Bond market slump shows no signs of abating

The Daily Shot: 02-Mar-23
• The United States
• Canada
• The United Kingdom
• The Eurozone
• Asia – Pacific
• China
• Emerging Markets
• Commodities
• Energy
• Equities
• Credit
• Global Developments
• Food for Thought

The United States

1. The ISM manufacturing index edged higher in February but remained well inside contraction territory.

– Here are the contributions.

Source: @TheTerminal, Bloomberg Finance L.P.

– The slump in manufacturing production accelerated.

– The pace of declines in new orders slowed.

– Factories reduced their workforce.

– Supplier delivery times continue to shorten.

– Input prices started rising again last month, which further spooked the bond markets.

• The ratio of cyclical to defensive equity sectors signals a rebound in factory activity ahead, …

… and so does the sharp rebound in China’s manufacturing activity (here and two charts below).

Source: Pantheon Macroeconomics

Source: ING

– However, South Korea’s weak exports point to downside risks.

Source: MUFG Securities

• Separately, the ISM Milwaukee PMI is back in growth territory.

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2. Rising manufacturing input costs (above) and stubbornly high inflation in Europe sparked further selling in global bond markets.

• The 10-year Treasury yield breached 4% again.

• The 2-year yield is nearing 5%.

• The 6-month T-bill yield is now firmly above 5%. How much do banks pay on savings accounts?

• The market-implied terminal rate is nearing 5.5%.

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3. Mortgage applications continue to hit multi-year lows,…

… as the 30-year mortgage rate nears 7% again.

Source: Mortgage News Daily

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4. As in January, last month’s auto sales topped expectations, boosted by fleet sales – which have been offsetting soft retail demand.

5. Residential construction spending declined again in January, …

Source: Chart and data provided by Macrobond

… and is now down on a year-over-year basis.

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6. The Penta-CS consumer sentiment index declined going into the end of February (confirming the Conference Board’s report).

Source: @PentaGRP, @CivicScience

7. Could the X-date come as early as June?

Source: Oxford Economics

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Canada

1. Factory activity returned to growth in February.

Price pressures continue to ease.

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2. The deceleration in Canada’s broad money supply signals softer inflation ahead.

Source: BMO; @SBarlow_ROB

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The United Kingdom

1. Manufacturing contraction appears to be almost over.

Source: S&P Global PMI

2. Mortgage approvals declined again but not as much as expected.

Source: Reuters Read full article

Consumer credit strengthened.

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3. Home prices are now down on a year-over-year basis.

Source: Reuters Read full article

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The Eurozone

1. Germany’s CPI topped expectations, following upside surprises from France and Spain.

Source: @WeberAlexander, @economics Read full article

These CPI reports point to a reacceleration in inflation at the Eurozone level.

Source: Pantheon Macroeconomics

Bund yields continue to surge.

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2. French and German final manufacturing PMIs were worse than the flash report.

Source: S&P Global PMI

Source: S&P Global PMI

However, factory activity returned to growth in Spain and Italy.

Source: World Economics

Source: S&P Global PMI

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3. Next, we have some updates on Germany.

• Import prices continue to ease.

• Mortgage demand is crashing.

Source: Barkow Consulting Read full article

• Bankruptcies are on the rise.

Source: PGM Global

• Government interest expense is increasing for the first time in over a decade.

Source: @DanielKral1

• German startup investments have returned to their long-term trend after a record uptick in 2021.

Source: Deutsche Bank Research

• The investment cycle in Germany, particularly in machinery and equipment, faces headwinds from weak credit demand and capacity utilization. (2 charts)

Source: Deutsche Bank Research

Source: Deutsche Bank Research

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Asia – Pacific

1. Japan’s CapEx remained robust in Q4.

2. South Korea’s manufacturing activity continues to contract.

Source: S&P Global PMI

Industrial production tumbled in January.

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3. Taiwan’s leading index deteriorated further in January.

4. Australia’s building approvals tumbled at the start of the year.

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China

1. Fiscal activity surged this quarter.

Source: China Beige Book

2. Central banks substantially cut their holdings of Chinese bonds.

Source: Gavekal Research

3. Infrastructure has replaced real estate as the engine of investment growth.

Source: ING

3. This chart shows the contributions to China’s consumer inflation.

Source: Arcano Economics

4. Hong Kong’s economy continues to underperform Singapore’s.

Source: @chen_long

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Emerging Markets

1. Let’s begin with Chile.

• Economic activity (trending higher again):

• Manufacturing output (below last year’s level but better than expected):

• Copper production (soft):

• Business confidence (rebounding):

• Retail sales (well below last year):

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2. Brazil’s manufacturing contraction is nearly over.

• The unemployment rate continues to fall.

• The debt-to-GDP ratio declined in January.

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3. Mexico’s factory activity is back in growth mode.

Remittances remain very strong.

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4. Turkey’s GDP is slowing.

Source: @berilakman, @economics Read full article

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5. Pakistan’s CPI continues to soar.

Source: Reuters Read full article

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6. Nigeria’s manufacturing activity is crashing.

Source: S&P Global PMI

Source: @bpolitics Read full article

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7. Market pricing of sovereign credit risk is meaningfully higher since 2010 for countries such as Turkey, Argentina, and South Africa.

Source: Codera Analytics Read full article

8. EM equity valuations returned toward their long-term average.

Source: TS Lombard

Many EM equity indices are trading at low valuations relative to history.

Source: TS Lombard

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Commodities

Sugar futures are surging.

Source: barchart.com Read full article

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Energy

1. US crude oil inventories are back inside the five-year range.

2. US gross crude oil exports are hitting record highs.

3. Gasoline inventories have been softening, …

… as demand improves, …

Source: Princeton Energy Advisors

… while refinery runs remain depressed.

– US gasoline futures have been rallying, which will soon be reflected at the pump.

4. Distillates inventories, on the other hand, are back inside the 5-year range.

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5. India and China buy cheap crude oil from Russia, refine it, and sell diesel to Europe.

Source: @EIAgov

European diesel inventories are now in good shape.

Source: @EIAgov

6. European heating demand remains below the long-term average.

Source: @JKempEnergy

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Equities

1. The S&P 500 continues to test support at the 200-day moving average. A break below that level could trigger substantial selling pressure.

2. Rising real yields are inconsistent with current stock valuations. Something has to give.

Source: @TheTerminal, Bloomberg Finance L.P.

3. Is the market too optimistic about corporate sales?

Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital

4. Speculative stocks continue to underperform as the Reddit crowd retreats (2 charts).

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5. The Invesco Equal-Weight Consumer Discretionary ETF (RCD) is holding up relative to the S&P 500.

Source: Aazan Habib, Paradigm Capital

6. Equity ETF flows deteriorated at the start of the year.

Source: @bespokeinvest Read full article

7. Industrials are highly vulnerable to an economic downturn.

Source: Numera Analytics (@NumeraAnalytics)

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Credit

1. Mutual fund inflows into US investment-grade credit increased this year, outpacing ETF flows.

Source: Morgan Stanley Research

• High-yield funds saw substantial outflows last month.

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2. US investment-grade total returns rolled over sharply with the rate sell-off in February.

Source: Morgan Stanley Research

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Global Developments

1. Global manufacturing activity has stabilized, with the PMI index back at 50.

Source: S&P Global PMI

Here are the PMI indicators by country.

Source: S&P Global PMI

And this chart shows the one-month change.

Source: Deutsche Bank Research

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2. Here is a look at February and year-to-date performance across major assets. The risk-on rally ran out of steam last month.

Source: Deutsche Bank Research

3. The dollar’s risk premium declined, but remains at high levels.

Source: Deutsche Bank Research

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Back to Index

Food for Thought

1. Average US tax refund by year:

Source: Earnest

2. How borrowers intend to spend “forgiven” student debt:

Source: @CivicScience Read full article

3. US government spending as a share of GDP:

Source: BofA Global Research

4. Expected population changes by age group:

Source: @jeffsparshott, @WSJ

5. Fertility rates in select countries (2 charts):

Source: @samkimasia, @economics Read full article

Source: Torsten Slok, Apollo

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6. North Korea’s estimated GDP:

Source: @JonHerskovitz, @bpolitics Read full article

7. What are the preferred destinations for individuals considering migration?

Source: Gallup Read full article

8. I would rather ____ than file my taxes:

Source: LendingTree Read full article

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