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The Capital Markets YoYo Continues

The Capital Markets YoYo Continues

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Overview: The 4.2% rally in the S&P 500 yesterday helped lift Asia Pacific markets earlier today, and the five basis point backing up of the US 10-year yield pushed regional yields higher. However, the coattails proved short, and Europe's Dow Jones Stoxx 600 is snapping a three-day advance and is off about 1.3% in late morning turnover to give back yesterday's gains. US shares are also trading heavily, and the S&P 500 looks almost 2% lower. European benchmark 10-year yields are mostly 1-3 bp firmer, though German Bund yields are slightly softer. The US 10-year yield is pushing back to nearly 95 bp as it unwinds yesterday's pick-up. The dollar is lower against almost all of the major currencies, but the Canadian dollar and the Norwegian krone. The liquid, accessible emerging market currencies are softer, including the South African rand, Turkish lira, and Mexican peso.The South Korean won was the strongest, with a 0.5% gain. Foreigners continue to sell Korean shares, but fully offsetting it and more, are their purchases of Korean bonds. Gold and oil are consolidating inside yesterday's ranges. OPEC+ meet, and many expect that the current cuts in production will be extended, while extra cuts of around 750k barrels per day can be cut for a quarter or two.    

Asia Pacific

Foreign investors continued to buy negative-yielding Japanese bonds last week, according to MOF figures. It was the sixth consecutive week of purchases, during which time they bought about $39 bln, the most in a six-week period in over a year. Many seem to be buying on a hedged basis. Consider that a dollar-based investor buys a short-dated JGB yielding minus 25 bp, hedging the yen back into dollars, one is paid sufficiently to turn the overall yield of the trade into more than a US two-year Treasury. 

The Bank of Japan does not meet until March 18-19. Market News International reported that officials do not see the need for an emergency meeting unless the yen were to strengthen sharply with the dollar falling through JPY105 toward JPY100. Reports suggest the BOJ will downgrade it economic assessment and either launch a new facility to ensure lending firms disrupted by the virus or scale-up existing facilities. 

The head of Australia's Treasury warned that his country will likely experience its first quarterly contraction in nine years but expects a recovery in Q2, avoiding the rule-of-thumb definition of a recession. A measured and targeted fiscal response is likely in the coming days. Asia-Pacific countries have already announced around $38 bln in fiscal measures. The IMF has made $50 bln available to help countries cope with the virus, including $10 bln to be lent at zero interest rates to help the poorest countries.  

The dollar initially rose to nearly JPY107.70, marginally taking out yesterday's high in early Tokyo trading before reversing lower and in the European morning has been sold through yesterday's low (~JPY106.85). The low from last October was set near JPY106.50, and below there was congestion around JPY106 from last August and September. As of about a week ago, the speculative market (non-commercials) had its largest gross short yen position in the CME futures since last May, apparently leaving plenty of scope for a short-squeeze. The Australian dollar is firm and held above $0.6600. However, the 20-day moving average, which it has not closed above since January 6 is the nearby hurdle and is found around $0.6640 today. The Chinese yuan consolidated its recent gains in subdued turnover. The dollar firmed slightly but remains below previous support around CNY6.95.  

Europe

Germany's construction PMI rose to 55.8 from 54.9. This is the strongest reading since January 2018. Of course, the construction sector is a smaller proportion of the German economy than manufacturing and services. However, it speaks to the resilience of the domestic economy. Germany exports around 40% of GDP, but construction is nearly exclusively a domestic activity. The focus is shifting toward the ECB meeting next week. It is the only major central bank meeting, and the market is expecting a policy response, supported by updated staff forecasts.  

Carney's replacement at the Bank of England, Bailey does not take office until March 16.  However, he weighed in on two issues. First, next week's budget is the near-term focus, and Bailey indicated the BOE will work closely with Chancellor of the Exchequer Sunak to coordinate the response to the virus. Second, the next MPC meeting is March 26, and Bailey seemed to push back against some speculation of an inter-meeting cut like the Fed delivered this week. Bailey indicated he thought more evidence is needed before acting.  

For the second consecutive session, the euro found solid bids below $1.11 yesterday and is consolidating inside yesterday's range today. It is testing the $1.1175 area in the European morning, where an option for about 775 mln euros expires later today. There is another option at $1.12 for roughly 565 mln euro that also gets cut today. The week's high set on Tuesday was just shy of $1.1215. A third expiring option for around 525 mln euros is struck at $1.1225. Sterling is bid for the third session in a row and is pushing above $1.29 for the first time this week. An option for nearly GBP210 mln placed there that expires today. Above there resistance is seen in the $1.2950 area and then $1.30. That said, the intraday technicals are stretched, cautioning early North American traders from chasing it. The euro's gain against sterling has been frustrated by the 200-day moving average (~GBP0.8740) for the past three sessions and reversed lower yesterday. The cross found support today near GBP0.8620, ahead of chart support near GBP0.8600, where an option for around 640 mln euro will expire today. 

America

The market had clearly recognized the risk but was still surprised when the Bank of Canada announced a 50 bp rate cut to 1.25%.  Last year, when the Fed cut three times, the Bank of Canada stood pat. However, the combination of Covid-19, which is what the Bank called "material negative shock," and the Fed's move, likely pushed Governor Poloz over the edge. The Bank of Canada's policy rate is still the highest in the G7.  It was also dovish ease in the sense that it seemed clear from Poloz's comments that the bar to additional cuts is not particularly high. Poloz presents the Economic Progress Report (the text on its website at 12:45 pm), and impressions from the rate cut will be clarified.  The next Bank of Canada meeting is in the middle of next month. 

Canada became the third major central bank to ease, following the Reserve Bank of Australia and the Federal Reserve. Although most centers in Europe have lower rates than the US, there is speculation of action by the ECB, which meets next week.  The market appears to be pricing in seven basis points of a 10 bp move, and there is some speculation of expanding the asset purchases, and maybe a new TLTRO facility to aid lending to be small and medium-sized businesses. The BOJ meets March 18-19, and it appears to be the most difficult central bank to read now. Its asset purchase programs can be scaled-up, but the market seems nearly evenly divided about the prospects of a deeper negative rate. The Bank of England does not meet until March 26, but an earlier move is being discussed by market participants, though, as noted above, was pushed back against by the incoming Governor Bailey. Another scenario is a 50 bp cut rather than 25 bp. These actions were not coordinated, but central banks are responding to the same thing. 

The US is joining mostly Asia Pacific countries at this juncture, with a fiscal response. In a bipartisan effort, the House of Representatives approved $7.8 bln emergency spending to cope with the virus, which is around three times more than what White House sought last week. The Senate is expected to take up the measure today or tomorrow. California has declared a state emergency, and this will also free up funds, while the CDC lifted restrictions on testing for the virus, which has been low in the US in both absolute and relative terms.  

The Beige Book, prepared for the upcoming FOMC meeting, reported broad concerns about supply chain disruptions but also hits to the travel and tourist industries. St. Louis Fed's Bullard cautioned against market expectations for a follow-up cut at the FOMC meeting, suggesting little new information may be known by then. The market appears to have another 25 bp cut fully discounted (which is what we suspect is the most likely scenario in a fluid situation) and about 70% chance of 50 bp move.  

The US dollar is trying again to establish a foothold above CAD1.34. It finished last week above there but has not done so this week. Canada's 2-year premium over the US is about 32 bp, the most in five years. However, it is not sufficient to compensate for the risk-off mood and the softer commodity prices.  Initial resistance is seen near yesterday's high around CAD1.3430. Nearby support is cited by CAD1.3380, with stronger support in the CAD1.3320-CAD1.3340 band. The greenback will begin the North American session above yesterday's highs against the Mexican peso (~MXN19.6250). A move above MXN19.68 today could signal gains toward MXN19.80. Given the sensitivity to the broader environment, participants may not attempt to pick a top until after the first equity losses.




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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Spread & Containment

Another beloved brewery files Chapter 11 bankruptcy

The beer industry has been devastated by covid, changing tastes, and maybe fallout from the Bud Light scandal.

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Before the covid pandemic, craft beer was having a moment. Most cities had multiple breweries and taprooms with some having so many that people put together the brewery version of a pub crawl.

It was a period where beer snobbery ruled the day and it was not uncommon to hear bar patrons discuss the makeup of the beer the beer they were drinking. This boom period always seemed destined for failure, or at least a retraction as many markets seemed to have more craft breweries than they could support.

Related: Fast-food chain closes more stores after Chapter 11 bankruptcy

The pandemic, however, hastened that downfall. Many of these local and regional craft breweries counted on in-person sales to drive their business. 

And while many had local and regional distribution, selling through a third party comes with much lower margins. Direct sales drove their business and the pandemic forced many breweries to shut down their taprooms during the period where social distancing rules were in effect.

During those months the breweries still had rent and employees to pay while little money was coming in. That led to a number of popular beermakers including San Francisco's nationally-known Anchor Brewing as well as many regional favorites including Chicago’s Metropolitan Brewing, New Jersey’s Flying Fish, Denver’s Joyride Brewing, Tampa’s Zydeco Brew Werks, and Cleveland’s Terrestrial Brewing filing bankruptcy.

Some of these brands hope to survive, but others, including Anchor Brewing, fell into Chapter 7 liquidation. Now, another domino has fallen as a popular regional brewery has filed for Chapter 11 bankruptcy protection.

Overall beer sales have fallen.

Image source: Shutterstock

Covid is not the only reason for brewery bankruptcies

While covid deserves some of the blame for brewery failures, it's not the only reason why so many have filed for bankruptcy protection. Overall beer sales have fallen driven by younger people embracing non-alcoholic cocktails, and the rise in popularity of non-beer alcoholic offerings,

Beer sales have fallen to their lowest levels since 1999 and some industry analysts

"Sales declined by more than 5% in the first nine months of the year, dragged down not only by the backlash and boycotts against Anheuser-Busch-owned Bud Light but the changing habits of younger drinkers," according to data from Beer Marketer’s Insights published by the New York Post.

Bud Light parent Anheuser Busch InBev (BUD) faced massive boycotts after it partnered with transgender social media influencer Dylan Mulvaney. It was a very small partnership but it led to a right-wing backlash spurred on by Kid Rock, who posted a video on social media where he chastised the company before shooting up cases of Bud Light with an automatic weapon.

Another brewery files Chapter 11 bankruptcy

Gizmo Brew Works, which does business under the name Roth Brewing Company LLC, filed for Chapter 11 bankruptcy protection on March 8. In its filing, the company checked the box that indicates that its debts are less than $7.5 million and it chooses to proceed under Subchapter V of Chapter 11. 

"Both small business and subchapter V cases are treated differently than a traditional chapter 11 case primarily due to accelerated deadlines and the speed with which the plan is confirmed," USCourts.gov explained. 

Roth Brewing/Gizmo Brew Works shared that it has 50-99 creditors and assets $100,000 and $500,000. The filing noted that the company does expect to have funds available for unsecured creditors. 

The popular brewery operates three taprooms and sells its beer to go at those locations.

"Join us at Gizmo Brew Works Craft Brewery and Taprooms located in Raleigh, Durham, and Chapel Hill, North Carolina. Find us for entertainment, live music, food trucks, beer specials, and most importantly, great-tasting craft beer by Gizmo Brew Works," the company shared on its website.

The company estimates that it has between $1 and $10 million in liabilities (a broad range as the bankruptcy form does not provide a space to be more specific).

Gizmo Brew Works/Roth Brewing did not share a reorganization or funding plan in its bankruptcy filing. An email request for comment sent through the company's contact page was not immediately returned.

 

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Government

Walmart joins Costco in sharing key pricing news

The massive retailers have both shared information that some retailers keep very close to the vest.

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As we head toward a presidential election, the presumed candidates for both parties will look for issues that rally undecided voters. 

The economy will be a key issue, with Democrats pointing to job creation and lowering prices while Republicans will cite the layoffs at Big Tech companies, high housing prices, and of course, sticky inflation.

The covid pandemic created a perfect storm for inflation and higher prices. It became harder to get many items because people getting sick slowed down, or even stopped, production at some factories.

Related: Popular mall retailer shuts down abruptly after bankruptcy filing

It was also a period where demand increased while shipping, trucking and delivery systems were all strained or thrown out of whack. The combination led to product shortages and higher prices.

You might have gone to the grocery store and not been able to buy your favorite paper towel brand or find toilet paper at all. That happened partly because of the supply chain and partly due to increased demand, but at the end of the day, it led to higher prices, which some consumers blamed on President Joe Biden's administration.

Biden, of course, was blamed for the price increases, but as inflation has dropped and grocery prices have fallen, few companies have been up front about it. That's probably not a political choice in most cases. Instead, some companies have chosen to lower prices more slowly than they raised them.

However, two major retailers, Walmart (WMT) and Costco, have been very honest about inflation. Walmart Chief Executive Doug McMillon's most recent comments validate what Biden's administration has been saying about the state of the economy. And they contrast with the economic picture being painted by Republicans who support their presumptive nominee, Donald Trump.

Walmart has seen inflation drop in many key areas.

Image source: Joe Raedle/Getty Images

Walmart sees lower prices

McMillon does not talk about lower prices to make a political statement. He's communicating with customers and potential customers through the analysts who cover the company's quarterly-earnings calls.

During Walmart's fiscal-fourth-quarter-earnings call, McMillon was clear that prices are going down.

"I'm excited about the omnichannel net promoter score trends the team is driving. Across countries, we continue to see a customer that's resilient but looking for value. As always, we're working hard to deliver that for them, including through our rollbacks on food pricing in Walmart U.S. Those were up significantly in Q4 versus last year, following a big increase in Q3," he said.

He was specific about where the chain has seen prices go down.

"Our general merchandise prices are lower than a year ago and even two years ago in some categories, which means our customers are finding value in areas like apparel and hard lines," he said. "In food, prices are lower than a year ago in places like eggs, apples, and deli snacks, but higher in other places like asparagus and blackberries."

McMillon said that in other areas prices were still up but have been falling.

"Dry grocery and consumables categories like paper goods and cleaning supplies are up mid-single digits versus last year and high teens versus two years ago. Private-brand penetration is up in many of the countries where we operate, including the United States," he said.

Costco sees almost no inflation impact

McMillon avoided the word inflation in his comments. Costco  (COST)  Chief Financial Officer Richard Galanti, who steps down on March 15, has been very transparent on the topic.

The CFO commented on inflation during his company's fiscal-first-quarter-earnings call.

"Most recently, in the last fourth-quarter discussion, we had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the 0% to 1% range," he said.

Galanti made clear that inflation (and even deflation) varied by category.

"A bigger deflation in some big and bulky items like furniture sets due to lower freight costs year over year, as well as on things like domestics, bulky lower-priced items, again, where the freight cost is significant. Some deflationary items were as much as 20% to 30% and, again, mostly freight-related," he added.

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