US default risk in perspective

The Daily Shot: 10-May-23
The United States
The United Kingdom
The Eurozone
China
Emerging Markets
Cryptocurrency
Commodities
Energy
Equities
Credit
Rates
Food for Thought



 

The United States

1. The NFIB small business sentiment index hit a multi-year low last month.
 

 
Source: Reuters   Read full article  
 
Sales expectations weakened.
 

 
CapEx expectations are crashing, …
 

 
… signaling further deterioration in business investment.
 
Source: Oxford Economics  
 
The index of job openings remains elevated.
 

 
Compensation plans continue to ease, …
 

 
… an indication of slower wage growth ahead.
 
Source: Oxford Economics  
 
Price plans are now at pre-COVID levels, …
 

 
… which is good news for inflation.
 
Source: Piper Sandler   

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2. Nomura revised its April core CPI estimate higher, …
 
Source: Nomura Securities  
 
… as used vehicle inflation rebounds.
 
Source: Nomura Securities  

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3. Wage growth has peaked across industries.
 
Source: Alpine Macro  
 
4. The Senior Loan Officers Survey typically leads GDP by a few quarters. So far, tighter lending standards point to a mild recession.
 
Source: Deutsche Bank Research  
 
For example, banks are rapidly cutting back on installment loans.
 

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5. Here is a look at labor productivity by sector.
 
Source: Morgan Stanley Research  
 
6. The rebound in vehicle sales is expected to continue.
 
Source: Scotiabank Economics  
 
7. In the past, the United States has faced multiple impasses over the debt ceiling, but these have always been settled eventually, even if only at the last minute. As a result, the markets have become accustomed to the idea that these are temporary issues that will ultimately be resolved. There is a widespread belief that politicians will never allow the US to default on its debt, and this has led to a sense of complacency among investors and the public.
 
However, the current political climate in the US is more polarized than ever before, and the hostile atmosphere in Congress could make it difficult to reach a resolution on the debt ceiling. Many constituents on both sides of the aisle seem unwilling to compromise, and some would rather see the country default than give ground in the negotiations.
 
Given these factors, it is possible that this time could be different, and that the debt ceiling impasse could have more serious consequences than in the past.
 
Tax receipts have been low relative to the CBO’s projections, bringing the X-date forward.
 
Source: The Wharton School of the University of Pennsylvania   Read full article  
 
June is now a possibility – otherwise, it’s July.
 
Source: Oxford Economics  
 
The T-bill curve says June.
 

 
Finally, let’s put the US sovereign credit default swap spread (an indicator of default probability) into perspective.
 


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The United Kingdom

1. GBP/USD is at resistance.
 

 
2. The UK economic surprise index has been outperforming the US and the Eurozone.
 
Source: BCA Research  
 
3. Here is a summary of the local elections.
 
Source: @financialtimes   Read full article  


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The Eurozone

1. The French trade deficit tightened more than expected in March. The current account balance was back in surplus.
 

 
2. Italy’s exports to China surged recently. This is mostly because of demand for a generic liver drug made in Italy that is rumored to prevent COVID-19, according to IIF. (2 charts)
 
Source: @RobinBrooksIIF  
 
Source: @RobinBrooksIIF  

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3. Ireland’s industrial production was down sharply in March.
 

 

 
Source: Business Plus   Read full article  

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4. The Eurozone’s economic surprises are now underperforming the US.
 
Source: @TheTerminal, Bloomberg Finance L.P.  


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China

1. China’s trade balance topped expectations, hitting a record high for this time of the year.
 

 
Exports are still robust, …
 

 
… but imports unexpectedly dropped. Exports could soon decline as well, which spooked the markets on Tuesday.
 

 
Source: Reuters   Read full article  

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2. Financials (mostly state banks) are reversing the recent rally.
 

 
3. The bounce in USD-denominated HY debt is fading (mostly offshore developer debt).
 

 
4. Smaller regional banks are the most exposed to LGFV debt.
 
Source: BCA Research  
 
5. Tourism has rebounded.
 
Source: Gavekal Research  


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Emerging Markets

1. Mexico’s inflation is moderating.
 

 
Source: @thatsleda, @economics   Read full article  
 
Vehicle production has been strong.
 

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2. India’s electronics exports are finally taking off.
 
Source: @WSJ   Read full article  
 
3. The South African rand is under pressure.
 


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Cryptocurrency

1. Crypto funds saw the third consecutive week of outflows.
 
Source: CoinShares   Read full article  
 
Bitcoin and Ethereum-focused funds saw the most outflows last week, although short-bitcoin funds saw the largest outflows on record.
 
Source: CoinShares   Read full article  

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2. Despite record transaction levels, bitcoin’s new active addresses (entities that send or receive BTC recorded on the blockchain) have started to decline…
 
Source: @glassnode  
 
…which could signal weaker demand, which typically subsides after a sharp uptick in transaction fees. Will we see a deeper pullback in BTC’s price?
 
Source: @glassnode  

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3. The next major support for BTC is around $25K, although momentum has weakened over the past two months.
 

 
4. Two of the world’s top market-making firms are pulling back from trading digital assets.
 
Source: @KatLeighDoherty, @Yueqi_Yang, @crypto   Read full article  


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Commodities

1. Orange juice futures tumbled on Tuesday.
 

 
2. Wholesale egg prices are falling rapidly.
 
Source: Agricultural Marketing Service  


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Energy

1. Oil and refined products’ positioning declined sharply last week.
 
Source: @JKempEnergy  
 
Here is the middle distillates positioning.
 
Source: @JKempEnergy  

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2. Largest US energy companies are sitting on a lot of cash.
 
Source: @WSJ   Read full article  
 
3. Is Uranium about to enter its third bull market?
 
Source: BofA Global Research  
 
The Global X Uranium ETF (URA) is testing resistance at its 200-day moving average. URA’s downtrend has stabilized over the past year.
 


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Equities

1. Volatility remains subdued.
 
S&P 500 intraday range:
 

 
Nasdaq 100 realized vol:
 

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2. The stock-bond correlation is moving deeper into negative territory.
 
Source: @WSJ   Read full article  
 
3. Bearish sentiment among global investment managers has reached extreme levels.
 
Source: S&P Global PMI  
 
4. The market expects wage growth to moderate. Companies with high labor costs have been outperforming.
 

 
5. Homebuilder shares have been surging.
 

 
6. The Dow Jones US Micro-Cap Index is testing support.
 
Source: Longview Economics  
 
7. What was the damage to the equity markets around the 2011 debt ceiling impasse?
 
Indices:
 
Source: Merrill Lynch  
 
Source: LPL Research  
 
Sectors:
 
Source: LPL Research  


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Credit

1. Demand for business loans has deteriorated.
 

 
2. The Fed has never tested for a rate shock in the CCAR stress tests.
 
Source: Goldman Sachs  
 
3. CLO issuance has slowed.
 
Source: Deutsche Bank Research  
 
4. Outstanding stressed corporate debt levels continue to climb.
 
Source: S&P Global Ratings  
 
5. Office property delinquencies have been rising.
 
Source: Goldman Sachs  


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Rates

1. The debt ceiling risk is creating more distortions in the T-bill market.
 
1-month T-bill vs. the fed funds rate:
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
1-month T-bill – OIS spread (OIS = market expectations of the fed funds rate).
 

 
The 4-week T-bill auction:
 
Source: Deutsche Bank Research  

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2. Short-covering ahead for Treasuries?
 
Source: Piper Sandler   


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Food for Thought

1. Legal status of marijuana:
 
Source: @axios   Read full article  
 
2. Helmet laws for cyclists:
 
Source: Statista  
 
3. Ukraine’s grain exports:
 
Source: Statista  
 
4. US middle-income families’ inflation experience relative to higher-income families:
 
Source: IMF   Read full article  
 
5. Eviction rates in the US:
 
Source: @TheDailyShot  
 
6. Valuations of US sports franchises:
 
Source: Opto Monthly   Read full article  
 
7. How important is a well-maintained lawn?
 
Source: @YouGovAmerica   Read full article  
 

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