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The Fed pivots—finally!

Thanks to today’s release of the November 2nd FOMC meeting minutes, we know that the Fed has "pivoted" as expected; they are backing off of their aggressive…

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Thanks to today's release of the November 2nd FOMC meeting minutes, we know that the Fed has "pivoted" as expected; they are backing off of their aggressive tightening agenda. Instead of hiking rates another 75 bps at their December 14th meeting, we are likely to see only a 50 bps hike, to 4.5%, and that could well be the last hike of this tightening cycle—which would make it the shortest tightening cycle on record (less than one year). And they might not even raise rates at all in December—that would be my preference.

For more than two years I have been one of a handful of economists keeping an eye on the rapid growth of the M2 money supply. Initially I warned that it portended much higher inflation than the market was expecting. But since May of this year I have argued that inflation pressures have peaked: "Many factors have contributed to this: growth in the M2 money supply has been essentially zero since late last year; the stimulus checks have ceased; the dollar has been very strong; commodity prices have been very weak; and soaring interest rates have brought the housing market to its knees. All of these developments mean that the supply of money and the demand to hold it have come back to some semblance of balance." To sum it up, I think the Fed has gotten policy back on track, so there's no need to do more. In fact, the October M2 release showed even more of a slowdown than previously, thus underscoring the need to avoid further tightening.

For a recap of my thinking on all this, here is a short summary of relevant posts:

October '20: On the demand for money and other considerations

March '21: The problem with unwanted money and More signs that inflation is set to increase

July '21: Big changes in inflation and government finances

August '21: Inflation update: this is serious

September '21: Money and inflation update

October '21: Monetary policy is a slow-motion train wreck

November '21: Recession risk is very low, but inflation risk is high

January '22: The bond market is wrong about inflation

Beginning last May I began arguing that we had seen the peak of inflation pressures, thanks to a big decline in the growth of the M2 money supply.

May '22: M2 growth slows: light at the end of the inflation...

August '22: Inflation pressures cool, economic outlook improves

Sep '22: Inflation pressures are in fact cooling ...

I'm still firmly in the inflation-is-falling camp, and it's because of the unprecedented decline in the M2 money supply, coupled with forceful actions on the part of the Fed to bolster money demand with sharply higher interest rates. As a result, I believe we are going to see a gradual decline in inflation over the next year or so.

The following charts round out the story:

Chart #1

Chart #1 has got to be the most significant monetary development that almost no one is paying attention to. It shows how M2 surged above its long-term trend growth rate beginning in April 2020, and then stopped growing about one year ago. It is still quite elevated (i.e., there is a lot of "excess" money sloshing around), but the growth rate of M2 is now negative: over the past six months M2 is down at an annualized rate of -2%, and over the past 3 months it is down at a -4% annualized rate. This adds up to the weakest growth of M2 since at least 1960—and possibly the weakest growth ever. M2 today is about 22% above its long-term trend, whereas it was almost 30% above trend earlier this year. The amount of "excess" money is declining rapidly, and that is a good thing.

Chart #2

Chart #2 shows how the surge in M2 growth was almost entirely driven by massive federal deficit spending from 2020 through late 2021. In effect, the government sent out many trillions in "stimulus" checks to people and most of that money ended up being stashed in bank deposit and savings accounts. The demand for money was intense back then since there was great pandemic-fueled uncertainty and besides, lockdowns left people with little ability to spend money. All that money wasn't a problem until early this year, when the pandemic crisis began to recede. That marked the point when people started to spend the money they had stockpiled, and that spending surge combined with supply-chain bottlenecks to produce a wave of higher prices for nearly everything. In short, an improving outlook and a return of confidence meant that the demand for all that money was evaporating.

Chart #3

Chart #3 tracks the demand for money as defined by the ratio of M2 to nominal GDP. Let me explain: M2 is a proxy for the amount of money the average person holds in currency and bank deposits. Nominal GDP is a proxy for average annual incomes. The ratio of the two therefore tells us what percent of one's annual salary is held in the form of readily-spendable money. When the ratio is higher than people feel comfortable with (i.e., when there is no longer a need to stockpile funds for a rainy day), people attempt to spend down their money balances, and that fuels a surge in demand. Money balances decline, and nominal GDP surges. I estimate that the ratio of M2 to GDP will fall to almost 80% by the end of this year, down from just over 90% at its peak in Q2/20. Today there is simply no need for people to hold so much of their income in the form of cash. Indeed, I don't see why this ratio can't fall back to 70%, where it was before the pandemic hit. For that to happen, nominal GDP (mostly inflation) is almost certainly going to continue to grow, albeit at a slower pace, and M2 balances are likely to decline some more.

(Note: for those who prefer to think in terms of the velocity of money, just invert Chart #3. Velocity is simply the inverse of money demand, and vice versa. Today velocity is definitely picking up. For a longer explanation of this see this post.)

As Milton Friedman taught us, inflation happens when the supply of money exceeds the demand for it. It's critical to understand that rapid growth in M2 from Q2/20 through Q3/21 was not inflationary because the demand for money was very strong during that period. But when the demand for money started to fall early this year, then inflation surged, even though M2 was no longer growing. From this we can infer that the demand for money fell significantly.

Money demand is likely still declining, and money supply is still contracting, but the huge rise in interest rates this year has acted to bolster money demand: earning 4-5% on bank CDs is an incentive to hold on to that money you stashed in the bank—at least some it. The net result of all this is an easing of inflationary pressures. That can be seen already in falling commodity prices and housing prices.


Chart #4

Chart #4 shows the level of bank reserves held by US banks. Recall that bank reserves are not money that can be spent anywhere. They are assets of the banking system and liabilities of the Fed; their main role today is to collateralize deposits and provide abundant risk-free assets to the banking system, since bank reserves are essentially default-free. Reserves are still super-abundant, thanks to the Fed's decision in late 2008 to permanently expand the level of bank reserves while controlling interest rates directly (i.e, by paying interest on reserves). In prior tightening cycles, the Fed had to drain reserves in order to force interest rates higher; that put a real squeeze on financial markets since it reduced liquidity. Now the Fed simply pays a higher rate on reserves instead of shrinking their supply, so the system is spared a liquidity crunch.

Chart #5

Chart #5 shows option-adjusted credit spreads for corporate bonds. This is an excellent proxy for the level of economic and financial stress in the US economy. As we see, despite a massive amount of monetary tightening, spreads are still at relatively low levels. In prior tightening episodes, spreads surged and bankruptcies followed, because the Fed was restricting liquidity. This time around things are very different. The risk of a recession is therefore much lower in today's monetary environment. Another great indicator of financial and economic stress is 2-yr swap spreads, and today they are a mere 31 bps, well within the range of normal.

Chart #6

Chart #6 shows us that household financial burdens (financial-related payments as a percent of disposable income) are unusually low. They were much higher going into recessions in the past. Businesses and households are still in pretty good shape despite all the tightening. Thus a recession is less likely now than during prior tightening cycles.

Shall we call this "tightening lite?"

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Futures Jump Above Key CTA Trigger Level Ahead Of PPI Data

Futures Jump Above Key CTA Trigger Level Ahead Of PPI Data

After sliding 8 of the previous 9 days, US stock futures extended yesterday’s…

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Futures Jump Above Key CTA Trigger Level Ahead Of PPI Data

After sliding 8 of the previous 9 days, US stock futures extended yesterday’s gains as investors awaited today's PPI data (ahead of next week's critical CPI print) and the Fed's final meeting for 2022 next week. Contracts on the Nasdaq 100 were up 0.6% as of 7:30 a.m. in New York, while S&P 500 futures rose 0.5%; more importantly spoos were back above the critical and closely watched medium-term CTA trigger of 3976. Treasury yields were little changed, with the 10-year rate just below 3.5%. The Bloomberg dollar index dropped.

And maybe even notable is that in its latest market commentary, Goldman's trading desk warned that "L/Os I speak with telling me they are bumping up against their cash ceilings." Are we about to see a flood of year-end buying as there is just too much cash on the sidelines as funds continue to dump assets. Underlying indexes rallied on Thursday after almost 9 straight days of losses, and are still on track to post a weekly decline amid fears of a hawkish-for-longer central bank and the risk of a recession in 2023.

Among notable moves in premarket trading, Activision Blizzard fell after the US Federal Trade Commission sought to block Microsoft’s $69 billion acquisition of the videogame publisher, saying the deal would harm competition. DocuSign Inc. jumped after the e-signature company reported third-quarter billings that were stronger than expected. Analysts noted that results were boosted by early renewals. Piper Sandler upgraded to neutral from underweight. Here are some other notable premarket movers:

  • Coinbase drops 2.8% in US premarket trading, after Mizuho Securities downgraded its rating on the cryptocurrency exchange to underperform from neutral. Analysts say that consensus expectations are “too optimistic” for the company’s 2023 revenue.
  • Netflix rises 2.3% after the streaming company is upgraded to overweight from equal-weight at Wells Fargo, with analysts seeing a path of positive catalysts in 2023 driven by lower churn and stable subscribers. Separately, Cowen names Netflix as its top large- cap stock pick for 2023.
  • Lululemon slides 6.8% in light volumes as lower-than-expected profitability raised concerns about a pileup of inventory, while the the yogawear maker’s full-year sales forecast disappointed Wall Street.
  • Pharvaris drops 14%, erasing some of yesterday’s gains, when the stock more than quadrupled in price. The surge followed the firm’s announcement that the RAPIDe-1 Phase 2 clinical study of PHVS416, an oral on-demand treatment for angioedema attacks, met primary endpoint and all secondary endpoints.
  • Take-Two Interactive has “bright” long-term prospects through owning iconic IPs such as Grand Theft Auto and a track record of successful releases, though Citi starts coverage on the video game developer on the sidelines on the expectation of consensus FY24 estimates falling.
  • Rally in Chinese stocks listed in the US continued, with major internet stocks making fresh gains in premarket trading on Friday as steps to relax pandemic curbs gain momentum.
  • Apple analysts are trimming their sales estimates for the iPhone maker’s fiscal first quarter as disruptions at its factories in China are expected to hit sales. With delivery times for iPhone recovering over the past week, analysts note that demand for the top-end smartphone models is still holding up and expect the backlog to benefit subsequent quarters. Shares gained about 1%.
  • Broadcom shares are up 4% after the semiconductor device company reported fourth-quarter results that beat expectations and gave a revenue forecast that was ahead of consensus. Analysts were positive about the company’s consistent execution amid a tough macro environment.
  • Carvana Co. slumps 6% after Needham cut its recommendation on the stock to hold from buy saying “confidence is low on the path forward.” The latest downgrade follows similar moves from at least five other brokerages in recent months, including Wedbush, William Blair and Cowen.
  • Chewy’s fiscal 3Q results look strong, though its conservative guidance may disappoint some investors, analysts say. Chewy shares fell 1.1%.
  • Erasca is 2.9% lower after its stock offering priced via JPMorgan and Goldman Sachs.

Focus this morning will be on US producer prices data amid optimism that inflation peaked earlier this year. The Fed has signaled it’s ready to start slowing the pace of rate hikes at its meeting next week, and investors will look for clues about its policy outlook for next year. CMC Markets market analyst Michael Hewson said “the big question” from hereon is whether the trend of cooling prices “can be maintained against a US central bank that doesn’t want to be seen as going soft on inflation, and services and wages data that points to a US economy that is slightly more resilient than originally thought.”

“Traders will be closely watching today’s PPI data, with S&P 500 options markets pricing the largest potential move around any PPI release this year,” said Hugo Bernaldo, senior cross-asset trader at Optiver. “Investors will also be looking for clues in today’s data of how Tuesday’s more important CPI figures will come in.”

A Bloomberg News survey showed fund managers are optimistic about a stock recovery next year, expecting low double-digit gains, although they cite a strong recession and stubborn inflation as the biggest risks. Top market strategists are more cautious, saying equities are likely in for a rough ride in the first half of the year as they price in a possible economic contraction. Bank of America Corp. strategists also warned that investors betting on a rally after the Fed’s last rate hike could be in for disappointment due to the impact of higher inflation. Their note, citing EPFR Global data, showed outflows of $5.7 billion from global equity funds in the week through Dec. 7.

Fed officials are leery of fanning stock rallies that ease financial conditions too much and thwart their inflation-fighting mission. Strategists have lined up to warn investors against piling back into risk on hopes the Fed is getting close to pivoting to easier policy. “Central banks will rather be on the safe side when it comes to future inflation after having underestimated inflationary pressures last year,” Karsten Junius, chief economist at Bank J. Safra Sarasin Ltd., wrote in a note to clients, adding that a pause in rate hikes is some way off.

European stocks also rose: travel, media and construction are the strongest-performing equity sectors. Euro Stoxx 50 rises 0.2%. FTSE MIB is flat but underperforms peers. Here are the most notable European movers:

  • BICO Group shares jump as much as 75% after the Swedish biotech issued shares to Germany’s Sartorius and agreed on a strategic collaboration with the lab-equipment group.
  • Man Group shares rose as much as 6.5% after the UK investment group announced a new share buyback program of up to $125m.
  • ABN Amro shares rise as much as 4.2% after it was upgraded to outperform at Credit Suisse
  • Credit Suisse shares rise 3.7% after the troubled lender completed its 4 billion-franc capital increase, giving the bank the funds needed to go ahead with its restructuring.
  • Pendragon shares drop as much as 28% after the auto dealer says Hedin Group no longer intends to make a bid for the company due to challenging market conditions and the uncertain economic outlook.
  • Carl Zeiss Meditec shares drop as much as 11%, the most intraday since October 2019, after the medical optical manufacturer said its first quarter 2022/23 Ebit margin is expected to fall significantly year-on-year amid higher costs and China’s Covid lockdowns.
  • Ipsen falls as much as 7.0%, the most since Oct. 27, after a phase III trial evaluating its Cabometyx in combination with another drug failed to meet its primary endpoint of overall survival in non-small cell lung cancer.
  • Worldline falls as much as 6.0% after it was cut to neutral from overweight at JPMorgan, with the broker saying a key pillar of its bullish view on the stock is deteriorating.
  • TotalEnergies shares retreated as much as 2.0% after the French energy group said it would take a $3.7 billion impairment hit in its fourth-quarter results following a decision to no longer consolidate its 19.4% stake in Russia’s Novatek.

Asian equities also gained Friday as most regional markets followed US shares higher, while reopening moves in China kept overall sentiment upbeat. The MSCI Asia Pacific Index rose as much as 1.4%, heading for a sixth-straight week of gains, lifted by technology shares. Hong Kong’s Hang Seng Index climbed more than 2%, leading gains in the region, while gauges in Japan and Taiwan advanced more than 1%. Shares of Chinese developers led the advance in Hong Kong as expectations grew for more policy support. Macau casino shares also rallied as the city followed the mainland to relax some of its Covid restrictions.  Read: China Stocks Cap Another Week of Hefty Gains on Reopening Moves

“A significant easing of Covid measures could happen in the second half of the year after gradual, piecemeal measures in the first quarter,” said Iris Pang, chief economist for Greater China at ING Groep NV. Still, “there are likely downside risks associated with the higher number of Covid cases.”  The Asian stock benchmark was on track for its longest weekly run of gains in two years, amid expectations for China’s reopening and the Federal Reserve’s pivot from its aggressive tightening. The gauge has risen more than 18% from its October low, on the cusp of entering a technical bull market. Traders are focusing on US producer prices data due later in the day, which may offer cues on the Fed’s tightening path

Japanese equities climbed, tracking a rebound in the S&P 500 Index, as investors awaited US inflation data for clues on the Federal Reserve’s tightening path.  The Topix rose 1% to 1,961.56 as of the 3 p.m. market close in Tokyo, while the Nikkei 225 advanced 1.2% to 27,901.01. Sony Group contributed the most to the Topix’s gain, increasing 2.3%. Asian gaming stocks rose as the US Federal Trade Commission seeks to block Microsoft’s $69 billion acquisition of Activision Blizzard.  Out of 2,164 stocks in the index, 1,633 rose and 420 fell, while 111 were unchanged. “The immediate focus of market participants is on PPI, CPI and the FOMC,” said Shogo Maekawa, chief global strategist at JPMorgan Asset Management.

Australian stocks gained as miners advance, tracking Asian peers. Australia’s key equity benchmark index rose 0.5%, boosted by miners and consumer staples shares, as regional stocks followed Wall Street higher. The S&P/ASX 200 closed at 7,213.20 on Friday but declined 1.2% for the week In New Zealand, the S&P/NZX 50 index fell 0.2% to 11,596.03.

Indian stocks were an outlier on Friday, among the biggest decliners in Asia on Friday,  with key gauges falling more than 1% as as tech shares dropped and investors booked some profits ahead of the year-end with economic growth expected to be under pressure. The S&P BSE Sensex fell 0.6% to 62,181.67 as of 3:45 p.m. in Mumbai, while the NSE Nifty 50 Index slipped by a similar magnitude. Both gauges fell 1.1% for the week, their biggest declines since late September. Tech shares contributed the most to Friday’s falls after management of HCL Technologies said fiscal 2023’s revenue growth will be at the lower end of the 13.5% to 14.5% band, triggering concerns about the industry’s prospects next year. Infosys was the biggest drag on the Sensex, with the company dropping 3.1%.

In FX, the dollar trims some of its earlier losses, though still lower on the day; CHF and JPY outperform in G-10 FX. The Bloomberg dollar index fell as much as 0.3% before paring much of that drop; it’s closed lower for the past two sessions.

  • The euro was little changed at 1.056 while the pound gained 0.2%, leaving it unchanged on the week at about $1.226
  • USD/JPY fell 0.5% to around 136; spot dollar was sold for the daily Tokyo fixing but Japanese banks continued after the event and in large amounts, according to Asia-based FX traders
  • Asian currencies “are buoyed on the back of overall risk on, a softer USD and China cheer” on re-opening hopes, said Vishnu Varathan, head of economics & strategy at Mizuho Bank Ltd. in Singapore. “This is at least partly owed to the fact that markets as of now are ignoring the ‘for longer’ threat embedded in the Fed’s rate hike dial-back,” he said

In rates, Treasuries outperform bunds and gilts at the 10-year mark. Treasury 10-year little changed around 3.475% with front-end richer and long-end cheaper; bunds lag by additional 5bp on the 10-year sector vs Treasuries, gilts by 3bp. The TSY curve was near steepest levels of the day heading into early US session with 2s10s, 5s30s spreads wider by 3bp and almost 4bp as long-end underperforms. Bigger losses across long-end of the German curve weigh on Treasuries, while US front-end recovered some of Thursday’s losses during Asia session. European bonds fell, led by Italy; 10-year German yield heads 4 basis points higher to 1.86%. Peripheral spreads widen to Germany with 10y BTP/Bund adding 4.3bps to 191.5bps.

In commodities, WTI trades within Thursday’s range, adding 1.4% to near $72.49. Spot gold rises roughly $5 to trade near $1,795/oz. Most base metals trade in the green.

To the day ahead now, and it’s a quiet one on the calendar, although data releases include the US PPI reading for November, as well as the University of Michigan’s preliminary consumer sentiment index for December.

Market Snapshot

  • S&P 500 futures up 0.6% to 3,989.75
  • STOXX Europe 600 up 0.2% to 436.37
  • MXAP up 1.2% to 159.01
  • MXAPJ up 1.2% to 518.83
  • Nikkei up 1.2% to 27,901.01
  • Topix up 1.0% to 1,961.56
  • Hang Seng Index up 2.3% to 19,900.87
  • Shanghai Composite up 0.3% to 3,206.95
  • Sensex down 0.7% to 62,154.01
  • Australia S&P/ASX 200 up 0.5% to 7,213.18
  • Kospi up 0.8% to 2,389.04
  • German 10Y yield up 2.1% to 1.86%
  • Euro little changed at $1.0550
  • Brent Futures up 0.9% to $76.80/bbl
  • Gold spot up 0.1% to $1,791.17
  • US Dollar Index little changed at 104.83

Top Overnight News from Bloomberg

  • The dollar is seen staying in defensive mode versus its major peers next year, according to analysts. Options traders remain bullish on its prospects yet topside bets continue to lose traction.
  • Three-month Euribor extends its advance as traders wager the European Central Bank will raise interest rates for a fourth successive meeting to a 13-year high at 2% next week.
  • The Bank of England said the expectations that British consumers have about where inflation is headed drifted further above its 2% target, and more people were dissatisfied with the way the central bank is doing its job.
  • The Riksbank may be near a peak level for borrowing costs after a string of key rate hikes, Riksbank Deputy Governor Per Jansson said.
  • China faces a daunting task after abruptly giving up on Covid Zero, with infections set to surge and deaths predicted to top 2 million.
  • China will sell 750 billion yuan ($108 billion) worth of special sovereign bonds next Monday to “support economic and social” development, the Ministry of Finance said in a statement late on Friday.

A more detailed summary of markets courtesy of Newsquawk

Asia-Pacific stocks traded mostly higher as the region took impetus from the gains on Wall St where the major indices found some relief during a quiet session ahead of next week's key risk events. ASX 200 was marginally positive with the index led higher by strength in the mining sector, but with gains capped by weakness in defensives and the top-weighted financial industry. Nikkei 225 moved closer to the 28,000 level amid the momentum from the US and after PM Kishida denied they were planning to increase the income tax for defence spending, although a separate report noted that Japan is considering raising corporate tax instead to fund the defence spending. Hang Seng and Shanghai Comp were indecisive in which the Hong Kong benchmark whipsawed and the mainland was lacklustre as participants digested the latest inflation data which showed a slowing pace of CPI growth and slightly narrower-than-expected fall in producer prices, while property names were underpinned on reports that China is mulling further property market easing measures at next week's economic meeting.

Top Asian News

  • Chinese Premier Li said inflation remains high in some countries and that the world economy faces grim challenges with the risk of a global recession increasing. Li also noted that the domestic economy is currently in a stable state after reversing the Q3 economic decline and said China is to further smooth logistics, while he added that China cannot stop opening up and will continue at a high level.
  • Canadian police suspended a contract with a China-linked firm amid concerns regarding potential Chinese access to Canadian police communications, according to SCMP.
  • Japan is considering raising corporate taxes to fund defence spending, according to Yomiuri.
  • Iron Ore Climbs to Four-Month High on Optimism Over China Policy
  • Xi Visit to Saudi Arabia Brings Pledge of More Oil Trade
  • SoftBank Group Cuts SenseTime Stake to 17.97% From 18.02%

Equities in Europe trade with no firm direction in what has been a quiet morning session thus far in holiday-thinned volumes, with little follow-through experienced from the gains in APAC. In Europe, sectors are mostly firmer with no overall bias and again with a narrow market breadth. Stateside, action is in-fitting with European peers as macro catalysts are light ahead of next week's blockbuster docket. China November vehicle sales fell 7.9% Y/YY vs prev. increase of 6.9% in October, according to the industry association, while CAAM suggests an extension of purchase tax cut on combustion engine vehicles to 2023. CAAM forecasts China 2023 vehicles sales +3% YY, large scale COVID infections will have an adverse influence in 2023. Tesla (TSLA) is to suspend Model Y production at Shanghai Plant between December 25th and January 1st; to reduce output in December by around 30% from November for Model Y, according to an internal memo cited by Reuters

Top European News

  • UK Treasury publishes the 'Edinburgh reforms': to reform short selling regulation. To consult on removing rules for capital deduction at banks. To review senior manager certification rules. Click here for more detail.
  • BoE/ Ipsos Inflation Attitudes Survey - November 2022: median public inflation expectation for the coming year at 4.8% in Nov (prev. 4.9% in Aug); 1-2yr inflation 3.4% (prev. 3.2%), 5yr 3.3% (prev. 3.1%).
  • UK Sets Out Post-Brexit Finance Plan to Spur City of London
  • Two More ECB Rate Hikes Seen Before QT Goes Live Early Next Year
  • Arnault’s Son Antoine Takes Wider Role at LVMH Luxury Empire

FX

  • DXY managed to derive some support after losing 104.50 in early trade, currently the index is lower but in proximity to the 104.86 peak.
  • Peers are generally fairly contained with modest outperformance in safe-haven JPY and CHF as US yields slip slightly.
  • Petro-FX continues to lag as the broader complex is once again consolidating with minor gains in the context of recent price action.
  • NOK knocked on soft CPI ahead of the Norges Bank while NZD was underpinned overnight despite mixed domestic data.
  • PBoC set USD/CNY mid-point at 6.9588 vs exp. 6.9604 (prev. 6.9606)

Fixed Income

  • EGBs and USTs continue to diverge, though overall action has been limited given a lack of drivers and thin volumes.
  • EZ periphery is cognisant of the looming TLTRO.III repayment publication, though the impact may not be felt until the January window.
  • Stateside, yields are modestly softer across the curve, with action slightly more evident at the short-end.

Commodities

  • WTI Jan and Brent Feb remain firmer intraday but in the grander scheme are consolidating with modest gains, the former around USD 72.50/bbl (vs low 71.32/bbl), and the latter just above the USD 77/bbl mark (vs low 75.95/bbl).
  • Kuwait set January KEC crude OSP for Asia at Oman/Dubai + USD 2.10/bbl, according to Reuters.
  • Russia is to decide on whether to increase oil production after Q1 following the introduction of the price cap, via Tass citing an official.
  • China's Securities Regulatory Commission is to allow overseas investors in DCE soybean, soybean meal and soybean oil futures and options from December 26th.
  • Canada to review regulatory framework for critical mineral mines and other cleans growth projects to make them faster and more predictable; seeking regulatory harmonization opportunities with the US in a new critical mineral strategy.
  • Spot gold remains capped by USD 1800/oz while base metals are off best levels after deriving modest support overnight.

Geopolitics

  • US is preparing to send a USD 275mln military aid package to Ukraine, according to AJA Breaking.
  • Lithuanian PM Simonyte says Russian President Putin wants a break in the Ukrainian invasion, in order to regroup.
  • US is to sanction entities from China and Russia related to human rights abuses, according to WSJ.

US Event Calendar

  • 08:30: Nov. PPI Final Demand MoM, est. 0.2%, prior 0.2%; YoY, est. 7.2%, prior 8.0%
    • PPI Ex Food, Energy, Trade MoM, est. 0.1%, prior 0.2%; YoY, est. 4.7%, prior 5.4%
    • PPI Ex Food and Energy MoM, est. 0.2%, prior 0%; YoY, est. 5.9%, prior 6.7%
  • 10:00: Oct. Wholesale Trade Sales MoM, est. 0.3%, prior 0.4%
  • 10:00: Dec. U. of Mich. Sentiment, est. 57.0, prior 56.8
    • U. of Mich. Expectations, est. 54.5, prior 55.6
    • U. of Mich. Current Conditions, est. 58.8, prior 58.8
    • U. of Mich. 1 Yr Inflation, est. 4.9%, prior 4.9%
    • U. of Mich. 5-10 Yr Inflation, est. 3.0%, prior 3.0%
  • 10:00: Oct. Wholesale Inventories MoM, est. 0.8%, prior 0.8%
  • 12:00: 3Q US Household Change in Net Wor, prior -$6.1t

DB's Jim Reid concludes the overnight wrap

Risk appetite returned to markets over the last 24 hours, with the S&P 500 snapping a run of 5 consecutive losses to advance +0.75%, whilst bond yields moved higher as well. That came in spite of fresh jitters about the state of the US economy, with the latest data on continuing jobless claims showing a further increase to 1.671m in the week ending November 26 (vs. 1.618m expected). That’s their highest level since early February, and follows a noticeable increase over recent weeks that’s seen them rise by nearly a quarter since mid-September.

With growing concern about a potential recession, attention today will turn to another couple of data points that may give a steer on how aggressively the Fed will lift rates over the coming months. The first is the US PPI inflation reading for November at 13:30 London time. Usually the producer price release gets less market attention compared to consumer prices, but in part that’s because the CPI number is normally out first. This month however, PPI is out first, so should offer a signal on inflation in November ahead of the all-important CPI release on Tuesday. Our economists forecast that both headline and core PPI will come in at +0.2% on a monthly basis, in line with consensus.

The second data point will be the preliminary reading on the University of Michigan’s consumer sentiment index for December. That fell back in November after having risen for the 4 previous months, so the question will be whether that was just a blip or the start of a more pronounced downturn. We’ll also get their measure of longer-term inflation expectations that is closely watched. That’s begun to tick back up over the last couple of months, so any further rises would be concerning from the Fed’s point of view, who thus far have been reassured by the fact that longer-term expectations have remained anchored.

Ahead of those releases, we got some fresh signs of elevated US inflation pressures from the Atlanta Fed’s wage growth tracker, with the main measure of median hourly wage growth remaining unchanged at 6.4% in November. That’s a bit beneath the peak of 6.7% between June and August, but isn’t suggesting a meaningful deceleration in wage inflation as we move deeper into Q4, and this data is normally highly correlated with the Employment Cost Index.

With upcoming data providing the main focus today, markets remained in something of a holding pattern as investors looked forward to the packed calendar of events next week, including the Fed and ECB decisions. For instance, expectations of the Fed’s terminal rate continued to hover around the 5% mark, where they’ve been for nearly a couple of months now. Sovereign bond yields did see a noticeable bounceback yesterday, but that was coming off from their lowest levels in a couple of months, with 10yr Treasury yields up +6.5bps on the day to 3.48%. The 2s10s curve also moved to become slightly less inverted with a +1.3bps move to -83.0bps, but again that was coming off a multi-decade low for the curve the previous day.

Elsewhere yesterday, the downward trajectory in oil prices continued, with Brent crude falling a further -1.32% to $76.15/bbl. That left it at its lowest levels of the year so far, despite a brief surge in prices intraday after the Keystone oil pipeline was shut following a leak. WTI similarly pared back its brief gains to close -0.76% lower at $71.46/bbl. These lower prices are flowing through to the real economy as well, with US gasoline prices now down by just over a third from their peak in mid-June, currently at $3.329/gallon. Furthermore, the energy price declines were seen in European natural gas futures as well, which fell -6.94% on the day to €139 per megawatt-hour.

For US equities, there was a decent bounceback yesterday, with the S&P 500 up +0.75% as technology stocks led the advance. For instance, the NASDAQ was up a larger +1.13%, and the FANG+ index of megacap tech stocks rose +2.51%. Over in Europe, the tone was much more subdued for equities, with the STOXX 600 (-0.17%) losing ground for a 5th consecutive day. However, sovereign bonds traded more in line with their US counterparts, with yields on 10yr bunds (+3.7bps), OATs (+4.5bps) and BTPs (+8.6bps) all moving higher on the day.

Overnight in Asia, the major equity indices have mostly followed the US higher, with gains for the Nikkei (+1.27%), the Hang Seng (+1.64%), the CSI 300 (+0.24%), the Shanghai Comp (+0.05%) and the Kospi (+0.47%). The moves came as Chinese inflation remained subdued in November, with year-on-year CPI down to +1.6% as expected, down from +2.1% in October, which was seen as offering policymakers more space to stimulate the economy if required. That continued to be driven by food prices, which were up +3.7%, compared to non-food prices which only rose +1.1%. Elsewhere, the PPI reading was slightly higher than expected, but was still at a deflationary -1.3% over the last year (vs. -1.5% expected).

To the day ahead now, and it’s a quiet one on the calendar, although data releases include the US PPI reading for November, as well as the University of Michigan’s preliminary consumer sentiment index for December.

Tyler Durden Fri, 12/09/2022 - 08:11

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November producer prices: YoY measures mask recent sharp deceleration to mainly tolerable levels

  – by New Deal democratConsumer prices for November won’t be reported until next Tuesday, but this morning we got the upstream producer prices. The…

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 - by New Deal democrat

Consumer prices for November won’t be reported until next Tuesday, but this morning we got the upstream producer prices. The news was mainly good, although not good enough to likely dissuade the Fed from its current course of interest rate hikes.


This is one of those cases where YoY measures give a false picture in comparison with seasonally adjusted monthly data.

YoY producer price growth decelerated, but is still very high: final demand prices increased 7.4%, “core” final demand less food and energy increased 8.1%, and commodity prices are up 8.2%:



That’s down from their respective peaks, but still very high compared with the last 40 years pre-pandemic.

But now let’s look at the seasonally adjusted monthly changes:



Since June there’s been a marked deceleration in final demand prices, and an outright decline in commodity prices.

So let’s norm June to 100, and see what we get:



Final demand prices are only up 0.4% in 5 months; less food and energy up 1.4%; and commodities are down -6.1%. Onan annualized basis, the first measure is trending at 1.0% rate, while the “core” second measure is slightly problematic, increasing at a 3.4% annualized rate.

A similar pattern appears when we break final demand down into goods vs. services. While YoY goods prices are up 9.6% and services prices up 5.9%:




Final good services prices are up 1.5% in the past 5 months, while final demand goods prices are actually down -1.3%:



In short, most of the upstream inflation problem in producer prices has been abating rapidly. Only “core” services prices remain elevated above levels tolerated without alarm before the pandemic.

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Remote work triggers move to DAOs in the post-pandemic world: Survey

A survey from a sample of the general U.S. public suggests that millennials are more likely to join a DAO than any other age group.

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A survey from a sample of the general U.S. public suggests that millennials are more likely to join a DAO than any other age group.

A survey sample of working Americans suggests that millennial and Generation Z workers are far more in favor of joining decentralized autonomous organizations (DAOs) and working remotely in the post-Covid-19 world.

Over 1,100 Americans took part in a survey conducted by MetisDAO Foundation which explores trends in remote working preferences and the emergence of DAOs in recent years. A key consideration is the effect that Covid-19 has had on worker sentiment and the growth of DAOs in corporate governance.

Citing a research report on DAOs published by the Harvard Law School Forum on Corporate Governance, the results of the survey highlight how DAOs saw their treasuries swell from $400 million to $16 billion in 2021.

This coincided with growing participant figures, up from 13,000 to 1.6 million people during the same period. Drawing comparisons to some of the largest multinational corporations, global DAO workforce numbers are equal to one Amazon, 18 Facebooks, seven Microsofts or 11 Google.

Related: Toss in your job and make $300K working for a DAO? Here’s how

The impact of Covid-19 is a primary driver of Metis’ report investigating workers readiness for decentralized employment opportunities. The unexpected, rapid shift to remote working conditions of the pandemic has seemingly driven knowledge and understanding of DAOs and decentralized autonomous companies (DAC), particularly among millennial and generation Z workers.

A major takeaway from the results is that nearly 75% of respondents believe that companies will need to adapt how they run their businesses to offer more remote work options. Millennials working in hybrid or remote settings offered the most positive responses on how DACs offer workers opportunities to help govern a company.

47% of the respondents also indicated that they would be open to working for a DAO or DAC as a contracted employee. The survey also indicates that millennial workers are more willing to work for a DAO or DAC than any other age group.

Meanwhile, Gen Z respondents most accurately defined a DAO compared to respondents from other age groups and a majority of Gen Z participants also defined DAOs as ‘revolutionary movement changing the future of work’.

MetisDAO concludes by highlighting the influence of prolonged remote working conditions driving the desire for more decentralized and autonomous work environments.

“The survey results show that a majority of respondents seek all of the things that DACs provide; remote work opportunities, independence from management, and influence over the organizations they work in.”

MetisDAO’s survey came from a sample of 1112 respondents through SurveyMonkey in November 2022. The DAO forms part of Metis, an Ethereum layer-2 rollup solution.

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