Fed rate hike expectations massively repriced

The Daily Shot: 13-Mar-23
The United States
Canada
The United Kingdom
The Eurozone
Japan
China
Emerging Markets
Cryptocurrency
Commodities
Equities
Credit
Rates
Global Developments
Food for Thought



 

The United States

1. Let’s begin with the banking sector situation.
 
The authorities closed down SVB as well as the crypto-focused Signature Bank.
 
All depositors will be made whole. While the US Treasury says it’s not a bailout because investors are wiped out, the move creates a moral hazard for large depositors.
 
SVB UK has been sold to HSBC for £1.
 
The Fed has set up the Bank Term Funding Program (BTFP) to deal with run on banks.
 
2. Next, let’s take a look at the market reaction.
 
Stock futures are up on regulatory action.
 

 
Treasury yields are down sharply over the past couple of days.
 

 
The market has massively repriced Fed rate hike expectations. 50 bps this month looks unlikely now.
 

 
March rate hike expectations:
 

 
The terminal rate:
 

 
Here are some additional market moves.
 
The US dollar:
 

 
Gold:
 

 
Bitcoin:
 

——————–

 
3. The February jobs report topped expectations …
 

 
… again.
 
Source: @bespokeinvest  
 
Here is the total employment level.
 

 
Tech job losses (“information”) have had a limited impact on total payrolls figures.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Source: @AtlantaFed  
 
Hiring at hotels, restaurants, and bars has been a substantial portion of recent employment gains (2 charts).
 
Source: @WSJ   Read full article  
 
Source: @d_harrison, @wsj  
 
The unemployment rate edged higher, …
 

 
… as more Americans entered/reentered the labor force. This is good news from the Fed’s perspective.
 
Source: Mizuho Securities USA  
 

 
Wage growth appears to be moderating.
 

 
We will have more on the employment report later in the week.

——————–

 
4. The US sovereign CDS spread hit a new high as the debt ceiling fight looms.
 

 
Source: Reuters   Read full article  


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Canada

1. The employment report was stronger than expected.
 

 

 

 
The unemployment rate and the participation rate held steady.
 

 

 
Wage growth surprised to the upside.
 

 
This chart shows employment changes by sector.
 
Source: Scotiabank Economics  

——————–

 
2. Canada’s exports are tracking robust gains for Q1.
 
Source: Scotiabank Economics  


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The United Kingdom

1. The January monthly GDP topped forecasts.
 

 
Industrial production declined, …
 

 
… and so did construction output.
 

 
But services showed an improvement.
 

 
The trade deficit was narrower than expected.
 

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2. UK coal demand has collapsed.
 
Source: Carbon Brief   Read full article  


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The Eurozone

1. The market pulled down expectations for the ECB rate hike this month as SVB collapsed. 50 bps this month still looks likely.
 

 
2. The probability of an economic slowdown in the euro area significantly declined, according to Danske Bank’s model.
 
Source: Danske Bank  
 
Economists have upgraded their forecasts for Germany’s GDP (2 charts).
 

 
Source: @CraigStirling, @economics   Read full article  

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3. Dutch industrial production was down on a year-over-year basis.
 

 
4. Spain’s retail sales were strong in January.
 


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Japan

1. Japan’s BSI survey was weak in Q1, reflecting a pessimistic outlook among large Japanese manufacturers.
 

 
2. Dollar-yen has been highly correlated to the 2-year Treasury yield.
 
Source: Simon White, Bloomberg Markets Live Blog  
 
Even a mild change in Japanese rates could boost the yen this year, according to MRB Partners.
 
Source: MRB Partners  
 
3. FX hedging costs are high, which could curtail Japanese flows into US bonds.
 
Source: MUFG Securities  


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China

1. Last month’s loan growth topped expectations.
 
CNY loans:
 

 
Aggregate credit:
 

 
The M2 money supply:
 

——————–

 
2. Private credit growth has been soft.
 
Source: BCA Research  
 
3. China has not massively expanded its exports to Russia.
 
Source: Gavekal Research  
 
4. Next we have some data on goods e-commerce in China from Fitch Ratings.
 
Source: Fitch Ratings  


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Emerging Markets

1. Brazil’s CPI is picking up steam again.
 

 
2. India’s industrial production held up well in January.
 

 
3. According to Russia’s government, the core CPI is moderating.
 

 
4. EM debt sales have slowed.
 
Source: @andradevini3, @vizcainomariae, @markets   Read full article  
 
5. Here is last week’s performance.
 
Yields:
 

 
Currencies:
 

 
Equity ETFs:
 


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Cryptocurrency

1. Ether outperformed over the past week, …
 

 
… with cryptos rebounding over the weekend.
 

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2. The collapse of Signature Bank (the third crypto-friendly bank to go dark in four days) has dealt a blow to Circle. This may prove important to Coinbase, too, which uses the bank’s infrastructure to allow for real-time payments and settlements.
 
Source: CoinDesk   Read full article  
 
Circle’s USDC “stable” coin lost its peg.
 
Source: @KaikoData  
 
For now, it appears that Circle is relying on settlements through BNY Mellon.
 
Source: @jerallaire  

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3. Coinbase has lost more than half of its liquidity over the past month. The exchange’s USD order books are merged with USDC, according to Kaiko.
 
Source: @KaikoData  


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Commodities

1. CTAs are boosting their bets on copper.
 
Source: Deutsche Bank Research  
 
2. Next, we have last week’s performance data across key commodity markets.
 


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Equities

1. Let’s take a look at some data on financials.
 
Bank shares over the past month:
 

 
The SPDR Regional Bank ETF’s (KRE) trading volume (spike on Friday):
 

 
Weekly performance:
 

 
Big banks have been the beneficiaries of SVB’s troubles (as deposits flow in their direction).
 
Source: @paulgp  
 
The Schwab selloff made no sense.
 

——————–

 
2. The put/call ratio jumped.
 

 
Traders started buying some tail-risk protection (out-of-the-money puts on SPY):
 

 
3. Inflows into cash continue.
 
Source: BofA Global Research  
 
4. Deutsche Bank boosted its forecast for the S&P 500 earnings this year.
 
Source: Deutsche Bank Research  
 
5. Substantial increases in labor costs signal lower profit margins ahead.
 
Source: Merrill Lynch  
 
6. Next, we have last week’s performance data.
 
Sectors:
 

 
Sectors (YTD):
 
Source: Yardeni Research  
 
Equity factors:
 

 
Macro-theme basket pairs (relative performance):
 

 
Thematic ETFs:
 

 
Largest US tech firms:
 


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Credit

1. The basis swap market shows some concerns about dollar funding, but nothing extreme yet.
 

 
2. Financials’ CDS spreads jumped last week.
 

 
The Credit Suisse CDS spread is nearing its recent high.
 

——————–

 
3. Next, let’s take a look at some SVB data. Misinformation about the bank’s securities portfolio has been spreading quickly. But SVB’s issue was a classic case of asset/liability mismanagement. Its securities portfolio was mostly Treasuries that had a mark-to-market loss. That’s not an issue if these securities could be held to maturity, but lumpy corporate deposits forced the crystallization of losses.
 
Loan portfolio (no major issues):
 
Source: @JosephPolitano   Read full article  
 
Bonds held to maturity:
 
Source: @WSJ   Read full article  
 
Mark-to-market losses:
 
Source: @JosephPolitano   Read full article  
 
Deposit outflows:
 
Source: @WSJ   Read full article  

——————–

 
4. This chart shows mark-to-market losses in the overall banking system.
 
Source: Longview Economics  
 
5. Next, we have last week’s performance by asset class.
 


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Rates

1. The 10-year note futures volume surged on Friday.
 
Source: FHN Financial  
 
2. US money market funds AUM hit a record high.
 
Source: BofA Global Research  


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Global Developments

1. A lower relative growth differential between the US and the rest of the world could weigh on the greenback.
 
Source: MRB Partners  
 
2. Here is a look at the year-to-date equity flows by country.
 
Source: EPFR  
 
3. This chart shows the largest sovereign bond markets.
 
Source: Goldman Sachs  
 
4. Finally, we have some performance data.
 
Currency indices:
 

 
Bond yields:
 

 
Large-cap equity indices:
 


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Food for Thought

1. Digital ad spending by region:
 
Source: @cecianasta, @BW   Read full article  
 
2. EV profit margins:
 
Source: Visual Capitalist   Read full article  
 
3. The likelihood of buying an EV due to tax credits:
 
Source: Morning Consult   Read full article  
 
4. Paying extra for a “child-free” zone on a plane:
 
Source: PhotoAiD   Read full article  
 
5. US consumers’ international vacation plans:
 
Source: Torsten Slok,¬†Apollo  
 
6. Center-based childcare costs:
 
Source: @WSJ   Read full article  
 
7. Ballistic missile trajectories:
 
Source: CBO   Read full article  
 
8. All-time leading point scorers in the NBA:
 
Source: Statista  
 

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