Core US Factory Orders Tumble In December As ISM Manufacturing Plunges
Following November’s slump (-1.8% MoM – the biggest drop since the COVID lockdowns), and despite weakening ISM Manufacturing data, analysts expected US Factory Orders to rebound strongly (+2.3% MoM) in December. However, while it did rebound, it rose ‘only’ 1.8% MoM in December (best since Jan 22)…
Source: Bloomberg
So we swing from biggest drop since April 2020 to best rise since Jan 2022?
However, the pain was in the core, which tumbled 1.2% MoM (having basically weakened for 6 straight months) leaving the YoY growth at 3.99% – the weakest since Feb 2021…
This leaves the total core factory orders at its weakest since Feb 2022…
All because of one-off surge in plane orders… it seems people are once again dying to fly the Boeing MAX…
There’s just one thing with that headline orders print…
Source: Bloomberg
WTF is going on with the actual manufacturers who are being surveyed by ISM and S&P Global as that survey data is collapsing?
Is the Federal Reserve easing off the accelerator on its inflation fight?
The answer depends on whether you believe your eyes or your ears.
Our eyes tell us the Fed is slowing down on rate hikes.
After easing back from a 75 basis point hike in November to a 50 basis point hike in December, the Federal Open Market Committee (FOMC) delivered an even smaller 25 basis point hike at its February meeting. With the most recent rate increase, the target range for the federal funds rate is between 4.5 and 4.75%.
A quarter-percent rate hike was widely anticipated. The mainstream narrative is that inflation has peaked and the central bank is now easing its foot off the accelerator.
But if our eyes tell us the Fed is winding down the inflation fight, the messaging coming from the central bank says the opposite. The FOMC statement said, “Inflation has eased somewhat but remains elevated,” and it signaled additional rate hikes in the future.
The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
As it did in the last two meetings, the FOMC left wiggle room to pivot, saying the committee will continue to take into account “cumulative tightening” and “the lags with which monetary policy affects economic activity and inflation” as it makes future decisions.
During his press conference, Powell repeatedly said “the job is not done,” and emphasized that “It would be very premature to declare victory, or to think that we’ve really got this.” He indicated that the central bank could raise rates a couple more times.
We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive. Why do we think that’s probably necessary? We think because inflation is still running very hot.”
Answering another question, Powell said, “It’s our judgment that we’re not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes.”
On the other hand, Powell also gave himself some wiggle room, saying that he does see inflation easing.
We can now say I think for the first time that the disinflationary process has started. We can see that and we see it really in goods prices so far.”
Powell continues to insist there is a path for the central bank to bring price inflation down to 2% without causing a significant economic slowdown. He brought up the “strong” labor market several times during his press conference.
Reaction
The markets appear to believe what they’re seeing, not what they’re hearing.
Despite what Powell actually said, the mainstream seemed to read between the lines and initially took the outcome of the FOMC meeting as confirmation that the tightening cycle is nearly over.
Stocks see-sawed after the announcement. The Dow initially sold off before swinging some 170 points to the upside after Powell’s press conference ended. The Dow slid into the close, finishing up 8 points. But the NASDAQ with its more speculative stocks closed up 2% on the day, and the S&P 500 finished up just over 1%.
Gold surged by over $20 and pushed over $1,950 an ounce. The dollar fell, along with bond yields.
All of this indicates that the initial market take was that the Fed is nearly finished raising rates.
Allianz Investment Management senior investment strategist Charlie Ripley told CNBC that the messaging leaned “slightly dovish,” adding that a lack of clarity on future interest rate moves signals the Fed is nearing the end of its rate tightening cycle
The Fed is essentially speaking out of both sides of the mouth as they signaled further increases are appropriate, but also acknowledged they will consider the cumulative amount of tightening in future policy decisions.”
In an interview on Fox Business, Peter Schiff said he heard a lot of economic ignorance coming out of Powell’s mouth. He said the “disinflation” that Powell mentions is “transitory.”
Schiff zeroed in on a comment Powell made claiming consumer expectations cause inflation.
“Inflation is caused by the government,” he said. “It’s caused by the Federal Reserve printing money and Congress spending it.”
Schiff said even if the Fed delivers a couple more 25 basis point hikes, it’s still not enough to slay inflation. He noted that even with the rate hikes, Americans continue to borrow money in order to keep up spending and saving has fallen into the basement.
Peter said he believes we are heading toward a major economic downturn, but even that won’t slay the inflation dragon.
Looking Ahead
No matter what’s going on in the Fed members’ heads, right now, I think the inflation fight will end the moment something breaks in the economy.
And I’m convinced something will break in the economy.
Powell insists there is a path forward that brings inflation down while avoiding a recession. I think that’s wishful thinking or bureaucratic spin. I think it’s a virtual certainty that the economy will spiral into a downturn. And I don’t think it will be short and shallow. I think it will be deep and prolonged.
My pessimism is rooted in the fact that the US economy is addicted to easy money. It is addicted to artificially low interest rates and quantitative easing. You can’t take an addict’s drug away without sending him into withdrawal. The economy can only limp along so long with tighter monetary policy.
Interest rates haven’t been this high since 2007. At that point, the Fed was cutting rates due to the housing bust. The economy couldn’t handle interest rates that high.
Powell and Company have backed themselves into a corner. They just don’t know it yet (or more likely, they haven’t admitted it).
Viktor Orbán is a hero to American national conservatives. So when in January 2022 the Hungarian Prime Minister announced he would supplement price caps on fuel and mortgage rates by mandating that sugar, flour, sunflower oil, chicken breasts, pork legs, and certain milk products be sold to consumers at lower October 2021 prices, some of this anti-free market cohort celebrated his decisive action to “protect families” from inflation. “But, but, but, what would Milton Friedman say!” tweetedCompact magazine editor Sohrab Ahmari, mocking advocates of market economics. This was “the party of the state for the win.”
Well, we know what Friedman would have said: these price controls will not work as you intend. Limited to a small range of goods, they won’t dampen even measured inflation rates. They cannot suppress actual inflationary pressure, which is determined by the intersection of total spending and output. Even if almost all prices were controlled, as in the U.S. during World War II, a lower measured inflation would ill-reflect the reduced quality and product re-formulations that sellers would reach for to circumvent price controls. When controls are removed, the official price level would surge again anyway.
No, the primary impact of crude price caps, Friedman would say, will be shortages of controlled products. At artificially low prices, the quantity demanded would expand, exceeding the now smaller quantity producers are willing to supply, forcing rationing and queuing, while encouraging black markets. There’d be no reason to expect that poor households would benefit from this scramble.
Well, what do you know? Headline inflation in Hungary is currently the highest in the European Union, running at a massive 24.5 percent, with food and power prices up 49 percent and 56 percent through December 2022. Fiddling with the relative price of goods has, predictably, done nothing to curb the inflationary forces of the Ukraine war supply-shocks and excessive domestic stimulus. In fact, it has made the Hungarian Central Bank’s job of curbing inflation more difficult, with mortgage, fuel, and food price freezes distorting the consumer price index that it targets.
What has happened is that 56 percent of Hungarians report experiencing regular shortages of price-controlled food products. Supermarkets are rationing sales of covered goods, to which eggs and potatoes were added in November. There have been shortages of granulated sugar, chicken breasts, and pork legs, and retailers are struggling to meet regulations for minimum stock. The central bank’s Governor Gyorgy Matolcsy has explained that price caps are offset by other non-controlled prices rising, as consumers shift to products they can find and producers seek higher margins elsewhere.
Fuel price caps exhibit the shortage effect best. Orbán capped gas and diesel prices in November 2021. Imported supply began drying up. Orbán thus narrowed eligibility for capped prices to just private, farm, and taxi vehicle sales. Nevertheless, consumer demand, unexposed to the incentive of high international fuel prices, stayed high with sales up 20 percent annually by October, despite petrol stations struggling for profitability. Pretty soon, a grounded fear of shortages induced the inevitable panic buying, resulting in Soviet-style queuing at filling stations. Orbán relented and removed the cap in December. Gas prices swiftly jumped by 46 percent.
Has this ongoing experiment helped normal Hungarian families? Even aside from all the queuing, searching, and rationing costs for the poor, the Hungarian Central Statistical Office’s own data shows that households with low incomes, large families, and pensioners saw higher inflation in 2022 than those on average or high incomes.
Faced with mockery for supporting these failing price controls, defensive national conservatives such as Sen. J.D. Vance (R–Ohio) are now blaming “a million refugees” from Ukraine for pushing up Hungarian prices. This number is wrong (just 33,603 Ukrainian refugees wanted to settle in Hungary—far too few to drive this inflation) but, in any case, the argument stretches credulity.
Yes, 2.15 million Ukrainians have crossed into Hungary temporarily since the war began (equivalent to 22 percent of Hungary’s population) and this could boost demand for food and fuel. But 9.3 million have passed into Poland (25 percent of their population)—a country whose inflation rate, while still high at 16.6 percent, is almost 9 percentage points below Hungary’s. In any case, higher demand from a larger consumer base strengthens the argument against price controls—as it means the inevitable disruptions will be worse.
Rather than reaching for a scapegoat, national conservatives should heed the lesson. They may believe that the national interest demands overriding market outcomes, especially when war is undoubtedly squeezing living standards. But junking market prices has a cost, even if it’s your ideological ally doing the junking.
Bird is one of several electronic scooter companies operating in Washington, D.C. The e-scooters are incredibly convenient for traveling around town; millions of rides are taken each year. But as of January 1, the Bird scooters have all disappeared from city sidewalks.
The reason for this has since become clear: The District Department of Transportation (DDOT) did not renew Bird’s permit to operate. The company is fighting the decision, and has filed a petition with the D.C. Superior Court.
Indeed, the city’s move to block Bird scooters seems extremely erratic. The DDOT renewed the permits of three other companies—Lime, Lyft, and Spin—and issued one for a newer entrant, VeoRide. The city had previously announced plans to allow up to five e-scooter companies to operate within the city, and thus it would seem there is room for Bird, too.
City officials ranked the five companies on a variety of criteria, including sustainability, safety, and equity. Bird came in fifth place, receiving 445 total points, and was not renewed. This was just one fewer point than the fourth-place finisher, which was renewed. It’s hard to understand why Bird’s nearly identical score did not qualify.
Moreover, Bird claims in its petition that the officials who scored the company clearly erred, awarding the company zero points in certain categories where the lowest possible score was one.
“There is room in the regulations for five operators and we are confident that if scored accurately, our application would make Bird eligible for a permit, benefiting riders and our logistics partners in D.C.,” said Maggie Hoffman, vice president of city growth and strategy at Bird, to DCist. “We’re filing this complaint because DDOT’s arbitrary and capricious decisions will harm District residents who rely on Bird.”
Arbitrary and capricious seem like accurate descriptions of the transportation authority’s behavior. I say this as a Washington, D.C., resident and a frequent rider of e-scooters. (Disclaimer: I have participated in numerous promotions to receive free rides, specifically from Bird.) The differences between Birds, Limes, Lyfts, and Spins are slight, having to do with the locking mechanisms, areas where geo-fencing kicks in, and the literal look and design of the scooters. There’s clearly no justification for concluding that the Birds are a unique public menace. The city isn’t even pretending there’s some big difference with Bird—the company’s score was just one point off.
The DDOT should do the right thing: Free Bird, right now.
“These incidents are never a one-off,” Arnold Ventures’ Walter Katz wrote in a Twitter thread following the release of a video showing five Memphis police officers beating Tyre Nichols until he collapsed. Nichols died in the hospital three days later. “They are the extreme culmination of behavior that was complained of and ignored.”
Join Reason‘s Nick Gillespie and Zach Weissmueller this Thursday at 1 p.m. Eastern for a live discussion of policing in America with Katz, a former independent police auditor and deputy inspector general in California, deputy chief of staff for public safety in Chicago, and current vice president of criminal justice at Arnold Ventures, a philanthropic LLC that’s spent more than $397 million on criminal justice initiatives since 2010. Watch and leave questions and comments on the YouTube video above or on Reason‘s Facebook page.
Meta’s bid to buy the virtual reality (V.R.) company Within Unlimited may proceed, a federal judge says—notwithstanding the objections of the Federal Trade Commission (FTC).
Meta—the parent company of Facebook, Instagram, and WhatsApp—has been betting big on V.R. with the launch of its “Metaverse.” Within Unlimited fits into that plan because of its popular V.R. fitness app Supernatural. But the FTC objected to this purchase, calling it an illegal acquisition.
If Meta wants a virtual reality fitness app, it should develop its own, the FTC said. Buying an existing app “would eliminate the prospect of such entry, dampening future innovation and competitive rivalry,” in violation of U.S. antitrust law.
So, the FTC sued to stop Meta from acquiring Within Unlimited. And far from merely determining whether Meta could buy the Supernatural app or must develop its own V.R. fitness platform, the case also served as something of a test case for a contentious Khan FTC proposition.
The case tests “the FTC’s argument that potential future concentration in the still-developing market for virtual reality fitness applications is enough to stall the merger of Meta and Within,” noted Max Gulker, senior policy analyst at Reason Foundation, the nonprofit that publishes Reason, in December:
[Khan] and others belonging to the New Brandeisian school of antitrust advocate a more aggressive stance toward mergers than has been seen in decades. This advocacy is making the FTC’s case against Meta a case to watch as it may offer a preview of the FTC’s new strategy, as well as its potential success in court….
A large tech company acquiring a niche startup in a nascent, fast-developing market is not an unusual event. Along with fitting Meta’s strategy, startups like Within often consider such buyouts successful outcomes of their entrepreneurial ventures.
The Federal Trade Commission’s July 2022 announcement that it was blocking the acquisition reflects the more aggressive antitrust approach Khan is taking.
Yesterday’s decision, from U.S. District Judge Edward Davila, strikes a blow against the Khan approach.
Davila declined to issue an injunction against the acquisition, reportsThe Wall Street Journal. As of now, the decision is still under seal.
This isn’t the end of the battle, however.
“The FTC could continue to try to block the deal through a separate lawsuit filed in its in-house administrative court, where a trial is scheduled to begin on Feb. 13,” the Journal points out. “But antitrust enforcers have in the past often abandoned such administrative litigation once a federal judge denies the request for an injunction.”
Trump is teasing out new avenues of authoritarianism. The former president and 2024 presidential candidate’s education plan would give the federal government even more control over what can be taught in schools around the country. His plans include treating what he calls “the Marxism being preached in our schools” (a.k.a. anything Trumpian conservatives don’t like) as both a violation of the separation between church and state and a violation of freedom of religion. In a video speech last week, Trump also pledged to create a “new credentialing body” for teachers who “embrace patriotic values,” and said he would cut federal funding for schools or education programs that push “critical race theory, gender ideology, or other inappropriate racial, sexual, or political content onto our children”—vague terms that can also mean whatever people in power want them to mean.
In a new video this week, Trump said that “as part of our new credentialing body for teachers, we will promote positive education about the nuclear family, the roles of mothers and fathers,” and sex differences. He vowed to ban transgender student athletes anywhere in the country from playing on sports teams that correspond with their gender identity, and pledged to sic the Department of Justice on teachers who talk to kids about being transgender (“they will be faced with severe consequences, including potential civil rights violations”).
Trump said he would “ask Congress to pass a bill establishing that the only genders recognized by the United States government are male and female, and they are assigned at birth.” He also vowed to cut hospitals or health care providers from Medicare and Medicaid eligibility if they allow any sort of gender transition treatments (including things like puberty blockers or hormone treatments) for minors, and said he would create a private right of action for people to sue doctors who do so.
Trump’s promises are part of a larger Republican strategy for 2024 that Axiosdescribes as a “‘Protect the children’ platform,” which centers on “aggressively target[ing] school policies on gender identity and how racial issues are taught.”
FREE MARKETS
Interest rates raised again. “The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter percentage point and gave little indication it is nearing the end of this hiking cycle,” notes CNBC:
Aligning with market expectations, the rate-setting Federal Open Market Committee boosted the federal funds rate by 0.25 percentage point. That takes it to a target range of 4.5%-4.75%, the highest since October 2007.
The move marked the eighth increase in a process that began in March 2022. By itself, the funds rate sets what banks charge each other for overnight borrowing, but it also spills through to many consumer debt products.
QUICK HITS
Ben Crump announces at Tyre Nichols’ funeral that Rep. Shelia Jackson Lee intends to re-introduce to Congress a new version of the George Floyd Justice in Policing Act that includes the Tyre Nichols Duty to Intervene Act
• Friends of self-proclaimed sex trafficking survivor and right-wing darling Eliza Bleu say she’s lying about key elements of her story.
• Southwest and the Federal Aviation Administration (FAA) both royally screwed up holiday travel. Southwest has already lost hundreds of millions of dollars. But what about the FAA?
Ferrari Shares Accelerate On Strong 2023 Outlook Despite “Complex Global Macro” Turmoil
Despite the stock, bond, and crypto turmoil last year, Italian supercar maker Ferrari posted full-year profits up 13% year-over-year and revealed an even stronger outlook for 2023. The CEO said robust supercar sales were fueled by “persistently high demand for our products worldwide.”
For the fourth quarter, Ferrari reported earnings per share of $1.33 from sales of $1.5 billion. Wall Street analysts were satisfied with the earnings.
“Last year ended with outstanding financial results that met and exceeded our guidance and set new records across all metrics, such as a net profit of €939M and an industrial free cash flow generation of €758M. These figures provide the base for an even stronger 2023, fueled by a persistently high demand for our products worldwide.”
“Despite a complex global macro scenario, we look ahead with great confidence, encouraged by the many signs and achievements of an evolving Ferrari,” CEO Benedetto Vigna said.
Ferrari shipped an impressive 13,221 vehicles in 2022, up 19% from 2021. This was a new record for the company.
US-listed shares of Ferrari were up nearly 5% in premarket trading. Shares traded near 2021 highs.
Analysts from Credit Suisse were surprised by the strong 2023 outlook. Morgan Stanley analysts said the guidance was solid and supportive.
Ferrari is bucking the trend as the overall auto industry wanes. High-interest rates have sparked an affordability crisis, while average folks with high monthly car payments struggle to service their debts.
What’s impressive with robust Ferrari sales and a strong outlook for this year is that demand has yet to be impacted by market turmoil. Last fall, we noted that “crypto bros” were panic-selling G-Wagons and McLarens while Bitcoin tumbled to a low of $15,500.
Biden, McCarthy Strike Positive Tone After Debt Ceiling Meeting
House Speaker Kevin McCarthy and President Joe Biden met at the White House on Wednesday to discuss the debt ceiling, and spending cuts which are set to become major points of contention in the coming weeks.
“I thought it was a very good discussion. We walked out saying we will continue that discussion. And I think there is an opportunity to come to an agreement, and I think that’s the best thing,” McCarthy told reporters following the one-hour discussion.
McCarthy refused to state which areas Republicans are focusing on for cuts, or when he would announce their plan – and that ‘negotiating in public’ won’t help in reaching an agreement. The only thing McCarthy did say was that cuts to Medicare and Social Security are not on the table.
Biden, meanwhile, said of the meeting: “Let’s start treating each other with respect, that’s what Kevin and I are going to do.”
The United States is close to exceeding its statutory debt ceiling, and Republicans are using the occasion to highlight the rapidly increasing federal debt and call for spending cuts.
The debt ceiling is the amount of debt Congress has authorized the federal government to have at one time.
Since the United States has operated on a deficit budget in all but four years since 1970, continued borrowing is essential to meet the country’s financial obligations.
The current ceiling is approximately $31.4 trillion, set 13 months ago.
“If we continue the trajectory that we’re in for the next 10 years, we’ll spend $8 trillion just on interest [on the national debt],” McCarthy said.
“The greatest threat to America is our debt. Our debt is now 120 percent of GDP, meaning our debt is larger than our economy.”
Setting Expectations
Prior to the meeting, both leaders attempted to define the terms of the discussion.
Biden characterized increasing the debt ceiling as a non-negotiable requirement for maintaining the integrity and economic stability of the United States.
“I will not let anyone use the full faith and credit of the United States as a bargaining chip,” Biden said on Jan. 26 while making remarks on the economy in Springfield, Virginia.
A White House memo released on Jan. 30 reiterated the president’s position.
“As the president has said many times, the United States must never default on its financial obligations. Raising the debt ceiling is not a negotiation; it is an obligation of this country and its leaders to avoid economic chaos,” the memo stated.
As vice president, Biden was involved in negotiations in 2011 when House Republicans demanded that President Barack Obama make deficit reductions in exchange for an increase in the debt ceiling.
The showdown prompted volatility in financial markets and caused the credit rating of the United States to be reduced for the first time in history.
The two sides eventually agreed on an increase in the debt ceiling accompanied by a deficit reduction. But the confrontation hardened Biden’s resolve to never again negotiate over the debt ceiling, a White House staffer reportedly told NBC News.
McCarthy has repeatedly said that he would not refuse to raise the debt ceiling but would ask the president to agree to reduce runaway spending.
“Look, there will not be a default,” McCarthy said on Face the Nation Sunday. “But what is really irresponsible is what the Democrats are doing right now, saying you should just raise the limit.”
After today’s meeting, McCarthy was more emphatic about reducing the national debt.
“The one thing I do know is our debt is too high. We have waste in our government. And we need to sit down together in a responsible will put us on a path to balance that will make the future of America stronger into the next century.”
A Successful Start
McCarthy’s goal for the meeting was to begin negotiations, which he believes was accomplished.
“I’ve just walked out having an hour conversation with this president, that I tell you from my perspective was a good conversation. No agreements, no promises except that we will continue this conversation,” McCarthy said.
He did acknowledge that the two are not yet close to making a deal.
“We have different perspectives. But we both laid out some of our vision of where we want to go, and I believe after a while, we can find common ground.”
The United States would have exceeded its current debt ceiling on Jan. 19 but for “extraordinary measures” taken by Secretary of the Treasury Janet Yellen to keep the government solvent.
Yellen estimated that would keep the nation below the ceiling until sometime in June.
McCarthy is hopeful that he and Biden can come to an agreement sooner than that. “I told the president I would like to see if we can come to an agreement long before the deadline so we can start working on other things.”
To accomplish that goal McCarthy said he will look for ways to compromise through discussion and negotiation.
“I think this is exactly how the government in America is designed because you have to find a compromise. The American people made the decision to have the Republicans in control in the house.
“Democrats have a small majority of the Senate, and the Democrats have a president. But we’re all Americans. We all have to work together.”
Adani Contagion Spreads As Citi Halts Margin Loans On Debt
Indian billionaire Gautam Adani’s corporate empire is crumbling. A deeper selloff forced Adani Enterprises Ltd. to pull a stock sale in the final minute. Two banks have rejected bonds tied to Adani companies as collateral for client trades. And the turmoil has pushed MSCI India Index to the brink of a technical correction.
Adani Enterprises plunged 27% on Thursday in Mumbai trading after it was revealed late Wednesday that it abandoned a $2.4 billion follow-on share sale. Today’s losses added to a 28% tumble in the previous session.
The decision to pull the share offering comes as more than $100 billion in market cap has been wiped out in Adani group’s stocks following a scathing report from Hindenburg Research last Tuesday. Dollar bonds tied to the companies are also plunging into the distressed territory, raising the risk of default.
Yesterday, Bloomberg reported that Credit Suisse designated a zero lending value for bonds sold by Adani Ports and Special Economic Zone, Adani Green Energy, and Adani Electricity Mumbai. Now Citi’s wealth management arm has done the same.
The meltdown in Adani shares has significant implications for Indian stocks:
“This is potentially a bigger problem for Indian equities, which have done so well during the pandemic as China pursued its Covid Zero policy.”
“The long-term ramifications could be quite negative,” said Peter Garnry, head of equity strategy at Saxo Bank A/S in Hellerup, Denmark.
Bloomberg added:
The implosion of the Adani companies, which accounted for almost one out of every $10 invested in Indian stocks at the group’s peak in September, has provided a catalyst for investors complaining about the nation’s expensive valuations to trim their holdings. The fallout is likely to make it harder for other Indian corporations to raise funds, put them under increased regulatory scrutiny, while also testing the faith voters have in Prime Minister Narendra Modi.
The turmoil has helped push MSCI India Index to the brink of a technical correction.
Meanwhile, global funds have yanked a net $2 billion out of Indian equities in the three days through Tuesday. Funds are selling now, and asking questions later.
“The Adani-related headlines are generating a high level of negative attention, which could dampen investor appetite for Indian stocks,” said Jian Shi Cortesi, who manages China and Asia equity funds at GAM Investment Management in Zurich.
One major risk we see is the deterioration in access to financing for Adani companies, some of which are highly leveraged.
Even after the latest slide in Adani group shares, Bloomberg Intelligence’s Nitin Chanduka believes there is more downside ahead.
ECB Hikes 50bps As Expected, Issues Dovish Forward Guidance, Unveils Climate QE
In a mirror image of the dovish BOE earlier this morning, which hiked 50bps but signaled that its tightening cycle may well be over sending sterling and gilt yields sliding, moments ago the ECB, which continues to believe erroneously that if only it can crash the European economy it will somehow have control over Russian commodity prices, hiked interest rates by 50bps, as expected.
We raised interest rates by 0.5 percentage points.
Also in a dovish twist of forward guidance, the central bank also said intends to hike another 50bps in March, and only then will it “evaluate the subsequent path of its monetary policy.” This is actually dovish because in December’s press conference Lagarde flagged that we could see as many as three more 50bp hikes… not any more. Here is the statement:
“In view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. In any event, the Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.”
Compare this to December, when the ECB expected “to raise [rates] significantly further, because inflation remains far too high and is projected to stay above the target for too long”. It also said that “rates will still have to rise significantly at a steady pace” and future decisions will “be data-dependent and follow a meeting-by-meeting approach ” In December its outlook was “euro area economy may contract in the current quarter and the next quarter, owing to the energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions.” adding that “a recession would be relatively short-lived and shallow ” Ahead “growth [was] projected to recover as the current headwinds fade.”
Breaking down the statement, let’s look at Guidance first:
Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target
The Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.
Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach
… and QT (as a reminder, in December, the APP portfolio will decline by €15 billion per month on average from the beginning of March until the end of June 2023, and the subsequent pace of portfolio reduction will be determined over time):
Remaining reinvestment amounts will be allocated proportionally to the share of redemptions across each constituent programme of the APP and, under the public sector purchase programme (PSPP), to the share of redemptions of each jurisdiction and across national and supranational issuers.
In particular, the remaining reinvestments will be tilted more strongly towards issuers with a better climate performance. Without prejudice to the ECB’s price stability objective, this approach will support the gradual decarbonisation of the Eurosystem’s corporate bond holdings, in line with the goals of the Paris Agreement.
And while it is of secondary important, the most hilarious part in the statement was the ECB’s disclosure of what can only be dubbed Climate QE, to wit:
For the Eurosystem’s corporate bond purchases, the remaining reinvestments will be tilted more strongly towards issuers with a better climate performance. Without prejudice to the ECB’s price stability objective, this approach will support the gradual decarbonisation of the Eurosystem’s corporate bond holdings, in line with the goals of the Paris Agreement.
Yup: just when you thought the idiots in charge of the ECB couldn’t shock us any more, they go ahead and totally redeem themselves.
What happened next?
Well, in wake of the ECB policy announcement, where a 50bp hike was delivered as expected, a marked dovish reaction has been seen given the dialling down of the hawkish language from December. In December’s press conference Lagarde flagged that we could see as many as three more 50bp hike (i.e the February. March and May meetings): however in the February statement the language has now been altered to guide participants towards a 50bp hike in March and thereafter the ECB will “evaluate the subsequent path of its monetary policy.”
Looking at market, the Mar 2023 bund spiked from 137.91 to an eventual session peak of 138.62 with the accompanying 10yr yield dropping from 2.21% to 2.15%. Given the pronounced EGB move, USTs and Gilts have also rallied with USTs at a fresh session high of 115.25.
In FX, the EUR/USD also came under immediate pressure falling from 1.0988 to 1.0961. before trimming back around half of the move as we await further commentary and guidance from President Lagarde and any fresh insights into the ongoing debate between the ECB’s hawks and doves, particularly on core inflation and the possibility for a step-down from 50bp increments to 25bp at a post-March meeting.
