No indications of US recession for now

The Daily Shot: 17-May-23
The United States
Canada
The United Kingdom
The Eurozone
Europe
Asia-Pacific
China
Emerging Markets
Cryptocurrency
Commodities
Equities
Alternatives
Credit
Rates
Global Developments
Food for Thought



 

The United States

1. April’s core retail sales topped expectations.
 

 
Source: @WSJ   Read full article  
 
Auto sales edged higher.
 

 
Adjusted for inflation, the retail sales control group (“core” retail sales) is still trending higher.
 

 
Here is a breakdown of retail sales components reflecting the April changes.
 
Source: @GregDaco  
 
Bond yields jumped in response to the retail sales report.
 

 
Tighter credit conditions point to a deterioration in retail sales going forward.
 
Source: Simon White, Bloomberg Markets Live Blog  

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2. Manufacturing output jumped last month, …
 

 
… boosted by vehicle production. Excluding the growth in auto manufacturing, industrial production would have remained nearly stagnant.
 

 
Source: Wells Fargo Securities  

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3. Inventories-to-sales ratios continue to climb.
 

 
4. Homebuilder sentiment improved again this month, topping expectations. The scarcity of housing inventory is spurring new construction activity.
 

 
However, falling mortgage applications point to downside risks for homebuilders.
 
Source: Pantheon Macroeconomics  

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5. At present, the Atlanta Fed’s GDPNow nowcast model indicates no signs of a recession, with the Q2 growth estimate tracking at 2.6% (annualized).
 
Source: Federal Reserve Bank of Atlanta  
 
However, failure to resolve the debt ceiling impasse will trigger a massive downturn. According to Anna Wong of Bloomberg Economics, “If the Treasury is forced to cut spending to meet debt obligations, a conservative estimate would put the downturn at 8%.”
 
Source: @AnnaEconomist, @TheTerminal, Bloomberg Finance L.P.  
 
Deutsche Bank sees the early-June X-date as the base case.
 
Source: Deutsche Bank Research  
 
Here is the Treasury bill curve.
 


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Canada

1. The headline CPI unexpectedly accelerated.
 

 
Source: Reuters   Read full article  
 
Here are the contributions.
 
Source: iA Global Asset Management  
 
Core inflation measures are moderating, …
 

 
… but are still elevated on a month-over-month basis.
 
Source: Scotiabank Economics  
 
Supercore inflation has been outpacing the core inflation measures.
 
Source: Desjardins  
 
Rent inflation remains high.
 
Source: iA Global Asset Management  
 
Here is the CPI breadth.
 
Source: Scotiabank Economics  
 
2. The loonie initially strengthened in response to the CPI surprise but sold off shortly after.
 

 
Bond yields surged.
 

 
Here is the US-Canada 2-year spread.
 

 
The probability of another BoC rate hike is small but no longer zero.
 

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3. Manufacturing sales improved in March.
 


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The United Kingdom

1. The labor market is starting to soften.
 
Unemployment:
 

 
Claims:
 

 
Payrolls:
 

 
Source: The Guardian   Read full article  
 
2. Wage growth is still elevated.
 
Source: Arcano Economics  
 

 
The influx of non-UK nationals will put downward pressure on wage growth.
 
Source: ING  
 
Vacancies continue to moderate.
 

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3. Labor productivity declined last quarter.
 


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The Eurozone

1. Germany’s ZEW index surprised to the downside.
 

 
Source: Reuters   Read full article  

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2. The euro-area economy managed to achieve modest growth in the last quarter.
 

 
Source: Reuters   Read full article  
 
But leading indicators point to downside risks for economic activity.
 
Source: Pantheon Macroeconomics  

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3. Dutch GDP declined sharply in Q1.
 

 
Source: ING   Read full article  

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4. Euro-area employment jumped last quarter.
 

 
5. The Eurozone’s trade balance is back in surplus as terms of trade improve (lower costs of energy imports).
 


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Europe

1. Poland’s GDP growth topped expectations.
 

 
Core inflation appears to have peaked.
 

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2. The contribution of food to the headline CPI has been rising in the UK and Eurozone.
 
Source: BCA Research  
 
The euro’s recent rebound should help lower food inflation.
 
Source: Gavekal Research  

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3. Which countries faced the greatest challenges in maintaining adequate home heating?
 
Source: Eurostat   Read full article  
 
4. This chart shows the EU’s trade with China.
 
Source: @genuine_impact  
 
Which countries have the most exposure to China?
 
Source: The Economist   Read full article  


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Asia-Pacific

1. Japan’s Q1 GDP growth topped expectations, …
 

 
… boosted by robust domestic demand. The rebound in business investment was a surprise.
 

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2. Australia’s Q1 wage growth was slightly below forecasts but still elevated.
 

 
Source: @Swatisays, @economics   Read full article  
 
The market is still pricing a ~40% chance of another RBA rate hike this summer.
 


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China

1. New home prices increased again last month.
 

 
2. The property sector notched the strongest revenue results in April, while retail slowed.
 
Source: China Beige Book  
 
3. Here is a summary of key economic indicators from Gavekal Research.
 
Source: Gavekal Research  
 
4. China-focused ETFs saw substantial inflows in recent weeks. On the other hand, non-ETF products have not attracted much capital since February.
 
Source: EPFR  


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Emerging Markets

1. Brazil’s service-sector output improved in March.
 

 
Investors increasingly see rate cuts in Brazil later this year.
 
Source: BofA Global Research  

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2. Colombia’s GDP has been holding up well.
 

 
3. A third of South Africa’s labor force remains unemployed.
 

 
Investors are becoming less concerned about South Africa’s electricity grid.
 
Source: BofA Global Research  

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4. Nigeria’s CPI is now above 22%.
 

 
5. Romania’s economic growth, which has been robust, slowed more than expected in Q1.
 

 
6. Hungary remains in recession.
 
Source: ING  
 
7. Market sentiment towards Turkey continues to be pessimistic due to the country’s economic challenges and political uncertainty.
 
The Turkish lira:
 

 
The 1-year CDS spread:
 

 
The 5-year USD-denominated bond yield:
 

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6. The Thai baht took a hit this week amid political uncertainty.
 

 
Source: CNN   Read full article  


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Cryptocurrency

Bitcoin is holding support at the 200-week moving average.
 


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Commodities

1. US grains saw some selling pressure on Tuesday. The July corn contract is now at support.
 
Source: barchart.com  
 
The soybean contract broke below support.
 
Source: barchart.com  
 
Source: Reuters   Read full article  

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2. The downtrend in Henry Hub Natural Gas futures has slowed. Technicals point to a bottoming process.
 
Source: @StocktonKatie  
 
3. Could graphite be the next beneficiary of rising battery demand?
 
Source: Livewire Markets¬†   Read full article  


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Equities

1. Risk appetite deteriorated this month, according to BofA’s fund manager survey.
 
Source: BofA Global Research  
 
2. The tech mega-cap surge has been remarkable.
 

 
The Nasdaq 100 equal-weigh index continues to widen its underperformance.
 

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3. Investors haven’t been this negative about REITs since the GFC.
 
Source: BofA Global Research  
 
Office REITs have lost about half of their market value over the past 12 months.
 

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4. US stocks tend to outperform global peers after the last Fed hike.
 
Source: Simon White, Bloomberg Markets Live Blog  
 
5. More US mutual funds are being converted to an ETF wrapper.
 
Source: Global X ETFs   Read full article  


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Alternatives

1. April was a slow month for PE activity.
 
Source: S&P Global Market Intelligence  
 
2. Late-stage ventures’ capital demand/supply ratio spiked to new highs.
 
Source: PitchBook  
 
3. More private equity firms are buying smaller pieces of large companies to restore, bolster growth prospects, or flip assets, according to PitchBook.
 
Source: PitchBook  
 
4. US private equity exit activity dropped sharply compared to investments. Elevated valuations and market volatility discouraged public listings last year, particularly in the tech space. (2 charts)
 
Source: PitchBook  
 
Source: PitchBook  


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Credit

1. Let’s take another look at the banking turmoil that caught the markets off guard this year. The post-COVID quantitative easing period marked a significant shift in the banking landscape, as financial institutions experienced a surge in deposits. This influx of liquidity was difficult for banks to manage, as they struggled to lend at a pace that matched the growth of deposits. Consequently, they sought alternative methods to deploy excess liquidity, turning to the purchase of Treasuries, agency mortgage-backed securities (MBS), and other liquid fixed-income products. However, these assets were acquired at yields approximately 3.5% below current levels, making them vulnerable to an increase in interest rates.
 
As the Federal Reserve proceeded to hike rates, the value of these securities dropped precipitously, leading to losses amounting to 34% of Common Equity Tier 1 (CET1) capital. This situation was further exacerbated by accelerated deposit withdrawals from smaller banks, a phenomenon facilitated by the convenience of modern banking applications. In a bid to maintain liquidity, some institutions were compelled to sell their securities, incurring substantial mark-to-market losses and leaving them severely undercapitalized.
 
Source: Goldman Sachs  
 
2. The share of bank deposits paying a zero interest rate is declining.
 
Source: Torsten Slok,¬†Apollo  
 
3. Bankruptcy courts have been busy.
 
Source: @LibbyCherry98, @markets   Read full article  
 
4. The US high-yield market now includes a higher percentage of secured bonds.
 
Source: Barclays Research; III Capital Management  
 
5. This chart shows the distribution of the credit ratings for muni bonds and IG corporates.
 
Source: S&P Dow Jones Indices  
 
6. Agency MBS spreads remain elevated as the Fed and commercial banks reduce holdings.
 


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Rates

1. Higher inflation expectations could boost Treasury term premium.
 
Source: Deutsche Bank Research  
 
In 1989/90, Treasury term premium increased as the Fed cut rates.
 
Source: Deutsche Bank Research  

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2. Fund managers are still overweight bonds.
 
Source: BofA Global Research  
 
3. Short-term rates vol remains elevated relative to long-dated markets.
 
Source: Deutsche Bank Research  


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Global Developments

1. The breadth of earnings beats spiked across most regions. The US and Japan were well above average, while China weighed on emerging markets.
 
Source: Deutsche Bank Research  
 
The size of earnings beats rose sharply. Chinese firms fell short of high reopening expectations, which also weighed on EM.
 
Source: Deutsche Bank Research  
 
2. Taiwan’s export weakness signals lower global corporate earnings ahead.
 
Source: Simon White, Bloomberg Markets Live Blog  


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Food for Thought

1. Jobs exposed to automation by AI:
 
Source: Goldman Sachs  
 
2. SNAP participation:
 
Source: @financialtimes   Read full article  
 
3. Share of Americans who identify as LGBT:
 
Source: Statista  
 
4. Interest in women’s sports:
 
Source: @CivicScience   Read full article  
 
5. Views on various religions in the US:
 
Source: Pew Research Center   Read full article  
 
6. What Americans view as “very important”:
 
Source: @WSJ   Read full article  
 
7. US favorability ratings of 21 countries:
 
Source: Gallup   Read full article  
 
8. The democracy score vs. voter turnout:
 
Source: Datawrapper  
 
9. Plastic waste trade:
 
Source: Visual Capitalist   Read full article  
 
10. American drivers in Formula One:
 
Source: The Washington Post   Read full article  
 

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