Chair Powell sends the terminal rate to new highs

The Daily Shot: 08-Mar-23
The United States
Canada
The United Kingdom
The Eurozone
Europe
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Commodities
Equities
Credit
Rates
Global Developments
Food for Thought



 

The United States

1. Chair Powell struck a hawkish tone on Tuesday.
 
Faster rate hikes:

Powell: – If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.

Higher terminal rate:

Powell: – The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.

The probability of a 50 bps hike this month surged.
 

 
Here are the market expectations for the fed funds rate changes on FOMC days.
 

 
The implied terminal rate climbed above 5.6%. Are we headed for 6%?
 

 

 
The 2-year Treasury yield rose above 5%, …
 

 
… and the Treasury curve moved deeper into inversion territory.
 

 

 
Real yields jumped.
 

 
Market-based inflation expectations moved lower.
 

 
Stocks retreated.
 

 
The dollar surged.
 

 
Commodities came under pressure.
 

 

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2. Consumer credit increased less than expected in January.
 

 
Credit card debt continues to rise.
 

 
But it declined in January as a share of disposable personal income.
 

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3. Next, we have some updates on inflation.
 
Consumer concerns about inflation have risen in recent weeks.
 
Source: @CivicScience  
 
The gap between goods and services prices remains elevated.
 
Source: BCA Research  
 
The ISM report has been pointing to lower services inflation.
 
Source: Morgan Stanley Research; @Marcomadness  
 
Rent inflation is sensitive to tight labor markets.
 
Source: Kansas City Fed; h/t Torsten Slok,¬†Apollo   Read full article  
 
This chart shows the truflation rate, which takes into account the changes in the quality of goods and services over time.
 
Source: truflation, @t1alpha   Further reading  
 
Wholesale used automobile prices are rising again.
 

 
Small business hourly wage growth slowed last month, but weekly pay gains hit a multi-year high.
 
Source: Paychex, IHS Markit  


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Canada

1. The loonie tumbled on Powell’s comments.
 

 
Canada’s currency could be in further trouble if the BoC doesn’t hike rates.
 
Source: Deutsche Bank Research  

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2. This chart shows the BoC’s balance sheet over time.
 
Source: Industrial Alliance Investment Management  
 
3. Consumer confidence is off the lows.
 


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The United Kingdom

1. The pound is breaking below support.
 

 
2. Consumer credit has been tight.
 
Source: Longview Economics  
 
3. Business investment has been running well below the pre-2016 trend.
 
Source: @financialtimes   Read full article  


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The Eurozone

1. Germany’s January factory orders and industrial production topped expectations.
 
Source: @ZSchneeweiss, @economics   Read full article  
 

 
Source: MarketWatch   Read full article  
 

 
Retail sales remained soft.
 

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2. Spain’s industrial production hit the lowest level in a year.
 

 
3. Pantheon Macroeconomics sees the ECB ramping up QT later this year.
 
Source: Pantheon Macroeconomics  


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Europe

1. Norway’s industrial production took a hit in January.
 

 
The Norwegian krone hit the lowest level (vs. EUR) in nearly three years.
 

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2. Sweden’s budget surplus exceeded last year’s levels in February.
 

 
3. Historically, European shares have demonstrated weaker performance compared to the S&P 500 between May and September.
 
Source: Simon White, Bloomberg Markets Live Blog  


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Asia – Pacific

1. Japan’s current account deficit hit a record in January.
 

 
Source: Reuters   Read full article  

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2. Taiwan’s core CPI appears to be peaking.
 

 
Taiwan’s exports were lower than expected last month.
 
Source: SCMP   Read full article  
 


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China

1. Local government debt is massive, …
 
Source: @WSJ   Read full article  
 
… pushing the total debt-to-GDP ratio well above that of the US and the Eurozone.
 
Source: @WSJ   Read full article  
 
Beijing wants to get the situation under control.
 
Source: @ANZ_Research  

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2. The percentage of cities with rising real estate prices is picking up.
 
Source: Alpine Macro  
 
Property sector borrowing is rebounding, mostly in commercial real estate. (2 charts)
 
Source: China Beige Book  
 
Source: China Beige Book  

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3. The share of urban workers has been rising.
 
Source: @hancocktom, @business   Read full article  


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Emerging Markets

1. Chile’s exports remain robust.
 

 
Copper exports are still below last year’s level in dollar terms.
 

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2. South Africa’s GDP declined more than expected in Q4.
 

 
Source: @financialtimes   Read full article  

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3. Turkey’s government budget hit a record deficit last month.
 

 
4. Next, we have some updates on Russia.
 
The budget deficit worsened in February, according to government data.
 

 
Source: @WSJ   Read full article  
 
Oil & gas revenues:
 

 
Source: Reuters   Read full article  
 
Monthly revenue and expenditures:
 
Source: @jakluge  
 
Source: @jakluge  
 
Car sales remain soft.
 

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5. EM central banks are closer to the point of easing monetary policy, joining China.
 
Source: MRB Partners  
 
Here is a forecast from Morgan Stanley.
 
Source: Morgan Stanley Research  

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6. The rise in EM growth versus value stocks points to a recovery in leading economic indicators.
 
Source: Alpine Macro  


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Cryptocurrency

1. Ether held up better than bitcoin after Powell’s hawkish comments.
 

 
2. Bitcoin held resistance at the 200-week moving average.
 

 
3. Bitcoin’s trading volume over the past weekend fell to its lowest level in months.
 
Source: @KaikoData  
 
4. Bitcoin’s transaction count ticked higher as exchange withdrawals exceed deposits. This is partly the result of the FTX collapse.
 
Source: @jimmyvs24  
 
5. Approximately $40K BTC from wallets associated with US government law enforcement seizures are on the move, possibly held in custody at exchanges such as Coinbase.
 
Source: @glassnode  
 
6. Fundraising in crypto gaming jumped 79% over the past two months.
 
Source: @DelphiDigital  


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Commodities

1. The SPDR gold ETF is at support.
 

2. Palladium prices continue to sink.
 

 
3. The Global X Uranium ETF broke below support at the 200-day moving average.
 

 
4. Commodity trading companies had a profitable year in 2022.
 
Source: Oliver Wyman   Read full article  


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Equities

1. Despite recent underperformance, tech mega-caps are still expensive.
 
Source: Alpine Macro  
 
The top 50 stocks in the S&P 500 remain expensive relative to the rest of the index.
 
Source: BofA Global Research; @MikeZaccardi  
 
Weak sales growth signals lower margins for tech mega-caps.
 
Source: Alpine Macro  

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2. The positioning of systematic strategies is now above that of discretionary ones.
 
Source: Deutsche Bank Research  
 
3. Will analysts upgrade their earnings forecasts if economic data surprises remain positive?
 
Source: BCA Research  
 
4. Growth vs. value relative performance looks very different for the S&P 500 vs. the Russell 1000 indices.
 
Source: Truist Advisory Services  
 
5. Should we continue to pay attention to the dot-com analog?
 
Source: Alpine Macro  


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Credit

1. Are stocks pointing to wider credit spreads?
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
2. Bank lending standards signal higher corporate bond premiums (spreads adjusted for expected default rates).
 
Source: Nomura Securities  
 
3. Investors have been shorting HYG.
 
Source: @BLaw   Read full article  
 
4. High-yield borrowing increased this year.
 
Source: @WSJ   Read full article  
 
5. Mutual fund ownership of US corporate credit has risen sharply since the financial crisis. ETFs have picked up market share over the past few years.
 
Source: Morgan Stanley Research  
 
6. Demand for private credit remains robust (one has to love that 50% PIK).
 
Source: @LisaLeereporter, @dscigliuzzo, @PSeligson, @jillrshah, @markets   Read full article  
 
7. Short-term muni debt issuance has been falling as rates surge.
 
Source: @WSJ   Read full article  


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Rates

1. The 2-year Treasury yield has been following the Citi Economic Surprise Index.
 
Source: Truist Advisory Services  
 
2. The Taylor rule says the terminal rate should be 6%.
 
Source: @ANZ_Research  
 
3. Foreign demand for Treasury notes and bonds has been robust.
 
Source: Truist Advisory Services  


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Global Developments

1. The US dollar index is breaking above its 200-day moving average.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
The dollar is trading in line with previous similar macro regimes. The recessionary flight to safety already happened last year, according to Variant Perception.
 
Source: Variant Perception  

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2. The NY Fed’s global index of supply bottlenecks is in negative territory for the first time since 2019.
 

 
Container shipping costs continue to move lower.
 
Source: Arcano Economics  

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3. Next, we have fund flows by broad category in the first two months of 2022 and 2023.
 
Source: EPFR  


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Food for Thought

1. Back to the office? Only if it’s a nice building …
 
Source: @axios   Read full article  
 
2. Who likes flying?
 
Source: @financialtimes   Read full article  
 
3. Using checks to make payments:
 
Source: BIS   Read full article  
 
4. Top-paid US CEOs:
 
Source: S&P Global Market Intelligence  
 
5. US and European defense spending:
 
Source: The Economist   Read full article  
 
6. Views on geopolitical risks:
 
Source: Oxford Economics  
 
7. Who is supplying Russia?
 
Source: IIF  
 
8. The vinyl comeback:
 
Source: Statista  
 

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