Month: September 2022

Authored by Wolf Richter via WolfStreet.com,

In terms of diversification between stocks and bonds, there is none. Not anymore. They even nailed the bear market rally in lockstep.

The average 30-year fixed mortgage rate, after weeks of enormous day-to-day volatility, was back at 6.25% on Tuesday, according to Mortgage News Daily. Today’s rate was just about even with the June-14 high of 6.28%, before the beautiful summer bear-market rally set in and turned everything upside down for a couple of months. With mortgage rates, that rally has now unwound.

I call them holy-moly mortgage rates because that’s the sound people are making when they figure the mortgage payment at those rates to buy their dream shack at today’s ridiculous prices (chart via Mortgage News Daily):

Treasury yields jumped, some to multi-year highs.

The bear-market rally was quite something. It started in mid-June and ran through mid-August. Both bonds and stocks surged, and then began unwinding the surge. While stocks have only partially unwound the bear market rally, mortgages and Treasury securities have unwound all of it already.

The 1-year Treasury yield jumped by 14 basis points, to 3.61%, the highest since November 2007. The spike started in November 2021, from near 0%. The summer bear-market rally was shallow and is barely visible in the long-term chart:

The 2-year Treasury yield jumped 10 basis points today to 3.50%, nearly matching the 3.51% last Thursday, which had been the highest since November 2007. The spike started in September 2021, when the Fed had its infamous pivot, the real one, and the 2-year yield reacted instantly. The summer rally was a little more pronounced than with the 1-year yield:

The 10-year Treasury yield jumped by 13 basis points today to 3.33%, the third highest since February 2011, behind only a couple of days in mid-June before the summer bear-market rally kicked off, which has now been wrung out of the 10-year yield:

The 30-year Treasury yield jumped by 14 basis points to 3.49%, the highest since September 2011, having squeaked past the November 2018 high. The summer bear-market rally is nicely visible in the chart, but right in line with other short-lived rallies:

So now there is all kinds of hand-wringing about the end of the bear-market rally that had been so much fun over the summer and that ended in mid-August at which point stocks and bonds began to spiral down again.

In terms of diversification between stocks and bonds, there is none. Back in the day, there was. But not anymore. They were going up together – when bond prices rise, yields fall. And now they’re going down together – when bond prices fall, yields rise. They even nailed the summer rally in lockstep. It’s just a question of which moves faster.

In terms of the bond market, corporate bond issuance came back to life as companies are trying to lock in still relatively low interest rates. According to Bloomberg, about 20 companies – including Lowe’s, Walmart, Deere, and McDonald’s – are lining up $30 billion to $40 billion in bond offerings this week, looking for buyers. And this apparently has caused Treasury yields to spike, or whatever.

There is always one reason or another that we can cite why yields are rising and unwinding the bear-market rally.

At the most basic level, markets spent two months, from mid-June through mid-August fighting the Fed, blowing off its hawkish statements, and citing stuff out of context to conjure up delusions about the Fed being in fact dovish and on the way to a pivot. As the tightening deniers fanned out and spread the gospel of the pivot, enough folks took it seriously, and so there was the summer bear-market rally.

But by mid-August, under steadfastly hawkish Fed comments, the rally petered out. And then came Powell’s Jackson Hole speech on August 26, which cleared up any remaining confusion.

So now we’re back to basics: The path of inflation, QT ramping up to full speed this month, the coming rate hikes, and still way over-inflated markets, along with speculation about when the Fed would pause to let the higher rates sink in – at 4%? – and let them and QT do their magic hopefully on cooling inflation and the labor market.

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As Apple is about to unveil its latest iPhone lineup along with a couple of other new or updated products this week, the anticipation among the company’s faithful has been slowly building.

But, as Statista’s Felix Richter notes, while while Apple’s launch events are still headline news in tech blogs (and every news outlet covering the tech industry really), the excitement around the company’s iPhone announcements has cooled off a bit in recent years.

You will find more infographics at Statista

With leaks and predictions become more accurate each year and real surprises becoming increasingly rare, Google Trends data suggests that new iPhone models no longer create as much buzz as they used to. Looking at global search interest for the term “iPhone” shows that the latest iPhone unveilings failed to spark as much enthusiasm online as earlier launch events.

Last year’s unveiling of the iPhone 13 for example led to search interest on Google roughly half the volume of the iPhone 5’s debut in 2012, which is when the iPhone hype peaked (at least in terms of Google searches).

Goldman Sachs’ Rod Hall previews Apple’s annual product launch event slated for this afternoon (1300ET). 

Heading into Apple’s big annual iPhone event Rod/GIR are most interested in how the company will approach pricing.

They believe it is unlikely that Apple raises Pro model prices because this potentially would generate lower gross profit contribution by prompting Pro owners to downshift in greater numbers to lower ASP non-Pro devices. Rather, Rod/GIR believe Apple’s strategy revolves around maximizing margins in the non-Pro models and “catching” some Pro downgrades with a higher ASP 14 Max product that also has strong margin characteristics.

They do believe Apple is likely to correct local currency prices for USD strength as the company did in Japan earlier.

As for features we see the potential for satellite communications in Pro models as most interesting because it could come along with a service plan option for Apple similar to Garmin’s current inReach satellite products.

You will find more infographics at Statista

In addition to the iPhone updates viewers are interested in the possibility for a higher priced Pro Watch as well as an update to the popular AirPods Pro product.

By Michael Msika, Bloomberg markets live commentator and reporter

While European stocks have sold off since the middle of August, one thing has been missing: market anxiety in the form of a spike in volatility indicators.

The Euro Stoxx 50 volatility index, also known as the V2X, remains below levels seen earlier this year, and given that bull market rallies typically follow a period of extreme stress, that may be a worrying sign for stock bulls. It’s also a pointer toward hedging opportunities as portfolio protection remains relatively cheap.

According to Bank of America analysts including Riddhi Prasad, there’s value in owning equity volatility given the “disconnect” with credit spreads that have widened to reflect the growing risk of an energy crunch, inflation and rising interest rates driving economies into recession.

In terms of hedging, investors are being drawn toward the DAX Index, given Germany’s high exposure to gas shortages and the benchmark’s 40% weighting in energy-intensive sectors such as industrials, autos and chemicals.

Patrick Bonouvrie, head of European equity index derivatives trading at Optiver, says activity in DAX options indicates there’s brisk demand to hedge against the risk of a prolonged shutdown of Russia’s main gas pipeline to Europe.

“In particular, DAX options one to three months out with strikes around 10% lower than current levels are trading near all-time highs relative to similar options on the Euro Stoxx 50 Index,” Bonouvrie says. Next week’s September options expiry could be eventful after some big index moves in the last quarter, giving traders more to do to rebalance positions and hedges, he says. 

Overall sentiment toward European stocks remains weak, especially with plenty of upcoming risk events in September, including Thursday’s ECB rate decision. “This could prove to be the calm before the storm,” says ActivTrades technical analyst Pierre Veyret.

The call is echoed by Zurich Insurance Chief Market Strategist Guy Miller, who says it would be unusual for equities to bottom before the US officially enters recession.

He sees stocks retesting the lows of mid-June, saying that “the most anticipated recession in the US and Europe that we’ve ever had is not totally reflected in markets.”

According to Sam Stovall, chief investment strategist at CFRA Research, markets typically bottom with “a spike in volatility from panic selling,” something that so far has been absent. “It would add more certainty to the conclusion of this bear market if we did get a spike,” he says.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 1.4 percent on September 7, down from 2.6 percent on September 1.

The Atlanta Fed breaks down the driver of the reduction:

After recent releases from the US Census Bureau, the US Bureau of Labor Statistics, the US Bureau of Economic Analysis, and the Institute for Supply Management, the nowcasts of third-quarter real personal consumption expenditures growth, third-quarter real gross private domestic investment growth, and third-quarter real government spending growth decreased from 3.1 percent, -3.5 percent, and 1.7 percent, respectively, to 1.7 percent, -5.8 percent, and 1.3 percent, respectively, while the nowcast of the contribution of the change in real net exports to third-quarter real GDP growth increased from 0.82 percentage points to 1.09 percentage points.

So to summarize – we are a third of the way to a 3rd negative quarterly GDP print with only one month left in the quarter.

But of course, 3 negative quarters of GDP would absolutely, definitely not be a recession remember.

By Michael Every of Rabobank

Steep Learning Curves

Yesterday saw a marked shift in bond yields and some steepening curves. US 2-year Treasury yields were +12bp to 3.50% and 10-years +16bp to 3.35%. The primary driver was a stronger than expected US ISM survey at 56.9 vs. 55.3 consensus, which outranked the dismal services PMI released shortly before, where the reading was only 43.7 vs. 44.2 expected. Will the real service sector please stand up?

UK 2-year Gilt yields were up little changed at the close. 10-years were a bigger rollercoaster than Alton Towers before closing +8bps. That’s what happens when the government launches an energy subsidy which could cost 5% of GDP and last until the current geopolitical crisis is resolved.

German 2-year Bund yields plunged from 1.14% to 0.95% before bouncing to close -4bps at 1.10%. 10-years were +2bps, -11bps, +16bps, -5bps, and closed +6bps at 1.63%. That was as Europe also gets ready to roll out massive open-ended energy subsidies, with market talk of up to €2 trillion as the bill – again presuming we know when the end date is, which we don’t. And don’t forget a massive new defence-spending round must be on the table at the same time. And to add to the fun, there are also reports that global energy traders need (Western) state bailouts of up to $1.5 trillion to cover margin calls.

Japan joined in today with a new ¥50,000 hand-out for low-income families. Those paying attention will also note a wide range of emerging markets are doing similar things. In short, hardly anyone is prepared to pay the real global energy price and lower demand in that painful manner. That means wholesale prices will just rise further – but that’s also a steep (learning) curve for some, it seems.

So to central banks. The Fed is going to keep hiking against this backdrop as the market starts looking at the 4% Fed Funds level again. The RBA hiked 50bps yesterday to take its OCR to 2.35%, through gritted teeth in saying medium-term inflation expectations are “well anchored”, and the market is again focused on 4%. The RBNZ thinks the same 4%. The BOC lifted rates to 3.25% today, with 4% again seen as a likely finishing point. But what will the BOE do given the new energy subsidy? What will the ECB do? Even before the ink is dry on EU fiscal largesse we got hints ECB President Lagarde might be happy with 50bps and a promise to “do whatever it takes” if inflation persists(!), while the risk is that even 75bps might be presented as a one-off Herculean effort deserving market praise.

In short, my meme that ‘DM=EM’ is looking bang on the money as Western governments try to repeat what they did during 2008’s and 2012’s liquidity crises with a global energy crisis. Politically, you can’t blame them; but you also can’t ‘print electricity’. As noted this week, we will still need rationing, if not by price. That implies central-planning from governments that only have one plan – ‘make this all go away’.

One therefore may have to theoretically flag the tail risk of a steepening tone to some yield curves, as seen yesterday, due to artificially declining inflation at the short end — especially if central banks buy what governments are selling with both hands, as consumers will with cheap energy — and as the market looks at the longer end of the yield curve, and banana-republic populist fiscal management becoming embedded, and thinks, “Really?”

Of course, in reality central banks can avoid this by repressing bond yields: we have ample evidence of that.

But what they cannot then do is also prop up their currency: and we have ample evidence of that too. Look at JPY, trading at 144.9 this morning, with 150 still a whisper number. If one applies the JPY trend across to EUR and GBP, one gets numbers like EUR/USD at 0.80 and GBP/USD at 0.90, both of which are inflationary on the import side. Neither are forecasts! But both look at how much further JPY has fallen on the BOJ’s “print it and they will come” policy stance. As such, expect a soaring Dollar and Fed swap lines to be a very big and very geopolitical thing very shortly – which is another theme flagged here for years.

Meanwhile, it is widely accepted that rate hikes can’t address supply shocks, and tightening now is a deliberate policy error by central banks. The same view rightly holds that ultra-low rates couldn’t raise inflation before Covid, thus the persistent flattening yield-curve trend that was seen for years, and again until recently. Yet combine the two views and we are saying interest rates cannot do anything about structural inflation most of the time: so why are we paying attention to monetary policy at all?

Indeed, looking back to really long-run inflation charts shows we constantly move through (geo)political structures that are either more or less inflationary: today, central banks are just along for the ride too.

The real solution to this inflation crisis obviously lies on the supply side, in terms of energy and other key goods. Yet that really takes us a step away from inflation-targeting and back towards an echo of how macro-stability was previously achieved. Under historical gold standards inflation was highly volatile, soaring and crashing year after year, because it was not what mattered: what was instead targeted was the stock and flow of bullion in and out of the country, like FX reserves until recently. This flow was best balanced by making sure one exported and imported appropriately, and focused on more exports and less imports, i.e., mercantilism. That was best achieved on the supply side!

The point is that one can start to construct a new mental framework where central banks actually need to be targeting MWh and tonnes of production, Soviet style, as the key macro-stability anchor: get that right, and get moderate inflation. Target just inflation, which you cannot control, and which governments are only pretending they can, and you won’t end up with macro-stability or low inflation.

Sadly, that might be a steeper learning curve for some.

Today in “signs the market has definitely peaked” news…

It was reported on Wednesday that reality TV star Kim Kardashian is going into business with a former Carlyle partner to start her own private equity firm. The firm is going to be focused on “investing in and building consumer and media businesses”, according to a writeup by the Wall Street Journal this week. ‘

Her partner in the venture, Jay Sammons, formerly was in charge of consumer investing at Carlyle. The two are starting a firm called SKKY partners, which The Journal writes “will make investments in sectors including consumer products, hospitality, luxury, digital commerce and media as well as consumer-media and entertainment businesses”. 

Sammons was formerly an investor in successful brands like Beats by Dre and Supreme. And despite being a reality TV star, Kardashian is no stranger to the business world. She has her own apparel business that was recently valued at $3.2 billion and has also launched a skin care line.

Sammons approached Kardashian about the idea “earlier this year” and the two will add Kim’s mom, Kris Jenner, as a partner to the business as well. 

Kardashian said she is excited to help founders of smaller businesses grow their brands. She said: “The exciting part is to sit down with these founders and figure out what their dream is. I want to support what that is, not change who they are in their DNA, but just support and get them to a different level.”

The fund has yet to make any investments and has not started fundraising yet, but they are looking to tap institutional investors “shortly” to begin the process. 

Sammons will be in charge of the day-to-day operations of the company, which is going to be based in Boston and Los Angeles. “Having built businesses themselves as true entrepreneurs is a very differentiated approach,” he said of the Kardashians. 

Authored by Irina Slav via OilPrice.com,

Germany is not convinced that a price cap on Russian gas imports would be a smart move, Politico has reported, citing a spokesman for the German economy ministry.

“We remain skeptical when it comes to issues surrounding a gas price cap, but we are generally ready for talks in the European framework,” he said.

The idea to cap Russian gas prices was floated earlier this month by European Commission President Ursula von der Leyen.

“I firmly believe that it is now time for a price cap on Russian pipeline gas to Europe,” Von der Leyen said last week at a meeting of conservative German legislators. 

“A gas price cap can be proposed at European level, and there also is a legal foundation at European level to skim profits temporarily as an emergency measure at a time of crisis,” she also said.

The idea has been taken up by other European officials as well and will be discussed at a meeting of EU energy ministers on Friday. There is also a variation of the price cap idea: Poland has called for a price cap on all imported gas, including LNG.

Politico reports that, according to German government officials, Berlin has misgivings about a gas price cap not because it fears for its own gas supply but because of concern about supply to Central Europe: Russia may respond to price caps with a halt of gas flows via Ukraine, flows that go to Central European countries, threatening the regional gas supply situation.

Norway, meanwhile, has signaled it was willing to discuss lower prices for the gas it sells to Europe, along with long-term contract commitments.

“I fully understand that Europe now has a profound debate about how energy markets work, how they can secure more affordable prices for citizens, families, industries, how this shortfall of gas after [Russian president Vladimir] Putin’s aggression can be handled,” said the country’s Prime Minister, Jonas Gahr Større, this week, as quoted by the FT.

It looks as though the Twitter versus Elon Musk drama is going to continue on schedule, according to a ruling out this morning by Delaware Chancellor Kathaleen McCormick. 

In the ruling, the court denied Musk’s request to delay the upcoming trial over whether or not he should be forced to fulfill his obligation to buy Twitter for $44 billion. Musk’s legal team had previously requested that the trial take place early next year, while Twitter originally requested the trial take place in October of this year. 

Musk’s legal team then changed their request and petitioned the court to have the trial start in mid-November, but the court ruled against them this morning. The trial is now expected to take place on October 17.

Shares of Twitter were up about 5% in early morning trading after the news broke:

McCormick’s ruling seemed to make it clear that she wasn’t interested in further delays. She wrote: “I previously rejected Defendants’ arguments in response to Twitter’s motion to expedite, making clear that the longer the delay until trial, the greater the risk of irreparable harm to Twitter. I am convinced that even four weeks’ delay would risk further harm to Twitter too great to justify.”

It wasn’t a total loss for Musk’s legal team, however. Their request that Musk would be allowed to add claims from a Twitter whistleblower to their suit was granted by the court. McCormick said there was a “low bar” for adding the claims that Musk’s team was able to meet. 

The whistleblower claims involved Twitter’s former head of security, Peiter “Mudge” Zatko, who claimed that Twitter had alleged “extreme, egregious deficiencies by Twitter” regarding privacy and security and that executives misled the board of directors on such issues. 

Musk’s team has claimed the whistleblower content could show that Twitter breached its terms of the merger agreement with Musk. 

Twitter, at the time the whistleblower went public, called the claims “a false narrative that is riddled with inconsistencies and inaccuracies, and presented without important context.” 

Developing…

As expected, and ahead of a potential 75bps rate hike by the ECB tomorrow and the Fed later this month, moments ago the Bank of Canada hiked rates by 75bps as expected, lifting the overnight rate to 3.25% – the highest policy rate among major advanced economies – with the fourth consecutive outsized (more than 25bps) rate hike, and warning that “given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further.”

Here are some more highlights from the BOC statement:

RATES:

• Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further.
• As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target. The Governing Council remains resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.

QT:

• Quantitative tightening is complementing increases in the policy rate

INFLATION:

• Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched.

LABOR MARKET:

• Canadian economy continues to operate in excess demand and labour markets remain tight

HOUSING MARKET:

• With higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic.

OUTLOOK:

• The global and Canadian economies are evolving broadly in line with the Bank’s July projection
• Continues to expect the economy to moderate in the second half of this year, as global demand weakens and tighter monetary policy here in Canada begins to bring demand more in line with supply.

And the statement redline, courtesy of Newsquawk:

Since the announcement was largely as expected, the market reaction was muted, with little movement in the loonie…

… and a modest rise in yields.