No Treasury debt default in early June, but meeting other obligations could be problematic

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



 

The United States

1. Let’s begin with the housing market.
 
Mortgage rates have been climbing again.
 

 
Economists boosted their forecasts for next year’s housing starts.
 

 
Depressed mortgage applications point to downside risks for new home sales.
 
Source: Pantheon Macroeconomics  
 
With many homeowners “trapped” by their low-rate mortgages, new listings continue to sink.
 
Source: Redfin  
 
The number of houses constructed for rental purposes has surpassed those built for sale.
 
Source: Calculated Risk  
 
Redfin’s index of home price appreciation suggests further price declines in April (year-over-year).
 
Source: Redfin  
 
Rents have significantly outpaced household incomes.
 
Source: @axios   Read full article  

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2. Manufacturing and housing conditions are starting to improve, which could stall a recession.
 
Source: MRB Partners  
 
3. Business applications are slowing.
 
Source: Arcano Economics  
 
4. The decline in small business hiring plans points to higher unemployment this year.
 
Source: Numera Analytics (@NumeraAnalytics)  
 
5. Deutsche Bank’s FCI indicator signals tight US financial conditions.
 
Source: Deutsche Bank Research  
 
However, the financial conditions index from RSM points to recent easing.
 
Source: RSM   Read full article  

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6. Finally, here is an update on the debt ceiling situation.
 
This chart compares the US Treasury’s cash balance trajectories in 2022 and 2023.
 
Source: Commerzbank Research  
 
The US Treasury has the authority to issue new debt to cover the principal, essentially rolling over maturing bonds, a maneuver that does not contribute to surpassing the debt ceiling. According to Oxford Economics, there are no interest payments on Treasury securities in the first half of June, thus significantly mitigating any imminent risk of debt default. However, at the month’s onset, the nation must fulfill obligations amounting to hundreds of billions of dollars earmarked for key government programs such as Medicare and Medicaid, Social Security, and benefits for military personnel and civilian government employees.
 
Source: Oxford Economics  
 
The Treasury bill market is signaling trouble in early June.
 

 
The yield on the June 8th T-bill is nearing 6%.
 


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The Eurozone

1. The rebound in consumer confidence is stalling.
 

 
2. Construction output declined in March.
 

 
3. Here are the sources of foreign direct investment in Germany.
 
Source: @financialtimes   Read full article  
 
4. French food spending tumbled as inflation pressures the nation’s households.
 
Source: Macrobond  
 
5. Political developments in Greece could result in a debt rating upgrade this year (to investment grade).
 
Source: @lineoyamada, @markets   Read full article  
 
Greek bank stocks:
 

 
Greek 10yr spread to Germany:
 

 
Greek 10yr spread to Italy (new low):
 


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Europe

1. Here are some updates on Poland.
 
Industrial output is down sharply on a year-over-year basis.
 

 
Source: ING   Read full article  
 
Wage growth remains elevated.
 

 
The Polish zloty has been strengthening.
 

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2. Battery plants are popping up throughout Europe.
 
Source: @financialtimes   Read full article  


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Asia-Pacific

1. The May PMI report showed Japan’s business activity accelerating this month, with services growth surging.
 
Source: S&P GlobalĀ PMI  
 
2. Taiwan’s April export orders were below forecasts.
 

 
The nation’s unemployment rate continues to fall.
 

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3. South Korea’s consumer confidence is rebounding.
 

 
4. Australia’s services remain in growth mode, but manufacturing is contracting.
 
Source: S&P GlobalĀ PMI  
 
Has Australia’s consumer sentiment finally bottomed?
 
Source: @ANZ_Research  


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China

1. China is focusing more on security than growth.
 
Source: Goldman Sachs  
 
2. US VCs have pulled back on China investments.
 
Source: Gavekal Research  
 
3. Residential sales are still above the underlying demand.
 
Source: BCA Research  
 
The pace of household formation continues to tumble.
 
Source: BCA Research  

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4. For years, numerous forecasts have projected an imminent overtaking of the US GDP by China’s booming economy. Yet, these predictions may not pan out as expected. China’s economy confronts a myriad of significant challenges, including an apparent end to the housing boom and a declining labor force, which will hinder anticipated growth.
 
Source: Capital Economics  
 
This projection from Capital Economics does not foresee China’s economy surpassing that of the US for decades, a stark contrast to prevailing forecasts.
 
Source: Capital Economics  


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Emerging Markets

1. Turkey’s consumer confidence is surging.
 

 
2. Malaysian exports are down sharply relative to last year.
 

 
3. The narrowing interest rate differential between EMs and mature markets could reduce the appeal of EM domestic securities.
 
Source: IIF  


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Cryptocurrency

1. Bitcoin’s seven-day price range is one of the tightest over the past three years. Will we see a rise in volatility?
 
Source: @glassnode  
 
2. Tether’s USDT stablecoin market cap is approaching all-time highs despite declining trading volume.
 
Source: @KaikoData  
 
However, Circle’s USDC stablecoin shows declining market cap and trading volume.
 
Source: @KaikoData  

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3. Crypto funds saw the fifth consecutive week of outflows.
 
Source: CoinShares   Read full article  
 
Bitcoin-focused led outflows last week, while multi-asset and altcoin funds saw inflows.
 
Source: CoinShares   Read full article  

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4. Ether’s implied volatility has dropped below that of bitcoin.
 
Source: @Suvajourno, @sidcoins, @technology   Read full article  


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Commodities

1. Soybeans held support near $13/bushel.
 

 
2. Lower agricultural commodity prices are yet to show up at the grocery store.
 
Source: Wells Fargo Securities  


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Equities

1. Shares of regional banks continue to move higher.
 

 
2. Equity valuations keep rising despite deteriorating liquidity.
 
Source: Longview Economics  
 
3. Tech fund inflows remain robust.
 
Source: BofA Global Research  
 
4. Tighter credit conditions point to downside risks for stocks vs. bonds (relative performance).
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  
 
5. Demand for equity call options surged in recent days.
 
Source: Deutsche Bank Research  
 
At the same time, bets on higher volatility remain elevated.
 
Source: @WSJ   Read full article  

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6. The S&P 500 equal-weight index has widened its underperformance.
 

 
Here is the equal-weight index performance by sector.
 
Source: Capital Economics  

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7. How much did F/X rates impact sales growth? What is the S&P 500 currency exposure by sector?
 
Source: Merrill Lynch  


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Credit

1. S&P Global Ratings expects a rise in the US speculative-grade default rate to 4.25% by March 2024, …
 
Source: S&P Global Ratings  
 
… although a moderate distress ratio points to a low default rate.
 
Source: S&P Global Ratings  

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2. High-yield spreads are low relative to macro risk metrics.
 
Source: @t1alpha, @SimplifyAsstMgt  
 
3. US investment-grade credit typically underperforms Treasuries a few months into a recession as spreads quickly widen.
 
Source: Variant Perception  
 
4. New-issue leveraged loan single-B/BB spread has widened.
 
Source: @theleadleft  
 
5. REITs’ spread between Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) is crashing, which signals declining profitability and increased delinquency rates.
 
Source: Gavekal Research  
 
Commercial real estate construction spending is expected to drop as credit tightens.
 
Source: ING  


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Rates

1. Bonds tend to perform well during Fed pauses.
 
Source: LPL Research  
 
2. Treasury futures positioning remains exceptionally bearish.
 

 
Source: Deutsche Bank Research  


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Global Developments

1. Are markets too optimistic about slowing inflation?
 
Source: IMF  
 
2. In this paper, the IMF investigates their persistent underestimation of inflation.
 
Source: IMF; h/t Torsten Slok   Read full article  
 
3. The median real policy rate may hit zero over the next few months.
 
Source: Simon White, Bloomberg Markets Live Blog  
 
4. Funding costs have spiked for high-yield sovereign borrowers, weighing on their ability to tap international debt markets, according to IIF.
 
Source: IIF  
 
5. This chart shows the median unemployment rate among G7 countries and associated economic events.
 
Source: Deutsche Bank Research  


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Food for Thought

1. Views on using AI to hire and track employees:
 
Source: Pew Research Center   Read full article  
 
2. The graying US Congress:
 
Source: FiveThirtyEight   Read full article  
 
3. Students ruling out college due to state social policies:
 
Source: Art & Science Group   Read full article  
 
4. The greatest threat to US public health:
 
Source: @axios   Read full article  
 
5. Cable viewers of the 8 pm weekday slot:
 
Source: The Economist   Read full article  
 
6. Concerns about environmental problems in the US:
 
Source: Gallup   Read full article  
 
7. Marijuana usage in the US:
 
Source: Statista  
 
Marijuana positivity rates by industry:
 
Source: @WSJ   Read full article  

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8. Leaving no tip due to poor service:
 
Source: LendingTree   Read full article  

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