Two weeks ago, just when everyone thought that he couldn't turn any more bearish, BofA's chief investment strategist Michael Hartnett, Wall Street's biggest bear who is by implication has also emerged as the most accurate sellside analyst (the average S&P price target of his peers is still around 4,700), stunned everyone when he told readers that while the mood on the street was already dismal, relaying the the Heard on the Street line was "I'm so bearish, and even I'm miserable", he warned that even though everyone was bearish, redemptions were just starting, and the real selling was only just beginning.
One week later - and much to the embarrassment of JPM's in house permabull who at the same time said to take the other side of the trade and to buy stocks - Hartnett was again been proven right, with the S&P tumbling and the Nasdaq suffering its worst month since the Lehman bankruptcy. Hartnett also correctly warned that the closer we got to the 4,000 "strange attractor" level, the more aggressive the selling would become (as we discussed in "Hartnett Turns Apocalyptic, Says Carnage To Accelerate With "Max Pain" And "Exit" Waiting Below 4,000")
Since then it's gotten even worse, providing the biggest bear on Wall Street with even more ammo for his latest weekly Flow Show note (available to pro subscribers in the usual place), and he wastes no time to terrify his readers of the hell that is coming, warning that with the NYSE Composite (US stocks + ADR's + bond ETFs) down -9% YTD to 100-week moving average, "recession/crises in past 25 years have always seen our fave Wall St barometer break decisively below this level (15350 today)...at 100wma;" And in case that's not enough, he also warns that "every crisis/recession sees meaningful dip below 100wma...game time!"
Extending this analogy to all bear markets - because the only ones who still don't realize that the S&P is in a brutal bear market are JPMorgan's strategists - Hartnett compiles the following useful information:
- 9 bear markets in the past 140 years
- Average price decline = 37.3%
- Average duration is 289 days
And while past performance no guide to future performance, if it were, today's bear market ends Oct 19th '22 with S&P500 at 3000, Nasdaq at 10000. There are two silver linings here:
- first: many stocks are already there, i.e., 49% of Nasdaq >50% below their 52-week highs, 58% of Nasdaq >37.3% down, and 77% of index in bear market, i.e. down >20%;
- second: bear markets are quicker than bull markets.
Hartnett next echoes what we said yesterday in our discussion of the BOE's shocking decision, which we said confirms the worst stagflationary case for the economy. According to the BofA strategist, the BoE projected UK CPI >10% by Oct'22, cut '23 GDP forecast 150bps to -0.25%; in other words, 10% inflation, 0% growth the living definition of stagflation.
It's why to Hartnett, the correct relative playbook is 1973/74 and it shows that cash and commodities beat bonds & stocks (esp consumer & tech; note Big Tech starting to ape Nifty 50 crash).
Meanwhile, flows - which are always a leading indicator for sentiment - confirm that none of this is a shock to investors, and after some huge outflows in the past month, the latest weekly flows into the FOMC were massively “risk-off” as investors waved in the cash: $0.3bn from gold, $3.4bn from stocks, $9.1bn from bonds, $14.0bn from cash. Some more details:
- big inflow to Treasuries ($6.0bn),
- big outflow from TIPS ($3.2bn),
- big outflow IG bonds ($7.3bn),
- largest REIT (real estate) outflow ever ($2.2bn),
- big outflow financials ($1.6bn),
- 4-week average of flows to stocks turning most negative since May’20 when the Fed had to step in to bail out the market.
Turning from the past - both distant and recent - to the future, and Hartnett's 2022 View, it will come as no surprise that the BofA strategist is not exactly bullish. Here's how he see things playing out
- Base case remains equity lows, yield highs yet to be reached
- Wall St to spend much of '22 working through "inflation shock", "rates shock", "recession shock" = negative, volatile returns in absolute terms
- Relative calls defensive...cash/volatility/commodities>stocks/bonds, IG>HY, defensives>cyclicals
- Meantime as recession risks next move up in commodities should be tactically sold,
- Lead indicators of bear market were trough in yields & US$ + peak in EM, crypto, speculative tech (e.g. biotech) in Q1'21; only once yields & US$ peak, and floor in EM, crypto, speculative tech follow, should risk be added, first and foremost in corporate bonds – we are not there yet (and note speculative tech will remain in bear market for next 2 years, a floor does not = new bull market)
Finally, Harnett turns to his favorite topic - the three types of shocks that define the transition from 2020 to 2022. According to the BofA strategist, in past 9 months “inflation shock” was priced-in slowly, “rates shock” was priced-in slowly, but “recession shock” was priced-in too quickly; this is a problem as stronger-than-expected economic data in H1’22 is causing market to price-in longer/bigger inflation/rates shock.
Inflation shock: inflation set to "peak" but lower inflation likely to be "transitory" given biggest macro story of ‘22...a lack of supply of energy, food, housing, labor relative to demand showing scant signs of improvement...
Energy...natural gas prices at highest since '08 as world scrambles to reconfigure energy supplies (note explosive upside of Russian ruble now at new highs vs sterling, euro, US dollar),
Food...fertilizer prices @ all-time highs = cost of food production up = supply of food down = price of food up, note corn prices @ new highs & food prices seriously vulnerable to super-spike on poor harvests,
Houses...mortgage rate surging but 93% of US mortgages are fixed and supply of existing homes near record low, as evidenced by housing permits highest since '74
Labor...there are 12mn US job openings versus a 6mn supply of unemployed workers , you do the math.
Rates shock: yes central banks on course to hike rates 251 times in 2022, yes net 34% tightening monetary policy most since '08, yes QT starts H2'22, yes not a lot rate hikes can do about broken supply chains; but yields & volatility will rise until Fed & central banks ahead of the curve...this week they moved further behind curve; US inflation 8%, EU inflation 8%, UK inflation heading >10%, yet they are quivering at the thought of selling $1 of bonds (QT) after buying $23,000,000,000,000 since Lehman, and $11,000,000,000,000 since COVID-19; little wonder bond vigilantes back to trading “end of central bank credibility” = volatility entrenched.
Recession shock: the economy today is strong, a problem; but macro data has turned from unambiguously strong to ambiguously strong; business confidence has stalled (see PMI’s) which threatens to stall improvement in labor market in H2; Asian FX devaluation discounts weaker Asian export growth...
... which discounts weaker US consumer; and quickest route to recession on Main St is via a sharp decline in asset valuations on Wall St, & risk of systemic events on bond/stock/real estate deleveraging in risk parity (RPAR)...
... private equity, sovereign wealth funds, credit events in speculative tech, shadow banking, US consumer buy now, pay later models, Emerging Markets, zombie corporations, goes up with every rate hike.
There is more in the full Hartnett note, available to pro subscribers in the usual place.
What Is Quantitative Tightening? How Does It Work?
What Is Quantitative Tightening?The main job of a central bank, like the Federal Reserve, is to keep the economy strong through maximum employment and…
What Is Quantitative Tightening?
The main job of a central bank, like the Federal Reserve, is to keep the economy strong through maximum employment and stable prices. It does this by managing the Fed Funds Rate, which it sets at its Federal Open Market Committee meetings. This effectively raises or lowers the interest rates that banks offer companies and consumers for things like mortgages, student loans, and credit cards.
But when the economy needs help and interest rates are already low, the Fed must turn to other tools in its arsenal. This includes practices like quantitative easing and quantitative tightening; the former expands the shares of Treasury bonds, mortgage-backed securities, and even stocks on the government’s balance sheets, while the latter tightens the monetary supply. Both have a profound effect on liquidity in the financial markets.
The Fed came to the rescue with trillions of dollar’s worth of quantitative easing at the end of the 2007–2008 Financial Crisis, and again during the global Coronavirus pandemic.
But the Fed can’t go on printing money forever. Whenever it employs quantitative easing, the Fed must eventually turn to its counterpart, which is known as quantitative tightening, in order to limit some of the negative outcomes of the former, such as inflation.
How Does Quantitative Tightening Work? What Is an Example of Quantitative Tightening?
Through quantitative tightening, the Federal Reserve reduces its supply of monetary reserves in order to tighten its balance sheet—and it does so simply by letting the bonds and other securities it has purchased reach maturity. When this happens, the Treasury department removes them from its cash balances, and thus the money it has “created” effectively disappears.
Does the Fed know exactly when to ease the gas pedal on quantitative easing? According to the Fed, timing is everything. Remember how the Fed’s main job is to create a strong economy through stable prices and high employment? As it carefully monitors the effects interest rates are having on the economy, it also keeps a close eye on the overall measure of inflation. It’s both a constant battle and a juggle.
Take the period following the Financial Crisis as an example. The 2007–2008 crisis stemmed in large part from the implosion of collateralized debt obligations, and so the Fed kept the Fed Funds Rate at virtually 0% for almost a decade in order to spur growth and maintain stable rates of employment.
During this period, it also undertook a series of quantitative easing measures, watching its balance sheet balloon from $870 billion in August 2007 to $4.5 trillion in September 2017.
The FRED graph below illustrates how the Fed Funds rate, in blue, remained at nearly zero for the period while the total size of the Fed’s balance sheet, in red, grew. The shaded areas indicate recession.
The Fed believed that as soon as employment became stable, it needed to turn its attention to meeting its 2% inflation target, which it accomplished by raising interest rates. And so, in October 2015, it began gradually increasing the Fed Funds Rate in 25 basis point increments. Over the next several years, rates went up from 0.0%–0.25% levels to 2.25%–2.5% in 2018. This course of action, in the Fed’s words, was known as liftoff.
After raising rates a few times with no disastrous consequences, in 2017 the Fed next embarked on an effort to reduce its balance sheet through quantitative tightening. This was also known as unwinding its balance sheet, because it was taking action in a slow and gradual way.
Between 2017 and 2019, the Fed let about $6 billion of Treasury securities mature and $4 billion of mortgage-backed securities “run off” per month, increasing that amount every quarter until it hit a maximum of $30 billion Treasuries and $20 billion mortgage-backed securities per month. By July 2019, the Fed announced that its unwinding was complete.
The Fed published a blog post detailing these efforts, categorizing them as its “balance sheet normalization program,” since it sought to “return the policy rate to more neutral levels.”
What Effect Does Quantitative Tightening Have on the Economy?
While the goal of quantitative easing is to spur growth, quantitative tightening doesn’t hinder it; in fact, many Governors of the Federal Reserve believe quantitative tightening doesn’t have much effect on the economy at all.
“Quantitative tightening does not have equal and opposite effects from quantitative easing,” said St. Louis Fed President Jim Bullard, “Indeed, one may view the effects of unwinding the balance sheet as relatively minor.”
Former Fed Chair Janet Yellen famously described quantitative tightening as “something that will just run quietly in the background over a number of years,” and that “it’ll be like watching paint dry.”
St. Louis Fed Research Director Chris Waller compared quantitative tightening with “slowly opening the stopper in a drain and letting the water run out,” and by doing so, they were “letting the supply of U.S. Treasuries in the hands of the private sector grow.”
But critics have argued that the excess reserves the Fed creates by “printing money” through quantitative easing have negative consequences on the overall economy. For example, these reserves can lead to currency devaluation and higher inflation, which is defined as when prices rise faster than wages. Inflation can have disastrous effects on an economy, resulting in asset bubbles and even recessions.
Even the Fed admitted as much when St. Louis Vice President Chris Neely noted that between 2008–13, the Fed’s asset purchases led to a decrease in 10-Year Treasury yields by 100–200 basis points. He said, “this reduction modestly raised prices and real activity.”
Just remember that the Fed’s principal aims are to generate stable prices and high employment. So while the Fed hasn’t explicitly said so, reducing its balance sheet might be one of its methods to combat inflation.
Why Is Quantitative Tightening on the Fed’s Agenda Again?
In 2022, inflation reached decades’ high, stemming from a number of factors, including fallout from the global Coronavirus pandemic, which increased labor prices, and Russia’s invasion of Ukraine, which affected energy and commodities. In March, 2020, the Fed slashed the Fed Funds rate to 0.00%–0.25% in response to the pandemic. In May, 2022 it raised rates again by 0.5%.
What Is the Schedule for Quantitative Tightening?
On May 4, 2022, the Fed announced it would be undertaking a “phased approach” of quantitative tightening measures beginning with a 3-month period of unwinding $30 billion of Treasuries and $17.5 billion mortgage-backed securities beginning on June 1, 2022. By September, 2022 these caps would increase to $60 billion and $35 billion, respectively.
Is Quantitative Tightening Really So Frightening?
TheStreet’s Ellen Chang says that, according to economists, inflation is on a downward trend, most likely to decline to 3% by the end of the year, and that higher interest rates as well as quantitative tightening should do what they’re supposed to, and reduce pricing pressure.recession pandemic coronavirus treasury bonds treasury securities bonds stocks open market committee fed federal reserve interest rates commodities russia ukraine
What is Stagflation?
Today we’ll look at what stagflation is, as well as how it impacts you and the broader economy. Keep reading to get started.
The post What is Stagflation?…
Stagflation seems to be a word that we’ve been hearing a lot of recently. With the CPI report showing that inflation had slowed less than expected, stagflation concerns became even louder. However, for the average person, the term probably has never been defined. So, what is stagflation? Today we’ll look at what stagflation is, as well as how it impacts you and the broader economy.
First things first, we should probably define what inflation is. The simplest way to define inflation is as the erosion of a currency’s purchasing power. Those moments where it feels like your dollar buys less than it used to are examples of inflation. Under economic theory, inflation primarily occurs when the growth of the money supply outpaces economic growth. For this reason, when inflation becomes an issue, central banks will attempt to limit the money supply. Essentially if more money is introduced to an economy, without an equal introduction of goods and/or services, inflation occurs. Other contributing factors include rising cost(s) of goods, wages and labor. The U.S. Federal Reserve aims for an inflation rate of 2%, and has averaged that since 2011.
So, now that we know what inflation is, we can address what stagflation is. If inflation alone has the power to impact markets and basic economies, what impacts can stagflation have? To simply define stagflation, allow me to present it as an equation or two:
- Stagflation = High Inflation + Slow Economic Growth + High Unemployment
- Stagflation = High Inflation + Decreasing GDP
Under the first equation, we aren’t yet in a period of stagflation. While inflation is high, the official unemployment rate is 3.6%. That level reasonably mirrors the level that we were at prior to the onset of Covid back in 2020. However, the labor participation rate is still below pre-pandemic levels by a full percentage point. While that may not sound like a lot, remember that equates to hundreds of thousands of people not participating in the labor force.
With that being said, based on the second equation, we are already experiencing a period of stagflation. The U.S. GDP declined by 1.4% in Q1 of 2022, when it was expected to grow by 1%.
An example of stagflation in the U.S. would be the America of the early to mid 1970s. During this time, the United States experienced two, separate, recessions. There were also four separate years of negative GDP growth, two of which being consecutive. Inflation skyrocketed from 3.6% in 1973 to 8.3%, incidentally, where we are now, to 1974. The closest unemployment was to the 3.6% we have now was 1970 and 1973, when it was 4.9%. In 1975, unemployment was 8.5%.
Impacts and Concerns
So, how does stagflation impact you? Well, first, through the basic inflationary impacts. Let’s say your investments are down 5% this year, better than the broader markets. Tack on 8.3% in inflationary costs, and your money is actually worth 13.3% less. Inflation and bonds have a well-defined history as well. Inflationary risks and different securities have well defined relationships such as the relationship with bonds and the inflation rate. If your bond pays 3%, but inflation rises from 2% to 6%, you are losing money on the investment. Let’s look at your paycheck too. If you got a 5% raise, but inflation went up from the 2% average to 8.5%, your real earnings went down 1.5%. In sum, high inflation hits you at every angle. You effectively make less, your investments return less/negative, and things get more expensive.
Second, looking at the other variable(s) in the equation. What do all of unemployment being high, GDP decreasing, and economic growth slowing mean? Essentially, it means that the average person is at risk of losing their job. Adding the increased costs of goods and services to a loss of income can cause incredible financial strife. Now, apply that on a national level. If more people are out of work, you would also expect less spending. If the average person is unable to stimulate the economy, via spending, it is hard to reverse poor economic growth.
There is also a less direct impact, though perhaps one even more impactful. With the national debt burgeoning in the last two years, financing that debt also becomes more difficult. Discussing the national debt in its current context is an issue deserving its own space. Thankfully, others have already attempted to broach the subject.
There is no surefire way to solve or fix stagflation. The general consensus is to first engage in the policies that address inflation. Examples of that would be printing less money and increasing interest rates, as to make borrowing more expensive. Other, less popular, examples would be cutting different government programs/expenditures. Next would be efforts to stimulate the economy, with the simplest being lowering taxes. That is also a complex suggestion to make, and agreeing to a proper execution is usually quite difficult. In addition, without the aforementioned spending cuts, the potential impact is greatly reduced.
Conclusions on Stagflation
There is no question that inflation is currently negatively impacting people. Concerns about global conflicts, and potential recessions, do nothing to assuage the average person’s concerns. Depending on how we look at it, America is already experiencing a period of stagflation. On the inflationary front, the Fed has begun increasing interest rates. Whether or not tax breaks and spending cuts follow are unclear, though admittedly a more accurate term might be unlikely.
In times like these, having a financial plan is important. While you cannot control the rate of inflation, you can control things like your spending and your investments. Even if it doesn’t eliminate it, proper financial planning should help minimize the detrimental impacts of stagflation.unemployment pandemic economic growth bonds fed federal reserve gdp interest rates unemployment
Futures Slide After China’s “Huge” Data Miss Sparks “Broad-Based Recession Talk”
Futures Slide After China’s "Huge" Data Miss Sparks "Broad-Based Recession Talk"
Friday’s bear market rally dead-cat bounce appears to be…
Friday's bear market rally dead-cat bounce appears to be over, and global stocks have started the new week in the red with US equity futures lower after a "huge miss", as Bloomberg put it, in Chinese data fueled concerns over the impact of a slowdown in the world’s second-largest economy. As reported last night, China’s industrial output and consumer spending hit the worst levels since the pandemic began, hurt by Covid lockdowns.
And even though officials took another round of measured steps to help the economy by cutting the interest rate for new mortgages over the weekend to bolster an ailing housing market, even as they left the one-year policy loan rate was left unchanged Monday, few believe that any of these actions will have a tangible impact and most continue to expect much more from Beijing.
As such, after a weekend that saw even Goldman's perpetually optimistic equity strategists slash their S&P target (again) from 4,700 to 4,300, and amid growing fears that a recession is now inevitable, Nasdaq 100 futures slid as much as 1.2%, before paring losses to 0.4% as of 730 a.m. in New York. S&P 500 futures were down 0.3%. 10Y Treasury yields were flat at 2.91% and the dollar dipped modestly while bitcoin traded just above $30,000 dropping from $31,000 earlier in the session.
Among notable moves in premarket trading, Spirit Airlines jumped as much as 21% following a report that JetBlue Airways is planning a tender offer at $30 a share in cash. Major US technology and internet stocks were down after rebounding on Friday, while Tesla shares dropped, with the electric-vehicle maker set to recall 107,293 cars in China over a potential safety risk. Twitter shares fall 3.4% in premarket trading on Monday, on course to wipe out all the gains the stock has made since billionaire Elon Musk disclosed his stake in the social media platform. Twitter fell to as low as $37.86 -- below the the April 1 close of $39.31, before Musk disclosed his stake.
US stocks have been roiled this year, with the S&P 500 on tick away from a bear market as recently as last Thursday, on worries of an aggressive pace of rate hikes by the Federal Reserve at a time when macroeconomic data showed a slowdown in growth. Data from China on Monday highlighted a massive toll on the economy from Covid-19 lockdowns, with retail sales and industrial output both contracting.
Although lower valuations sparked a rally in stocks on Friday, strategists including Morgan Stanley’s Michael Wilson warned of more losses ahead as equity markets also price in slower corporate earnings growth. Goldman Sachs strategists led by David Kostin cut their year-end target for the S&P 500 on Friday to 4,300 points from 4,700.
"The broad-based recession talk is the major catalyzer this Monday,” Ipek Ozkardeskaya, a senior analyst at Swissquote, wrote in a note. “Activity in US futures hint that Friday’s rebound was certainly nothing more than a dead cat bounce” just as we said at the time.
The risk of an economic downturn amid price pressures and rising borrowing costs remains the major worry for markets. Goldman Sachs Group Senior Chairman Lloyd Blankfein urged companies and consumers to gird for a US recession, saying it’s a “very, very high risk.” Traders remain wary of calling a bottom for equities despite a 17% drop in global shares this year, with Morgan Stanley warning that any bounce in US stocks would be a bear-market rally and more declines lie ahead.
In Europe, the Stoxx Europe 600 index fell as much as 0.8% before paring losses, with declines for tech and travel stocks offsetting gains for basic resources as industrial metals rallied. The Euro Stoxx 50 falls 0.4%. IBEX outperforms, adding 0.3%. Tech, personal care and consumer products are the worst performing sectors. Here are some of the biggest European movers today:
- Basic Resources stocks outperformed with broad gains among mining and steel companies; ArcelorMittal +3.5%; SSAB +2.6%; Glencore +2.1%; Voestalpine +3.1%.
- Sartorius AG and Sartorius Stedim shares gain as UBS upgrades both stocks to buy following a “significant de-rating” for the lab-equipment companies, seeing supportive global trends.
- Carl Zeiss Meditec gains as much as 4.9% after HSBC raised its recommendation to buy from hold, saying the medical optical manufacturer is “well-equipped to deal with supply chain challenges.”
- Interpump rises as much as 7.6%, extending winning streak to five days, as Banca Akros upgrades the stock to buy from accumulate following Friday’s 1Q results.
- Casino shares jump as much 5.8% after the French grocer said it’s started a process to sell its GreenYellow renewable energy arm, confirming a Bloomberg News report from Friday.
- Ryanair shares decline as much as 4.3% on FY results, with analysts focusing on the low-budget carrier’s recovery outlook. They note management is cautiously optimistic about summer travel.
- Vantage Towers shares decline after the company posted FY23 adjusted Ebitda after leases and recurring free cash flow forecasts that missed analyst estimates at mid- points.
- Unilever falls after a 13-F filing from Nelson Peltz’s Trian shows no position in the company, according to Jefferies, damping speculation after press reports earlier this year that the fund had built a stake.
- Michelin shares fall as much as 3.7% after being downgraded to neutral from overweight at JPMorgan, which says it writes off any chance of seeing a recovery in volume production growth in FY22.
Earlier in the session, Asian stocks eked out modest gains as surprisingly weak Chinese economic data spurred volatility and caused traders to reassess their outlook on the region. The MSCI Asia-Pacific Index was up 0.1%, paring an earlier advance of as much as 0.9% on stimulus hopes. The region’s information technology index rose as much as 1.5%, with TMSC giving the biggest boost. A sub-gauge on materials shares fell the most.
Equities in China led losses, as Beijing’s moves to cut the mortgage rate for first-time home buyers and ease lockdown restrictions in Shanghai failed to reverse the downbeat mood. Asian stocks were trading higher early Monday, building on Friday’s rally, only to trim or reverse gains as data showed a sharper-than-expected contraction in Chinese activity in April. Signs of an earnings recovery in China are needed for investors to come back, Arnout van Rijn, chief investment officer for APAC at Robeco Hong Kong Ltd., said on Bloomberg Television.
“It looks like China is not going to meet the 15% earnings growth that people were looking for just a couple of months ago. So now we’re looking for five, 10, maybe it’s even going to fall to zero.” Meanwhile, JPMorgan analysts, who had called China tech “uninvestable” in March, upgraded some tech heavyweights including Alibaba in a Monday report, citing less regulatory uncertainties. Benchmarks in Japan, Australia, India and Taiwan maintained gains while Hong Kong also recovered some ground later in the day. Markets in Singapore, Thailand, Malaysia and Indonesia were closed for holidays.
Japanese equities were mixed, with the Topix closing slightly lower after worse-than-expected Chinese economic data amid the impact from virus-related lockdowns. The Topix fell 0.1% to close at 1,863.26, with Honda Motor contributing the most to the decline after its forecast for the current year missed analyst expectations. The Nikkei advanced 0.5% to 26,547.05, with KDDI among the biggest boosts after announcing its results and a 200 billion yen buyback. “Though the lockdowns in China are pushing down the economy and causing supply chain difficulties, there’s a positive outlook since the weekend that there could be a gradual easing of the lockdowns as it seems that virus cases have peaked out,” said Masashi Akutsu, chief strategist at SMBC Nikko Securities.
In Australia, the S&P/ASX 200 index rose 0.3% to 7,093.00, trimming an earlier advance of as much as 1.1% after soft Chinese economic data stoked concerns about global growth. Read: Aussie, Kiwi Slump After Weak China Data: Inside Australia/NZ Brambles was the top performer after confirming it’s in talks with private equity firm CVC Capital Partners on a takeover proposal. Qube also climbed after completing a A$400 million share buyback. In New Zealand, the S&P/NZX 50 index fell 0.1% to 11,157.66.
In rates, Treasuries were steady with yields within 1bp of Friday’s close. US 10-year yield near flat ~2.91% with bunds cheaper by ~5bp, gilts ~3.5bp amid heavy. German 10-year yield up 5 bps, trading narrowly below 1%. Italian 10-year bonds underperform, with the 10-year yield up 8 bps to 2.93%. Peripheral spreads are mixed to Germany; Italy and Spain widen and Portugal tightens. The Italy 10-year was cheaper by more than 6bp on the day amid renewed ECB jawboning. Core European rates are higher, pricing in ECB policy tightening. During Asia session, Chinese data showed industrial output and consumer spending at worst levels since the pandemic began. The dollar issuance slate includes CBA 3T covered SOFR; $30b expected for this week as syndicate desks seek opportunities for pent-up supply. Three-month dollar Libor +1.13bp at 1.45500%.
In FX, the Bloomberg Dollar Spot Index was little changed while the greenback advanced against most of its Group-of-10 peers. Treasuries inched lower, led by the front end, and outperformed European bonds. The euro inched up against the dollar. Italian bonds dropped, leading peripheral underperformance against euro- area peers, while money markets showed increased ECB tightening wagers after policy maker Francois Villeroy de Galhau said a consensus is “clearly emerging” at the central bank on normalizing monetary policy and that June’s meeting will be “decisive.” He also signaled that the weakness of the euro is focusing the minds of ECB policy makers at a time when the currency is heading toward parity with the dollar. The euro may resume its rally versus the pound in the spot market as options traders pile up bullish wagers. The pound fell against both the dollar and euro, staying under selling pressure on concerns that high UK inflation will weigh on the economy. Markets await testimony from Bank of England Governor Andrew Bailey and other central bank officials later in the day, ahead of a reading of April inflation later in the week. Australian and New Zealand dollars fell after Chinese industrial and consumer data fanned concerns of a further slowdown in the world’s second-largest economy.
In commodities, WTI drifts 0.4% lower to trade above $110. Spot gold pares some declines, down some $6, but still around $1,800/oz. Most base metals trade in the green; LME tin rises 3.4%, outperforming peers. Bitcoin falls 4.6% to trade below $30,000
Looking ahead, we get the US May Empire manufacturing index, Canada April housing starts, March manufacturing, wholesale trade sales. Central bank speakers include the Fed's Williams, ECB's Lane, Villeroy and Panetta, BOE's Bailey, Ramsden, Haskel and Saunders. We get earnings from Ryanair, Take-Two Interactive.
- S&P 500 futures down 0.3% to 4,008.75
- STOXX Europe 600 little changed at 433.33
- MXAP up 0.2% to 160.34
- MXAPJ up 0.2% to 523.32
- Nikkei up 0.5% to 26,547.05
- Topix little changed at 1,863.26
- Hang Seng Index up 0.3% to 19,950.21
- Shanghai Composite down 0.3% to 3,073.75
- Sensex up 0.6% to 53,119.79
- Australia S&P/ASX 200 up 0.3% to 7,093.03
- Kospi down 0.3% to 2,596.58
- German 10Y yield little changed at 0.98%
- Euro up 0.1% to $1.0424
- Brent Futures down 1.4% to $109.98/bbl
- Gold spot down 0.8% to $1,797.30
- US Dollar Index little changed at 104.46
Top Overnight News from Bloomberg
- NATO members rallied around Finland and Sweden on Sunday after they announced plans to join the alliance, marking another dramatic change in Europe’s security architecture triggered by Russia’s war in Ukraine
- The euro area’s pandemic recovery would almost grind to a halt, while prices would surge even more quickly if there are serious disruptions to natural-gas supplies from Russia, according to new projections from the European Commission
- UK energy regulator Ofgem plans to adjust its price cap every three months instead of every six. Changing the level more often would help consumers to take advantage of falling wholesale prices more quickly, it said in a statement Monday. This would also mean higher prices filter through bills quicker
- Boris Johnson has warned Brussels that the UK government will press ahead with unilateral changes to parts of the Brexit agreement if it does not engage in “genuine dialogue”
- While debt bulls on Wall Street have been crushed all year, market sentiment has shifted markedly over the past week from inflation fears to growth. That theme gathered more strength Monday, when data showing China’s economy contracted sharply in April set off fresh gains for Treasuries
- China’s economy is paying the price for the government’s Covid Zero policy, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery. Industrial output unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than a projected 6.6% drop
- Japanese manufacturers are increasingly looking to move offshore operations to their home market, according to a Tokyo Steel Manufacturing Co. executive. The rapidly weakening yen, global supply-chain constraints, geopolitical risks and shifting wages patterns are prompting the switch, Kiyoshi Imamura, a managing director of the steelmaker, said in an interview in Tokyo last week
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks traded mixed after disappointing Chinese activity data clouded over the early momentum from Friday’s rally on Wall St. ASX 200 was higher as tech stocks were inspired by US counterparts and amid M&A related newsflow with Brambles enjoying a double-digit percentage gain after it confirmed it had talks with CVC regarding a potential takeover by the latter. Nikkei 225 kept afloat as earnings releases provided the catalysts for individual stocks but with gains capped by a choppy currency. Hang Seng and Shanghai Comp initially gained with property names underpinned after China permitted a further reduction in mortgage loan interest rates for first-time home purchases and with casino stocks also firmer in the hope of a tax reduction on gaming revenue. However, the mood was then spoiled by weak Chinese data and after the PBoC maintained its 1-year MLF rate.
Top Asian News
- PBoC conducted a CNY 100bln in 1-year MLF with the rate kept unchanged at 2.85% and stated the MLF and Reverse Repo aim to keep liquidity reasonably ample, according to Bloomberg.
- Beijing extended work from home guidance in several districts and announced three additional rounds of mass COVID-19 testing in most districts including its largest district Chaoyang, according to Reuters.
- Shanghai will gradually start reopening businesses including shopping malls and hair salons in China's financial and manufacturing hub beginning on Monday following weeks of a strict lockdown, according to Reuters.
- Shanghai city official said 15 out of the 16 districts achieved zero-COVID outside quarantine areas and the city's epidemic is under control but added that risks of a rebound remain and they will need to continue to stick to controls. The official said the focus until May 21st will be to prevent risks of a rebound and many movement restrictions are to remain, while they will look to allow normal life to resume in Shanghai from June 1st and will begin to reopen supermarkets, convenience stores and pharmacies from today, according to Reuters.
- Chinese financial authorities permitted a further reduction in mortgage loan interest rates for some home buyers whereby commercial banks can lower the lower limit of interest rates on home loans by 20bps based on the corresponding tenor of benchmark Loan Prime Rates for purchases of first homes, according to Reuters.
- China's stats bureau spokesman said economic operations are expected to improve in May and that China is steadily pushing forward production resumption in COVID-hit areas, while they expect China's economic recovery and rebound in consumption to quicken but noted that exports face some pressure as the global economy slows, according to Reuters.
- Macau is reportedly considering a tax cut for casinos amid a decline in gaming revenue in which a cut could be as much as 5% off the current 40% levied on casino gaming revenue, according to Bloomberg.
European bourses are mixed, Euro Stoxx 50 -0.6%, following a similar APAC session with impetus from Shanghai's reopening offset by activity data and geopolitics. Stateside, futures are lower across the board, ES -0.4%, with the NQ marginally lagging as yields lift; Fed's Williams due later before Powell on Tuesday. US players are focused on whether the end-week bounce is a turnaround from technical bear-market levels or not. China's market regulator says Tesla (TSLA) has recalled 107.3k Model 3 & Y vehicles, which were made in China. JetBlue (JBLU) is to launch a tender offer for Spirit Airlines (SAVE); JetBlue is to offer USD 30/shr, but prepared to pay USD 33/shr if Spirit provides JetBlue with requested data, WSJ sources say. Elon Musk tweeted that Twitter’s (TWTR) legal team called to complain that he violated their NDA by revealing the bot check sample size and he also tweeted there is some chance that over 90% of Twitter’s daily active users might be bots.
Top European News
- UK PM Johnson is reportedly set to give the green light for a bill on the Northern Ireland protocol, according to the Guardian.
- UK PM Johnson said he hopes the EU changes its position on the Northern Ireland protocol and if not, he must act, while he sees a sensible landing spot for a protocol deal and will set out the next steps on the protocol in the coming days, according to Reuters.
- UK PM Johnson is expected to visit Northern Ireland on Monday for talks with party leaders in an effort to break the political deadlock at Stormont, according to Sky News.
- Irish Foreign Minister Coveney says the EU is prepared to move on reducing checks on goods coming into the region from Britain, via Politico.
- UK Cabinet ministers have turned on the BoE regarding rising inflation, whereby one minister warned that the Bank was failing to "get things right" and another suggested that it had failed a "big test", according to The Telegraph.
- Group of over 50 economists warned that the UK's post-Brexit plans to boost the competitiveness of its finance industry risk creating the sort of problems that resulted in the GFC, according to Reuters.
- European Commission Spring Economic Forecasts: cuts 2022 GDP forecast to 2.7% from the 4.0% projected in February. Click here for more detail.
- ECB's Villeroy expects a decisive June meeting and an active summer meeting, pace of further steps will account for actual activity/inflation data with some optionality and gradualism; but, should at least move towards the neutral rate. Will carefully monitor developments in the effective FX rate, as a significant driver of imported inflation; EUR that is too weak would go against the objective of price stability.
- ECB’s de Cos said the central bank will likely decide at the next meeting to end its stimulus program in July and raise rates very soon after that, while he added that they are not seeing second-round effects and are monitoring it, according to Reuters.
- Euro firmer following verbal intervention from ECB’s Villeroy and spike in EGB yields EUR/USD rebounds from sub-1.0400 to 1.0435 at best.
- Dollar up elsewhere as DXY pivots 104.500, but Yen resilient on risk grounds as Chinese data misses consensus by some distance; USD/JPY capped into 129.50.
- Franc falls across the board after IMM specs raise short bets and Swiss sight deposits show SNB remaining on the sidelines; USD/CHF above 1.0050 at one stage.
- However, HKMA continues to defend HKD peg amidst CNY, CNH weakness in wake of disappointing Chinese industrial production and retail sales releases.
- Norwegian Crown undermined by pullback in Brent and narrower trade surplus, EUR/NOK over 10.2100.
- SA Rand soft as Gold retreats to test support around and under Usd 1800/oz.
- Loonie slips with WTI ahead of Canadian housing starts, manufacturing sales and wholesale trade, Sterling dips before BoE testimony; USD/CAD 1.2900+, Cable sub-1.2250.
- EGBs rattled by ECB rhetoric inferring key policy meetings kicking off in June and extending through summer.
- Bunds down towards 153.00 and 10 year yield back up around 1%, Gilts almost 1/2 point adrift and T-note erasing gains from 12/32+ above par at best.
- Eurozone periphery underperforming with added risk-off angst following much weaker than expected Chinese data.
- WTI and Brent are pressured, but well off lows, and torn between China's lockdown easing and poor activity data amid numerous other catalysts
- Specifically, the benchmarks are around USD 110/bbl and USD 111/bbl respectively,
- Saudi Aramco Q1 net income rose 82% Y/Y to INR 39.5bln for its highest quarterly profit since listing, according to Sky News.
- Saudi Energy Minister says they are going to get to 13.2-13.4mln BPD, subject to what is done in the divided zone, by end-2026/start-2027; can maintain production when there, if the market demands this.
- OPEC+ to continue with monthly output increases, according to Bahrain's oil minister via Reuters.
- Iraqi state-run North Oil Company said Kurdish armed forces took control of some oil wells in northern Kirkuk, according to Reuters.
- Iraq oil minister says they aim to increase oil production to 6mln BPD by end-2027, OPEC is targeting a energy market balance not a price; adding, current production capacity is 4.9mln BPD, will reach 5mln BPD before the end of 2022.
- China is to increase fuel prices from Tuesday, according to China's NDRC; gasoline by CNY 285/t and diesel by CNY 270/t.
US Event Calendar
- 08:30: May Empire Manufacturing, est. 15.0, prior 24.6
- 16:00: March Total Net TIC Flows, prior $162.6b
DB's Jim Reid concludes the overnight wrap
Markets managed a big bounce on Friday but the mood has soured again in the Asian session after a weak slew of data from China as covid lockdowns had an even worse impact than expected. Industrial production (-2.9% vs +0.5% expected), retail sales (-11.1% vs -6.6% expected) and property investment (-2.7% vs -1.5% expected) all crashed through estimates by a large margin. The slump in retail sales and industrial production was the weakest since March 2020. The latter also had the lowest print on record, with the worst decline coming from auto manufacturing (-31.8%). The surveyed jobless rate (6.1% vs estimates of 6.0%) also ticked up by more than expected from 5.8% in March and is now close to the high of 6.2% in February 2020. Although the 1-year policy loan rate was left unchanged today, the PBoC did ease the rate on new mortgages this weekend. In other data releases, Japan’s April PPI (+10.0%) came in above estimates of +9.4%, the highest since 1980.
Amid this, the Shanghai Composite (-0.51%) and the Hang Seng (-0.43%) are in the red, and outperformed by the KOSPI (-0.21%) and the Nikkei (+0.46%). The sentiment has soured in American markets too, with S&P 500 futures also trading lower (-0.68%) and the US 10y yield declining by -2.2bps. Oil (-1.48%) is edging lower too on growth concerns.
After last week’s meltdown in crypto markets, Bitcoin is back at above $30k this morning – a jump since the lows of nearly $26k last Thursday but way short of the $38k it traded at in the beginning of the month and $68k early last November. The infamous TerraUSD, the stablecoin that fuelled the crypto slide, is at $0.18. It is supposed to trade at $1 at all times.
Looking forward now and there's not a standout event to focus on this week but they'll be plenty to keep us all occupied. US retail sales (tomorrow) looks like the highlight alongside Powell's speech the same day. There will also be US housing data smattered across the week and UK and Japanese inflation on Wednesday and Friday respectively.
Let's start with US retail sales as it will be a good early guide for Q2 GDP. Our US economists are anticipating a +1.7% print, up from +0.7% in March. Rebounding auto sales should help the headline number. For more on the consumer, Brett Ryan put out this chartbook last week on the US consumer (link here). US industrial production is out the same day.
We have a long list of central bank speakers this week headed by Powell and Lagarde (tomorrow) and BoE Bailey today. There are many more spread across the week and you can see the list in the day by day event list at the end. We do have the last ECB meeting minutes on Thursday but the subsequent push towards a July hike might make these quite dated.
US housing will be a big focus next week. It's probably too early for the highest mortgage rates since 2009 to kick in but with these rates around 220bps higher YTD, some damage will surely soon be done after the highest YoY price appreciation outside of an immediate post WWII bounce, in our 120 year plus housing database. On this we will see the NAHB housing market index (tomorrow), April’s US building permits and housing starts (Wednesday), and existing home sales (Thursday).
Turning to corporate earnings, it will be another quiet week after 457 of the S&P 500 companies and 368 of the STOXX 600 companies have reported earnings this season so far. Yet, it will be an important one to gauge how the US consumer is faring amid inflation at multi-decade highs, including reports such as Walmart, Home Depot (tomorrow), Target and TJX (Wednesday). Results will also be due from China's key tech and ecommerce companies like JD.com (tomorrow), Tencent (Wednesday) and Xiaomi (Thursday). Other notable corporate reporters will include Cisco (Wednesday), Applied Materials, Palo Alto Networks (Thursday) and Deere (Friday).
A quick recap of last week’s markets now. Fears that global growth would slow due to the tightening task at hand for central banks sent ripples across markets, without a clear specific catalyst. Equities declined, credit spreads widened, the dollar rallied, and sovereign yields declined.
The S&P 500 fell for the sixth consecutive week for the first time since 2011, falling -13.0% over that time. Even with a +2.39% rally on Friday, it fell -2.41% last week. Large cap technology firms underperformed, with the NASDAQ falling -2.80% (+3.82% Friday), while the FANG+ index fell -3.48% (+5.45% Friday). Volatility was elevated, with the Vix closing above 30 for 6 straight days for the first time since immediately following the invasion, narrowly avoiding a 7th straight day above 30 by closing the week at 28.8. European equities outperformed, with the STOXX 600 climbing +0.83% after a banner +2.14% gain Friday. The Itraxx crossover ended the week at 446bps, its widest level since June 2020. Crypto assets sharply declined, with Bitcoin down -12.51% and Coinbase -34.58% over the week, with a number of so-called ‘stablecoins’ breaking their pledged parity, forcing some to stop trading.
The growth fears drove a flight to quality. The dollar index increased +0.87% (-0.27% Friday) to its highest levels since 2002. Only the yen outperformed the US dollar in the G10 space. Sovereign yields rallied significantly, with 10yr Treasuries, bunds, and gilts falling -19.3bps (+8.5bps Friday), -23.0bps (+6.2bps Friday), and -28.7bps (+4.7bps Friday), respectively.
Reports that the EU was considering softening their oil-related sanctions due to member resistance combined with growth fears to send oil prices much lower at the beginning of the week, with Brent crude futures almost breaking $100/bbl. When all was said and done, a gradual rally over the back half of the week saw Brent merely -1.04% lower (+3.82% Friday). On the back of disappointing data from China it is down -1.48% this morning.
There was a lot of high-profile central bank speak to work through, as there will be this week. The main takeaways included Fed officials aligning behind a series of +50bp hikes the next few meetings, downplaying the chances of +75bp hikes until September at the earliest. Meanwhile, momentum in the ECB is growing toward a July policy rate hike, with policy rates breaching positive territory by the end of the year.
In terms of data Friday, the University of Michigan survey of inflation expectations for the next five years was unchanged at 3 percent, though inflation has weighed on consumers’ perception of the current situation.
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