US economic news summary of the week ending on January 20. 2023

 Market Instability Watch:

January 19 – Financial Times (Kate Duguid and Adam Samson): “Trillions of dollars each day are gushing into a Federal Reserve facility designed to mop up excess cash in the financial system, showing how many ultra-safe investment funds are avoiding volatile US government debt markets even as interest rates rise. Investors this month are stashing an average $2.2tn a day in the Fed’s reverse repo facility… That is down from a record $2.6tn on the last trading day of 2022, but above last year’s average of $2tn. Before March 2021, usage was typically just a few billion dollars a day. The heavy use of the Fed’s reverse repo facility in recent months has confounded central bank officials and private analysts…”

Bursting Bubble and Mania Watch:

January 18 – CNBC (Ashley Capoot and Sofia Pitt): “The job cuts in tech land are piling up, as companies that led the 10-year bull market adapt to a new reality. Microsoft said Wednesday that it’s letting go of 10,000 employees, which will reduce the company’s headcount by less than 5%. Amazon also began a fresh round of job cuts that are expected to eliminate more than 18,000 employees and become the largest workforce reduction in the e-retailer’s 28-year history.”

January 19 – Bloomberg (Neil Callanan): “The slump in the world’s biggest asset class has spread from the housing market to commercial real estate, threatening to unleash waves of credit turmoil across the economy. Almost $175 billion of real estate credit is already distressed, according to data compiled by Bloomberg — about four times more than the next biggest industry. As the toll from higher interest rates and the end of easy money mounts, many real estate markets are almost frozen with some lenders telling borrowers to sell assets or risk foreclosure amid demands for additional capital from landlords. Distress levels in European real estate are at the highest in a decade…, according to… law firm Weil, Gotshal & Manges. UK commercial property values fell more than 20% in the second half of 2022, MSCI Inc. data show. In the US, the drop was about 9%, according to Green Street.”

January 17 – Bloomberg (John Gittelsohn): “Some of the biggest investors in US commercial real estate are looking to cash in before property values slide further. A group of property funds for institutional investors ended last year with $20 billion in withdrawal requests, the biggest waiting line since the Great Recession, according to IDR Investment Management… ‘It’s like the nightclub where everybody lines up to get in and then lines up to leave when it closes,’ John Murray, head of global private commercial real estate at Pacific Investment Management Co., said… Institutional investors sought to cut their exposure to some of the biggest funds at managers including JPMorgan..., Morgan Stanley and Prudential Financial Inc., according to people familiar…”

January 19 – Bloomberg (Allison McNeely): “KKR & Co. joined rivals including Blackstone Inc. in limiting withdrawals from a real estate investment trust after investors sought to pull out more money. KKR Real Estate Select Trust received requests in the first-quarter tender offer period to repurchase 8.1% of its net asset value, exceeding the 5% quarterly limit… The trust fulfilled 62% of each shareholder’s request… Real estate investment vehicles overseen by KKR and Blackstone have come under pressure in recent months as investors requested their money back beyond limits set by the funds. Blackstone Real Estate Income Trust and Starwood Real Estate Income Trust have said they would limit redemptions…”

January 17 – Wall Street Journal (Will Parker and Konrad Putzier): “The cost of insuring commercial real-estate loans against a rise in interest rates has exploded over the past year, raising the prospect of a market selloff since many property owners will no longer be able to afford these hedges. About one-third of all commercial property debt is floating rate, according to a 2019 report by the Mortgage Bankers Association. Lenders usually require that these borrowers hedge against an increase in borrowing costs… When rates were very low, the cost of this insurance was minimal. The cap on a multimillion-dollar mortgage could be had for as little as $10,000. These hedges saved real-estate owners millions of dollars by limiting their exposure to rising interest rates in 2022.”

January 17 – Reuters (Niket Nishant, Noor Zainab Hussain and Saeed Azhar): “Goldman Sachs… reported a bigger-than-expected 69% drop in fourth-quarter profit as it struggled with a slump in dealmaking, a drop in asset and wealth management revenue and booked losses at its consumer business. Wall Street banks are making deep cuts to their workforce and streamlining their operations as dealmaking activity, their major source of revenue, stalls on worries over a weakening global economy and rising interest rates. Goldman is also curbing its consumer banking ambitions as Chief Executive Officer David Solomon refocuses the bank's resources on strengthening its core businesses such as investment banking and trading.”

January 15 – Financial Times (Stephen Foley): “Some of the world’s biggest companies are facing multibillion-dollar writedowns on recent acquisitions as a wave of dealmaking gives way to a new era of economic uncertainty and higher interest rates… US media and healthcare companies are among those to have slashed the value of business units in the past few months and accountants are warning that more cuts could be imminent as the annual reporting season gets under way.”

January 16 – Financial Times (Tabby Kinder, Richard Waters and Eric Platt): “The bill for Elon Musk’s purchase of Twitter is coming due, with the billionaire facing unpalatable options on the company’s enormous debt pile, ranging from bankruptcy proceedings to another costly sale of Tesla shares. Three people close to the entrepreneur’s buyout of Twitter said the first instalment of interest payments related to $13bn of debt he used to fund the takeover could be due as soon as the end of January. That debt means the company must pay about $1.5bn in annual interest payments. The Tesla and SpaceX chief financed his $44bn deal to take Twitter private in October by securing the huge debt from a syndicate of banks led by Morgan Stanley, Bank of America, Barclays and Mitsubishi. The $13bn debt is held by Twitter at a corporate level, with no personal guarantee by Musk.”

January 18 – Dow Jones (Erich Schwartzel): “Even by show-business standards, former Walt Disney Co. executive Geoff Morrell netted a massive payday from his brief time in Hollywood. Mr. Morrell started working at Disney on Jan. 24, 2022, as the company's chief corporate-affairs officer. He left less than four months later following a public-relations implosion that led to employee protests and pitted the company and then-CEO Bob Chapek against Florida Gov. Ron DeSantis. For those 70 weekdays, Mr. Morrell made $8,365,403 in total compensation – or about $119,505 a day…”

Crypto Bubble Collapse Watch:

January 20 – Reuters (Tom Hals, Akanksha Khushi, and Elizabeth Howcroft): “The lending unit of crypto firm Genesis filed for U.S. bankruptcy protection on Thursday, owing creditors at least $3.4 billion… Genesis Global Capital, one of the largest crypto lenders, froze customer redemptions on Nov. 16 after the collapse of major exchange FTX sent shockwaves through the crypto asset industry, fuelling concern that other companies could implode. Genesis is owned by venture capital firm Digital Currency Group (DCG). Its bankruptcy filing is the latest in a string of crypto failures triggered by a market collapse that wiped about $1.3 trillion off the value of crypto tokens last year.”

Inflation Watch:

January 15 – Wall Street Journal (David Harrison): “Worker pay increases fell behind inflation in 2022 for the second year in a row, leaving households worse off despite historically strong pay gains. But recent data suggest a shift is under way, with paycheck totals gaining ground as inflation eases… A historically tight labor market pushed up average hourly earnings by 4.6% in December from a year earlier…, compared with a 6.5% annual inflation rate in the same period. Likewise, average hourly earnings rose 4.9% in December 2021 from a year earlier, compared with a 7% annual inflation rate.”

January 18 – CNBC (Jeff Cox): “Prices for wholesale goods and services fell sharply in December, providing another sign that inflation, while still high, is beginning to ease. The producer price index, which measures final demand prices across hundreds of categories, declined 0.5% for the month… The decline was the biggest on a monthly basis since April 2020. Excluding food and energy, the core PPI measure rose 0.1%... For the year, headline PPI rose 6.2%, the lowest annual level since March 2021 and down considerably from the 10% annual increase in 2021. A sharp drop in energy prices helped bring the headline inflation reading down for the month. The PPI’s final demand energy index plunged 7.9% on the month. Within that category, wholesale gasoline prices fell 13.4%.”

Biden Administration Watch:

January 19 – CNN (Tami Luhby): “In a letter to House Speaker Kevin McCarthy…, Treasury Secretary Janet Yellen announced that the agency will start taking ‘extraordinary measures’ now that the US has reached its $31.4 trillion debt limit. But the nation is not yet at the debt ceiling crisis point that could tank the financial markets, suspend Social Security payments to senior citizens, hurt the economy and cause other chaos. That’s what the so-called extraordinary measures are designed to temporarily avoid. And while they might sound dire, they are mainly behind-the-scenes accounting maneuvers that the Treasury Department can take to give Congress time to increase or suspend the limit before the US has to default on its debts. ‘We’re not in any immediate crisis right now economically,’ said Steven Pressman, economics professor at The New School. But these moves don’t last indefinitely. In the past, they’ve given lawmakers between a few weeks and several months to address the borrowing cap. How much revenue the government collects in tax revenue this spring will also be a factor in how long the country can go before default.”

January 20 – Reuters (Trevor Hunnicutt): “The White House is refusing to negotiate with hardline Republicans on raising the debt ceiling because it believes enough of them will eventually back off their demands, as a growing chorus of investors, business groups and moderate conservatives warn of the dangers of edging towards a default. The high-stakes deadlock is widely expected to last for months, and could come down to the last minute as each side tests the other ahead of June when the U.S. government might be forced to default on paying its debt… ‘Leading congressional Republicans have themselves admitted in the past that default would trigger an economic collapse, killing millions of jobs and decimating 401k plans,’ said White House spokesperson Andrew Bates... ‘But hardline MAGA Republicans are now advocating for this outcome.’”

January 19 – New York Times (Jim Tankersley and Alan Rappeport): “The United States hit its debt limit on Thursday, prompting the Treasury Department to begin using a series of accounting maneuvers to ensure the federal government can keep paying its bills ahead of what’s expected to be a protracted fight over whether to increase the borrowing cap… The milestone of reaching the $31.4 trillion debt cap is a product of decades of tax cuts and increased government spending by both Republicans and Democrats. But at a moment of heightened partisanship and divided government, it is also a warning of the entrenched battles that are set to dominate Washington, and that could end in economic shock.”

U.S. Bubble Watch:

January 19 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, pointing to another month of solid job growth and continued labor market tightness… ‘It is a frustrating reminder for the Fed that the labor market remains tight as employers hold onto workers,’ said Matthew Martin, a U.S. economist at Oxford Economics... ‘We don't expect a spike in initial jobless claims even as the economy slows.’ Initial claims for state unemployment benefits dropped 15,000 to a seasonally adjusted 190,000 for the week ended Jan. 14, the lowest level since September.”

January 18 – Associated Press (Anne D’Innocenzio): “Americans cut back on spending in December, the second consecutive month they’ve done so, underscoring how inflation and the rising cost of using credit cards slowed consumer activity over the crucial holiday shopping season. Retail sales fell a worse-than-expected 1.1% in December, following a revised 1% drop in November… In October, retail sales ticked up 1.3%, helped by early holiday shopping. Auto sales declined as rising interest rates for auto loans crimped demand. That, and falling gas prices, helped to pull overall retail sales lower. The December figure marked the biggest monthly decline in 2022.”

January 18 – CNBC (Diana Olick): “Builder sentiment in the single-family housing market posted an unexpected gain in January, rising for the first time in 12 straight months… Sentiment rose 4 points to 35 on the National Association of Home Builders/Wells Fargo Housing Market Index… The metric stood at 83 in January 2022.”

January 18 – Reuters (Lindsay Dunsmuir): “There were some encouraging signs U.S. inflation pressures and labor shortages were easing, a Federal Reserve report showed…, but economic activity was tepid as the central bank's actions weigh on growth. Five of the Fed's districts reported slight or modest increases in overall economic activity over the last several weeks, while six noted no change or slight declines…, and one cited a significant decline... The Fed released its latest survey on the health of the economy derived from business contacts nationwide after a slew of recent data raised hopes that too-high inflation is on a sustainable path downwards… ‘On balance, contacts generally expected little growth in the months ahead,’ the Fed said in its survey, known as the ‘Beige Book,’ which was conducted across its 12 districts through Jan. 9.”

January 18 – CNBC (Diana Olick): “Consumers returned from the holiday season to find mortgage rates at their lowest point since September, and they are responding in dramatic fashion. Mortgage application volume jumped nearly 28% last week compared with the previous week… Refinance demand made the biggest move, up 34% from the previous week, but it was still 81% lower than the same week one year ago. The refinance share of mortgage activity increased to 31.2% of total applications from 30.7% the previous week. Applications for a mortgage to purchase a home rose 25% week to week but were 35% lower than the same week one year ago.”

January 19 – CNBC (Nick Timiraos): “JPMorgan Chase CEO Jamie Dimon believes interest rates could go higher than what the Federal Reserve currently projects as inflation remains stubbornly elevated. ‘I actually think rates are probably going to go higher than 5% ... because I think there’s a lot of underlying inflation, which won’t go away so quick,’ Dimon said…”

Fixed-Income Watch:

January 15 – Financial Times (Harriet Clarfelt): “Risky corporate bonds trading in the US have kicked off 2023 on an upbeat note, with investors tolerating a smaller premium to hold low-grade debt as evidence of cooling inflation mounts. Yields on speculative-grade US bonds have fallen by about 0.8 percentage points in the first two weeks of January to slightly more than 8%, according to an ICE Data Services index… Borrowing costs for groups with the lowest credit quality have dropped even more, according to an Ice gauge of distressed debt, sliding about 3 percentage points to 19.3% — a level last seen five months ago.”

Leveraged Speculation Watch:

January 17 – Bloomberg (Nishant Kumar and Lisa Abramowicz): “Bob Prince, who helps manage the world’s largest hedge fund, said we’re seeing the return of the boom-bust cycle and more people need to lose their jobs before inflation will be brought under control. ‘It is hard to say whether we are done with the tightening or we will have another tightening,’ Prince, the co-chief investment officer of Bridgewater Associates, said… at the World Economic Forum in Davos... ‘What we can say is that the next shoe to drop has to be a decline in the economy, in particular, a contraction in the labor markets.’”