Market Instability Watch:
January 12 – Bloomberg (Christopher Condon): “The US government’s budget deficit widened by 12% for the first quarter of the fiscal year, presaging what’s set to be an intense political battle over fiscal policy. The budget gap for October through December reached $421 billion, with the increase from the previous year largely driven by rising expenses linked to higher inflation… Interest payments on public debt rose by $57 billion, or 37% over the same period a year before, to $210 billion. The Treasury has been forced to pay investors higher rates on new debt as the Federal Reserve ratchets up its benchmark interest rate to combat inflation.”
January 9 – Bloomberg (Alexandra Harris): “The US is expected to run up against its statutory borrowing cap later in the year, and the risk is that lawmakers may resort to a series of can-kicking measures that wind up roiling financial markets. That’s the view of Wrightson ICAP economist Lou Crandall. He said the past week’s chaotic developments around choosing a House speaker make it more likely efforts to raise or suspend the government’s limit will result in a series of short-term agreements until a longer deal can be reached. ‘A dysfunctional Congress could force the Treasury to live hand-to-mouth through a series of interim debt-ceiling increases for weeks or even months,’ Crandall wrote…”
January 11 – Bloomberg (Liz Capo McCormick and Craig Torres): “Federal Reserve officials are making a full-court-press effort to convince investors they won’t be slashing their benchmark interest rate before year’s end. It’s not working. Money markets are pricing a rate peak around 4.9%, followed by nearly half a percentage point of rate cuts by the end of 2023. That’s despite multiple officials in recent days delivering a sharply contrasting message: Rates are heading above 5% and will stay there all year. Just last month, Chair Jerome Powell highlighted that history warns against ‘prematurely loosening policy.’ With traders effectively rejecting his narrative, the risk is that exuberance over monetary easing causes Fed officials to tighten even more…”
January 13 – Bloomberg (Maria Elena Vizcaino): “The world is at risk of a crisis as governments, households and financial institutions binge on debt, a habit that S&P Global Ratings warns could push overall leverage to 366% of global gross domestic product by 2030. That would mark a sharp increase from the world’s $300 trillion pile of debt — or 349% of global GDP — as of June 2022, as leverage rises slightly faster for mature economies than emerging peers, S&P’s Terry Chan and Alexandra Dimitrijevic wrote in a report.”
January 10 – Bloomberg (Eva Szalay): “Some of the world’s largest asset managers such as BlackRock Inc., Fidelity Investments and Carmignac are warning markets are underestimating both inflation and the ultimate peak of US rates, just like a year ago. The stakes are immense after Wall Street almost unanimously underestimated inflation’s trajectory. Global stocks saw $18 trillion wiped out, while the US Treasury market suffered its worst year in history. And yet, going by inflation swaps, expectations are again that inflation will be relatively tame and drop toward the Federal Reserve’s 2% target within a year…”
January 10 – Bloomberg (Lu Wang): “A disaster for bulls, the yearlong tumble in American stocks has in some respects been almost as rough for the other side of the trade. The hardships of being short were made vivid Tuesday as a Goldman Sachs Group Inc. basket of most-hated stocks climbed more than 4%, saddling bears with losses. While the S&P 500 have alternated between gains and losses into 2023, each up day overpowered the previous down session, resulting in an overall gain that marked the market’s best start to a year since 2019.”
Bursting Bubble and Mania Watch:
January 10 – Associated Press (Adam Beam): “From a budget perspective, the first four years of California Gov. Gavin Newsom’s time in office has been a fairy tale: A seemingly endless flow of money that paid to enact some of the country’s most progressive policies while acting as a bulwark against a tide of conservative rulings on abortion and guns from the U.S. Supreme Court. But just days into his second term, that dream appeared to be ending. Tuesday, Newsom announced California likely won’t collect enough money in taxes to pay for all of its obligations, leaving a $22.5 billion hole in its budget.”
January 10 – Bloomberg (Natalie Wong): “Salesforce Inc. is paring its real estate as part of sweeping cost cuts. Compass Inc., reeling from a housing slowdown, has put its New York headquarters up for sublease. Meta Platforms Inc. is giving up Manhattan offices that it recently built out. Major US office markets were already struggling with empty buildings as flexible work becomes the norm. Now, mounting layoffs and corporate cost cuts threaten to worsen the glut, particularly in New York and San Francisco… Both cities ended 2022 with a rising supply of space and leasing demand still far below historical averages, according to… CBRE Group Inc. In San Francisco, the office-vacancy rate soared to a record 27.6%, compared with just 3.7% before the pandemic.”
January 11 – Bloomberg (James Tarmy): “In the last half of 2022 the market for homes priced at $10 million and more fell precipitously in New York and South Florida, according to… brokerage Serhant. ‘The second half of the year was more affected at the super-prime level than most people initially believed,’ says Garrett Derderian, Serhant’s director of market intelligence. ‘The big takeaway is that this year the market is going to slow considerably, and it could be one of the slowest years in the super-prime market in the last decade.’”
Crypto Bubble Collapse Watch:
January 12 – Financial Times (Nikou Asgari): “Crypto broker Genesis owes creditors more than $3bn, prompting its owner Digital Currency Group to explore selling assets in its large venture portfolio to raise money, according to people familiar with the matter. DCG, a conglomerate that controls crypto media outlet CoinDesk and investment manager Grayscale, is seeking to raise fresh cash after its Genesis unit was wrongfooted in November by the collapse of FTX.”
January 9 – Bloomberg (David Pan): “Cash-strapped Bitcoin miners are reducing loans and scaling back their operations as the crypto-mining industry continues to weather a plunge in the digital asset’s price. During the historic bull run in late 2021, miners raised billions of dollars in debt financing to fund their expanding operations. But since the crash early last year, publicly traded miners are refinancing and selling coin reserves as well as equity to repay loans and cover operational costs. ‘Miners are trying to deleverage to avoid margin calls or an imminent liquidity crunch if Bitcoin drops below a certain price point,’ Wolfie Zhao, an analyst at crypto-consulting firm BlocksBridge, said.”
January 10 – Reuters (Manya Saini and Niket Nishant): “Coinbase Global Inc said… it will cut about 950 jobs, or 20% of its workforce, as part of a restructuring plan that marks the third round of layoffs for the cryptocurrency exchange since last year… ‘The entire industry is going through a crisis of confidence and trading volume remains very weak. This job cut is a reflection of the current challenging environment,’ Oppenheimer analyst Owen Lau said.”
January 13 – Bloomberg (David Pan): “Bitfarms Ltd. warned one of its subsidiaries may default on a loan with bankrupt Blockfi Inc., becoming the latest Bitcoin mining company seeking relief as the industry reckons with a plunge in the digital asset.”
January 12 – Reuters (Elizabeth Howcroft): “Illicit use of cryptocurrencies hit a record $20.1 billion last year as transactions involving companies targeted by U.S. sanctions skyrocketed, data from blockchain analytics firm Chainalysis showed… The cryptocurrency market floundered in 2022, as risk appetite diminished and various crypto firms collapsed. Investors were left with large losses and regulators stepped up calls for more consumer protection.”
Inflation Watch:
January 12 – Financial Times (Jeff Cox): “Inflation closed out 2022 in a modest retreat, with consumer prices in December posting their biggest monthly decline since early in the pandemic… The consumer price index… fell 0.1% for the month, in line with the Dow Jones estimate… Even with the decline, headline CPI rose 6.5% from a year ago, highlighting the persistent burden that the rising cost of living has placed on U.S. households. However, that was the smallest annual increase since October 2021. Excluding volatile food and energy prices, co-called core CPI rose 0.3%, also meeting expectations. Core was up 5.7% from a year ago, once again in line.”
January 9 – Reuters (Michael S. Derby): “U.S. households see weaker near-term inflation and are expecting notably less spending, even as they foresee their incomes continuing to rise, the New York Federal Reserve said… in its December Survey of Consumer Expectations. The bank reported that respondents to its monthly survey said they see inflation a year from now at 5%, from 5.2% in November, for the lowest reading since July 2021. Meanwhile, respondents’ expectations for inflation three years from now were unchanged at 3% while projections of inflation in five years’ time stood at 2.4%, up from 2.3% in November.”
January 9 – Wall Street Journal (Jennifer Williams-Alvarez and Dean Seal): “After a year of significant price increases, companies are trying to figure out how far they can go in 2023. Companies in 2022 increased sale prices to offset higher costs for everything from freight to wages to raw materials such as lumber and steel, with little pushback from customers. Net profit margins at S&P 500 companies hit 11.6% during the third quarter of 2022, down from 12.7% the same period a year earlier but still higher than the same period in 2020 and before the pandemic, according to… Refinitiv.”
Biden Administration Watch:
January 9 – Wall Street Journal (Jinjoo Lee): “It took less than a year to draw 180 million barrels of oil out of the U.S. Strategic Petroleum Reserve. Replacing those barrels will likely take a lot longer, if it happens at all. After President Biden authorized a historic emergency release last year, there were roughly 372.4 million barrels left in the SPR as of Dec. 30, the lowest level in 39 years. No wonder the Energy Department is pivoting toward a refill: In mid-December, the agency announced that it would start repurchasing crude for the SPR. It is taking baby steps, starting with a 3-million-barrel pilot program under which it would offer market participants a fixed price for future delivery.”
U.S. Bubble Watch:
January 8 – Wall Street Journal (Dana Mattioli and Miles Kruppa): “A new wave of tech layoffs signals how executives in the industry are pivoting from a growth-above-all mindset to protecting their bottom line. After a bruising 2022 in which companies from small startups to tech giants slammed the brakes on expansion, some of the biggest names in the sector are demonstrating that an era of austerity is only beginning, with expenses scrutinized and moonshot projects abandoned. Amazon.com Inc.; and Salesforce Inc. both announced plans for layoffs in the past week.”
January 10 – CNBC (Jessica Dickler): “With day-to-day expenses staying high due to inflation, more Americans are relying on credit cards to make ends meet. As the personal savings rate sank near an all-time low, credit card balances jumped 15% year over year, according to… the Federal Reserve Bank of New York, notching the largest increase in more than 20 years… Nearly half, or 46%, of credit cardholders carry debt from month to month on at least one card, up from 39% last year, according to… Bankrate.com. ‘People are hanging in there for now, but some of the cracks are starting to show,’ said Ted Rossman, senior industry analyst at Bankrate.”
January 10 – The Atlantic (Mac Schwerin): “As familiar as Americans are with the concept of credit, many of us, upon encountering a sandwich that can be financed in four easy payments of $3.49, might think: Yikes, we’re in trouble. Putting a banh mi on layaway—this is the world that ‘buy now, pay later’ programs have wrought. In a few short years, financial-technology firms such as Affirm, Afterpay, and Klarna, which allow consumers to pay for purchases over several interest-free installments, have infiltrated nearly every corner of e-commerce. People are buying cardigans with this kind of financing. They’re buying groceries and OLED TVs. During the summer of 2020, at the height of the coronavirus pandemic, they bought enough Peloton products to account for 30% of Affirm’s revenue.”
January 10 – Reuters (Dan Burns): “U.S. small-business confidence slid to a six-month low in December, according to a survey…, which also showed that inflation and worker shortages remained major issues for firm owners. The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell 2.1 points to 89.8 last month - the lowest since June - amid a decline in the share of owners who expected better business conditions over the next six months… 32% of owners reported that inflation was their single most important problem, unchanged from November and 5 points lower than July's reading, which was the highest since the fourth quarter of 1979. On net, about 43% of owners reported raising average selling prices, down 8 points from November and the lowest since May 2021.”
January 9 – CNBC (Diana Olick): “Mortgage rates are still twice what they were a year ago, but home prices have been falling since June, and that’s finally making consumers feel better about what had been an overheated, highly competitive housing market. A monthly housing sentiment index from Fannie Mae showed sentiment improving from November to December. The index is still lower than it was a year ago and just slightly off its record low set in October and November. The share of respondents saying now is a good time to buy a home was still low, at just 21%, but it was up from 16% in October.”
January 11 – CNBC (Diana Olick): “Mortgage applications to purchase a home fell 1% for the week and were 44% lower than the same week one year ago. That was the lowest reading since 2014. Buyers today are not only contending with higher interest rates but falling supply. They are also seeing prices come down and may be waiting to see how low they go.”
January 10 – CNBC (Hugh Son): “Wells Fargo is stepping back from the multitrillion-dollar market for U.S. mortgages amid regulatory pressure and the impact of higher interest rates. Instead of its previous goal of reaching as many Americans as possible, the company will now focus on home loans for existing bank and wealth management customers and borrowers in minority communities... Dual factors of a lending market that has collapsed since the Federal Reserve began raising rates last year and questions about the long-term profitability of the business led to the decision, said consumer lending chief Kleber Santos.”
January 10 – Bloomberg (Maxwell Adler): “US state and local pensions funds’ unfunded liabilities climbed to $1.45 trillion last year, according to estimates from the… nonprofit Equable Institute. That compares to $986.6 billion in 2021, Equable said… Poor investment returns last year drove down the average funded ratio for top state and local pension plans to 77.3% from 83.9% in 2021, according the report. The drop reflects almost a half trillion dollar increase in the gap between assets and what’s owed to retirees.”
January 12 – Wall Street Journal (Justin Lahart): “Earnings at big public companies haven’t been growing all that much lately… Earnings season is getting under way, and results for the final quarter of last year look to be underwhelming. Analysts’ latest estimates are for earnings per share for members of the S&P 500 to have shrunk by 2.2% in the fourth quarter from a year earlier—a figure that is flattered by an expected 65% gain in energy-sector earnings. Exclude those, and analysts estimate earnings fell by 6.7%.”
January 10 – Reuters (Lisa Baertlein): “U.S. imports of goods in ocean shipping containers in December fell to levels approaching those last seen before the COVID-19 pandemic, a new report said… Demand for kitchen appliances, furniture, big-screen TVs, apparel and other retail goods softened late last year as record inflation bit into disposable income and consumers shifted spending back to travel and other previously restricted activities. December 2022 U.S. container import volume topped 1.9 million 20-foot equivalent units (TEUs), according to Descartes Systems Group. That was down 19% from the year earlier, but 1% above December 2019…”
Fixed-Income Watch:
January 12 – Bloomberg (Lisa Lee, Claire Ruckin, and Jill R Shah): “One of the most lucrative money-making machines in the world of finance is all clogged up, threatening a year of pain for Wall Street banks and private-equity barons as a decade-long deal boom goes bust. After driving a flurry of mega buyouts that contributed to a $1 trillion profit haul in the good times, some of the world’s largest banks have been forced to take big write downs on debt-fueled mergers and acquisitions underwritten late in the cheap-money era. Elon Musk’s chaotic takeover of Twitter Inc. is proving especially painful, saddling a Morgan Stanley-led cohort with around $4 billion in estimated paper losses…”
January 7 – Financial Times (Kate Duguid): “Companies have rushed to borrow money in the US corporate bond market in the first week of the year, taking advantage of easier financial conditions… In the first seven days of 2023, companies from Credit Suisse to Ford issued $63.7bn worth of US-marketed debt, according to data from Dealogic, compared to a total of $36.6bn in the last five weeks of 2022. While this week’s issuance is lower than the $73.1bn issued in the first week of January 2022, interest rates have jumped from near zero to a range of 4.25-4.5% since then.”
Environmental and Social Instability Watch:
January 11 – Bloomberg (Brian K. Sullivan): “California’s flooding rains and heavy snows that killed at least 17 people have likely caused more than $30 billion in damages and economic losses, according to AccuWeather Inc. The Pacific storms, known as atmospheric rivers, are estimated to have caused $31 billion to $34 billion of economic impacts through major flooding, widespread power outages, landslides, fallen trees and road closures, the commercial weather forecaster said…”
January 11 – Bloomberg (Naureen S. Malik): “The largest US grid operator saw almost one-fourth of power plants serving 65 million people shut down during the Christmas weekend storm, pushing the region to the brink of blackouts. In the first autopsy of the winter freeze that strained PJM Interconnection LLC last month, the grid operator saw 23% of its power-generation fleet shut down on the morning of Dec. 24… PJM manages the electrical network that stretches from New Jersey to Illinois.”
Leveraged Speculation Watch:
January 10 – Reuters (Svea Herbst-Bayliss): “Some hedge funds that bet on macroeconomic trends boasted eye-popping double and even triple digit gains for 2022, investors said, while other prominent firms that were long on technology stocks got clobbered with deep losses in volatile markets… Many macro managers sidestepped tumbling equity markets rocked by fast-paced interest rate hikes and geopolitical turmoil including the war in Ukraine to rank among the hedge fund industry's best performers, data from Hedge Fund Research show. The firm's macro index gained 14.2% while the overall hedge fund index dropped 4.25%, its first loss since 2018.”
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