Signs of an earnings recovery in China are needed for investors to come back, Arnout van Rijn, chief investment officer for APAC at Robeco Hong Kong Ltd., said on Bloomberg Television.

“It looks like China is not going to meet the 15% earnings growth that people were looking for just a couple of months ago. So now we’re looking for five, 10, maybe it’s even going to fall to zero.”   Meanwhile, JPMorgan analysts, who had called China tech “uninvestable” in March, upgraded some tech heavyweights including Alibaba in a Monday report, citing less regulatory uncertainties. Benchmarks in Japan, Australia, India and Taiwan maintained gains while Hong Kong also recovered some ground later in the day. Markets in Singapore, Thailand, Malaysia and Indonesia were closed for holidays.     

Japanese equities were mixed, with the Topix closing slightly lower after worse-than-expected Chinese economic data amid the impact from virus-related lockdowns. The Topix fell 0.1% to close at 1,863.26, with Honda Motor contributing the most to the decline after its forecast for the current year missed analyst expectations. The Nikkei advanced 0.5% to 26,547.05, with KDDI among the biggest boosts after announcing its results and a 200 billion yen buyback. “Though the lockdowns in China are pushing down the economy and causing supply chain difficulties, there’s a positive outlook since the weekend that there could be a gradual easing of the lockdowns as it seems that virus cases have peaked out,” said Masashi Akutsu, chief strategist at SMBC Nikko Securities.

In Australia, the S&P/ASX 200 index rose 0.3% to 7,093.00, trimming an earlier advance of as much as 1.1% after soft Chinese economic data stoked concerns about global growth. Read: Aussie, Kiwi Slump After Weak China Data: Inside Australia/NZ Brambles was the top performer after confirming it’s in talks with private equity firm CVC Capital Partners on a takeover proposal. Qube also climbed after completing a A$400 million share buyback.  In New Zealand, the S&P/NZX 50 index fell 0.1% to 11,157.66.

In rates, Treasuries were steady with yields within 1bp of Friday’s close. US 10-year yield near flat ~2.91% with bunds cheaper by ~5bp, gilts ~3.5bp amid heavy. German 10-year yield up 5 bps, trading narrowly below 1%. Italian 10-year bonds underperform, with the 10-year yield up 8 bps to 2.93%. Peripheral spreads are mixed to Germany; Italy and Spain widen and Portugal tightens. The Italy 10-year was cheaper by more than 6bp on the day amid renewed ECB jawboning. Core European rates are higher, pricing in ECB policy tightening. During Asia session, Chinese data showed industrial output and consumer spending at worst levels since the pandemic began. The dollar issuance slate includes CBA 3T covered SOFR; $30b expected for this week as syndicate desks seek opportunities for pent-up supply. Three-month dollar Libor +1.13bp at 1.45500%.

In FX, the Bloomberg Dollar Spot Index was little changed while the greenback advanced against most of its Group-of-10 peers. Treasuries inched lower, led by the front end, and outperformed European bonds. The euro inched up against the dollar. Italian bonds dropped, leading peripheral underperformance against euro- area peers, while money markets showed increased ECB tightening wagers after policy maker Francois Villeroy de Galhau said a consensus is “clearly emerging” at the central bank on normalizing monetary policy and that June’s meeting will be “decisive.” He also signaled that the weakness of the euro is focusing the minds of ECB policy makers at a time when the currency is heading toward parity with the dollar. The euro may resume its rally versus the pound in the spot market as options traders pile up bullish wagers. The pound fell against both the dollar and euro, staying under selling pressure on concerns that high UK inflation will weigh on the economy. Markets await testimony from Bank of England Governor Andrew Bailey and other central bank officials later in the day, ahead of a reading of April inflation later in the week. Australian and New Zealand dollars fell after Chinese industrial and consumer data fanned concerns of a further slowdown in the world’s second-largest economy.

In commodities, WTI drifts 0.4% lower to trade above $110. Spot gold pares some declines, down some $6, but still around $1,800/oz. Most base metals trade in the green; LME tin rises 3.4%, outperforming peers. Bitcoin falls 4.6% to trade below $30,000

Looking ahead, we get the US May Empire manufacturing index, Canada April housing starts, March manufacturing, wholesale trade sales. Central bank speakers include the Fed's Williams, ECB's Lane, Villeroy and Panetta, BOE's Bailey, Ramsden, Haskel and Saunders. We get earnings from Ryanair, Take-Two Interactive.

Market Snapshot

  • S&P 500 futures down 0.3% to 4,008.75
  • STOXX Europe 600 little changed at 433.33
  • MXAP up 0.2% to 160.34
  • MXAPJ up 0.2% to 523.32
  • Nikkei up 0.5% to 26,547.05
  • Topix little changed at 1,863.26
  • Hang Seng Index up 0.3% to 19,950.21
  • Shanghai Composite down 0.3% to 3,073.75
  • Sensex up 0.6% to 53,119.79
  • Australia S&P/ASX 200 up 0.3% to 7,093.03
  • Kospi down 0.3% to 2,596.58
  • German 10Y yield little changed at 0.98%
  • Euro up 0.1% to $1.0424
  • Brent Futures down 1.4% to $109.98/bbl
  • Gold spot down 0.8% to $1,797.30
  • US Dollar Index little changed at 104.46

Top Overnight News from Bloomberg

  • NATO members rallied around Finland and Sweden on Sunday after they announced plans to join the alliance, marking another dramatic change in Europe’s security architecture triggered by Russia’s war in Ukraine
  • The euro area’s pandemic recovery would almost grind to a halt, while prices would surge even more quickly if there are serious disruptions to natural-gas supplies from Russia, according to new projections from the European Commission
  • UK energy regulator Ofgem plans to adjust its price cap every three months instead of every six. Changing the level more often would help consumers to take advantage of falling wholesale prices more quickly, it said in a statement Monday. This would also mean higher prices filter through bills quicker
  • Boris Johnson has warned Brussels that the UK government will press ahead with unilateral changes to parts of the Brexit agreement if it does not engage in “genuine dialogue”
  • While debt bulls on Wall Street have been crushed all year, market sentiment has shifted markedly over the past week from inflation fears to growth. That theme gathered more strength Monday, when data showing China’s economy contracted sharply in April set off fresh gains for Treasuries
  • China’s economy is paying the price for the government’s Covid Zero policy, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery. Industrial output unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than a projected 6.6% drop
  • Japanese manufacturers are increasingly looking to move offshore operations to their home market, according to a Tokyo Steel Manufacturing Co. executive. The rapidly weakening yen, global supply-chain constraints, geopolitical risks and shifting wages patterns are prompting the switch, Kiyoshi Imamura, a managing director of the steelmaker, said in an interview in Tokyo last week

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mixed after disappointing Chinese activity data clouded over the early momentum from Friday’s rally on Wall St. ASX 200 was higher as tech stocks were inspired by US counterparts and amid M&A related newsflow with Brambles enjoying a double-digit percentage gain after it confirmed it had talks with CVC regarding a potential takeover by the latter. Nikkei 225 kept afloat as earnings releases provided the catalysts for individual stocks but with gains capped by a choppy currency. Hang Seng and Shanghai Comp initially gained with property names underpinned after China permitted a further reduction in mortgage loan interest rates for first-time home purchases and with casino stocks also firmer in the hope of a tax reduction on gaming revenue. However, the mood was then spoiled by weak Chinese data and after the PBoC maintained its 1-year MLF rate.

Top Asian News

  • PBoC conducted a CNY 100bln in 1-year MLF with the rate kept unchanged at 2.85% and stated the MLF and Reverse Repo aim to keep liquidity reasonably ample, according to Bloomberg.
  • Beijing extended work from home guidance in several districts and announced three additional rounds of mass COVID-19 testing in most districts including its largest district Chaoyang, according to Reuters.
  • Shanghai will gradually start reopening businesses including shopping malls and hair salons in China's financial and manufacturing hub beginning on Monday following weeks of a strict lockdown, according to Reuters.
  • Shanghai city official said 15 out of the 16 districts achieved zero-COVID outside quarantine areas and the city's epidemic is under control but added that risks of a rebound remain and they will need to continue to stick to controls. The official said the focus until May 21st will be to prevent risks of a rebound and many movement restrictions are to remain, while they will look to allow normal life to resume in Shanghai from June 1st and will begin to reopen supermarkets, convenience stores and pharmacies from today, according to Reuters.
  • Chinese financial authorities permitted a further reduction in mortgage loan interest rates for some home buyers whereby commercial banks can lower the lower limit of interest rates on home loans by 20bps based on the corresponding tenor of benchmark Loan Prime Rates for purchases of first homes, according to Reuters.
  • China's stats bureau spokesman said economic operations are expected to improve in May and that China is steadily pushing forward production resumption in COVID-hit areas, while they expect China's economic recovery and rebound in consumption to quicken but noted that exports face some pressure as the global economy slows, according to Reuters.
  • Macau is reportedly considering a tax cut for casinos amid a decline in gaming revenue in which a cut could be as much as 5% off the current 40% levied on casino gaming revenue, according to Bloomberg.

European bourses are mixed, Euro Stoxx 50 -0.6%, following a similar APAC session with impetus from Shanghai's reopening offset by activity data and geopolitics. Stateside, futures are lower across the board, ES -0.4%, with the NQ marginally lagging as yields lift; Fed's Williams due later before Powell on Tuesday. US players are focused on whether the end-week bounce is a turnaround from technical bear-market levels or not. China's market regulator says Tesla (TSLA) has recalled 107.3k Model 3 & Y vehicles, which were made in China. JetBlue (JBLU) is to launch a tender offer for Spirit Airlines (SAVE); JetBlue is to offer USD 30/shr, but prepared to pay USD 33/shr if Spirit provides JetBlue with requested data, WSJ sources say. Elon Musk tweeted that Twitter’s (TWTR) legal team called to complain that he violated their NDA by revealing the bot check sample size and he also tweeted there is some chance that over 90% of Twitter’s daily active users might be bots.

Top European News

  • UK PM Johnson is reportedly set to give the green light for a bill on the Northern Ireland protocol, according to the Guardian.
  • UK PM Johnson said he hopes the EU changes its position on the Northern Ireland protocol and if not, he must act, while he sees a sensible landing spot for a protocol deal and will set out the next steps on the protocol in the coming days, according to Reuters.
  • UK PM Johnson is expected to visit Northern Ireland on Monday for talks with party leaders in an effort to break the political deadlock at Stormont, according to Sky News.
  • Irish Foreign Minister Coveney says the EU is prepared to move on reducing checks on goods coming into the region from Britain, via Politico.
  • UK Cabinet ministers have turned on the BoE regarding rising inflation, whereby one minister warned that the Bank was failing to "get things right" and another suggested that it had failed a "big test", according to The Telegraph.
  • Group of over 50 economists warned that the UK's post-Brexit plans to boost the competitiveness of its finance industry risk creating the sort of problems that resulted in the GFC, according to Reuters.
  • European Commission Spring Economic Forecasts: cuts 2022 GDP forecast to 2.7% from the 4.0% projected in February. Click here for more detail.

Central Banks

  • ECB's Villeroy expects a decisive June meeting and an active summer meeting, pace of further steps will account for actual activity/inflation data with some optionality and gradualism; but, should at least move towards the neutral rate. Will carefully monitor developments in the effective FX rate, as a significant driver of imported inflation; EUR that is too weak would go against the objective of price stability.
  •  
  • ECB’s de Cos said the central bank will likely decide at the next meeting to end its stimulus program in July and raise rates very soon after that, while he added that they are not seeing second-round effects and are monitoring it, according to Reuters.

FX

  • Euro firmer following verbal intervention from ECB’s Villeroy and spike in EGB yields EUR/USD rebounds from sub-1.0400 to 1.0435 at best.
  • Dollar up elsewhere as DXY pivots 104.500, but Yen resilient on risk grounds as Chinese data misses consensus by some distance; USD/JPY capped into 129.50.
  • Franc falls across the board after IMM specs raise short bets and Swiss sight deposits show SNB remaining on the sidelines; USD/CHF above 1.0050 at one stage.
  • However, HKMA continues to defend HKD peg amidst CNY, CNH weakness in wake of disappointing Chinese industrial production and retail sales releases.
  • Norwegian Crown undermined by pullback in Brent and narrower trade surplus, EUR/NOK over 10.2100.
  • SA Rand soft as Gold retreats to test support around and under Usd 1800/oz.
  • Loonie slips with WTI ahead of Canadian housing starts, manufacturing sales and wholesale trade, Sterling dips before BoE testimony; USD/CAD 1.2900+, Cable sub-1.2250.

Fixed income

  • EGBs rattled by ECB rhetoric inferring key policy meetings kicking off in June and extending through summer.
  • Bunds down towards 153.00 and 10 year yield back up around 1%, Gilts almost 1/2 point adrift and T-note erasing gains from 12/32+ above par at best.
  • Eurozone periphery underperforming with added risk-off angst following much weaker than expected Chinese data.

In commodities

  • WTI and Brent are pressured, but well off lows, and torn between China's lockdown easing and poor activity data amid numerous other catalysts
  • Specifically, the benchmarks are around USD 110/bbl and USD 111/bbl respectively,
  • Saudi Aramco Q1 net income rose 82% Y/Y to INR 39.5bln for its highest quarterly profit since listing, according to Sky News.
  • Saudi Energy Minister says they are going to get to 13.2-13.4mln BPD, subject to what is done in the divided zone, by end-2026/start-2027; can maintain production when there, if the market demands this.
  • OPEC+ to continue with monthly output increases, according to Bahrain's oil minister via Reuters.
  • Iraqi state-run North Oil Company said Kurdish armed forces took control of some oil wells in northern Kirkuk, according to Reuters.
  • Iraq oil minister says they aim to increase oil production to 6mln BPD by end-2027, OPEC is targeting a energy market balance not a price; adding, current production capacity is 4.9mln BPD, will reach 5mln BPD before the end of 2022.
  • China is to increase fuel prices from Tuesday, according to China's NDRC; gasoline by CNY 285/t and diesel by CNY 270/t.

US Event Calendar

  • 08:30: May Empire Manufacturing, est. 15.0, prior 24.6
  • 16:00: March Total Net TIC Flows, prior $162.6b

DB's Jim Reid concludes the overnight wrap

Markets managed a big bounce on Friday but the mood has soured again in the Asian session after a weak slew of data from China as covid lockdowns had an even worse impact than expected. Industrial production (-2.9% vs +0.5% expected), retail sales (-11.1% vs -6.6% expected) and property investment (-2.7% vs -1.5% expected) all crashed through estimates by a large margin. The slump in retail sales and industrial production was the weakest since March 2020. The latter also had the lowest print on record, with the worst decline coming from auto manufacturing (-31.8%). The surveyed jobless rate (6.1% vs estimates of 6.0%) also ticked up by more than expected from 5.8% in March and is now close to the high of 6.2% in February 2020. Although the 1-year policy loan rate was left unchanged today, the PBoC did ease the rate on new mortgages this weekend. In other data releases, Japan’s April PPI (+10.0%) came in above estimates of +9.4%, the highest since 1980.

Amid this, the Shanghai Composite (-0.51%) and the Hang Seng (-0.43%) are in the red, and outperformed by the KOSPI (-0.21%) and the Nikkei (+0.46%). The sentiment has soured in American markets too, with S&P 500 futures also trading lower (-0.68%) and the US 10y yield declining by -2.2bps. Oil (-1.48%) is edging lower too on growth concerns.

After last week’s meltdown in crypto markets, Bitcoin is back at above $30k this morning – a jump since the lows of nearly $26k last Thursday but way short of the $38k it traded at in the beginning of the month and $68k early last November. The infamous TerraUSD, the stablecoin that fuelled the crypto slide, is at $0.18. It is supposed to trade at $1 at all times.

Looking forward now and there's not a standout event to focus on this week but they'll be plenty to keep us all occupied. US retail sales (tomorrow) looks like the highlight alongside Powell's speech the same day. There will also be US housing data smattered across the week and UK and Japanese inflation on Wednesday and Friday respectively.

Let's start with US retail sales as it will be a good early guide for Q2 GDP. Our US economists are anticipating a +1.7% print, up from +0.7% in March. Rebounding auto sales should help the headline number. For more on the consumer, Brett Ryan put out this chartbook last week on the US consumer (link here). US industrial production is out the same day.

We have a long list of central bank speakers this week headed by Powell and Lagarde (tomorrow) and BoE Bailey today. There are many more spread across the week and you can see the list in the day by day event list at the end. We do have the last ECB meeting minutes on Thursday but the subsequent push towards a July hike might make these quite dated.

US housing will be a big focus next week. It's probably too early for the highest mortgage rates since 2009 to kick in but with these rates around 220bps higher YTD, some damage will surely soon be done after the highest YoY price appreciation outside of an immediate post WWII bounce, in our 120 year plus housing database. On this we will see the NAHB housing market index (tomorrow), April’s US building permits and housing starts (Wednesday), and existing home sales (Thursday).

Turning to corporate earnings, it will be another quiet week after 457 of the S&P 500 companies and 368 of the STOXX 600 companies have reported earnings this season so far. Yet, it will be an important one to gauge how the US consumer is faring amid inflation at multi-decade highs, including reports such as Walmart, Home Depot (tomorrow), Target and TJX (Wednesday). Results will also be due from China's key tech and ecommerce companies like JD.com (tomorrow), Tencent (Wednesday) and Xiaomi (Thursday). Other notable corporate reporters will include Cisco (Wednesday), Applied Materials, Palo Alto Networks (Thursday) and Deere (Friday).

A quick recap of last week’s markets now. Fears that global growth would slow due to the tightening task at hand for central banks sent ripples across markets, without a clear specific catalyst. Equities declined, credit spreads widened, the dollar rallied, and sovereign yields declined.

The S&P 500 fell for the sixth consecutive week for the first time since 2011, falling -13.0% over that time. Even with a +2.39% rally on Friday, it fell -2.41% last week. Large cap technology firms underperformed, with the NASDAQ falling -2.80% (+3.82% Friday), while the FANG+ index fell -3.48% (+5.45% Friday). Volatility was elevated, with the Vix closing above 30 for 6 straight days for the first time since immediately following the invasion, narrowly avoiding a 7th straight day above 30 by closing the week at 28.8. European equities outperformed, with the STOXX 600 climbing +0.83% after a banner +2.14% gain Friday. The Itraxx crossover ended the week at 446bps, its widest level since June 2020. Crypto assets sharply declined, with Bitcoin down -12.51% and Coinbase -34.58% over the week, with a number of so-called ‘stablecoins’ breaking their pledged parity, forcing some to stop trading.

The growth fears drove a flight to quality. The dollar index increased +0.87% (-0.27% Friday) to its highest levels since 2002. Only the yen outperformed the US dollar in the G10 space. Sovereign yields rallied significantly, with 10yr Treasuries, bunds, and gilts falling -19.3bps (+8.5bps Friday), -23.0bps (+6.2bps Friday), and -28.7bps (+4.7bps Friday), respectively.

Reports that the EU was considering softening their oil-related sanctions due to member resistance combined with growth fears to send oil prices much lower at the beginning of the week, with Brent crude futures almost breaking $100/bbl. When all was said and done, a gradual rally over the back half of the week saw Brent merely -1.04% lower (+3.82% Friday). On the back of disappointing data from China it is down -1.48% this morning.

There was a lot of high-profile central bank speak to work through, as there will be this week. The main takeaways included Fed officials aligning behind a series of +50bp hikes the next few meetings, downplaying the chances of +75bp hikes until September at the earliest. Meanwhile, momentum in the ECB is growing toward a July policy rate hike, with policy rates breaching positive territory by the end of the year.

In terms of data Friday, the University of Michigan survey of inflation expectations for the next five years was unchanged at 3 percent, though inflation has weighed on consumers’ perception of the current situation.

Tyler Durden Mon, 05/16/2022 - 08:02

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