Something usually breaks at the end of the Fed’s tightening cycle

The Daily Shot: 22-Mar-23
The United States
Canada
The Eurozone
Europe
Asia – Pacific
China
Emerging Markets
Commodities
Energy
Equities
Credit
Rates
Global Developments
Food for Thought



 

The United States

1. Let’s begin with the housing market.
 
Last month’s existing home sales topped expectations.
 

 
Source: MarketWatch   Read full article  
 
But slower mortgage applications this month point to weakness ahead for home sales.
 
Source: Pantheon Macroeconomics  
 
This chart shows sales changes by price range.
 
Source: @WSJ   Read full article  
 
The median sale price declined on a year-over-year basis for the first time in over a decade.
 

 
Inventories remain relatively tight (2 charts).
 
Source: Realtor.com  
 

 
Homeowner vacancy rates are low.
 
Source: BCA Research  
 
Mortgage costs for recent home buyers represent a significant portion of their incomes.
 
Source: Pantheon Macroeconomics  
 
It has been taking longer to build homes.
 
Source: Calculated Risk  
 
Single-family rent inflation continues to slow.
 
Source: CoreLogic  

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2. The Philly Fed’s regional nonmanufacturing index shows a deterioration in demand this month.
 

 
Service-sector wage growth and price pressures are moderating.
 

 

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3. Next, we have small business bank accounts’ inflows vs. outflows at BofA.
 
Source: BofA Global Research  
 
Small business rental costs continue to climb rapidly.
 
Source: BofA Global Research  

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4. Individual tax refunds have slowed.
 
Source: Oxford Economics  
 
5. Households’ excess savings remain elevated.
 
Source: Arcano Economics  
 
6. The market is leaning toward a 25 bps Fed rate hike today.
 

 
7. Something usually breaks at the end of the Fed’s tightening cycle (2 charts). As Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.”
 
Source: Oxford Economics  
 
Source: BofA Global Research  


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Canada

1. The headline inflation figure was softer than expected.
 

 
Here are the core inflation trends (3 charts).
 

 

 

 
Supercore inflation is still running hot.
 
Source: Desjardins  

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2. Home price declines should be slowing.
 
Source: Capital Economics  


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The Eurozone

1. Germany’s ZEW expectations index declined this month.
 

 
2. The euro-area construction output was above last year’s levels in January.
 

 
3. The Eurozone/US gap in economic surprises has closed.
 

 
4. Loan demand has been weakening.
 
Source: Longview Economics  
 
5. Dutch home prices are down for the first time since 2014.
 


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Europe

1. European natural gas inventories remain elevated.
 
Source: @JKempEnergy  
 
2. This chart shows the labor market slack in the EU.
 
Source: Eurostat   Read full article  
 
3. European investors are worried about US credit.
 
Source: BofA Global Research  
 
4. European defense spending is projected to keep rising.
 
Source: BCA Research  


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Asia – Pacific

1. Variant Perception’s leading indicator for inflation remains elevated, mostly because of previous yen depreciation and consumer/business expectations for higher prices.
 
Source: Variant Perception  
 
2. South Korea’s exports are down 17% relative to 2022, …
 

 
… with demand from China weakening further.
 
Source: Pantheon Macroeconomics  

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3. Australia has been an outlier among G10 nations, with negative inflation and economic growth surprises. This could signal a peak in the policy rate cycle.
 
Source: Variant Perception  
 
4. Singapore’s fund launches are outpacing Hong Kong.
 
Source: @financialtimes   Read full article  


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China

1. The reopening rebound sent the Citi Economic Susrpise Index to multi-year highs.
 

 
2. China’s actual government debt levels are much higher than the official figures.
 
Source: Gavekal Research  
 
3. Beijing has been reducing economic transparency.
 
Source: BofA Global Research  
 
4. Despite a falling population, continued urbanization implies that cities will grow faster than in most developed market economies, according to MRB Partners.
 
Source: MRB Partners  


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Emerging Markets

1. Chile’s Q4 GDP “rebound” was disappointing.
 

 
2. LatAm fund managers have been increasing cash positions.
 
Source: BofA Global Research  
 
3. Next, we have two EM vulnerability heatmaps.
 
Wells Fargo:
 
Source: Wells Fargo Securities  
 
TS Lombard:
 
Source: TS Lombard  


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Commodities

1. Let’s take a look at edible oils, where prices have been trending lower.
 
European sunflower oil:
 

 
CBOT soybean oil:
 

 
Malaysian palm oil:
 

 
ZCE rapeseed oil:
 

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2. The iron ore rally is fading.
 

 
3. A peak in the Fed funds rate has generally been bullish for gold.
 
Source: Aazan Habib, Paradigm Capital  


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Energy

1. Rising US crude oil inventories have been a drag on prices.
 
Source: BCA Research  
 
2. MLP valuations remain below average levels.
 
Source: Global X ETFs   Read full article  


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Equities

1. Let’s start with some earnings trends.
 
S&P 500 2023 earnings estimates (stabilizing?):
 

 
2023 earnings estimates by quarter:
 
Source: Yardeni Research  
 
Rolling 12- and 24-month blended earnings estimates:
 

 
A growing dispersion in analyst earnings estimates (typically occurs during risk-off periods):
 
Source: Piper Sandler¬†  
 
A pullback in earnings guidance:
 
Source: BofA Global Research  
 
Analysts’ optimism bias over time:
 
Source: Yardeni Research  

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2. It’s been a rough few days for trend followers (2 charts):
 

 
Source: SocGen; @krisaqnews, @markets   Read full article  

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3. Will large US banks outperform European peers?
 
Source: Simon White, Bloomberg Markets Live Blog  
 
4. Changes to the GICS structure are in effect, resulting in a large reduction in market cap for the tech sector and a boost to financials.
 
Source: Global X ETFs   Read full article  
 
Here is a breakdown of the impact of GICS changes on Financials. A portion of FinTech will go into a new sub-industry of Transactions and Payments, while the banking weight will decline.
 
Source: Global X ETFs   Read full article  

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5. Stocks with high options volumes have been outperforming.
 

 
6. Post-IPO stocks surged on Tuesday.
 


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Credit

1. This chart shows agency MBS securities held by banks. Will we see more forced selling to meet deposit withdrawals?
 
Source: @WSJ   Read full article  
 
MBS bonds have underperformed Treasuries recently.
 

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2. It will be increasingly challenging for smaller banks to compete, as their cost of funds surges.
 
Source: @axios   Read full article  
 
Small banks have also been paying higher rates for reserves (borrowed from bigger banks who are awash with deposits).
 
Source: Simon White, Bloomberg Markets Live Blog  

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3. Next, we have some additional data on the banking sector.
 
Deposits (2 charts):
 
Source: BCA Research  
 
Source: Quill Intelligence  
 
Regional banks’ cash as a share of assets (before the SVB fiasco):
 
Source: Alpine Macro  
 
The number of FDIC-insured commercial banks:
 
Source: Quill Intelligence  
 
Small vs. large banks’ asset growth this year:
 
Source: Simon White, Bloomberg Markets Live Blog  
 
Held-to-maturity securities portfolios:
 
Source: Pantheon Macroeconomics  
 
Capital expense at the largest, systemically important banks:
 
Source: FHN Financial  

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4. Here is the share of OECD credit provided by non-banks.
 
Source: TS Lombard  
 
5. Leveraged loan yields have risen sharply over the past 12 months.
 


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Rates

1. So far, the 2-year Treasury yield is holding support above 4%.
 
Source: Aazan Habib, Paradigm Capital  
 
2. Market expectations for the fed funds rate trajectory saw massive shifts over the past year.
 
Source: Deutsche Bank Research  
 
3. For money market funds, keeping liquidity at the Fed’s reverse repo facility (paying 4.55%) is hard to resist, …
 

 
… which is draining deposits from the financial system.
 
Source: The Economist   Read full article  

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4. BofA’s private clients continue to buy bonds.
 
Source: BofA Global Research  


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Global Developments

1. Investors’ risk perceptions worsened in March.
 
Source: BofA Global Research  
 
2. Supply pressures have eased.
 

 
3. Goldman is more upbeat on global growth than the market.
 
Source: Goldman Sachs; @MikeZaccardi  
 
4. Swiss watch exports are surging, pointing to robust demand for luxury products.
 


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Food for Thought

1. How the two became one:
 
Source: @chartrdaily  
 
2. Consumer mobile transactions:
 
Source: Global X ETFs   Read full article  
 
3. Financial decisions made based on horoscopes:
 
Source: LendingTree   Read full article  
 
4. Babysitting rates:
 
Source: @axios   Read full article  
 
5. Liquor suppliers’ revenues:
 
Source: @chartrdaily  
 
6. No more booze shortages in the US (the wholesale inventories-to-sales ratio hit a record high):
 

 
7. Ukraine reaching Russian territory:
 
Source: The Washington Post   Read full article  
 
8. Concerns over data privacy on health apps:
 
Source: Morning Consult   Read full article  
 
9. Remittances in select LatAm countries:
 
Source: @WSJ   Read full article  
 
10. Electric or gas stove:
 
Source: Statista  
 

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