One sure way to get a recession is a debt crisis

The Daily Shot: 17-Jan-23
The United States
Canada
The United Kingdom
The Eurozone
Europe
Japan
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Commodities
Energy
Equities
Credit
Global Developments
Food for Thought



 

The United States

1. The U. Michigan consumer sentiment index improved this month, topping expectations.
 

 
Indicators of buying conditions moved higher.
 

 
Goldman’s Twitter sentiment index points to further gains in consumer confidence.
 
Source: Goldman Sachs  

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2. Next, we have some updates on inflation.
 
The U. Michigan’s 1-year consumer inflation expectations declined further, but longer-term inflation projections edged up.
 
Source: Reuters   Read full article  
 

 
Import prices unexpectedly jumped in December.
 
Source: MarketWatch   Read full article  
 

 
Next, we have the alternative measures of core inflation (year-over-year).
 
Median CPI:
 

 
Trimmed-mean CPI:
 

 
Sticky CPI:
 

 
How does the current inflationary spike compare to the 1970s?
 
Source: TS Lombard  
 
Here is the CPI price level versus the 2% target trends.
 
Source: Mizuho Securities USA  
 
Freight inflation and warehousing costs continue to ease.
 
Source: Cass Information Systems  
 
Source: Quill Intelligence  

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3. According to the Earnest Analytics Spend Index, retail sales softened in December.
 
Source: Earnest Analytics  
 
4. The budget deficit exceeded fiscal 2022 levels in December.
 

 
5. Next, let’s take a look at recession risks.
 
Leading indicators continue to point to a substantial GDP contraction.
 
Source: Alpine Macro  
 
The cycle component of the Brave-Butters-Kelley Indexes reflects “movements that are likely to govern the direction of growth going forward,” picking up the “turning points in the business cycle.”
 

 
This will be the most anticipated recession in history as forecasters boost their downturn expectations.
 
Source: Yardeni Research  
 
Deutsche Bank expects a deeper recession than the consensus.
 
Source: Deutsche Bank Research  
 
Here is the DB recession probability model.
 
Source: Deutsche Bank Research  
 
Below is a model from Capital Economics.
 
Source: Capital Economics  
 
And this is Bloomberg’s recession probability index.
 

 
But not everyone sees a recession this year. Here is Goldman’s recession probability vs. other forecasters.
 
Source: Goldman Sachs  
 
The fiscal and financial conditions drag on growth will ease this year.
 
Source: Goldman Sachs  
 
As of Q3, household cash balances remained well above pre-COVID levels, which will be a tailwind for consumer spending.
 
Source: Torsten Slok,¬†Apollo  
 
And discretionary spending remains robust.
 
Source: BofA Global Research; @SamRo, h/t @dailychartbook  
 
The outcome will hinge on whether labor market imbalances diminish, allowing the Fed to stop raising rates.
 
Source: BCA Research  
 
One sure way to get a recession is a debt crisis, with 2023 increasingly looking like 2011.
 
Source: Alpine Macro  

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6. Over $1 trillion of student debt is in forbearance (and rising). At some point (perhaps this summer), payments will become due.
 
Source: @WSJ   Read full article  


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Canada

1. Manufacturing sales held up in November.
 

 
2. According to the BoC’s business survey, companies are gloomy about future sales.
 

 
Firms have pared back hiring plans.
 

 
Businesses see inflation surpassing the BoC’s target.
 
Source: Scotiabank Economics  

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3. The BoC’s balance sheet continues to shrink.
 
Source: Industrial Alliance Investment Management  
 
4. Home price declines have been severe (2 charts).
 
Source: Scotiabank Economics  
 
Source: Industrial Alliance Investment Management  


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The United Kingdom

1. The monthly GDP edged higher in November, topping estimates.
 

 
Manufacturing production shrunk, …
 

 
… but service sector output improved.
 

 
Construction was flat.
 

 
The trade balance is back in deficit.
 

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2. UK labor inactivity rates have been trending higher.
 
Source: ING  
 
But hiring challenges are easing.
 
Source: ING  


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The Eurozone

1. For the first time in a year, economists upgraded the Eurozone GDP forecast as the energy crisis eases (see the energy section).
 

 
Goldman no longer sees a recession.
 
Source: Goldman Sachs  
 
The Citi Economic Surprise Index continues to outpace the US.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
However, the Commerzbank leading indicator for Germany has deteriorated.
 
Source: Commerzbank Research  

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2. Industrial production improved in November, despite soft manufacturing PMI figures.
 

 
Auto production has picked up.
 
Source: TS Lombard  

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3. The trade gap is narrowing rapidly.
 

 
4. Real wage growth is now below the rate we see in the US.
 
Source: ECB   Read full article  
 
5. Germany’s wholesale inflation is easing.
 

 
Spain’s core CPI is now above the headline index.
 
Source: ING  


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Europe

1. The Swiss franc tumbled last week.
 

 
Will the euro hold above parity versus the Swiss franc?
 

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2. Norway’s economic growth remains above the pre-COVID trend.
 

 
3. Sweden’s core CPI continues to surge.
 

 
4. Poland’s inflation shows signs of peaking.
 

 
The nation’s exports hit a record high in November.
 

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5. Czech inflation is off the highs.
 

 
Source: ING  

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6. Citizens of Western European nations increasingly perceive their country as making progress, with the exception of France and Norway.
 
Source: Morning Consult   Read full article  


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Japan

1. Traders continue to play the game of chicken with the BoJ, with the 10-year JGB yield edging above 0.5%. At some point, the central bank will run out of bonds to buy.
 

 
The 10-year swap spread has blown out (traders express their short bets via the rates swap market).
 

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2. Japanese investors built up large dollar cash positions. This could be deployed in Japanese government bonds once the BoJ’s yield curve control adjustment is complete, according to Deutsche Bank.
 
Source: Deutsche Bank Research  
 
3. Machine tool orders climbed above 2021 levels in December.
 

 
4. Real wage growth is deeply negative.
 
Source: Goldman Sachs  
 
5. Banks’ profitability will improve once the Bank of Japan discontinues its negative rate policy.
 
Source: PGM Global  


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Asia – Pacific

1. The BoK is on hold for now.
 
Source: ING  
 
South Korean inflation should decline rapidly this year.
 
Source: Goldman Sachs  

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2. Australia’s consumer confidence improved this month but remains near extreme lows.
 


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China

1. The economic growth report topped forecasts, with the Q4 GDP change coming in at zero rather than negative.
 

 
December economic activity indicators were stronger than expected.
 
Industrial production:
 

 
Retail sales:
 

 
Here is the retail sales value (back at the 2020 level).
 

 
Unemployment:
 

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2. New home prices have declined for 16 months in a row.
 

 
Residential property sales were below the 2018 level in 2022.
 

 
Property market excess remains large.
 
Source: BCA Research  

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3. This chart shows China’s PPI components.
 
Source: Arcano Economics  
 
4. Elevated savings could generate a spending boom this year.
 
Source: Citi Private Bank  
 
5. China accounts for 17% of worldwide exports.
 
Source: MarketDesk Research  
 
6. Corporate earnings revisions have turned positive as reopening takes hold.
 
Source: Citi Private Bank  


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Emerging Markets

1. India’s exports remain below last year’s levels.
 

 
The December trade gap was a bit wider than expected.
 

 
India’s wholesale price inflation continues to moderate.
 

 
But the core CPI has been persistently high.
 
Source: @ANZ_Research  

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2. Falling inflation could permit eventual rate cuts across EM.
 
Source: MRB Partners  
 
3. This scatterplot shows EM exposure to China vs. the US.
 
Source: @TCosterg  
 
4. Next, we have some performance data since January 6th.
 
Currencies:
 

 
Bond yields (Colombia’s yield is down 155 bps):
 

 
Equity ETFs:
 


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Cryptocurrency

1. Cryptos are off to a strong start this year, with ether (ETH) leading other large tokens.
 
Source: FinViz  
 
SOL has been surging.
 

 
However, over the past week, bitcoin’s market cap relative to the total crypto market cap (dominance ratio) ticked higher. A sustained rise in the dominance ratio typically signals risk-off conditions.
 

 
Roughly half of the top 50 tokens have outperformed BTC over the past month.
 
Source: Blockchain Center  
 
2. The Crypto Fear & Greed Index escaped “extreme fear” territory.
 
Source: Alternative.me  
 
3. In risk-adjusted terms, an equal-weight basket of BTC and ETH in line with global stock indices last year.
 
Source: Coinbase Institutional  
 
Most institutional investors expect crypto prices to stay range-bound or trend lower over the next 12 months, according to a survey by Coinbase.
 
Source: Coinbase Institutional  

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4. Shares of crypto mining companies have been surging.
 

 
5. The end of magical thinking?
 
Source: @jessefelder, @ttmygh, The New York Times   Read full article  
 
Not quite …
 
Source: CoinMarketCap  


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Commodities

1. Corn and soybean futures jumped on last week’s USDA report.
 

 

 
Source: Successful Farming  
 

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2. Iron ore futures declined as Beijing cracks down on rising prices.
 

 
Source: @markets   Read full article  

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3. Gold has been less sensitive to Treasury yields in recent years.
 
Source: @ANZ_Research  
 
4. Will improving supplies stabilize concrete prices?
 
Source: ING  
 
5. Finally, we have last week’s performance across key commodity markets.
 


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Energy

1. European natural gas prices continue to tumble …
 

 
… amid elevated inventories.
 
Source: Chart and data provided by Macrobond  
 
Moreover, winds have been blowing across Europe, boosting renewables’ contribution to electricity production.
 
Source: Commerzbank Research  
 
German forward power prices continue to ease.
 

 
This chart shows Germany’s shift from Russian natural gas.
 
Source: @janrosenow   Read full article  

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2. There is a lot of Russian crude oil on water these days (headed for Asia).
 
Source: Goldman Sachs  
 
3. Are energy sector earnings about to slow?
 
Source: Longview Economics  
 
4. Oil services stocks are breaking out relative to exploration and production stocks.
 
Source: Aazan Habib, Paradigm Capital  


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Equities

1. Last week saw some short covering.
 

 
2. In spite of the market challenges, companies set a new record in 2022 for repurchasing their own shares.
 
Source: Birinyi Associates; @luwangnyc, @markets   Read full article  
 
Companies known for share buybacks have been outperforming.
 

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3. 2022 was a rough year for IPOs.
 
Source: @financialtimes   Read full article  
 
4. A break from the 2008 analog?
 
Source: @NautilusCap  
 
5. In recent years, bear-market lows occurred after the yield curve has been steepening for some time.
 
Source: Longview Economics  
 
6. VIX closed at the lowest level in over 12 months, …
 

 
… diverging from rates vol (MOVE).
 
Source: @themarketear  

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7. Net bullish options volume remains depressed.
 
Source: Deutsche Bank Research  
 
8. Historically, equities and bonds become less correlated when the economic cycle slows.
 
Source: HSBC  
 
9. Finally, we have some performance data from last week.
 
Sectors:
 

 
Equity factors:
 

 
Thematic ETFs:
 

 
Largest US tech firms:
 

 
Also, this chart shows the relative performance of various thematic basket pairs.
 
Long-duration shares have been outperforming as Treasury yields ease.
Companies with sales in China have benefitted from the reopening trend.
 


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Credit

1. Corporate credit default swap spreads have been tightening since the start of the year.
 

 
2. Leveraged loan ratings downgrades continue.
 
Source: Bloomberg Law   Read full article  
 
3. It’s been a good few days for Europen corporate bond sales.
 
Source: @priazrocha, @markets   Read full article  
 
4. Next, we have last week’s performance by asset class.
 


Back to Index

 

Global Developments

1. The dollar index (DXY) has entered a death cross and broke below the near-term uptrend support.
 

 
Source: @Ruth_Liew10, @markets   Read full article  
 
But the dollar appears to be oversold.
 
Source: @StocktonKatie  
 
The inverse correlation between the dollar and a long equity/bond risk parity basket is starting to break. Is the dollar losing its safe-haven appeal?
 
Source: Deutsche Bank Research  

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2. Asia has the largest potential upside in reopening.
 
Source: HSBC  
 
3. Product shortages continue to ease.
 
Source: Capital Economics  
 
4. Next, we have some performance data since January 6th.
 
Trade-weighted currency indices:
 

 
Bond yields:
 


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Food for Thought

1. Deadliest places for journalists:
 
Source: Statista  
 
2. Exports of Intel products to Russia:
 
Source: Reuters   Read full article  
 
3. Smoking among women and men globally:
 
Source: Visual Capitalist   Read full article  
 
4. Vegetarian diet (changes in recent years):
 
Source: Statista  
 
5. Broken January temperature records:
 
Source: @financialtimes   Read full article  
 
6. Racial and ethnic diversity in the US Congress:
 
Source: Pew Research Center   Read full article  
 
7. Corporate tax rates around the world:
 
Source: @TaxFoundation   Read full article  
 
8. Dinner time across Europe:
 
Source: @conradhackett  

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