Month: November 2022

Despite better-than-expected US macro data in the last few weeks, the ‘soft’ survey data on the Manufacturing side of the economy has been rapidly losing momentum.

However, according to this morning’s final October print for S&P Global’s PMI, things improved throughout the month from a 49.9 (contractionary) preliminary print to a final of 50.4 (still notably down from September’s final print of 52.0). That is the weakest print since June 2020.

The ISM Manufacturing survey also printed slightly better than expected at 50.2 (50.0 exp) but was lower than the September print of 50.9. That is the weakest since May 2020.

Source: Bloomberg

This comes after the overnight session saw China and UK PMIs remain in contraction (deepening in the latter).

The PMI data showed the sharpest drop in new orders since May 2020, but on the positive side, inflationary pressures softened further.

On the ISM side none of the major components are in expansion with new orders at 49.2 and employment at 50.0, but, like PMI, prices plunged to 46.6…

Source: Bloomberg

Inventories and production added very marginally to PMI…

Source: Bloomberg

ISM Respondents did not sound upbeat at all:

• “Flat business activity: continued electronics market challenges.” (Computer 8 Electronic Products]

• “Customers are canceling some orders. Inventories of finished goods increasing. Expect some bounce back as some customers may be waiting for commodity prices to decline (further).” (Chemical Products]

• “Challenges with labor and parts delivery are easing. Order levels are slowing down after pent-up demand in the previous month.” [Transportation Equipment]

• “Growing threat of recession is making many customers slow orders substantially. Additionally, global uncertainty about the Russia-Ukraine (war) is influencing global commodity markets.” (Food. Beverage 8 Tobacco Products]

• “We have seen a general pullback in available capital budgets from our customers, and that is having a significant impact on our sales in the fourth quarter.” (Machinery]

• “Housing market is down, so our business is affected. Capacity has increased over the last two years due to high orders of consumer goods and appliances, so now we re trying promotions to get our orders up to where we can use all our capacity.” [Electrical Equipment. Appliances 8 Components]

• “Customer demand has been slower for two months. Production is decreasing our inventory and (we are) implementing forecasts carefully. The headwind seems to be very strong, so we need to be prepared for that.” (Fabricated Metal Products]

• “International conditions loom large and seem very foreboding. Overall, we still think 2023 will be a positive year, with at least some moderate growth.” (Nonmetallic Mineral Products]

• “Lead times are improving. Plastic prices are coming down.” [Plastics 8 Rubber Products]

• “Prices are continuing a slight decline. Suppliers are trying to hold off decreases, but competition is increasing.” [Miscellaneous Manufacturing]

Looking forward, things are bleak as output expectations for the coming 12 months weakened in October. Although still generally upbeat, the degree of confidence was the lowest since May 2020 as firms expressed concerns regarding inflation and overall demand conditions.

Siân Jones, Senior Economist at S&P Global Market Intelligence, said:

“October PMI data signalled a subdued start to the final quarter of 2022, as US manufacturers recorded a renewed and solid drop in new orders. Domestic and foreign demand weakened due to greater hesitancy among clients as prices rose further and amid dollar strength. As such, efforts to clear backlogs of work, rather than new order inflows, drove the latest upturn in production.

“Confidence in the outlook waned as underlying data also highlighted efforts to cut costs and adjust to more subdued demand conditions in the coming months. Input buying fell sharply and resilience in employment stumbled, as the pace of job creation eased to only a marginal rate.

“On a more positive note, input costs rose at the slowest pace in almost two years amid signs of reduced disruption in supply chains. Lower demand for inputs was a contributing factor to this, however. Nevertheless, softer hikes in costs were reflected in a slower uptick in output charges, as firms sought to pass on cost savings where possible to try and boost sales.”

Finally, this ISM print is important as JPMorgan warned this morning:

“The Fed may have comments on economic risks becoming more balanced between growth and inflation; in that regard, ISM numbers matter as once the US falls into contractionary territory, the market will increasingly look for a change to the Fed’s hawkish behavior.“

The question is – are these ISM/PMI prints on the day the FOMC begins its deliberations enough to spook Powell into pausing or ‘stepping down’?

by Michael Every of Rabobank

The times are not just a-changin’ – they have changed. Let’s take six of the top seven headlines in the Financial Times this morning in Asia as Exhibit A:

• ‘Biden claims oil companies are ‘war profiteering’ as he floats windfall tax’
• ‘The Long View. Is Europe winning the gas war with Russia?’
• ‘Military Briefing: Russia and Ukraine prepare for the rigours of winter war’
• ‘The Big Read. Egypt and the IMF: will Sisi take the economy out of the military’s hands?’
• ‘The nuclear threats that hang over the world’
• ‘Live news updates: Putin says grain deal ‘suspended’ not terminated’’

Do you spot a pattern? War; economic war; war; military; war; economic war. Are you incorporating them into your forecasts? I can assure you that the vast majority of analysts still aren’t because this is apparently ‘exogenous’. If so, what is endogenous is irrelevant. Anyway, on we go into those murky waters, via a mini-edition of the Global D’Oily.

The White House has come out all guns blazing against Big Oil, calling them war profiteers (which the US is no stranger to: **cough** The 2003 Iraq War **cough**), and threatening windfall taxes. President Biden gave a public address and specifically tweeted that: “The oil industry has a choice. Either invest in America by lowering prices for consumers at the pump and increasing production and refining capacity. Or pay a higher tax on your excessive profits and face other restrictions.” Recall when in 2016 I talked of geopolitical ‘Thin Ice’ we could fall through, after which markets would no longer operate the way they used to? Well, it wasn’t just about tariffs: the US is now laying down the law to not only the Russian energy industry, but its own.

Public anger at firms making huge profits during periods of high inflation and low growth is understandable: just wait for high unemployment too and then see how angry the atmosphere gets. Yet saying a private firm can make a fixed % return on the nominally-priced volume of a product it sells –until it exceeds an unclear threshold that is no longer “a fair return on hard work”– is not neoliberal laissez-faire. The last time we saw that in the US was 1980. (And if we saw it again now, who might be next, as commodity trading house profits echo those of Big Oil?)

The way the tweet is worded, could we see the use of the Defence Production Act to force Big Oil to build more refineries, which will take years to come on line, or key pipelines, including the one which the White House put the kybosh on early in this administration? The industry itself claims aggressive federal regulations aimed at preventing it growing, and in favour of a green transition, are the real culprit. Or is Big Oil expected to directly subsidise energy prices from current profits, as well as to increase production against a backdrop of lower prices? Or might we see export bans, which would make energy cheap in the US, but extortionate elsewhere? Or is this just a sham?

Since the news broke, oil has failed to fall back – which is what has happened in most other economies where governments lean on their energy sectors to “step up” and help the public by “lowering prices at the pump”. Indeed, the Saudis are still pressing ahead with their 500km-long, glass-walled, linear city called Neom, which looks like something from Logan’s Run. (But, I suspect, won’t age as well as the inhabitants of that movie’s city.)

That is despite the looming COP27 summit in Sharm el-Sheikh, Egypt, who got that FT mention today, and are hosting the Green Team while building a new Pharaonic capital city that includes a vast public park in the middle of a desert, backed by earnings from LNG exports. Saint Greta of Thunberg says she, like UK PM Sunak, will not be attending this year because, in so many words, she sees it as ‘Sham el-Chic’ (hat tip to Michael Magdovitz for that one).   

Also in the energy mix, the US is to exempt Russian oil loaded before 5 December from its price cap (just to clarify, that’s a price cap on Russian, not US oil), with a deadline of 19 January 2023 before it is imposed on unloaded cargo. How this will all work out in practice also remains to be seen. Sham is very much the word on the energy street.

More deliberate shambles, 90% of Kyiv is now reportedly without running water and/or electricity – and winter is coming. Are we really going to see a modern European city of millions having to see its population melt snow with firewood to get by? Perhaps, yes; or millions of refugees.

On the upside, several ships departed from Ukraine laden with grain yesterday despite the Russian threat of a blockade: that’s some relief for food prices, if so – but let’s wait and see.

Yet given the Eurozone inflation numbers yesterday –October headline CPI was 1.5% m-o-m, taking the y-o-y rate up to a record high of 10.7% vs. consensus estimates of 10.3%, and even core CPI was 5.0% y-o-y– there may yet be some other Europeans having to rely on firewood in 2023 too.

Sadly, those who think of this is as ‘exogenous’ sadly includes ECB President Lagarde, who gave an interview on Irish television in which she stated the “energy crisis is causing massive inflation,” and that said inflation came from “pretty much nowhere”.

European Central Bank President Christine Lagarde: “Inflation came from nowhere”
Source: https://t.co/xk4sNujsDU pic.twitter.com/YMNNuKBA7L

— Wittgenstein (@backtolife_2023) October 30, 2022

I guess that’s true if you don’t understand the real physical economy, or economic theory, or economic history, or geopolitics, which is true of most of the economics trade. They too specialise in Sham el-Chic

Update (0950ET):

Both boosters have successfully landed. 

*  *  *

Update (0946ET):

The SpaceX Falcon Heavy rocket’s side boosters have separated. 

Falcon Heavy’s side boosters separate: pic.twitter.com/QqDYgRiqja

— Michael Sheetz (@thesheetztweetz) November 1, 2022

*  *  *

Update (0942ET):

The SpaceX Falcon Heavy rocket has lifted off the launch pad at NASA’s Kennedy Space Center in Florida. 

The world’s most powerful rocket carries a classified payload for the Space Force. 

You can watch the Falcon Heavy launch live here:

*  *  *

The launch of a SpaceX Falcon Heavy rocket is expected at 0941 ET from NASA’s Kennedy Space Center in Florida. If all goes well, a classified payload for the US Space Force will be catapulted into low-Earth orbit. 

All systems and weather are looking good for Falcon Heavy’s launch of USSF-44; the 29-minute launch window opens at 9:41 a.m. ET → https://t.co/EDwAlAYGuI

— SpaceX (@SpaceX) November 1, 2022

“Falcon Heavy rolling up the ramp ahead of tomorrow’s targeted launch of the USSF-44 mission; weather is 90% favorable for liftoff,” SpaceX tweeted Monday evening. 

Falcon Heavy rolling up the ramp ahead of tomorrow’s targeted launch of the USSF-44 mission; weather is 90% favorable for liftoff pic.twitter.com/ZhLHUkSPKV

— SpaceX (@SpaceX) October 31, 2022

SpaceX then tweeted a video of the Falcon Heavy being lifted into a vertical position around midnight. 

Falcon Heavy going vertical at Launch Complex 39A pic.twitter.com/4rOUg5q2tY

— SpaceX (@SpaceX) November 1, 2022

Space Launch Delta 45, the official account of Patrick Space Force Base and Cape Canaveral Space Force Station, warned of a “double sonic boom” during this morning’s launch. 

“Please be advised, tomorrow morning’s launch will be followed by a double sonic boom. This will occur shortly after launch, as the boosters land on landing zone 1 and landing zone 2 at Cape Canaveral Space Force Station,” the space agency said. 

Please be advised, tomorrow morning’s launch will be followed by a double sonic boom.

This will occur shortly after launch, as the boosters land on landing zone 1 and landing zone 2 at Cape Canaveral Space Force Station. pic.twitter.com/2wAHkyyx3q

— Space Launch Delta 45 (@SLDelta45) October 31, 2022

USSF-44 will be just the fourth-ever Falcon Heavy mission and its first since June 2019. The world’s most powerful rocket in operation can lift a 140,000-pound payload to low-Earth orbit and beyond. There were no further details on the classified payload for the Space Force. 

The ranks of rebellious treasonous Democrats willing to meddle in the “independent” machinations of The Fed is growing as the countdown to the midterm meltdown continues to accelerate.

Who could have seen this coming?

In early September, we warned that The Fed’s actions mean millions of Americans are about to lose their jobs… and Democratic lawmakers will not just quietly sit by:

…due to the recency bias of Biden’s trillions in stimmies, and a world where workers – whether working form home or the office – have virtually all the leverage, few today can conceive of a world where inflation is zero or negative and is instead replaced with millions in unemployed workers, an outcome which one could (or rather should) say is even worse for the ruling democrats than roaring inflation. At least, with runaway prices, most people have a job and their wages are rising (at least nominally, if not in real terms).

However, the higher rates rise, the closer we get to that inevitable moment when the BLS – unable to kick the can any longer – admits what has been obvious to so many for months: the US is facing a labor crisis of epic proportions with millions and millions of mass layoffs.

In “Inflation and the Scariest Economics Paper of 2022“, Furman summarizes a paper written by Johns Hopkins macroeconomist Larry Ball with co-authors Daniel Leigh and Prachi Mishra of the International Monetary Fund released by the Brookings Papers on Economic Activity, whose conclusion is as follows: “To bring price increases down to 2%, we may need to tolerate unemployment of 6.5% for two years.“

What does this mean in absolute numbers? 

Assuming a modest increase in the US labor force, a 6.5% unemployment rate in 2024 would translate into no less than 10.8 million unemployed workers, an 80% increase from the 6 million today!

Still think that politicians – and especially Democrats – will sit quietly and blindly ignore how high the Fed is hiking rates if it means that to normalize inflation back to 2% it means nearly doubling the number of unemployed Americans (and a crushing recession to boot). Spoiler alert: no, they won’t, and this may be one of the very rare occasions when Elizabeth Warren is actually right to worry about what the coming mass layoff wave means for Democrats… and the 2024 presidential election.

Well, surprise, surprise, here comes Elizabeth Warren, Bernie Sanders, Rashida Tlaib and the rest of the progressive panderers to pressure The Fed to take its foot off the throat of the “strong as hell” economy.

Building on what Senate Baking Committee Chair Sherrod Brown recently warned last month:

“For working Americans who already feel the crush of inflation, job losses will make it much worse. We can’t risk the livelihoods of millions of Americans who can’t afford it. I ask that you don’t forget your responsibility to promote maximum employment and that the decisions you make at the next FOMC meeting reflect your commitment to the dual mandate.”

Warren et al. slam the implications of The Fed’s projected job losses from its official projections and its intention to continue raising interest rates at an “alarming pace”:

“You continue to double down on your commitment to ‘act aggressively’ with interest rate hikes and ‘keep at it until it’s done’…”

The lawmakers remind Powell that his tools are limp in the face of Putin’s price-hikes and corporate gouging…

Your “overarching focus” on “using [the Fed’s] tools to bring inflation back down to our 2 percent goal” no matter the cost is particularly troubling given the limits of interest rate hikes in addressing key drivers of today’s inflation, including lingering supply chain snarls, corporate price gouging, and the war in Ukraine.

Then they conclude with the same language that Brown used:

“These statements reflect an apparent disregard for the livelihoods of millions of working Americans, and we are deeply concerned that your interest rate hikes risk slowing the economy to a crawl while failing to slow rising prices”

They end with a series of questions that pointedly highlight the economic impact (and inequity) of The Fed’s actions, awkwardly bring up former Fed Vice Chair Richard Clarida recent comments that “Until inflation comes down a lot, the Fed’s really a single-mandate central bank,” asking Powell “Do you agree with that assessment?”

“Failure is not an option for Jay Powell,” says Former Fed Vice Chair Richard Clarida. “I think they’re going to 4% hell or high water. Until #inflation comes down a lot, the Fed is really a single mandate central bank.” pic.twitter.com/4hfLCVWZDP

— Squawk Box (@SquawkCNBC) September 9, 2022

Circling back to our initial thoughts, remember The Fed is apolitical and independent and anyone who tries to sway them is a treasonous traitor.

When President Trump publicly spoke about The Fed cutting rates, some former Fed officials were not happy:

“I am not pleased,” said Carl Tannenbaum, a former Chicago Fed official and chief economist at Northern Trust.

“The remarks certainly aren’t an immediate threat to Fed independence, but they break with the tradition of respectful distance.”

Randall Kroszner, a former Fed governor, said the central bank has withstood political pressure before and will continue to do so under Mr. Powell’s leadership.

“The Fed has often faced political pressures — from Congress, presidents, Treasury secretaries and innumerable outside groups,” said Mr. Kroszner, an economics professor at the University of Chicago.

“My experience at the Fed is consistent with what Jay Powell recently said — being non-political is deep in the Fed’s DNA — and I believe that Jay will keep it that way.”

But hey, it’s different this time… because “this economy is strong as hell”…

For now the market is reacting ‘with’ the politicians and shifting rate-trajectory expectations dovishly:

Read the full letter below:

North Korea has lashed out in condemnation of the US and South Korea’s five days of joint war drills which kicked off Monday, which mark the largest ever of the annual joint ‘Vigilant Storm’ exercise.

The north vowed to take “all necessary measures” to defend itself, while also claiming that the joint aerial drills are in preparation for a nuclear strike on the DPRK, with a statement from a foreign ministry official cited in KCNA describing “an aggression-type war exercise with the basic purpose of hitting strategic targets of the Democratic People’s Republic of Korea,” which presents the risk of “serious confrontation with great powers.”

“Nowhere in the world can we find a military exercise with an aggressive character like the joint military exercise held by the United States and its followers in terms of duration, scale, content and density,” the foreign ministry official continued. “The US nuclear war script against the Democratic People’s Republic of Korea has entered the final stage,” the official claimed, as cited in Russian media.

The drills include about 100 American warplanes and 140 South Korean aircraft, additionally with Australian assets participating. The Pentagon has said it was “designed to practice wartime missions, roles and tasks in effort to enhance the combat readiness and survivability of US and [South Korean] forces.”

A North Korean Foreign Ministry stated further, “The situation in the Korean Peninsula and its vicinity has entered the serious confrontation phase of power for power again due to the ceaseless and reckless military moves of the US and South Korea.”

The ministry then warned that “if the US continuously persists in the grave military provocations, the DPRK will take into account more powerful follow-up measures.”

Seoul and Washington have been warning since the summer that the north is undergoing preparations for a nuclear test, which would be the first since 2017. 

#MarineCorps F-35 Lightning II aircraft from Marine Fighter Attack Squadron 242 land at Kunsan Air Base, Republic of Korea, for Exercise Vigilant Storm 23, Oct. 31#VigilantStorm enhances combat readiness and strengthens the ROK-U.S. Alliance. #CombinedForce #USMC #military pic.twitter.com/5uIYQkeQoR

— U.S. Marines (@USMC) October 31, 2022

Last week, South Korean President Yoon Suk Yeol briefed his parliament on what he described as imminent plans for such a first nuclear test in five years. “We assess that it has already completed preparations for a seventh nuclear test,” he said Tuesday. He reminded lawmakers that Kim Jong-un has already justified the preemptive use of nuclear weapons, making a test if carried through a severe threat to Seoul’s as well as the broader region’s security. 

White House national security official John Kirby has also lately reiterated the US intelligence belief that the north “could conduct a nuclear test at any time.”

Authored by Lance Roberts via RealInvestmentAdvice.com,

October started strong and then slid to new lows but managed to rally back toward the month’s end. As noted in “As Buybacks Return:”

“The Dow is on pace for its best month since 1976. It is also close to its best month since 1938. So far, the Dow is up four straight weeks (+14%) and is posting its biggest 4-week gain since April 2020. Despite dismal FANG earnings, the Nasdaq is ‘only’ up 5% on the month.”

With those gains, it was not surprising to see articles flipping bullish. To wit:

“Here’s a little news flash. Tech stocks have entered a brand-new bull market that could be the start of a massive 50%-plus melt-up. And certain tech plays could see a 10X surge higher!“

So, did October mark the bottom and the end of the bear market? Or is this rally that fails as the bear market continues?

The honest answer is no one knows for sure. However, as Yahoo Finance recently noted, October market lows did historically mark the end of bear markets more often than not.

As Stock Trader’s Almanac’s Jeffrey Hirsch recently noted:

“Not all indices have bottomed on the same day for all bear markets, but the lion’s share, or bear’s share I should say, bottomed in October.”

October market lows have also occurred regularly before a midterm election, such as in 2022. As Deutsche Bank recently observed:

“The S&P 500 has risen in the year after every single one of the 19 midterm elections since World War II, with not a single instance seeing a negative return.”

However, while there is undoubtedly historical precedent to suggest October market lows may be in, it is crucial to remember there are “no sure things” in the financial markets. ‌

“History is a great guide, but it’s not gospel.” – Sam Stovall

The Lows Are Likely Not In

After ten months of a brutal grind lower in the markets, it is no wonder why investors are looking for any sign the selling may be over. As Bob Farrell once quipped:

“Bull markets are more fun than bear markets.”

There is little doubt as to the veracity of that statement. However, while we can certainly hope that the October market lows marked the bottom, there are reasons to expect such is not the case. At least not yet.

While the mainstream media continues to define the current decline as a “bear market,” it remains a “correction” within the bullish trend. Several reasons for that statement will determine whether the October market lows were just that.

The current decline in the market has only reversed the extreme extension above the 200-week moving average. That long-term moving average continues to define the bullish market trend from the 2009 lows. It also defined the bullish trend following the previous bear market lows. Most importantly, the 50-week moving average has not crossed below the 200-week, representing each previous bear market and recession.

Most notably, many factors are currently missing that coincided with each previous bear market cycle.

• Surging unemployment

• Recession

• Bankruptcies

• Defaults

• Fed cutting rates

• Falling 2-year and 10-year Treasury yields

• Un-inversion of the yield curve.

• Spiking credit spreads

Further to this point, BofA recently published a checklist of “signposts” that previously signaled bear market lows. Currently, only 2 of the 10-signposts are registered.

While the market will likely have a sustained rally from the recent October market lows, it is probably not the bottom of the bear market. In fact, there a numerous reasons to suspect that lower market lows are coming in 2023.

The 2023 Market Bottom

As we move into 2023, the markets will have much to contend with. With valuations still elevated by many measures, earnings are weakening, and profit margins under pressure from inflation, a repricing risk of equities remains. Investors should remain cautious until the economy shows signs of improvement.

Notably, markets tend to bottom and recover before the economic data, which is why it tends to be a leading indicator of economic activity. However, the risk to investors in 2023 is an economic recession, which is most likely not accounted for currently.

As we have noted previously, each increase in the Fed funds rate takes between 9 and 12 months to impact the economy. At the same time, the economy is already slowing, and assuming the Fed hikes to its predicted target, that 4% increase in rates has yet to impact growth. If such is the case, earnings growth will slow considerably more.

But critically, the Fed is not operating in a vacuum. Accompanying that surge in the dollar was the sharpest increase in interest rates in history. Sharp increases in interest rates, particularly in a heavily indebted economy, are problematic as debt servicing requirements and borrowing costs surge. Interest rates alone can destabilize an economy, but when combined with a surging dollar and inflation, the risks of market instability increase markedly.

We suspect that the risk of a recession in 2023 is substantially higher than most economists expect. Such is particularly the case when the lag effect of monetary policy collides with economic weakness from reduced consumer demand.

Navigating What Comes Next

As noted, the biggest problem of investing during a recession is knowing that you are in one. Many indicators suggest we could be heading into a recession next year, but unfortunately, we won’t know for sure until after the fact.

Therefore, we must respond to market warnings and take action to prepare for a recession in advance. That said, the most important thing isn’t necessarily what steps to take but what behaviors to avoid. During market downturns, our emotional and behavioral biases tend to inflict the most damage on our financial outcomes.

“Loss aversion” is one of the leading factors influencing investment decisions, according to a recent survey from the CFA Institute.

“Loss aversion is a tendency in behavioral finance where investors are so fearful of losses that they focus on trying to avoid a loss more so than on making gains. The more one experiences losses, the more likely they are to become prone to loss aversion.” – Corporate Finance Institute

Therefore, to avoid losing money in a recession, you must:

• Avoid trying to time the exact bottom.

• Don’t try to “day trade” markets.

• Reduce leverage and speculative bets

• Avoid selling quality companies just because they are down.

I agree with Motley Fool’s conclusion:

“The bottom line is that, during recessions, it’s important to stay the course. It becomes a bit more important to focus on top-quality companies in turbulent times, but, for the most part, you should approach investing in a recession in the same manner you would approach investing any other time. Buy high-quality companies or funds and hold on to them for as long as they stay that way.”

Most importantly, you must know the difference between a “top-quality” company and one that isn’t.

Incumbent Jair Bolsonaro has still not acknowledged his loss with any public statements over a day after Luiz Inacio Lula da Silva was declared winner of Brazil’s 2022 presidential election held Sunday.

Local media says President Bolsonaro, who is now expected to leave office by January 1st, has not so much as issued any official comments to government ministers. Lula da Silva said in front of a crowd of supporters while celebrating the historic win Sunday night, “Anywhere else in the world, the president who lost would have called me by now and conceded.”

Lula said he remains “part happy, part worried” about the transfer of power, given that “He still hasn’t called, I don’t know if he will and I don’t know if he will concede.”

As we detailed earlier, already many world leaders including those previously considered key global allies of Bolsonaro have called to offer their congratulations to Lula, including Russia’s Vladimir Putin and China’s Xi Jinping, among many others, as well as US President Joe Biden. 

CNN notes that the formal process of certifying the vote is underway: “It is Brazil’s Supreme Electoral Court that officially validates election results and communicates them to the Senate, Chamber of Deputies and State Assemblies.”

A number of major highways in Brazil blocked by truck drivers and other Bolsonaro supporters refusing to accept Lula’s victory in the elections

Many we spoke to are openly calling for a military takeover of the country… no sign of anything like that but it’s a tense situation pic.twitter.com/noFWc8MENX

— Secunder Kermani (@SecKermani) October 31, 2022

However that validation process is not completed yet: “A press officer for the Electoral Court told CNN that the vote’s results are already considered validated, since the court’s declaration of the outcome on Sunday. A court session at a later point will formally confirm the win, but no date has been set for it yet, he said,” according to the CNN report. 

Protests by Bolsonaro supporters against the election results – which saw Lula receive 50.9% to Bolsonaro’s 49.10% of the vote – have popped up reportedly in more than 100 locations. 

Bolsonaro supporters are claiming the election was “stolen”…

HAPPENING NOW: Things are developing quickly in Brazil, and not in a good way after the election that was STOLEN from Bolsonaro.

The police are starting to join with the Bolsonarista truck drivers who are protesting the fraudulent results of the Brazilian election. pic.twitter.com/FFWV7EOuDu

— VISH BURRA 🔫 (@VishBurra) November 1, 2022

BBC reports Tuesday morning, “Lorry drivers in Brazil loyal to President Jair Bolsonaro have blocked roads across the country, after his poll defeat to leftist rival Lula.” The report describes, “Blockages were reported in all but two states, causing considerable disruption and affecting food supply chains.” And more:

By Monday night, the federal highway police reported 342 such incidents, with the biggest protests going on in the country’s south. Some of the blockages were later cleared by police.

…Supreme Court judge Alexandre de Moraes on Monday ordered the police to disperse the roadblocks immediately. He warned that all those still blocking the roads on Tuesday would be each fined 100,000 Brazilian reals (£16,700: $19,300) per hour.

Bolsonaro has recently expressed concern over the potential for the country’s voting machines to be manipulated or tampered with, something that his political opponents have dismissed as “Trump-style” election denial rhetoric. 

WATCH: #BNNBrazil Reports.

Rural producers and truck drivers block highways after the defeat of President Jair Bolsonaro. Some demonstrations take place in the interior of Mato Grosso and Santa Catarina. #Brazil #Politics pic.twitter.com/rTPrMiESIZ

— Gurbaksh Singh Chahal (@gchahal) October 31, 2022

Into Tuesday morning, nothing has been posted to Bolsonaro’s official social media accounts since the night before Sunday’s vote.

His last last tweet came shortly before midnight on the eve of the election. He quoted from the Bible, the book of Ephesians, which says “Put on the whole armor of God, that you may be able to stand against the wiles of the devil…”. Some are taking this as a sign he could be readying to not go down without a political fight contesting the election results.

The New York Times is meanwhile reporting that Presient Bolsonaro is expected to give a speech on Tuesday, but it’s unclear when or precisely what he will say.

US equity futures started off the new month with a bang, set to surge after Monday’s less than spooky declines, as investors awaited Wednesday’s Fed decision (where JPM sees one outcome pushing stocks 10% higher… and another sending them crashing 8%), while sentiment got a big boost from speculation that Chinese policymakers are making preparations to gradually exit the stringent Covid Zero policy. 

At 7:30am, contracts on the S&P 500 rose 1.0% while those on the Nasdaq 100 gained 1.1% on the first day of November, a month that has seen the underlying benchmarks end in the green on average for the past three decades. Dow Jones futures climbed 0.6% after the underlying gauge wrapped up its best month since 1976. Treasuries were poised for their biggest jump in a week as 10Y yields dropped to 3.94%, alongside real rates and the dollar as hawkish Fed hike wagers are trimmed ahead of this week’s policy outcome; the yen, euro and cable surged.

Chinese stocks listed in the US surged in New York premarket trading, their gains fueled by speculation that Beijing is preparing to phase out Covid Zero policies, even as the country’s Foreign Ministry said it was unaware of such a plan. The KraneShares CSI China Internet Fund, an exchange-traded fund holding more than 40 Chinese stocks, soared 7.7%. Also in the premarket, Tesla shares rose as much as 2.1% following a Reuters report that the EV maker plans to start mass production of its Cybertruck at the end of 2023. Here are other notable premarket movers:

• Abiomed shares soared 51% in US premarket trading to $379.55 after Johnson & Johnson agreed to buy all its outstanding shares for an upfront payment of $380 per share in cash plus a CVR consideration of up to $35 if certain clinical and commercial milestones are achieved
• GameStop shares rise as much as 5.6% in US premarket trading, with a meme-stock revival set to extend into a second day as other stocks popular with retail traders also rally. The video-game retailer also launched an NFT marketplace. Among other meme stocks AMC Entertainment (AMC US) +1.4%, Bed Bath & Beyond (BBBY US) +3.5%, Lucid (LCID US) +2.1%
• Carvana shares jump as much as 15% in US premarket trading after JPMorgan upgraded the online used-car platform to neutral from underweight, with analysts saying that risks appear to be “better understood” and liquidity is “manageable.”
• Macau casino stocks rise in US premarket trading amid speculation that China is planning to gradually exit its Covid Zero policies, even as the country’s Foreign Ministry said it was unaware of any government committee that’s assessing ways to carry out the plan. Melco Resorts (MLCO US) +7.5%, Las Vegas Sands (LVS US) +4.1%, Wynn Resorts (WYNN US) +3.3% and MGM Resorts (MGM US) +2.3%
• Stryker delivered a strong top-line that bodes well for the medtech group’s outlook, but questions remain on when that will translate into a stronger earnings performance, analysts say. Stryker shares fell 5% in postmarket trading after the update.

All eyes will be on the Fed on Wednesday, when it’s widely expected to raise rates by 75 basis points for a fourth time but the question is how Powell will guide for December and his views on the terminal rate. His comments will also be key in understanding the trajectory of tightening in the US, where the policy is already having an impact on company earnings.

“What is important is the path Chair Powell lays out for next year. The Fed probably doesn’t want the market to start pricing in rate cuts, and this is what the market tends to do,” said Stephen Innes, managing partner at SPI Asset Management. “It’s an open invitation to buy stocks in case we do get a Fed pivot or inflation starts abating and we get a huge asymmetrical move to the top side.”  

Strategists are expecting the US central bank to end tightening in the near term. Indicators including the inversion of the yield curve between 10-year and three-month Treasuries “all support a Fed pivot sooner rather than later,” according to Morgan Stanley’s Michael Wilson. Also, JPMorgan’s Marko Kolanovic is seeing signs boosting optimism that the global tightening cycle could end by early 2023, which of course is also market consensus.

“If the Fed does give us some indication that there is light at the end of the tunnel, we are very close if not already past peak dollar,” Mark Matthews, head of Asia research at Julius Baer said on Bloomberg TV. “Then all the currencies which have declined like the euro will rebound.”

Meanwhile, economists surveyed by Bloomberg said Fed officials will maintain their resolutely hawkish stance this week, laying the groundwork for interest rates reaching 5% by March 2023, moves that seem likely to lead to a US and global recession. Nomura Holdings Inc. quantitative strategist Yoshitaka Suda said derivatives cues imply the pace of the ongoing rebound in the S&P 500 benchmark is likely to dwindle after the Fed’s decision. The comparatively low volatility ahead of the meeting shows that the options market is “increasingly optimistic” about the event, he said. A shift in options hedging by traders could also weigh on the market, he added.

European equity benchmarks rose over 1% as bond yields retreated lower. CAC 40 outperfoms while the DAX lags peers a bit. Mining shares led gains as most base metals trade in the green. European luxury stocks jumped, tracking an earlier rally in Chinese markets on speculation that the country’s policymakers are looking at gradually unwinding its stringent Covid Zero policy. LVMH rose as much as 3.9%. Shares in tech investor Naspers and its unit Prosus also surged, following Tencent higher as Chinese tech stocks rose after unverified social media posts circulated online that a committee was being formed to assess scenarios on how to exit Covid Zero. A Chinese Foreign Ministry spokesman said he’s unaware of a committee. Here are the biggest European movers:

• Oil advanced and BP Plc climbed after announcing a further $2.5 billion buyback. Here are Europe’s biggest movers: 
• Ocado Group surged as much as 40% in a brisk short covering rally sparked by news the UK online grocer has entered a partnership to develop Lotte’s online business in South Korea.
• Shares of European online retailers and food delivery firms rally on Tuesday after heavy selling this year, as yields on 10-year US Treasuries and German bunds slide. Delivery Hero rises as much as 15%.
• Scor shares gain as much as 6.3% as Mediobanca upgraded the reinsurer to outperform in a reshuffling of its sector preferences.
• ALKB- Abello fell as much as 7% after Danske Bank analyst Thomas Bowers cut the recommendation to hold from buy.
• Fresenius Medical Care falls as much as 5.5% after Warburg downgraded the stock to sell from hold, citing increased uncertainties regarding the supply chain and macro factors despite 3Q figures slightly above estimates.
• Rentokil shares drop as much as 4.5% after the company posted 3Q growth in line with expectations. Morgan Stanley noted that the firm’s maintained outlook implies more subdued progress on margins in 2H.

Asian stocks advanced ahead of a key US Federal Reserve rate decision, as Chinese shares staged a strong rebound on speculation of a potential reopening. The MSCI Asia Pacific Index jumped as much as 2.4%, the most in more than two weeks, as Chinese and Hong Kong gauges roared back from multi-year lows on speculation that policymakers are making preparations to gradually exit the stringent Covid Zero policy. The Hang Seng Index climbed more than 5%, with internet giants Meituan and Tencent Holdings the biggest contributors to the advance.

Unverified social media posts circulated online on Tuesday showed a committee was being formed to assess scenarios on how to exit Covid Zero. A Covid-induced economic slowdown in China has been one of the biggest overhangs for the region’s markets. “Obviously some people are betting big on China’s reopening,” said Willer Chen, an analyst at Forsyth Barr Asia. “At this level, it’s probably better to trade every rumor than ridiculing its authenticity.” Meanwhile, the Federal Reserve looks set to raise interest rates by 75 basis points on Wednesday amid its most-aggressive tightening campaign in four decades. Investors will be watching for any signs that hikes may slow in the future. Asian equities fell 2% in October, capping a third-straight monthly decline, amid headwinds including China’s slowdown and global monetary tightening. The MSCI Asian benchmark is hovering near the lowest level since April 2020.

Japanese stocks rose as the yen’s weakness was seen providing earnings benefits for the nation’s exporters. The Topix rose 0.5% to close at 1,938.50, while the Nikkei advanced 0.3% to 27,678.92. Keyence Corp. contributed the most to the Topix gain, increasing 3.4%. Out of 2,166 stocks in the index, 1,011 rose and 1,044 fell, while 111 were unchanged. “Japanese stocks are holding firm as the market sees a positive impact of the yen’s depreciation reflected in the recent earnings,” said Tetsuo Seshimo, portfolio manager at Saison Asset Management

Australian government bond yields reversed earlier gains and the nation’s stocks rallied to a seven-week high after the central bank raised interest rates by a quarter point as expected and signaled further tightening to come as it combats escalating inflation. Australia’s S&P/ASX 200 index rose 1.7% to close at 6,976.90, the highest since Sept. 13, Mining and bank shares boosted the benchmark most, with all 11 sectors advancing.  In New Zealand, the S&P/NZX 50 index fell 0.2% to 11,316.64

India’s key stocks posted its 11th advance in thirteen sessions, inching closer to record levels on robust earnings and resumption of foreign flows. The S&P BSE Sensex rose 0.6% to close at 61,121.35 in Mumbai, its highest since Jan. 17. The NSE Nifty 50 Index advanced 0.7%. The gauges rose more than 5% each in October and are trading close to their peak levels seen a year ago.   All but one of the 19 sector sub-gauges compiled by BSE Ltd. advanced, led by power companies and utilities. Software exporter Infosys Ltd. provided the biggest boost to the Sensex, which is now close to trading at 14-day RSI of 70, a signal to some traders that the security is overbought.    Foreigners bought $186 million of Indian equities in the month through Oct. 28 after net withdrawals of $1.6 billion in September.    Corporate earnings for the September quarter have been mostly impressive. Of 32 Nifty companies which have so far reported, 21 have either met or exceeded average analyst estimates, while nine have missed. Agrochemicals maker UPL Ltd.’s quarterly numbers trailed the estimates on Tuesday, while three Nifty companies beat the consensus.   

In rates bunds, Treasuries and gilts all rallied across the curve. US yields are richer by 6bp to 10bp across the curve with gains led by intermediates, tightening the 2s5s30s fly by 4.5bp on the day; 10-year yields near lows of the day around 3.95%, outperforming bunds and gilts by 1.5bp and 3bp in the sector. The advance began during Asia session after RBA raised rates 25bp and lowered GDP forecasts. Gilts rally added support, with the UK government focusing on raising taxes to restore stability to public finances. In swaps market, Fed-dated OIS rates ease lower ahead of Wednesday’s policy decision.

In FX, Bloomberg Dollar Spot index falls 0.6%, snapping three days of gains as traders positioned for the Federal Reserve to potentially turn less hawkish at this week’s policy meeting. DKK and EUR were the weakest performers in G-10 FX, NZD and NOK outperform. The Fed is expected to raise rates by 75 basis points this week and some analysts are beginning to believe that the most aggressive interest-rate hiking cycle in decades by global central banks is nearing an end “Markets may be attempting to front-run the Fed on bets they may not give an outsized rate hike at the meeting this week, which is buoying other currencies against the dollar,” said Mingze Wu, a foreign-exchange trader at StoneX Group in Singapore. The Australian dollar gained against the greenback after the RBA hiked rates by 25bps.  “While the market may interpret this as the central bank potentially signaling a pause in rate hikes, we think this would be wrong as the RBA is simply reinforcing its gradual approach of raising rates by 25bp rate hikes at its next few meetings,” says David Forrester, FX strategist at Credit Agricole CIB.

In commodities, Crude benchmarks are firmer intraday but off best levels, deriving support in tandem with broader risk sentiment on the China COVID rumours and associated USD pullback. WTI Dec and Brent Jan futures are around USD 87.00/bbl (85.92-88.24 range) and USD 93.50/bbl (92.33-94.74) respectively. WTI trades within Monday’s range, adding 1.7% to trade near $88-handle. Brent rises 1.6% to top $94. Spot gold is bolstered by the USD’s retreat and has surpassed the 10-DMA but met  resistance thereafter around USD 1650/oz amid the constructive risk tone. Base metals are firmer across the board on the China reports, with LME copper briefly extending past USD 7.6k/T for instance.

Bitcoin is firmer but in contained ranges above the USD 20k mark, while more pronounced upside is seen in the likes of ETH and Dogecoin.

Looking to the day ahead, data releases from the US include the ISM manufacturing reading for October and the JOLTS job openings for September. Otherwise, there’s the October manufacturing PMIs from around the world. Earnings releases include Eli Lilly, Pfizer and Uber. Finally in the political sphere, general elections will be taking place in Denmark and Israel.

Market Snapshot

• S&P 500 futures up 0.8% to 3,915.25
• MXAP up 2.1% to 139.01
• MXAPJ up 2.5% to 444.55
• Nikkei up 0.3% to 27,678.92
• Topix up 0.5% to 1,938.50
• Hang Seng Index up 5.2% to 15,455.27
• Shanghai Composite up 2.6% to 2,969.20
• Sensex up 0.5% to 61,024.40
• Australia S&P/ASX 200 up 1.7% to 6,976.86
• Kospi up 1.8% to 2,335.22
• STOXX Europe 600 up 1.3% to 417.58
• German 10Y yield down 3.3% to 2.07%
• Euro up 0.5% to $0.9926
• Brent Futures down 0.8% to $94.10/bbl
• Gold spot up 0.9% to $1,648.12
• U.S. Dollar Index down 0.54% to 110.93

Top Overnight News from Bloomberg

• Crispin Odey has closed his flagship hedge fund and two others to new clients, hoping to keep assets at a manageable level following a record year.
• Chinese stocks roared back from a rout and the yuan strengthened as speculation mounted that policymakers are making preparations to gradually exit the stringent Covid Zero policy that’s been the biggest bugbear for investors.
• UK house prices fell the most since the start of the pandemic in October as political and market turmoil sent shock waves through the property market.
• Any bargain hunters hoping to snap up Credit Suisse Group AG now that the lender’s revamp has pushed its stock down yet again may find themselves getting short shrift in Zurich.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded mostly higher as the region shrugged off the losses on Wall St and with Chinese Caixin PMI data not as bad as feared, although some cautiousness remained ahead of the looming risk events. ASX 200 finished positive with all sectors in the green after the RBA rate decision whereby it stuck to a 25bps rate increase instead of reverting to a more aggressive pace. Nikkei 225 eked modest gains amid a slew of earnings releases which were the catalyst for the biggest movers. Hang Seng and Shanghai Comp were both positive with notable outperformance in Hong Kong amid a tech-led surge and  bargain buying after its brief retreat beneath the 15,000 level, while Caixin Manufacturing PMI data printed better than forecast despite remaining at a contraction.

Top Asian News

• Bloomberg suggests that the gains in Chinese stocks are due to an unverified social media post that circulated online overnight that a committee was being formed to assess scenarios on how to exit COVID Zero; subsequently, China’s Foreign Ministry says they are not aware of the situation.
• Zhengzhou in C.China’s Henan said on Tue that the city will lift the temporary control for COVID-19 low-risk regions and gradually resume normal life “after over 10-day fight against the virus”, according to Global Times.
• RBA hiked the Cash Rate Target by 25bps to 2.85%, as expected. RBA said the board remains resolute in determination to return inflation to the target and expects to increase interest rates further over the period ahead, as well as reiterated that the size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. RBA also noted that the central forecast for GDP growth has been revised down a little with growth of around 3% expected this year and 1.5% in 2023 and 2024, while inflation is now forecast to peak at around 8% later this year and the central forecast is for CPI inflation to be around 4.75% over 2023 and a little above 3% over 2024.
• RBA Governor Lowe says the board has judged it appropriate to raise rates at a lower magnitude, will return to larger rate hikes if deemed necessary, will hold rate if the situation requires it.
• Hong Kong Exchange is to to cut trading tariff on cash market to boost market efficiency, effective 1st Jan 2023.

European bourses are firmer across the board with commodity stocks leading the way on the overnight China COVID rumours, Euro Stoxx 50 +1.40%. Sectors are all in the green and show clear outperformance in Basic Resources while some of the more defensively inclined sectors lag, but remain positive overall. Stateside, futures are similarly supported though magnitudes a touch more contained ES +0.8%; NQ outperforms as global yields pullback post-RBA with key data and more Central Bank action looming.

Top European News

• ECB President Lagarde said they have not reached the destination on rates yet and reiterated that the ECB is committed to doing whatever it takes to get inflation back to the 2% target, while she added that inflation is too high throughout the eurozone and the possibility of a recession has increased.
• Europe is set for mild weather in November, via Bloomberg citing forecasters.
• Sunak, Hunt Say ‘Inevitable’ All Britons Will Pay More Tax
• Credit Suisse Top Wealth Executive Sommerhalder Leaving Firm
• Ex-Deutsche Trader Asks Top Court to Quash Spoofing Conviction
• Sasol Convertible Bond Books Are Covered, Terms Show
• Ocado Deal With South Korea’s Lotte Shopping Boosts Shares

FX

• USD pressured as risk rebounds and yields retreat, with new month and pre-FOMC positioning also potentially impacting; DXY sub-111.00 to a 110.80 low.
• USD/JPY slumps amid fresh remarks from Finance Minister Suzuki, approaching a test of the 147.00 mark vs earlier 148.80 best.
• Antipodeans benefit from the USD but NZD outpaces its AUD peer following the RBA sticking with a 25bp hike and Governor Lowe thereafter keeping their options open.
• Both EUR and GBP benefitting from the USD’s dip with Cable reclaiming 1.15 after an upward revision to Manufacturing PMI while EUR/USD remains just shy of hefty OpEx at 0.9950.
• Petro-FX benefits from benchmark pricing with Norwegian data adding impetus for the Scandi’s while the CAD awaits its own PMI release.

Fixed Income

• Both core and periphery benchmarks are bid amid a broad pullback in yields post-RBA and as participants await upcoming Central Bank announcements and key data readings.
• Gilts are the current outperformer and have topped 103.00 amid the latest reporting around the upcoming Autumn statement.
• Specifically for the complex, today sees the commencement of the BoE’s QT with the first operation focused on the short-end.
• Both Bunds and USTs are similarly supported in tandem with a busy afternoon and week-ahead docket stateside, USTs peaking at 111.15 thus far.
• UK DMO reschedules the 0.35% 2025 Gilt to November 23rd (prev. November 16th).

Commodities

• Crude benchmarks are firmer intraday but off best levels, deriving support in tandem with broader risk sentiment on the China COVID rumours and associated USD pullback.
• Specifically, WTI Dec and Brent Jan futures are around USD 87.00/bbl (85.92-88.24 range) and USD 93.50/bbl (92.33-94.74) respectively.
• Russia Deputy PM Novak says Russia and Iran discussed an oil swap and gas supply, according to TASS.
• Iranian Oil Minister says “our relations with Russia are closer than ever, and the level of cooperation will increase day by day”, according to Al Jazeera.
• Libya’s NOC chief says oil output at 1.2mln BPD (vs 1.163mln BPD reported in September due to power issues).
• Spot gold is bolstered by the USD’s retreat and has surpassed the 10-DMA but met resistance thereafter around USD 1650/oz amid the constructive risk tone.
• Base metals are firmer across the board on the China reports, with LME copper briefly extending past USD 7.6k/T for instance.

US Event Calendar

• 09:45: Oct. S&P Global US Manufacturing PM, est. 49.9, prior 49.9
• 10:00: Sept. JOLTs Job Openings, est. 9.75m, prior 10.1m
• 10:00: Oct. ISM Manufacturing, est. 50.0, prior 50.9
  • Oct. ISM Employment, prior 48.7
  • Oct. ISM New Orders, prior 47.1
  • Oct. ISM Prices Paid, est. 53.0, prior 51.7
• 10:00: Sept. Construction Spending MoM, est. -0.6%, prior -0.7%

DB’s Jim Reid concludes the overnight wrap

Morning again from NY. I’ve had to fly back for an important event after only landing back to London from NY on Friday. I had a load of emails and work to do on the plane but was told that their Wi-Fi wasn’t working. I hadn’t downloaded any films or research so after briefly working out what on earth I could do for 7 hours without any entertainment or work, I plumped for starting to write a surprise Xmas song for my family on the recording software on my iPad (note: with headphones). I now have two verses, a chorus, drums, some sleigh bells, Xmas strings and some heavy sampled guitar riffs. It’s either quite good or awful. I’m not sure which yet. I’ll aim to give it to them on December 1st. If you’re unlucky I’ll offer up a link to it then. You can see my short surprise Halloween song on my Bloomberg header page. It’s not for the faint hearted.

December is now only a month away as today welcomes in November. Since it’s the start of the month, Henry will be shortly releasing our usual performance review. October proved to be a much better month for financial assets after the disastrous performance over Q3, aided by hopes of a pivot from central banks, a stabilisation in Europe’s energy situation, as well as an end to the UK market turmoil. But we shouldn’t get ahead of ourselves, as the S&P 500’s +8.1% gain over the month in total return terms means it’s only partially recovered from its -9.2% loss in September, let alone its -23.9% loss over the first nine months of the year as a whole. There’s also some other interesting milestones, with gold having lost ground for a 7th consecutive month for the first time since 1869. The full report will be in your inboxes shortly.

When it comes to the last 24 hours in markets, investors have been in something of a holding pattern ahead of the Fed’s decision tomorrow, but previous hopes about an imminent central bank pivot have continued to fade. The latest catalyst was another upside inflation surprise from the Euro Area, albeit one flagged from some of the regional reports on Friday. Once again, the inflation report was bad news from whichever angle you wanted to look at it, with the headline CPI reading for October rising to +10.7% according to the flash reading, which was not only above the +10.3% expected (which may have been a bit stale after Friday), but also easily the highest inflation since the formation of the single currency. So that’s further bad news for the ECB, and points away from some of the more dovish signals they sent at last week’s press conference.

Even as headline inflation hit a new record, what’s concerning for policymakers is that the details suggest it’s increasingly impossible to just pin this on the energy shock, even if that has been the single biggest driver. In fact, CPI excluding energy hit a record +6.9%, and overall core CPI also hit a record +5.0%. In addition, the rises have been broad-based across the 19 countries that make up the single currency, and October marked the first month yet that inflation has been above 7% in every single Euro Area country at once. We did hear from a couple of the more dovish members of the ECB’s Governing Council yesterday, including Italy’s Visco, who warned that a worse-than-expected deterioration in the economic outlook “shouldn’t be underestimated”, and said that there were “no clear signs” that inflation expectations were becoming unanchored.

That backdrop prompted a decent selloff across European sovereign bonds, with yields on 10yr bunds (+4.1bps), OATs (+6.3bps) and BTPs (+12.7bps) all moving higher on the day. That came as inflation breakevens in France hit their highest level since May, with the 10yr breakeven up +1.1bps on the day to 2.79%.

Those moves higher in inflation expectations were given further support by the latest moves in European natural gas prices, which continued to tick higher from their recent lows last week, gaining another +9.90% yesterday to hit €123 per megawatt-hour. That pattern was echoed more broadly, with UK natural gas futures up +22.04% after the Met Office released their latest 3-month weather outlook for the UK. Although the forecast said that their base case (60%) was that the coming season would be around average in terms of temperature, there was a larger chance than usual that it would be a cold season (25%), and a smaller than usual chance of a mild season (15%).

Over in the US, there was a similar unwinding in the pivot trade yesterday as investors looked forward to the Fed’s decision tomorrow. For instance, the peak terminal rate priced in for the May 2023 meeting rose by +7.1bps yesterday to 4.96%, which is the highest it’s been since the WSJ’s Nick Timiraos released his article on October 21 discussing the potential for a slower pace of rate hikes from December. And in turn, expectations of a more aggressive pace of rate hikes meant that Treasuries lost ground too yesterday. 10yr yields were nearly 10bps higher intraday, before rallying hard late on in what looked like month-end driven buying flows to finish the day just +3.6bps higher at 4.05%. Speaking of Timiraos though, a reminder that as we mentioned in yesterday’s edition, he wrote a further article on Sunday pointing out that cash-rich consumers with larger savings buffers could mean that interest rates need to move higher than anticipated given spending is less sensitive. So if you value him as an indicator of the Fed’s thinking, that certainly pointed in a more hawkish direction as well.

With the pivot trade unwinding, equities put in a weaker performance and the S&P 500 (-0.75%) moved off from its six-week high that it reached on Friday. It was a broad-based decline, but the more cyclical sectors and interest-sensitive tech stocks suffered in particular, with the FANG+ index (-1.81%) nearly reaching its recent low from mid-October. Over in Europe the main indices put in a somewhat better performance, with the STOXX 600 up +0.35%, but that in part reflected the fact that they hadn’t been open during the late US rally on Friday.

Overnight in Asia however, the major equity indices have put in a much stronger performance, with the Hang Seng (+3.43%) leading the way, followed by the CSI 300 (+2.00%), the KOSPI (+1.42%), the Shanghai Comp (+1.22%), and the Nikkei (+0.15%). That’s come amidst sizeable advances for tech stocks, with the Hang Seng tech index up by an even larger +4.71%. In the meantime, Australian equities have also rallied following the RBA’s decision to raise their cash rate target by 25bps to 2.85%, in line with expectations. Their statement said that the Board “expects to increase interest rates further over the period ahead.” They also upgraded their inflation forecasts relative to last month, now saying they expected CPI inflation to be around 4.75% over 2023, having previously said they saw it “a little above” 4%. Looking forward, US equity futures are pointing higher as well, with those on the S&P 500 up +0.43%.

In terms of yesterday’s other data, Euro Area GDP grew a bit faster than expected in Q3, with the preliminary flash estimate showing growth of +0.2% (vs. +0.1% expected). Otherwise, German retail sales unexpectedly grew by +0.9% in September (vs. -0.5% expected), and UK mortgage approvals fell by less than expected in September to 66.8k (vs. 63.7k expected).

To the day ahead now, and data releases from the US include the ISM manufacturing reading for October and the JOLTS job openings for September. Otherwise, there’s the October manufacturing PMIs from around the world. Earnings releases include Eli Lilly, Pfizer and Uber. Finally in the political sphere, general elections will be taking place in Denmark and Israel.

Authored by Charles Hugh Smith via OfTwoMinds blog,

What’s different now? Quite a few fundamentals are consequentially different.

The closest thing to a guarantee in finance is the truism that recessions always follow Treasury bond yield inversions, where short-term bond yields exceed longer-duration bond yields.

Does history alone guarantee the same result this time? The consensus is “yes,” but as grizzled market observers have noted, when everyone is sure the market is going to do one thing, it does something else.

The better approach would be to say all else being equal to previous conditions, recessions follow yield inversions as night follows day. But are conditions the same now? It can be argued that conditions are fundamentally different, and so the guarantee of recession might be flawed.

What’s different now?

Quite a few fundamentals are consequentially different.

1. The labor force is no longer expanding, and may be shrinking. As the chart below illustrates (courtesy of Econimica), the number of employees 25-54 has been stagnant for 20 years. The only growth in the employed are in the 55 and older cohort, which added 20 million employed in those 20 years.

As the population ages and the birthrate declines, the workforce ages and then shrinks as older workers retire. This puts a floor under employment that didn’t exist in previous eras. Wages are finally rising after 45 years of stagnation. This trend will only accelerate as the workforce contracts.

Social and health changes are exacerbating this contraction in those willing to work. Laying flat and Let It Rot are Chinese terms for younger generations opting out of the rat-race, but they apply to American workers as well. Quiet quitting is only one manifestation of a larger social movement of take this job and shove it.

Long COVID is not being tracked all that well, but anecdotal evidence suggests it’s impacting the younger workforce. The general decline of American workers’ health (lifestyle diseases / disorders, burnout, etc.) is having a substantial but poorly documented effect. The workforce is not just a count of warm bodies, it’s the count of those willing and able to work demanding jobs.

2. Turning to household wealth, note that household wealth doubled from 2008 to 2022, from $81 trillion to $162 trillion in Q2 2022. As noted here many times, the majority of this wealth is in the hands of the top 10%, who generate roughly 40% of all consumer spending.

Many of these households bought assets long ago. Asset valuations can drop substantially but the gains are so large that those who own most of the assets will still feel well-off. For example, if you bought a house for $150,000 and it was worth $1 million earlier this year, if it drops to $750,000 next year, you may regret not selling it but you’re not exactly hurting.

In other words, there are buffers in employment, wages and wealth that are substantially different from previous eras. Labor has already been cut to the bone in most of Corporate America and small business, and essential workers run the spectrum from hotel maids and other lower-skill positions to experienced welders and electricians to tech workers.

The slack got squeezed out long ago. If you struggled to hire reliable, experienced workers, you’re going to do everything else to cut expenses to keep those essential workers in a downturn.

3. Lastly, reshoring and friendshoring are bringing capital and jobs back to North America. 

The perversities and vulnerabilities of Hyper-Globalization are now apparent to all, and this reality will only gather momentum.

Recessions are not equal. 

A deep recession is characterized by 10% to 15% of the workforce being laid off, and credit, consumption, asset valuations and profits all fall off a cliff.

A recession in which the GDP shrinks by 1% for two quarters while employment remains stable may be more statistical than consequential. All things are not equal, and the herd running toward the “guaranteed recession” may thunder off the cliff.

*  *  *

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Chinese stocks rebounded from extremely oversold territories amid speculation Beijing is preparing to roll back the draconian Covid Zero policy. The country’s Foreign Ministry denied such reports. 

Chinese stocks listed in Hong Kong jumped as much as 7% intraday, rebounding from their lowest levels since 2005 after unverified social media posts circulated a rumor about reopening the economy. The Hang Seng Tech Index surged as much as 9%, the most significant intraday move since April on the speculation. 

“Heard that “Reopening Committee” has been formed & led by Wang Huning, Politburo Standing Member. The Committee is reviewing COVID data from US/HK/SG to assess various reopening scenarios, target 03/2023 reopen,” Twitter account “Hao HONG 洪灝, CFA” tweeted. 

Heard that “Reopening Committee” has been formed & led by Wang Huning, Politburo Standing Member. The Committee is reviewing COVID data from US/HK/SG to assess various reopening scenarios, target 03/2023 reopen.

HK finally rebounded 3%, A-shares +1%. $EWH $KWEB $FXI $PGJ https://t.co/ZgN2EYqUzH

— Hao HONG 洪灝, CFA (@HAOHONG_CFA) November 1, 2022

Chinese equity indexes pared gains after China’s Foreign Ministry spokesperson Zhao Lijian said he was unaware of any committee preparing to end the Covid-zero strategy. 

“I’m not surprised by the rumor circulating online about a conditional reopening,” Liu Xiaodong, a fund manager at Shanghai Power Asset Management Co., told Bloomberg.

China stocks were in a severe rout last week after the Communist Party congress granted President Xi Jinping a third term. Stocks panic crashed the most since 2008 GFC on fears of Xi’s power consolidation and continuation of economically damaging Covid-zero policies. 

Meanwhile, last week, JPMorgan’s strategist Marko Kolanovic urged investors to buy the dip in Chinese stocks even though Xi’s tightening grip on power will exact a heavy toll on free enterprise and economic growth. 

The reopening speculation also led to a jump in Chinese stocks listed in the US. KraneShares CSI China Internet Fund is up more than 7% premarket, while shares of Alibaba Group Holding Ltd., Pinduoduo Inc., and JD.com Inc. are up between 6-8% premarket. 

Any confirmation about reopening by authorities could result in a more sustainable upside for Chinese stocks and strengthen the yuan. 

“One must be cautious about investing on speculation, particularly because much positive speculation about China Internet in recent months has proven unfounded,” said Adam Montanaro, investment director of global emerging-market equities at Abrdn.