SOURCE:
Credit Bubble Bulletin : Weekly Commentary: Dissecting Chairman Xi
For the Week Ending October 21, 2022:
FINANCIAL DATA:
S&P500 rallied 4.7% (down 21.3% y-t-d),
Dow Industrials recovered 4.9% (down 14.5%)
Utilities gained 1.9% (down 12.8%)
Banks increased 0.7% (down 25.2%)
Broker/Dealers jumped 4.0% (down 11.0%)
Transports advanced 1.5% (down 23.0%)
S&P 400 Midcaps rose 3.0% (down 18.6%)
Small cap Russell 2000 rallied 3.6% (down 22.4%)
Nasdaq100 jumped 5.8% (down 30.7%)
Semiconductors surged 8.1% (down 40.8%)
Biotechs gained 1.5% (down 15.2%).
the HUI gold equities index recovered 6.8% (down 24.2%).
Japan's Nikkei slipped 0.7% (down 6.6% y-t-d).
Three-month Treasury bill rates ended the week at 3.8375%.
Two-year government yields declined two bps to 4.48% (up 374bps y-t-d).
Five-year T-note yields rose seven bps to 4.34% (up 308bps).
Ten-year Treasury yields jumped 20 bps to 4.22% (up 271bps).
Long bond yields surged 34 bps to 4.34% (up 244bps).
Benchmark Fannie Mae MBS yields gained 10 bps to 6.01% (up 395bps).
Federal Reserve Credit declined $4.2bn last week to $8.721 TN. Fed Credit was down $180bn from the June 22nd peak. Over the past 162 weeks, Fed Credit expanded $4.994 TN, or 134%.
Freddie Mac 30-year fixed mortgage rates added two bps to 6.94% (up 385bps y-o-y) - the high since April 2002.
Fifteen-year rates jumped 14 bps to 6.23% (up 390bps) - the high since August 2007.
Five-year hybrid ARM rates declined 10 bps to 5.71% (up 317bps).
Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 7.18% (up 400bps) - the high since December 2008.
Currency Watch:
For the week, the U.S. Dollar Index declined 1.1% to 112.01 (up 17.1% y-t-d).
The Chinese (onshore) renminbi declined 0.53% versus the dollar (down 12.09% y-t-d).
Commodities Watch:
Bloomberg Commodities Index fell 2.1% (up 12.2% y-t-d).
Spot Gold rallied 0.8% to $1,658 (down 9.4%).
Silver surged 6.3% to $19.42 (down 16.7%).
WTI crude slipped 56 cents to $88.05 (up 13%).
Gasoline added 1.2% (up 20%)
Natural Gas sank 23.2% to $4.96 (up 33%).
Copper gained 1.5% (down 22%).
Wheat declined 1.0% (up 10%)
Corn slipped 0.8% (up 15%).
Bitcoin was little changed this week at $19,200 (down 59%).
U.S. ECONOMIC NEWS:
Bursting Bubble and Mania Watch:
October 17 – Reuters (Davide Barbuscia): “Government bonds may not offer much protection in a recession if surging inflation pressures central banks to continue tightening monetary policy, the BlackRock Investment Institute said. Risks of a global recession have increased as central banks around the world tighten monetary policy to bring down consumer prices… ‘Investors traditionally take cover in sovereign bonds, but we see this recession playbook as obsolete ... Result: We stay underweight Treasuries,’ they said, adding they expect government bond yields - which move inversely to prices - will keep rising.”
October 20 – Bloomberg (Jill R. Shah and Claire Ruckin): “The world’s biggest banks have already had to use about $30 billion of their own cash this year to fund loans for acquisitions and buyouts that they weren’t able to offload to investors. The lenders have been forced to fund at least 15 deals in the US and Europe as inflation and fears of a recession sap investor appetite for risky corporate debt. The total tally… could nearly double over the coming months as more deals are scheduled to close. While it’s not uncommon for banks to self-fund deals when market sentiment sours, the sheer amount of hung debt -- including $3.9 billion for Apollo Global Management Inc.’s purchase of Brightspeed and more than $8 billion for a buyout of Nielsen Holdings Plc -- is deterring banks from making new financing commitments.”
October 19 – Bloomberg (Davide Scigliuzzo and Michelle F. Davis): “Long maligned as the debt-addicted corporate raiders of Wall Street, private equity firms are resorting to an unusual maneuver to get deals done as borrowing costs spiral. They’re taking the leverage out of leveraged buyouts. Francisco Partners, Thoma Bravo and Stonepeak Partners are among those that announced new acquisitions in recent weeks without debt financing in place, effectively backstopping the entire purchase price… with cash from their own funds. Though likely temporary, the all-equity move is a dramatic departure for an industry famously hooked on leverage and constantly on the hunt for ever-more creative ways to boost returns.”
October 17 – Bloomberg (Nick Turner): “Chip delivery times shrank by four days in September, the biggest drop in years, in a sign that the industry’s supply crunch is easing. Lead times -- the gap between when a chip is ordered and when it is delivered -- averaged 26.3 weeks in the period, according to research by Susquehanna Financial Group. That compares with nearly 27 weeks the prior month.”
October 19 – Wall Street Journal (Peter Rudegeair): “The pandemic day-trading boom has gone bust. A swooning stock market and high inflation have sapped individual investors’ enthusiasm for buying and selling stocks. That was on display in earnings reports and financial disclosures from some of the biggest retail brokerages in recent weeks. The average daily number of retail trades handled by Charles Schwab Corp. fell to 5.52 million in the third quarter, the lowest level since it acquired TD Ameritrade… in late 2020. At Morgan Stanley, retail traders placed an average of 805,000 trades a day in the third quarter. That was down 16% from a year earlier and the lowest level since the investment bank bought E*Trade Financial Corp. in late 2020.”
October 17 – Bloomberg (Jan-Patrick Barnert): “History shows that the bear market in US stocks may be far from over. The S&P 500 Index has fallen 25% in a little more than nine months since its January peak, a shallower and shorter drop than is typical of similar instances over the last century. On average in that time, the benchmark has slid about 38% over a period of 15 to 16 months before reaching a bottom…”
Inflation Watch:
October 19 – Bloomberg (Jo Constantz): “Over half of working Americans have considered holding multiple jobs to pay their living expenses as inflation remained stubbornly high in September and real wages fell. About 38% of workers have looked for a second job, while an additional 14% have plans to do so, according to a survey of more than 1,000 full-time US employees by Qualtrics International… At the same time, 18% of working adults said they had moved to an area with a lower cost of living to cut expenses, and another 13% plan to do so. Working parents, in particular, are in the hot seat. About 70% say their pay isn’t keeping up with rising expenses.”
Biden Administration Watch:
October 19 – Financial Times (Edward Luce): “Imagine that a superpower declared war on a great power and nobody noticed. Joe Biden this month launched a full-blown economic war on China — all but committing the US to stopping its rise — and for the most part, Americans did not react. To be sure, there is Russia’s war on Ukraine and inflation at home to preoccupy attention. But history is likely to record Biden’s move as the moment when US-China rivalry came out of the closet. America is now pledged to do everything short of fighting an actual war to stop China’s rise. It is not clear that corporate America, or its foreign counterparts, have fully digested what is about to hit them.”
U.S. Bubble Watch:
October 18 – Wall Street Journal (Heather Gillers): “The U.K. pension blowup has left many U.S. companies pushing to assess whether the sharp 2022 rise in global interest rates could expose losses tied to the use of derivatives—contracts whose value is derived from the price of some other financial asset or indicator—in defined-benefit pension plans. The question hangs over private pension plans that together control $3.7 trillion in retirement savings in the U.S… General Motors Co., Eli Lilly & Co. and General Electric Co. are among the companies using a version of liability-driven investing, a strategy that triggered sizable cash calls for U.K. pensions and fueled market upheaval and central-bank intervention. So far, people who work in the U.S. corporate pension industry say there appears to be little cause for alarm.”
October 19 – Reuters (Dan Burns): “U.S. economic activity expanded modestly in recent weeks, although it was flat in some regions and declined in a couple of others, the Federal Reserve said… in a report that showed firms growing more pessimistic about the outlook. Moreover, the U.S. central bank's latest collection of anecdotes from contacts across its 12 districts, known as the ‘Beige Book,’ noted inflation pressures had eased somewhat and were expected to continue doing so, a key ‘soft data’ indication that the Fed's aggressive interest rate hikes may have started to turn the tide against the highest inflation in 40 years. ‘Some contacts noted solid pricing power over the past six weeks, while others said cost pass-through was becoming more difficult as customers push back… Looking ahead, expectations were for price increases to generally moderate.’”
October 19 – Bloomberg (Molly Smith): “US mortgage rates continued to climb last week, advancing to a two-decade high and escalating the downturn in the housing market. The contract rate on a 30-year fixed mortgage jumped another 13 bps to 6.94% in the week ended Oct. 14, marking the ninth-straight increase… That pushed down the group’s gauge of applications to purchase or refinance a home by 4.5%, the ninth drop in 10 weeks, to remain at the lowest level since 1997. Mortgage News Daily… put the 30-year rate at 7.15% on Tuesday.”
October 19 – CNBC (Diana Olick): “Mortgage demand… fell last week to the lowest level since 1997, as interest rates continued to rise. Homebuyers’ demand for mortgages dropped 4% for the week and was 38% lower than the same week one year ago… Applications to refinance a home loan fell 7% compared with the previous week… Demand was 86% lower than the same week one year ago. The number of borrowers who can benefit from refinancing is at a record low. Interest rates were so low during the first two years of the Covid pandemic that the vast majority of borrowers with higher rates already refinanced.”
October 20 – CNBC (Diana Olick): “Existing homes are selling at the slowest pace since September 2012, with the exception of a brief drop at the start of the Covid 19 pandemic. Sales of previously owned homes fell 1.5% in September from August to a seasonally adjusted annual rate of 4.71 million units… That marked the eighth straight month of sales declines. Sales were lower by 23.8% year over year… Despite the slowdown in sales, inventory continues to drop. There were 1.25 million homes for sales at the end of September, down 0.8% compared with September 2021… The median price of an existing home sold in September was $384,800, an increase of 8.4% from September 2021. Prices climbed at all price points. This makes 127 consecutive months of annual increases.”
October 18 – CNBC (Diana Olick): “Homebuilder sentiment in the single-family home market has fallen to half what it was just six months ago as mortgage rates climb… The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), which is designed to gauge market conditions, fell 8 points to 38 in October from the previous month. That’s the lowest level since 2012, with the exception of a brief drop at the start of the coronavirus pandemic… ‘High mortgage rates ... have significantly weakened demand, particularly for first-time and first-generation prospective home buyers,’ said NAHB Chairman Jerry Konter… ‘This situation is unhealthy and unsustainable.’… Of the index’s three components, current sales conditions slid 9 points to 45, and sales expectations in the next six months dropped 11 points to 35. Buyer traffic fell 6 points to 25.”
October 18 – Bloomberg (John Gittelsohn): “California home sales plunged 30% in September from a year earlier as soaring interest rates held back buyers in the costly state. Prices appeared to plateau, rising just 1.6% from last September to a median of $821,680, the California Association of Realtors reported... The majority of homes sold below the asking price as properties stayed on the market for a median of 22 days — more than double last year’s selling time. ‘High inflationary pressures will keep mortgage rates elevated, which will reduce homebuyers’ purchasing power and depress housing affordability in the upcoming year,’ Jordan Levine, chief economist for the real estate group, said... ‘A pullback in sales and a downward adjustment in home prices are expected in 2023.’ Last week, the group projected the statewide median home price would decline 8.8% next year, following a 5.7% gain for 2022.”
October 19 – Bloomberg (Esha Dey): “The clouds over the US car industry darkened further on Wednesday after auto-lending giant Ally Financial Inc.’s disappointing third-quarter results showed fewer people than expected took out new loans to buy vehicles. Ally’s shares nosedived on the results, falling as much as 11%... before trimming part of those losses. General Motors Co. and dealers Carvana Co. and CarMax Inc. also fell. ‘Ally is among the largest auto lenders in the country -- if credit is cracking, this is just the latest giant red flag for the whole auto complex,’ the Vital Knowledge newsletter wrote.”
October 18 – Reuters (Danilo Masoni): “Investors raised cash levels further in October to their highest in 21 years, as sentiment towards the economic outlook remained close to max bearishness, the latest global fund manager survey (FMS) by BofA showed… BofA said however growing investor expectations of a change in central bank monetary policy indicate a 'big rally' is likely in 2023. ‘FMS screams macro capitulation, investor capitulation, start of policy capitulation,’ BofA said, adding it expected the rally in the first half of next year, when interest rate cuts by the U.S. Federal Reserve become the consensus position.”
Fixed Income Watch:
October 19 – Wall Street Journal (Matt Grossman): “Investors are unloading securities sold by Fannie Mae and Freddie Mac FMCC that shift the risk of mortgage defaults away from taxpayers, a sign of growing concern about defaults if rising interest rates cause a severe recession. The securities, called credit-risk transfers, could incur losses if rising defaults creep into the massive swaths of mortgage debt backed by the housing-finance giants. The Federal Reserve’s interest-rate increases have shown signs of cooling the pandemic’s roaring real-estate market, and many worry that the central bank’s inflation-fighting may cause a recession that hurts homeowners’ ability to repay their loans.”
DOUG NOLAND'S COMMENTARY:
Credit Bubble Bulletin : Weekly Commentary: Dissecting Chairman Xi
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