S&P Futures Rebound Above 4,000, Boosted By Surging Nvidia
S&P Futures Rebound Above 4,000, Boosted By Surging Nvidia
US futures rebounded from yesterday’s post FOMC selloff, rising back over 4,000…
US futures rebounded from yesterday's post FOMC selloff, rising back over 4,000 as concern about aggressive monetary tightening eased and Nvidia soared 10% after giving a bullish revenue outlook. Contracts on the Nasdaq 100 were up 1% as of 7:45 a.m. ET while S&P 500 futures rose 0.4%. The underlying stock gauges closed mixed on Wednesday as minutes from the Federal Reserve’s latest meeting signaled its determination to keep hiking interest rates to combat inflation. The tech rally may be short-lived thought: treasuries edged lower again, reversing yesterday’s gains. The Bloomberg Dollar Spot Index recovered from earlier lows, pressuring most Group-of-10 currencies. Gold was little changed, while oil advanced. Bitcoin rose nearly 2% following two days of losses, before fading some of its gains.
In premarket trading, tech stocks were among the best performers, with chipmaker Nvidia, which has a 4.2% weighting in the Nasdaq 100, surging 10% after it reported Q4 results that beat expectations and gave a bullish revenue outlook for the current quarter. Growth in sales of chips for data centers has helped the company weather a slowdown in the PC market as it gears up for an expected boom in artificial intelligence. By contrast, EV maker Lucid plunged 8.1% in premarket trading after it posted worse-than-expected results in the final months of what it called a “challenging” year. Unity Software dropped 7.3% after the company’s revenue forecasts trailed consensus estimates. Here are some other notable premarket movers:
- EBay shares fall ~5% in US premarket trading after the online auction and retail company’s 2023 guidance came in weaker than expected, with a more difficult macro picture set to weigh and a “challenging” margin outlook.
- Enovix shares rise ~gr15% in premarket trading after the electronic-components maker reported revenue for the fourth quarter that beat the average estimate. Analysts note the earnings call reiterated milestones disclosed in January’s presentation and progress on cash.
- Graphite Bio soars 16% in premarket trading after the biotech company unveiled plans to trim its workforce by 50% while exploring “strategic alternatives.”.
- Teladoc shares fall ~7% in US premarket trading after the online health services firm guided to a slowdown in revenue growth, which analysts said more than offset an improved margin outlook.
- Unity Software shares drop as much as 8.9% in premarket trading after the software maker’s first-quarter and full-year revenue forecasts trailed consensus estimates. The guidance was the main point of discussion among analysts, with Citi saying it might weaken sentiment toward the stock.
- Moderna Inc. shares climb 2.9% in postmarket trading after the personalized mRNA cancer vaccine that it’s developing in combination with Merck & Co.’s flagship immunotherapy, Keytruda, received Breakthrough Therapy Designation from the US Food and Drug Administration.
- Etsy gained 6% in extended trading, after the online retailer focused on handmade and vintage items reported fourth-quarter results that beat expectations. It also gave an outlook that analysts see as mixed.
- Rackspace Technology gained 8% in postmarket trading after reporting adjusted earnings per share and revenue for the fourth quarter that beat the average analyst estimates.
Nvidia provided “an excellent report and solid outperformance amid weakening macro trends,” CJ Muse, an analyst at Evercore ISI, wrote in a note. Still, others saw this as merely another modest bounce in an otherwise bearish slump. Further policy tightening “will create some small recessionary result probably in the third or fourth quarter of 2023, but we will still be in a scenario of soft landing,” said Stephane Monier, chief investment officer at Banque Lombard Odier. “In that scenario we expect the S&P 500 to be around 3,900,” he said on Bloomberg TV. “We are currently underweight US equities as we are expecting a little bit of a correction in the weeks to come,” Monier said. “And we have a strong preference for Asian equities, particularly China but not only.”
After months of divergence over the perceived path of monetary tightening, the Fed and markets are increasingly getting aligned in their expectations, reducing the scope for hawkish shocks. While the minutes and comments by Fed officials including James Bullard reiterated a continuing preference for rate hikes, they didn’t say anything that wasn’t factored in by the market’s aggressive repricing of Fed bets in recent weeks.
“One of our big concerns coming into this year was the market was anticipating an event that wasn’t likely to occur, that being a dovish Fed pivot,” Danielle Poli, co-portfolio manager of the diversified income fund for Oaktree Capital Management, said in an interview with Bloomberg Television. “The market has woken back up a little bit in these last two weeks.”
US Jobless claims data due Thursday may help shine a light on the strength of the labor market, which has remained stubbornly robust through the rate-hiking cycle. Eurozone inflation data due today will also help investors outline the health of the European economy.
European stocks struggled for direction as investors remained wary of the prospect of additional monetary tightening by the Fed when the latest Fed minutes revealed that a “few” officials favored a larger half-point hike. The Stoxx 600 was up less than 0.1% with autos, tech and media the best performing sectors. The FTSE loses 0.4%. Here are some of the biggest European movers:
- Rolls-Royce shares soar as much as 20%, the most since November 2020, after the engine manufacturer’s full-year earnings and forecast topped expectations on all metrics
- Axa climbed 3.8%, the top performing stock on the Stoxx 600 Insurance Index, after the French insurer announced it could buy back up to €1.1 billion worth of shares
- HeidelbergCement rises as much as 3.1% as analysts say the outlook is positive for the German construction giant, noting diminishing energy cost headwinds from 2022
- Accor shares rise as much as 2.8%, after the hospitality company reported full-year Ebitda and dividend per share that was ahead of analyst estimates
- Bouygues shares rise as much as 3.9%, after the French conglomerate posted what Citi analysts described as a “solid” set of numbers, with top line ahead of consensus and margin up
- Spectris rises as much as 7.6%, the most since April 2022, after the precision-measurement specialist released full- year results which Shore Capital says were a beat
- Anglo American drops as much as 2.8% after the mining giant revealed a significant writedown at its Woodsmith polyhalite project
- Munich Re slumped as much as 6.2%, the most since July, as analysts pointed to weaker underlying property and casualty underwriting despite an overall earnings beat for the German reinsurer
Earlier in the session, Asian stocks snapped a two-day decline as traders focused on US economic data due Thursday, while shares in Hong Kong entered correction territory. The MSCI Asia Pacific ex Japan Index rose as much as 0.9%, before paring gains to 0.3% in afternoon trading. South Korean shares were among the biggest advancers in the region as the Bank of Korea paused rate hikes for the first time in a year. Meanwhile, Hong Kong’s Hang Seng Index fell into correction amid growing geopolitical concerns and doubts over the strength of China’s economy. Japan was closed for a holiday. The US will release data on economic growth, consumption and employment, providing more clues on the Fed’s policy path.
The MSCI Asia gauge is trading about 6% lower than a peak reached in late January as investors assess higher bond yields and China’s path to recovery. Still, a gauge of tech stocks soared as the US 10-year Treasury yield eased toward 3.9% overnight, although it reversed the decline in the afternoon. Minutes of the latest Federal Reserve meeting showed that officials continued to anticipate further increases in borrowing costs, although most were in favor of smaller rate increases. Fed’s Williams Says Fed’s 2% Inflation Goal Key to Taming Prices The FOMC “sounded hawkish at the margin,” Saxo Capital Markets strategists wrote in a note. “While this risk of a recession was noted, data since the meeting including the most recent PMI numbers this week have continued to ease recession concerns.”
Australian stocks declined again, as the S&P/ASX 200 index fell 0.4% to close at 7,285.40, extending losses for a third day, dragged by mining shares and banks. National carrier Qantas was among the day’s laggards after the airline flagged higher-than-expected spending on planes, while Eagers, the top performer, rallied after the Australian auto dealer said demand for new cars remains strong. In New Zealand, the S&P/NZX 50 index rose 0.8% to 11,888.50.
Indian stocks ended lower after a volatile session as monthly derivative contracts expired on Thursday. The S&P BSE Sensex fell 0.2% to 59,605.80 in Mumbai, while the NSE Nifty 50 Index declined by a similar measure. The gauges have now dropped for five straight sessions, the longest run of declines since Sept. 29. The benchmark Sensex has nearly erased its gains for February, while the Nifty has fallen to its lowest levels since Oct. 18. All but two of ten companies controlled by the Adani Group closed lower as concerns linger about the conglomerate’s corporate structure. Expiry of monthly options also weighed on the stocks. India’s finance ministry on Thursday said that if predictions on the return of El Nino conditions are accurate, that could lead to a deficient monsoon, resulting in lower agricultural output and higher prices. Sixteen of 20 sector sub-gauges compiled by BSE Ltd. declined. Realty firms and utilities were the worst performers, while metal and services sector companies advanced. For the week, all but fast-moving consumer-goods companies have retreated. HDFC Bank contributed the most to the Sensex’s decline on Thursday, decreasing 0.7%. Out of 30 shares in the Sensex index, 13 rose and 17 fell.
In FX, the BBG Dollar Index traded marginally weaker, having come off day’s lows; the New Zealand dollar and Australian dollar are vying for top sport among the G-10’s, while the pound was the worst.
- The euro edged lower, extending its slump into a fourth day, and touched 1.0587, the lowest since Jan. 6. The German yield curve twist-flattened very modestly. Three-week implied volatility in euro-dollar is up a third day for the first time this month as the tenor now captures the ECB meeting on March 16 and the release of US CPI data two days earlier
- The pound slumped. Gilts underperformed European peers, with yields rising around 3bps across the curve, as traders added to BOE pricing after policymaker Catherine Mann said more interest-rate rises are needed to clamp down on inflation as she dismissed talk of a looming “pivot” to easier monetary policy
- The Australian dollar climbed from a seven-week low as dip-buyers emerged and business spending beat estimates
In rates, Treasuries were under pressure as US trading day begins, with yields still inside Wednesday’s ranges. UST yields are higher by as much as 2.4bp in 10-year sector; Wednesday’s ranges included YTD highs for most tenors; the 10Y TSY rose 4bps to 9.449%, near session highs. The week's auction cycle concludes with 7-year note sale at 1 p.m. New York time, last coupon auction until March 8 and poised to draw a record high yield. WI 7-year yield 4.08%; record high stop was 4.027% in October. In Europe, gilts underperformed their German counterparts after hawkish remarks from BOE policymaker Mann. UK 10-year yields are up 4bps while the German equivalent is up 2bps.
Traders are now pricing in a Fed peak rate of 5.55% by July, compared with 4.90% they were betting on at the start of year. However, Fed officials haven’t grown more aggressive during this time: Fed Bank of St. Louis President Bullard reiterated his earlier stance, saying “I’m still at 5.375%.” Markets fully price in a 25 basis-point hike in March, but assign a 24% probability for a 50-point hike.
In crypto, bitcoin is firmer on the session having successfully reclaimed the USD 24k mark after losing the figure on Wednesday, though it remains shy of recent USD 25k+ levels.
In commodities, oil gained — after the longest run of losses this year — as traders took stock of a mixed demand outlook of tightening US monetary policy and China’s reopening. WTI rose 0.7% to trade near $74.45. Spot gold is little changed around $1,826.
Looking to the day ahead now, and data releases include the final CPI release from the Euro Area in January, which came in just hotter than the Flash print, as well as the second estimate of US GDP in Q4. Otherwise, we’ll get the US weekly initial jobless claims, and the Kansas City Fed’s manufacturing index for February. Meanwhile from central banks, we’ll hear from the Fed’s Bostic and Daly, the ECB’s de Cos, and the BoE’s Cunliffe and Mann. Finally, today’s earnings releases include Booking Holdings and Moderna.
- S&P 500 futures up 0.3% to 4,012.25
- MXAP up 0.1% to 160.54
- MXAPJ up 0.3% to 523.26
- Nikkei down 1.3% to 27,104.32
- Topix down 1.1% to 1,975.25
- Hang Seng Index down 0.4% to 20,351.35
- Shanghai Composite down 0.1% to 3,287.48
- Sensex down 0.3% to 59,551.16
- Australia S&P/ASX 200 down 0.4% to 7,285.40
- Kospi up 0.9% to 2,439.09
- STOXX Europe 600 little changed at 462.61
- German 10Y yield little changed at 2.53%
- Euro down 0.1% to $1.0593
- Brent Futures up 0.1% to $80.72/bbl
- Gold spot up 0.0% to $1,826.01
- U.S. Dollar Index little changed at 104.62
Top Overnight News from Bloomberg
- The global economy is in a better place today than many predicted months ago, US Treasury Secretary Janet Yellen said Thursday, while reiterating her calls for support to Ukraine on the eve of the one-year anniversary of Russia’s invasion. BBG
- The EU and the US are close to an agreement on raw materials used in batteries that would allow EU companies access to some of the same benefits in President Joe Biden’s green investment plan as Washington’s free-trade partners, according to the bloc’s trade chief Valdis Dombrovskis. BBG
- Sweden’s government budget is likely to be in the red for the first time since the pandemic hit in 2020, as tax income is set to drop and large-scale electricity-price support weighs on finances, according to the National Debt Office. BBG
- Hong Kong’s CPI for Jan overshoots the St, coming in at +2.4% Y/Y (vs. the consensus forecast of +2.1% and up from +2% in Dec). BBG
- BABA +4% pre mkt reported solid Q4 upside, including revenue +2% to RMB247.7B (vs. the St RMB245.8B), EBITDA +15% to RMB59.16B (vs. the St $RMB53.5B), and EPS +14% to RMB19.26 (vs. the St 16.57). Revenue upside was driven by the core China Commerce business along with Int’l Commerce and Cainiao Logistics while Local Consumer Services and Cloud Computing fell a bit short. During Q4 the company repurchased 45.4 million ADSs for approximately US$3.3 billion. They still have $21.3B left on the buyback (as of 12/31). BBG
- Chinese leader Xi Jinping is preparing to shake up the leadership of the country’s financial system, installing key associates to run the central bank and reviving a Communist Party body to tighten political control over financial affairs, according to people familiar with the discussions. WSJ
- Washington is considering releasing intelligence showing that China is considering supplying weapons to Russia as part of a campaign aimed at deterring Beijing from intervening militarily. WSJ
- South Korea’s central bank left rates on hold, as expected, joining the Bank of Canada as the second monetary authority to complete its hiking cycle. RTRS
- The European Commission has banned its staff from using the TikTok app on their work-issued devices, widening across the Atlantic a patchwork of similar, limited bans affecting U.S. officials. WSJ
- Europe’s final CPI for Jan was revised higher on core (from +5.2% to +5.3%) while the headline figure of +8.6% was kept unchanged. BBG
- The US oil buildup continued. Inventories bumped up by just under 10 million barrels last week for a ninth weekly increase, the API is said to have reported. That would take total holdings to the highest in 21 months if confirmed by the EIA. More bearish pressures: Brent's prompt timespread narrowed sharply yesterday, signaling a softer market, and the nearest spread for WTI indicates ample supply. BBG
- New York Federal Reserve Bank President John Williams on Wednesday said the U.S. central bank is "absolutely" committed to bringing inflation back down to its 2% target over the next few years, by bringing demand down in line with constrained supply. RTRS
- After peaking at $47.7 trillion in June, the total value of US homes declined by $2.3 trillion, or 4.9%, in the second half of 2022, according to real estate brokerage Redfin. That’s the largest drop in percentage terms since the 2008 housing crisis, when home values slumped by 5.8% from June to December. BBG
A more detailed look at global markets courtesy of Newsquawk
Asia-Pacific stocks lacked firm direction with price action mostly rangebound amid thinned conditions due to the holiday closure in Japan and following the mixed performance stateside where the major indices faded mild gains in the aftermath of the FOMC minutes. ASX 200 was the laggard with the index weakened by underperformance in the mining industry after recent declines in commodity prices and a slump in Rio Tinto’s profits, although losses were limited as participants also digested better-than-expected capex data. KOSPI was the biggest gainer amid recent currency weakness and after the BoK kept its rate unchanged for the first time in a year, as unanimously expected. Hang Seng and Shanghai Comp. were indecisive with stocks initially led higher by strength in tech and after China vowed to improve measures to cut taxes and fees, although the gains were briefly pared amid ongoing global frictions and the PBoC’s liquidity drain.
Top Asian News
- BoK maintained its base rate at 3.5%, as expected, while it noted uncertainties surrounding the policy decision are high and it deemed it warranted to keep a restrictive policy stance for a considerable time. BoK Governor Rhee said board member Cho Yoon-Je dissented and that the decision should not be taken as indicating the tightening cycle is over. Furthermore, Rhee stated that five members wanted to keep the chance open for the terminal rate to reach 3.75% and that the decision was based on the expectation that inflation will head down from March, while he added that it is time to stop and watch if the inflation trend goes along the expected path.
- Chinese Commerce Ministry says the consumer market recovery momentum was strong in January, will take more measures to restore and expand consumption.
- China is to shake up its financial system, according to WSJ; Citic Group Chairman Zhu Hexin is reportedly the leading candidate for PBoC governor, according to sources.
- PLDT Said to Weigh Data Center Stake Sale After Spending Overrun
- Janus Henderson Bets Big on Hedge Funds, Alts After Outflows
- Astra Clinches Deal for China Drug to Boost Cancer Pipeline
European bourses are firmer on the session with a hefty earnings docket dictating action after an uninspiring APAC handover, Euro Stoxx 50 +0.4%. However, the FTSE 100 -0.5% is the exception following pressure from Anglo American and BAE Systems post earnings, though this is offset a touch by marked outperformance in Rolls Royce. Stateside, futures are broadly-speaking in-fitting with Europe though the NQ +0.7% outperforms given tailwinds from NVIDIA's after-market update.
Top European News
- BoE's Mann says failing to do enough now risks the worst of both worlds – the higher inflation and lower activity – as monetary policy will have to stay tighter for longer. Believe that more tightening is needed, and caution that a pivot is not imminent. In her view preponderance of turning points is not yet in the data. BoE should weigh inflation more highly in our reaction function. Adding, she does not think UK monetary policy is in a restrictive stance particularly.
- Axa Plans $1.2 Billion Buyback as Underlying Earnings Rise
- Ukraine Latest: EU Rushes on Sanctions; Russians Still Back War
- Eni Posts Record Annual Profit on High Oil and Gas Prices
- Apollo Mulls $750 Million First Boston Leveraged-Finance Bet
- EssilorLuxottica Falls After Profit Growth Slows in Second Half
- WPP CEO Says AI Already ‘Fundamental’ to Advertising Giant
- The DXY continues to grind higher at the top-end of 104.30-65 parameters to the mixed fortune of peers.
- Antipodeans are the modest outperformers with AUD benefitting from overnight data and NZD revisiting post-RBNZ highs amid commentary from Governor Orr; AUD/USD and NZD/USD printed peaks of 0.6841 and 0.6251 respectively.
- Despite modest upside following hawkish commentary from BoE's Mann, GBP is the incremental laggard vs USD, though Cable remains comfortably above 1.20 within 1.2015-74 boundaries.
- Elsewhere, EUR was unreactive to unsurprising upwards revisions to January's EZ HICP while the JPY is little changed ahead of domestic CPI and Ueda's Lower House appearance; pivoting 1.06 and 134.90 respectively.
- PBoC set USD/CNY mid-point at 6.9028 vs exp. 6.9028 (prev. 6.8759)
- Gilts are the incremental laggards post-Mann and down to a new 101.26 session low with the Sonia strip similarly dented; market pricing for a 25bp BoE hike in March is around the 95%, in-fitting with recent sessions.
- Within the EZ, the hawkish direction remains in-play with Bunds at the lower-end of 133.92 to 134.41 parameters; similarly, USTs are underpressure ahead of 7yr supply and commentary from non-voters Bostic and Daly.
- WTI and Brent April futures are consolidating following another hefty session of losses on Wednesday which saw both benchmarks settle lower by almost USD 2.50/bbl apiece.
- Nat Gas futures experienced modest divergence with TTF fairly contained while Henry Hub is firmer as attention turns to potential cold weather state-side ahead.
- Exxon posted USD 2.5bln after-tax earnings in Kazakhstan and produced 246k bpd there for 2022, while it alerted against potential risks of disruptions of Kazakhstan oil through the CPC pipeline.
- Spot gold has drifted towards the bottom of its intraday range as the Dollar picked up this morning, with the intraday low just under yesterday’s USD 1,823.56/oz trough
- Russian Defence Ministry accused Ukraine of planning to stage an 'armed provocation' in the near future against Transnistria, Moldova and noted that it is ready to respond to any changes in the situation, according to a Telegram and RIA news agency.
- Russian President Putin said Moscow will pay increased attention to bolstering the country's nuclear forces and will start mass deliveries of Zirkon sea-launched hypersonic missiles, according to Reuters.
- US President Biden said Russian President Putin's suspension of the New START treaty is a big mistake and is not very responsible, while Biden added that he does not read into Russian President Putin's comments that he's thinking of using nuclear weapons and sees no change in Russia's nuclear posture, according to an interview with ABC News.
- US mulls releasing intelligence on China's potential arms transfer to Russia, according to WSJ.
- Russian Defense Ministry plane has reportedly crashed near Belgorod, Russia, via AJA Breaking citing Tass.
US Event Calendar
- 08:30: 4Q GDP Annualized QoQ, est. 2.9%, prior 2.9%
- 4Q Personal Consumption, est. 1.9%, prior 2.1%
- 4Q GDP Price Index, est. 3.5%, prior 3.5%
- 4Q PCE Core QoQ, est. 3.9%, prior 3.9%
- 08:30: Feb. Initial Jobless Claims, est. 200,000, prior 194,000
- Feb. Continuing Claims, est. 1.7m, prior 1.7m
- 08:30: Jan. Chicago Fed Nat Activity Index, est. -0.25, prior -0.49
- 11:00: Feb. Kansas City Fed Manf. Activity, est. -2, prior -1
DB's Jim Reid concludes the overnight wrap
Although markets have stabilised after Tuesday’s sell-off, the release of the FOMC minutes yesterday still led the S&P 500 (-0.16%) to lose ground for a 4th consecutive session, marking the longest run of declines of 2023 so far. Admittedly, the minutes were always going to feel a bit stale given the strong payrolls and CPI data as well as the upward revisions that have transpired since the meeting, but there were still some insights to be gleaned. In particular, they showed that “almost all” participants favoured downshifting to a 25bp hike, whilst “a few” still wanted a 50bp move. Furthermore, many on the committee “observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures, leading inflation to remain above the Committee’s 2 percent objective for a longer period, and pose a risk of inflation expectations becoming unanchored.” That follows recent data prints indicating that policy may not yet be fully restrictive. And on financial conditions, the minutes noted that “a number of participants observed that financial conditions had eased in recent months, which some noted could necessitate a tighter stance of monetary policy."
Following the minutes, pricing for the Fed’s terminal rate closed at its highest level of this cycle to date, with futures expecting a rate of 5.37% at the July meeting, ending the day up +0.5bps higher. Overall though, the curve was little changed, with the end-2023 rate for December down by -1.1bps to 5.18% by the close. In turn, that prompted US Treasuries to pare back their earlier gains, with the 10yr yield moving off its lows for the day prior to the minutes to only close down -3.7bps at 3.92%. Those swings were even more evident looking at the 2 year yield, which was down -7.1bps in the early US afternoon before spiking +4.1bps to end the day down -2.9bps at 4.69%.
The perception that the minutes had a hawkish tilt meant that market-based measures of US inflation expectations moved lower in response, having been on a consistent run higher over recent weeks. For instance, at one point yesterday the 2yr inflation breakeven was on track to close above 3% for the first time in over 6 months, before closing -1.9bps lower at 2.97%. Bear in mind it was only on January 18 that it closed at 2.04%, so the last month has seen a serious reappraisal about the likely path of inflation over the next couple of years. That’s been echoed at longer time horizons as well, with the 10yr breakeven on track to close at its highest level since early November yesterday just ahead of the minutes, before falling -4.1bps to 2.60%.
Ahead of the Fed minutes, we heard separately from St Louis Fed President Bullard who said in a CNBC interview that “I’m still at 5.375%” in terms of where he wanted to take rates. That would be 75bps above their current levels, and is roughly in line with where current market pricing is expecting terminal to get to. After the close, we then heard from New York Fed President Williams, who reiterated his previous stance that inflation would return to trend in the next “few years”. He noted that goods prices have come down, but not as quickly as he had hoped. He also echoed the FOMC minutes by emphasising they did not want the “inflation expectations anchor to slip.”
When it comes to the Fed’s hiking cycle, another interesting datapoint came from the Mortgage Bankers Association, whose index of home-purchase applications fell to its lowest level since 1995 in the week ending February 17. That comes as mortgage rates have begun to rise again following their decline at the end of last year, with the MBA’s data for a 30-year contract showing rates have gone up by +44bps in the last two weeks, which is the biggest two-week increase since September.
US equities had fluctuated between moderate gains and losses throughout the day, before moving lower following the FOMC minutes with the S&P 500 down -0.16%. The largest underperformers were mostly made up of cyclicals such as Real Estate (-1.02%), Transportation (-0.99%), and Energy (-0.77%), but also some defensives like Food & Staples (-1.15%). The best performers were led by Autos (+1.34%) due in large part to Tesla (+1.77%), and the NASDAQ (+0.13%) posted a modest gain as well.
Over in Europe, markets had similarly put in a pretty subdued performance ahead of the Fed minutes, with the STOXX 600 down a further -0.33%. That said, this marked a recovery from its earlier lows, when it had been down -1.03% during the European morning before recovering into the afternoon. It was much the same story for bonds, with yields on 10yr bunds as high as 2.57% intraday before closing -0.8bps lower at 2.52%. Those more positive moves came as we had further evidence that the economic situation was improving in Europe with the release of the Ifo Institute’s latest business climate indicator for February. That rose to 91.1 in February (vs 91.2 expected), which marked its 4th consecutive monthly advance and is its highest level since June. The expectations component also hit a 1-year high of 88.5 (vs. 88.4 expected), although the current assessment dipped slightly to 94.1 (vs. 94.9 expected).
Overnight in Asia, it’s a quieter session given the Japanese holiday today, but equity markets have remained subdued as in the US and Europe. For instance, the Hang Seng is up just +0.01% this morning, whilst the Shanghai Comp (-0.11%) and the CSI 300 (-0.11%) have both posted modest declines. The main exception to that pattern has come from the KOSPI (+1.01%), which follows the Bank of Korea’s decision to leave interest rates unchanged for the first time in a year, holding at 3.5%. The BoK’s Governor said that one member wanted a 25bp increase, and also that “I hope the hold this time isn’t going to be seen as meaning the rate-hike stance is over”. In response, the South Korean Won has strengthened by +0.62% against the US Dollar this morning. And looking forward, US equity futures are pointing to a better performance today, with those on the S&P 500 (+0.43%) and the NASDAQ 100 (+0.79%) posting decent gains.
To the day ahead now, and data releases include the final CPI release from the Euro Area in January, as well as the second estimate of US GDP in Q4. Otherwise, we’ll get the US weekly initial jobless claims, and the Kansas City Fed’s manufacturing index for February. Meanwhile from central banks, we’ll hear from the Fed’s Bostic and Daly, the ECB’s de Cos, and the BoE’s Cunliffe and Mann. Finally, today’s earnings releases include Booking Holdings and Moderna.
How much more financial pressure can Australian mortgagees take?
Talk to anyone on the street these days and the conversation will inevitably turn to how inflation is increasing their cost of living in some form or another….
Talk to anyone on the street these days and the conversation will inevitably turn to how inflation is increasing their cost of living in some form or another. Inflation has risen steadily since the beginning of 2022 despite the determined efforts of Reserve Bank of Australia (RBA) to bring it back towards its target range of 2-3 per cent.
In less than 1 year and 11 interest rate rises later, official interest rates have risen from 0.10 per cent to 3.85 per cent but inflation remains stubbornly high at 7 per cent. Interest rates have never risen this fast before nor from such a historically low level either.
As previously outlined in an earlier blog entry on Commonwealth Bank (ASX:CBA), the big four banks of Australia have just under 80 per cent of the residential property mortgage loan market. In “normal” economic times of rising interest rates, banks should be natural beneficiaries of these conditions. However, these are not normal times.
The business model of banks has generally stayed the same for centuries, i.e. borrow money from one source at a low interest rate and lend it to a customer at a higher rate. Today, the Australian banks generally get their funding from wholesale and retail sources. However, the banks were offered a one-off funding source from the RBA called the Term Funding Facility (TFF) during the COVID-19 period to support the economy. This started in April 2020, priced at an unprecedented low fixed rate of 0.10 per cent for 3 years with the last drawdown accepted in June 2021 for a total of $188 billion. Fast forward to today and the first drawdowns from this temporary facility have already started to roll-off which means that these fund sources need to be replaced with one of considerably more expensive sources, namely wholesale funding or retail deposits. As a result of this change in funding, bank CEOs have unanimously declared that net interest margins, and hence its effect on bank earnings, have peaked for this cycle despite speculation that interest rates may still rise later in the year.
Prior to the start of the roll-off of TFF drawdowns, the entire Australian banking industry engaged in cutthroat competition for new and refinancing mortgage loans in a bid to maintain or grow market share. In the aftermath of the bank reporting season, two of the big four banks have stated they are no longer pursuing market share at any price, with CBA and National Australia Bank (ASX:NAB) announcing they will scrap their refinancing cashback offers after 1 June and 30 June respectively.
Turning our attention back to the average Australian, the big bank mortgage customers have been remarkably resilient. The Australian dream of owning the house you live in is still alive for now, with owners willing to endure significant lifestyle changes in a bid to keep up with mortgage payments. The big banks have reflected this phenomenon with a reduction in individual loan provisions and only a modest increase in collective loan provisions.
Time will tell how much more financial pressure Australian mortgagees can take, especially with the RBA still undecided on the future trajectory of interest rates. What has been agreed on by the big banks, is that things are not going to get easier. At least not in the short-term.
The Montgomery Funds own shares in the Commonwealth Bank of Australia and National Australia Bank. This article was prepared 29 May 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.interest rates covid-19
U.S. Breakeven Inflation Comments
I just refreshed my favourite U.S. breakeven inflation chart (above), and I was surprised by how placid pricing has been. This article gives a few observations regarding the implications of TIPS pricing.Background note: the breakeven inflation rate is …
Background note: the breakeven inflation rate is the inflation rate that results in an inflation-linked bond — TIPS in the U.S. market — having the same total return as a conventional bond. If we assume that there are no risk premia, then it can be interpreted as “what the market is pricing in for inflation.” I have a free online primer here, as well as a book on the subject.
(As an aside, I often run into people who argue that “breakeven inflation has nothing to do with inflation/inflation forecasts.” I discuss this topic in greater depth in my book, but the premise that inflation breakevens have nothing to do with inflation only makes sense from a very short term trading perspective — long-term valuation is based on the breakeven rate versus realised inflation.)
The top panel shows the 10-year breakeven inflation rate. Although it scooted upwards after the pandemic, it is below where is was pre-Financial Crisis, and roughly in line with the immediate post-crisis period. (Breakevens fell at the end of the 2010s due to persistent misses of the inflation target to the downside.) Despite all the barrels of virtual ink being dumped on the topic of inflation, there is pretty much no inflation risk premium in pricing.
The bottom panel shows forward breakeven inflation: the 5-year rate starting 5 years in the future. (The 10-year breakeven inflation rate is (roughly) the average of the 5-year spot rate — not shown — and that forward rate.) It is actually lower than its “usual” level pre-2014, and did not really budge after recovering from its post-recession dip. (My uninformed guess is that the forward rate was depressed because inflation bulls bid up the front breakevens — because they were the most affected by an inflation shock — while inflation bears would have focussed more on long-dated breakevens, with the forward being mechanically depressed as a result.)
Since I am not offering investment advice, all I can observe is the following.
Since it looks like one would need a magnifying glass to find an inflation risk premium, TIPS do seem like a “non-expensive” inflation hedge. (I use “non-expensive” since they do not look cheap.) Might be less painful than short duration positions (if one were inclined to do that).
Breakeven volatility is way more boring than I would have expected based on the recent movements in inflation. The undershoot during the recession was not too surprising given negative oil prices and expectations of another lost decade, but the response to the inflation spike was restrained.
The “message for the economy” is that market pricing suggests that either inflation reverts on its own, or the Fed is expected to break something bigger than a few hapless regional banks if inflation does not in fact revert.
Otherwise, I am preparing for a video panel on MMT at the Canadian Economics Association 2023 Conference on Tuesday. (One needs to pay the conference fee to see the panel.) I have also been puttering around with my inflation book. I have a couple draft sections that I might put up in the coming days/weeks.
“What’s More Tragic Is Capitalism”: BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros
"What’s More Tragic Is Capitalism": BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros
Authored by Jonathan Turley,
Two years ago, I wrote columns about companies pouring money into Black Lives Matter to establish their bona fides as “antiracist” corporations. The money continued to flow despite serious questions raised about BLM’s management and accounting. Democratic prosecutors like New York Attorney General Letitia James showed little interest in these allegations even as James sought to disband the National Rifle Association (NRA) over similar allegations. At the same time, Black Lives Matter co-founder Patrisse Cullors cashed in with companies like Warner Bros. eager to give her massive contracts to signal their own reformed status. It now appears that BLM is facing bankruptcy after burning through tens of millions and Warner Bros. cut ties with Cullors after the contract produced no — zero — new programming.
Some states belatedly investigated BLM as founders like Cullors seemed to scatter to the winds.
Gone are tens of millions of dollars, including millions spent on luxury mansions and windfalls for close associates of BLM leaders.
The usual suspects gathered around the activists like former Clinton campaign general counsel Marc Elias, who later removed himself from his “key role” as the scandals grew.
When questions were raised about the lack of accounting and questionable spending, BLM attacked critics as “white supremacists.”
Warner Bros. was one of the companies eager to grab its own piece of Cullors to signal its own anti-racist virtues. It gave Cullors a lucrative contract to guide the company in the creation of both scripted and non-scripted content, focusing on reparations and other forms of social justice. It launched a publicity campaign for everyone to know that it established a “wide-ranging content partnership” with Cullors who would now help guide the massive corporation’s new programming. Calling Cullors “one of the most influential thought leaders in American public life,” Warner Bros. announced that she was going to create a wide array of new programming, including “but not limited to live-action scripted drama and comedy series; longform/event series; unscripted docuseries; animated programming for co-viewing among kids, young adults and families; and original digital content.”
Some are now wondering if Warner Bros. ever intended for this contract to produce anything other than a public relations pitch or whether Cullors took the money and ran without producing even a trailer for an actual product. Indeed, both explanations may be true.
Paying money to Cullors was likely viewed as a type of insurance to protect the company from accusations of racial insensitive. After all, the company was giving creative powers to a person who had no prior experience or demonstrated talent in the area. Yet, Cullors would be developing programming for one of the largest media and entertainment companies in the world.
One can hardly blame Cullors despite criticizism by some on the left for going on a buying spree of luxury properties.
After all, Cullors was previously open about her lack of interest in working with “capitalist” elements. Nevertheless, BLM was run like a Trotskyite study group as the media and corporations poured in support and revenue.
It was glaringly ironic to see companies like Warner Bros. falling over each other to grab their own front person as the group continued boycotts of white-owned businesses. Indeed, if you did not want to be on the wrong end of one of those boycotts, you needed to get Cullors on your payroll.
Much has now changed as companies like Bud Light have been rocked by boycotts over what some view as heavy handed virtue signaling campaigns.
It was quite a change for Cullors and her BLM co-founder, who previously proclaimed “[we] are trained Marxists. We are super versed on, sort of, ideological theories.” She denounced capitalism as worse than COVID-19. Yet, companies like Lululemon rushed to find their own “social justice warrior” while selling leggings for $120 apiece.
When some began to raise questions about Cullors buying luxury homes, Facebook and Twitter censored them.
With increasing concerns over the loss of millions, Cullors eventually stepped down as executive director of the Black Lives Matter Global Network Foundation, as others resigned. At the same time, the New York Post was revealing that BLM Global Network transferred $6.3 million to Cullors’ spouse, Janaya Khan, and other Canadian activists to purchase a mansion in Toronto in 2021.
According to The Washington Examiner, BLM PAC and a Los Angeles-based jail reform group paid Cullors $20,000 a month. It also spent nearly $26,000 on meetings at a luxury Malibu beach resort in 2019. Reform LA Jails, chaired by Cullors, received $1.4 million, of which $205,000 went to the consulting firm owned by Cullors and her spouse, according to New York magazine.
Once again, while figures like James have spent huge amounts of money and effort to disband the NRA over such accounting and spending controversies, there has been only limited efforts directed against BLM in New York and most states.
Cullors once declared that “while the COVID-19 illness is tragic, what’s more tragic is capitalism.” These companies seem to be trying to prove her point. Yet, at least for Cullors, Warner Bros. fulfilled its slogan that this is all “The stuff that dreams are made of.”
U.S. Breakeven Inflation Comments
Biden reaches ‘tentative’ US debt ceiling deal: Report
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“What’s More Tragic Is Capitalism”: BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros
How much more financial pressure can Australian mortgagees take?
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