Month: March 2023

By Michael Every of Rabobank

Yesterday’s European inflation data surprised to the upside. Who could have known that inflation would not just fade away, as the market tried to peddle two months ago? We have more key numbers to focus on today, including German CPI and global PMIs, but it would take a shock along the lines of what we just saw in Aussie CPI (7.4% y-o-y vs. 8.1% expected despite the surge in that month’s retail sales) and GDP (Q4 0.5% q-o-q vs. 0.8% consensus, in line with y-o-y expectations at 2.7%) to shift sentiment back towards the median ‘2023 Outlook’ view of disinflation and a looming rates pivot. I have been mocking that in my own counter-outlook presentation called ‘The Pause That Doesn’t Refresh’. Data like China’s PMIs (manufacturing at 52.6 vs. 50.6 expected, services at 56.3 vs. 54.9 expected) are certainly not going to refresh any disinflation or rates pivots calls – unless they are just to freshen up the atmosphere at the National People’s Congress starting this weekend.

Indeed, the big picture still matters more. Much as I try to veer away from what I’ve flagged would be THE topic since early 2016, the news-flow doesn’t let me: the Global Markets Daily is increasingly the Deglobal Markets Daily. The global architecture shifting rapidly. And when I say rapidly, I mean *every day* brings shocks for those paying attention. Then, after a lag, shocks for markets not paying attention. So what is new in the last 24 hours?

First, the new US House committee on the Chinese Communist Party’s threat to America is underway: as I type, witnesses are pushing for a massive increase in US military spending; an urgent investment in Taiwan’s defences; preventing US supply-chain vulnerabilities stemming from China; breaking China’s Great Firewall; and blocking Chinese investment in US agri. Second, the word on the street is that if the White House executive order to impose capital controls on US firms investing in China is more limited than first floated, Congress will impose its own tougher version. Third, the Wall Street Journal reports the US may revoke export licenses for Huawei. Fourth, any US chipmaker given part of the $39bn Federal funding for onshoring is to be banned from expansion in China for a decade.

But it gets worse. Ignored by the mainstream media and most of social media despite officially running in 2024, and some polls showing he could win, former President Trump just launched his trade plan that “takes a SLEDGEHAMMER to Globalism” via “Universal Tariffs” – “Total Independence From China” – “Patriotic Protectionism” – “Reviving Mercantilism for the 21st Century”. In short, his proposed “America First” policy would phase in a system of universal, baseline tariffs on most foreign products, the revenue from which would reduce taxation on firms producing in the US. Moreover, tariffs “would increase incrementally depending on how much individual foreign countries devalue their currency.”

Honestly, I am not shocked. I am sure no other markets Daily uses the word “mercantilism” as freely as this one has for around a decade – I had to explain the word in 2015, and then how pre-WW2 US presidents were mercantilists; when Trump floated his first tariffs, I argued phasing them in to allow onshoring FDI before imported goods got more expensive would be logical; ‘Weaker currency = higher tariffs’ was factored into our report on ‘Balance of payments -and power- crises’; and clearly there is still US momentum to change things even if means breaking things, which we factored into our ‘The World in 2030’ report  – which we may arrive at early; moreover, as argued last year, and this, ‘Bretton Woods 3 Won’t Work’.

As Twitter discussions over this topic continue in less Trumpian size-100 font-all-caps-bold-underlined form, I think @matthew_pines summarises things, and the arguments in this Daily since 2014, when he notes:

“A key function of the economic system post China-in-WTO has been to allow western capital to (1) arbitrage labor costs & (2) grow FIRE sector to direct resulting USD mercantilist surpluses into scarce, desirable assets (NYC real estate, Ivy degrees, UST/Agencies, farm land).

(1) has just about reached its limit, and (2) will face headwinds (if not outright reversal) for national security and domestic political reasons. What new system will result? TBD, but these shifts typically don’t happen smoothly (or peacefully)…”

That’s as this weekend’s National People’s Congress in Beijing is set to see an overhaul of China’s government agencies, including the PBOC, key industries and sectors, bringing them all directly under the CCP in a “relatively intensified” manner, in Xi’s words. What this means is the CCP, not state institutions, will be running things openly from hereon out. These changes will affect the interests of many, he added. And not only in China.

Meanwhile, things are already the opposite of smooth and peaceful in Russia-Ukraine. Look at headlines like:

• ‘Lukashenko Proposes Unifying Russia, China, and Belarus’ Industrial Policies’; or

• ‘Russia’s Medvedev floats idea of pushing back Poland’s borders’; or

• ‘Putin orders tighter security at Russia-Ukraine border after spate of drone attacks’.

It should be screamingly obvious that all of the above has an structural inflationary implication far above what we just saw in France and Spain, or may see elsewhere this week. Indeed, in an argument running parallel to that of Matthew Pines, but absolutely linked to it, @S_Mikhailovich notes:

“40 years of falling rates were the engine of financialism – optimizing the real economy around leveraged finance and asset prices. Without the ever-falling rates, financialism is over. The next 40 years can’t be like the last 40. Investors are yet to see it.”

So, is this the Deglobal Definancialisation Markets Daily? That might sound like biting the hand that feeds, but it’s actually trying to guide that hand to avoid it getting bitten off entirely.

After reporting last week that production volume had spooled up at Tesla’s new Germany plant, this week we are learning that the Tesla production expansion continues: this time to Mexico.

The company is slated to build a new plant in Monterrey, Mexico, it was reported by Bloomberg this week. The announcement comes after weeks of guessing over where the U.S. based EV company would expand its reach next. 

President Andres Manuel Lopez Obrador announced on Wednesday that the facility would help Mexico “build on the millions of combustion-engine vehicles the country already supplies to the US every year,” according to Bloomberg. 

Companies like BMW and GM have also recently announced new investments in Mexico, also. 

Lopez Obrador reportedly spoke to Tesla Chief Executive Officer Elon Musk about environmental commitments for the plant, which included recycled water throughout the manufacturing process. 

AMLO said of the deal: “He was very responsive, understanding our concerns and accepting our proposals. I want to thank Mr. Elon Musk for being very respectful, attentive and understanding of the importance of addressing the problem of water scarcity.” 

AMLO had said in the past that permitting could be called into question for the plant if there wasn’t enough water in the area of the proposed production sight. Nuevo Leon, where Monterrey is located, even had to have its water access cut last summer due to dams being at risk of emptying. Tesla had similar water scarcity issues that it had to deal with when building its most recent plant in Germany. 

So far, neither Tesla nor AMLO has specified what Tesla will be building at the new plant, though over the past week there has been renewed talk of Tesla producing an even more affordable subcompact vehicle. The company is also expected to begin producing its Cybertruck within the next 18-24 months.

Tesla will hold its investor day this week, where it is expected to announce further details of the plan. 

The Kremlin said Wednesday that it prevented another ‘massive’ drone attack on its territory – this time in Russian-held Crimea, stating that a total of 10 drones were shot down or disabled through electronic warfare measures.

“An attempt by the Kyiv regime to carry out a massive drone attack on the facilities of the Crimean peninsula has been prevented,” the Russian defense ministry (MoD) said in a statement, as cited in TASS.

“Six Ukrainian attack drones were shot down by air defense systems. Another four Ukrainian drones were disabled by electronic warfare. There were no casualties and destruction on the ground,” the MoD said. 

It comes a day after a spate of drone attacks on and near multiple Russian cities were reported. Some of them were reported downed, but others appeared to have hit their targets – including against an oil facility in Tuapse, which lies about 150 miles southeast of the Crimean peninsula, about 500 kilometers from the nearest Ukrainian-held territory.

During those prior attacks, inbound enemy UAVs had been observed outside of Moscow, St. Petersburg, and over the Belgorod region. On Tuesday there were in total possibly half-a-dozen to a dozen or more inbound drones which had been sent against various Russian cities.

Given the air raid alerts and sirens that went out warning heavily populated areas over a span of Monday into Tuesday, The Daily Beast had described it as a day of chaos for Russians:

The strikes were part of what local media described as a “mass drone attack” that appears to have intensified in the last 24 hours.

On Monday morning, residents of an apartment building in the Belgorod region, near the border with Ukraine, were forced to evacuate in the middle of the night after one of four drones crashed into the building, according to Baza. Another drone landed on the roof of a supermarket and exploded, scorching the premises.

The fresh drone attack on the Crimean peninsula comes amid fresh denials by the Ukrainian government that it’s targeting Russian soil using drones.

⚡️The drone that crashed near Kolomna in the Moscow region the day before was reportedly filled with explosives

According to Russian media, it had a C4 explosive weighing about a kilogram. Also, during the examination of the aircraft, several charges for RPGs were found. https://t.co/cacYUnHKSP

— War Monitor (@WarMonitors) March 1, 2023

According to regional reports, the alleged attacks have led to new tit-for-tat accusations:

Kremlin spokesman Dmitry Peskov on Wednesday said Moscow does not trust Ukrainian authorities when they say the country’s military is not carrying out drone attacks on Russia.

“We don’t trust them,” Peskov told a press briefing in Moscow, commenting on remarks by Ukraine’s presidential adviser Mikhaylo Podolyak who denied Kyiv carries out strikes on the territory of the Russian Federation.

Russia’s Defense Ministry on Tuesday accused Ukraine of launching drone strikes targeting infrastructure in several Russian regions.

But this comes after a past year which witnessed a number of sporadic drone and alleged sabotage attacks on sensitive Russian facilities, including military bases, as Ukraine and its backers grow more emboldened. 

One December investigative report written by a US special forces veteran said the CIA was behind many of the covert sabotage operations happening with increasing frequency on Russian soil. President Putin has recently said he sees the conflict in Ukraine and West-backed proxy war there as a fight for the survival of the Russian people, alluding to it as an ‘existential threat’ in fresh comments. Likely these attacks on Russian soil will only serve to convince much of the Russian public of the accuracy of his words.

Coming on the heels of yesterday’s hotter than expected inflation prints in France and Spain, this morning’s German CPI printed hotter than expected (+9.3% YoY vs +9.0% exp vs +9.2% prior) as the continued slowing of inflation narrative busts.

The hot German CPI prompted Goldman to upgrade their Euro area headline inflation forecast to 8.46%yoy, from 8.36%yoy previously, and mark up their core inflation tracking estimate by 10bp to 5.38%yoy. This raises their estimate for seasonally adjusted Euro area core inflation to 0.47%mom, 9bp above January’s 0.38%mom.

The reading for Europe’s biggest economy puts more pressure on the ECB to hike higher for longer, prompting markets for the first time to price a 4% peak in the ECB’s deposit rate which currently stands at 2.5%.(as we detailed yesterday)…

As Bloomberg economist, Martin Ademmer, noted,“For the ECB, a sequence of upside surprises to readings for the euro area’s biggest economies is awkward. That the bulk of the misses are accounted for by food and energy is cold comfort.”

Addressing reporters in Frankfurt earlier Wednesday, Bundesbank President Joachim Nagel warned that core price pressures remain very elevated and that the inflation rate is only likely to retreat gradually — averaging between 6% and 7% in Germany this year.

“One thing is clear: the interest-rate step announced for March will not be the last,” he said in a speech. “Further significant interest-rate steps might even be necessary afterwards, too.”

…and that is knocking into US yields…

And dragging US stocks into the red…

It appears the inflation monster is more sticky than the ivory tower believed.

Everyone knows that monetary policy acts with a lag, but the $64 trillion question – and in the case of global capital markets, literally – is how big said lag is at a time when central banks have engaged in one of the most aggressive hiking cycles in history to stem the runaway inflation spawned by the Helicopter Money unleashed during the covid shock, and not just by the Fed, which in 2022 saw the most rate hikes in a calendar year in history…

… but by all developed central banks.

Why this obsession with the lag? Because, as DB’s head of thematic research (and in house credit guru not to mention aspiring piano player) Jim Reid writes in a recent note, “Most (but not all) big hiking cycles bring recessions with a lag”…

…  and the ones that do “tend to be when the Fed is furthest away from its dual mandate and that invert the curve.” In case it’s unclear, both apply to this cycle, but certainly inflation is the outlier with prices still rising at a 6%+ annual clip.

So with that in mind, let’s take a look at some of the key “lag” indicators, starting with the US Senior Loan Officers Survey (SLOOS), which as we noted recently has painted a “dire picture” for the economy as “Loan Standards Are Approaching Record Tightness As Loan Demand Plummets“, and which leads GDP by two quarters…

… and leads a surge in HY defaults by around 3 quarters…

To be sure, the banks may not discuss it openly but they are ready: as shown below, we’re halfway between 2007 and 2008 in terms of banks’ forecasting 2023 delinquencies; specifically, US banks forecasting rising 2023 delinquencies is worse than Jan’07 levels.

Taking another look at the SLOOS, the survey showed expected delinquencies across a broad range of sectors, which to Reid is “a good correlation to future charge-offs.”

Then there is the yield curve: the 2s10s has inverted before ALL of the last 10 US recessions, and it takes 12-18 months for the lag on average but some cycles take longer….

But here is a way to improve the fit: as Reid notes, the “3-month rule” tightens up the gap between US 2s10s inversion and recession to 8-19 months. That takes us to March ‘23 – February ‘24. The one exception is the Fed policy error of mid-60s.

As an aside, Reid believes that Fed hikes to recession and inversion to recession are likely compressed in this cycle: the shortest cycles are very biased to those where the 2s10s curve inverted during the hiking cycle.. The longest cycles tended not to invert the curve during hiking cycles…

Here are some practical consequences of the accelerating rate inversion:

Impact 1. By May US IG (investment grade) should yield same as Fed Funds… “which would you prefer? 11yr credit risk or safe front end risk?”

Impact 2: Whether it matters or not is a moot point but it’s striking that 6m US rates matched the earnings yield (1/PE) for the S&P 500 for the first time since 2001 in mid-February

What about Europe, and the ECB, where today’s red hot inflation data moved up expectations for rate hikes to 3.75% by June? According to Reid, the peak impact from ECB hikes will likely be in Q2 2024…

And while lending standard in Europe might ease in Q1 vs. Q4 as war/energy shock dissipate, will the lag of policy then take over?

And there there is broad money supply, or M2, which has (very) long and variable lags, and has seen a Boom and Bust in last 3 years: the biggest increase since WWII and now first fall since just after..

And since over the very long run the two move in tandem, will the fact that M2 YoY is now negative impact growth with a lag? (spoiler alert: yes).

Turning to markets, Reid then shows S&P 500 Performance in Fed Tightening Cycles since 1955 by day: normally the weakness starts to materialize only 9-10 months after the first hike and lasts a year or so, but not this time since the Fed was hiking when the economy and earnings were already slowing; “So either lag is shorter now or we soon move on from the shock of a once in a generation rates move to the economic lag of monetary policy.”

And while equities may diverge from trendline, all is going to script in rates, as shown in the chart of the average movement in 2s10s US yield curve in Fed Tightening Cycles since 1955 by month.

Where there are variations from trendline, is in core CPI, where Core CPI is declining more than the average…

… and unemployment which is notably falling far less than average at this stage, and which “probably reflects a Fed that was well behind the curve…. On average it turns higher 18 months after the Fed starts hiking”

Going back to capital markets, a nagging question: why have risk assets held in as well as they have? For the answer look not to stocks but bonds, and specifically bond volatility (i.e., the MOVE index). As Reid notes, the risk market bottom on October 12th was exactly when the MOVE index reversed from 2009 highs (ex. one day at start of pandemic): the first 9 months of 2022 was a shock after a decade of ultra low rates and lower and lower bond vol.

Once Fed Terminal rate assumptions plateaued, rates vol fell sharply… hence the sweet spot between max fears over rates and before lag of policy on economy kicks in. But since the shock payrolls print on Feb 3rd, the terminal rate is edging up again though complicating the picture a bit.

The bottom line is that rates vol has driven equities over last year or so. Rates vol falling since March has been a support for equities but when the recession comes this correlation will break down…

Finally, some hard landing slides. First, Reid notes that DB’s recession probability model has risen to 90% over the next 12 months (on the other end, Goldman sees recession odds at 25% over the next year).

Why note a soft landing? Take one look at the Fed Misery Index: according to Reid, soft landings have only occurred in hiking cycles where the Fed was around its mandate (unlike now).

And then there is the actual weakness in the economy with trend growth rapidly weakening. As noted in the last GDP report, we are seeing the softest growth in final sales to private domestic purchasers since GFC (ex-Covid).

… or the Leading Index: anything more than a -1% YoY decline in US LEI has always led to a US recession within a few months. We’re now at -6% YoY

There are similar observations to be made regaring declines in the US new Mfg orders, the Philly Fed index (another one in the camp of “never been this bad without a recession swiftly following”), and others, but understandably all eyes remain glued to the surprising strength in jobs.  And understandably so… but as shown below, that can and will change furiously and on a dime: in the next chart, Reid shows that US unemployment barely budges between recession (R) minus 6 months and R minus 1 month…. and then surges in the recession.

Finally, while payrolls don’t suggest we’re in recession now – not by a long stretch – look at the non-linearity when the recession hits shown by Reid in the chart below: a sharp fall with little warning… this is especially true as we wait to see how much of Jan 23’s gains were seasonals.

The irony here is that not just stock markets (or at least the bulls) are hoping the recession starts as soon as possible: the Fed does too, as it can finally go back to what it does best and brrrrrr. The only question is whether anyone in the Biden admin realizes that hopes of perpetuating the growth fallacy into 2024 – a key election year – will end in disaster, and it behooves the president to push the economy over the cliff now rather than wait…

There is much more in the full must read presentation from Jim Reid, available to pro subscribers in the usual place.

Authored by Tom Blackstone via CoinTelegraph.com,

The company provided a link for voters to sign up so that they can gain information about local politicians’ crypto policies…

Coinbase has launched a grassroots political campaign to promote pro-crypto policies, according to a Feb. 28 Twitter thread from the company.

The company said that the #Crypto435 campaign is intended to “grow the crypto advocacy community and share tools and resources” so that crypto users can make their voices heard in all 435 congressional districts.

1/ It’s time to advance pro-crypto policy in all 435 Congressional Districts across the U.S.

Introducing #Crypto435, our campaign to grow the crypto advocacy community and share tools and resources to make your voice heard.

Become an advocate today 👇 https://t.co/TPJhtoP9eC

— Coinbase (@coinbase) February 28, 2023

Coinbase provided a link to a signup page asking users to provide a name, address, phone number and email address to receive further information. The exchange claimed that it will provide people who sign up with “information about how to contact specific politicians in their local districts, what those politicians’ records on crypto are, tips for making your voices heard in D.C., and more.”

In the thread, Coinbase argued that the crypto community has reached a “pivotal moment” in which political action will now be necessary, stating:

“The crypto community has reached an important moment. Decisions being made by legislators and regulators in DC and around the country will impact the future of how we can build, buy, sell, and use crypto.”

The announcement had mixed reactions from Twitter users. Many applauded the move with statements like “Crypto is what we can all come together and support.” and “Good stuff Coinbase. Very important!” At the same time, some XRP fans alleged that the announcement was hypocritical. They felt that if Coinbase really wanted to fight the powers that be, it would not have delisted XRP after the Securities and Exchange Commission labeled it as a security.

It’s simple, #relistXRP That’s how our voices will be heard.

— Teddy Rauxpin🧸ammoNitE🦑³Ω³ 🃏☀️ (@teddy_rauxpin) February 28, 2023

Aside from a small tax provision enacted in 2021, the U.S. Congress has not passed any laws defining what a cryptocurrency is or legislating how specifically crypto businesses can comply with regulation.

This is in contrast to Singapore, where the legislature passed a law that specifically spelled out the requirements for operating a crypto-related business in the country.

SEC Chair Gary Gensler has argued that existing U.S. securities law applies to crypto in some cases. But Nexo and other crypto companies have claimed that current U.S. laws are so vague the industry doesn’t know how to comply with them.

The issue of crypto regulation continues to be hotly debated both inside and outside the crypto community. Crypto companies have donated to lobbying groups in the past. But this appears to be one of the first times a crypto company has tried to organize a grassroots political campaign.

US equity rebounded from Tuesday’s month-end pension and CTA selling boosted by overnight news that China’s economy was roaring back sparked growth optimism and outweighed concerns about sticky inflation that could keep the Fed on its hawkish path. S&P 500 futures rose 0.3% at 7:40 a.m. ET, still hovering below the key technical support level of 4,000, while Nasdaq futures edged higher, up 0.4%. Sentiment was boosted by a sharp drop in the dollar which saw the Bloomberg Dollar Spot Index traded down 0.5% near session lows, the biggest drop since Feb. 14, as the yuan stormed higher. Treasuries edged lower, mirroring moves in Europe after German states saw annual inflation accelerate in February. Oil fell, while gold gained with Bitcoin.

Boosting sentiment today was news that China’s economy is showing signs of a stronger rebound after Covid restrictions were abandoned, with manufacturing posting its biggest improvement in more than a decade. The big economic news overnight came from China’s random number generator, and specifically the manufacturing PMI which rose to 52.6 last month, the highest reading since April 2012. The Caixin manufacturing PMI also rose into expansion, to 51.6 in February from 49.2 in January. The NBS non-manufacturing PMI increased markedly to 56.3 in February from 54.4 in January, driven by an acceleration in both construction and service sectors. Both the NBS and Caixin manufacturing PMIs pointed to improvement in the manufacturing sector in February, as firm operations and customer demand recovered in February after the LNY impact dissipated and the post-Covid recovery gathered steam.

Some observations from Goldman on the Chinese data:

• The China NBS purchasing managers’ indexes (PMIs) survey suggested manufacturing activity improved significantly in February. The NBS manufacturing PMI headline index jumped to 52.6 in February from 50.1 in January, the highest reading since April 2012. The improvement was broad-based. Among major sub-indexes of NBS manufacturing PMI, the output sub-index rebounded to 56.7 from 49.8, the new orders sub-index increased sharply to 54.1 from 50.9, and the employment sub-index rose to 50.2 from 47.7. The suppliers’ delivery times sub-index rose notably to 52.0 in February from 47.6 in January, implying faster supplier deliveries and artificially depressed the headline PMI. NBS commented that business operations and customer demand accelerated on the dissipation of LNY impact and the removal of zero-Covid policy.
• The Caixin manufacturing PMI was released later in the morning. The headline index rose to 51.6 in February from 49.2 in January, on the relaxation of Covid restrictions. Surveyed companies mentioned that the increase in production was linked to easing Covid restrictions and recovery of business operations and client demand. Sub-indexes in the Caixin manufacturing PMI suggest expansion in output in February (53.3 vs. 49.0 in January), rising new orders (52.9 vs. 49.3 in January), stronger employment (50.6 vs. 48.4 in January), rising inventories in raw inputs (49.3 vs. 48.4 in January), faster suppliers’ delivery (51.2 vs. 49.3 in January), slightly stronger inflationary pressures in input and output prices (51.7 and 50.3 vs. 52.0 and 49.7 in January, respectively), and stronger new export orders (52.2 vs. 48.7 in January).
• Both the NBS and Caixin manufacturing PMIs reported expansion in new orders and output, stronger new export orders and faster suppliers’ delivery. Both manufacturing supply and demand expanded in February, as production quickly normalized, and domestic and external demand improved after the Covid policy change.
• The official non-manufacturing PMI (comprised of the services and construction sectors) rose to 56.3 in February (vs. 54.4 in January), driven by an acceleration in both sectors. The services PMI increased to 55.6 (vs. 54.0 in January). According to the survey, the PMIs of transport service industries such as postal, airline and road transport services were above 60 in February. The construction PMI rose in February to 60.2 (vs. 56.4 in January). NBS noted that the growth of the construction sector (presumably infrastructure-related) accelerated in February.

“US index futures are trying to rebound this morning following stronger than expected China figures suggesting the economy is responding positively to the reopening,” Peter Garnry, head of equity strategy at Saxo Bank, said in a note.

In premarket trading, Novavax shares plummeted more than 25% putting the Covid-19 vaccine maker on track for its worst day in more than two months, after fourth-quarter revenue missed analyst estimates and the firm said there is substantial doubt over its future. Reata Pharmaceuticals surged in premarket trading after winning FDA approval for a new drug. Meanwhile, Tesla is set to hold an investor day on Wednesday, where Chief Executive Officer Elon Musk is poised to unveil his latest and much-hyped “master plan” for the electric-vehicle maker. Several Wall Street analysts turned more bullish on the stock in anticipation of the event, but after a nearly 70% surge in just two months of this year, further gains may require more fireworks than are expected. Here are some other notable premarket movers:

• US-listed Chinese stocks stage a strong rally in premarket trading, rebounding from a recent slump, after a slew of data showed that China’s economy is on track for a stronger recovery. Alibaba (BABA US) +6.1%, Baidu (BIDU US) +6.8%, JD.com (JD US) +4.9%, Bilibili (BILI US) +9%, Nio (NIO US) +6%, XPeng (XPEV US) +7.4%
• Rivian (RIVN US) shares fell 8.1% after the electric-truck maker’s 2023 production forecast fell short of expectations amid supply-chain snags. Analysts at Truist cut their price targets on the stock, but noted that the lower outlook was mainly down to cost cuts, which should benefit the company in the long run.
• Sarepta Therapeutics (SRPT US) gains 20% after saying that the FDA doesn’t plan to hold an advisory committee for the approval of its experimental gene therapy to treat Duchenne muscular dystrophy.
• Monster Beverage (MNST US) shares drop 3.8% after the energy drink maker reported fourth- quarter results, with analysts highlighting the miss on revenue and earnings per share.
• BrightSpire Capital (BRSP US) shares fall 14% after holder DigitalBridge offered 30.4 million Class A shares in the mortgage finance company at $6 apiece, representing a 19% discount to Tuesday’s close.

The strong rally seen at the start of 2023 in US equities is showing signs of petering out, as inflation is proving stickier than expected, prompting investors to grow wary of the potential for hawkish central bank dynamics. The S&P 500 declined 2.6% in February, paring much of the strong year-to-date gains, but JPMorgan strategists believe this doesn’t capture the sharp increase in rates since the Federal Reserve’s last meeting and that the index at risk of further losses as a divergence with bonds is yet to close. Other strategists – in fact most of Wall Street – are similarly bearish

“The market is increasingly coming around to a more bearish view and previously expected rate cuts are being taken out of the curve and terminal rates are moving up,” Marija Veitmane, strategist at State Street Bank told Bloomberg. “Investors perceive any strong economic data as evidence that the Fed’s job is not yet done” while any poor data is sign of an imminent recession.

“Since the start of February, bond markets have been pricing in higher rate hikes from the Fed, but mixed economic data and lower decline in fourth-quarter earnings kept stocks afloat,” said Ipek Ozkardeskaya, senior analyst at Swiss Group. “Yet, US yields are poised to trend higher, and that will at some point pull equity valuations lower. A setting where yields and stocks rise together is not sustainable.”

Meanwhile, economic indicators are still running hot in the US, with official data on Monday showing that orders placed with US factories for business equipment increased in January by the most in five months. Wednesday’s data on construction spending, ISM manufacturing, and light vehicle sales will be watched closely by investors for further signs that the Federal Reserve might take as reason to tighten monetary policy more aggressively, or extend high interest rates for longer.

As a result, bond traders no longer view the odds of a Fed rate cut this year as better than-even, a shift from what they were expecting just a month ago. Market expectations also see the European Central Bank raising rates through February 2024, with a 4% ECB terminal rate fully priced. “February has poured cold water on hopes that policy makers may quickly tame inflation towards target,” Generali Investments strategists wrote in their monthly outlook. “We now have even higher peak rates in our books.” Watch this sentiment reverse with a bang the moment February jobs comes far below expectations next Friday..

On the other hand, contrary to expectations by Morgan Stanley’s Michael Wilson who has effectively staked his carrer on a forecast for a collapse in corporate profits, company earnings have proved more resilient than expected, even as traders question how long this can be sustained, given rising costs and the recessionary backdrop. In a sign that margins may yet be squeezed, asset manager Janus Henderson believes that dividend returns may be set to slow. Portfolio manager Jane Shoemake said she expects global dividend payouts to rise 2.3% to $1.6 trillion in 2023, a slower pace of growth compared with 8.4% last year, amid elevated inflation and geopolitical risks.

European stocks are ahead, tracking gains in Asia after Chinese manufacturing PMI rose to its highest in almost 11 years. The Stoxx 600 is up 0.1% with miners, autos and consumer products the strongest-performing sectors. Here are the biggest European movers:

• Aston Martin surges 22%, climbing to the highest since June, after the carmaker released results that analysts say showed a strong finish to the year with guidance for 2023 positive
• Moncler shares jumped as much as 8.5%, their biggest rise since November, after the luxury group’s full-year results beat expectations and Citigroup noted upbeat comments about its outlook
• Weir Group shares rise as much as 8.6%, hitting the highest since February 2021, with analysts saying the results from the mining-equipment firm are strong across the board
• Adidas shares jump as much as 3% after the sportswear brand was upgraded at HSBC, which says the company is likely to “embark on an ambitious path to reconquer market share”
• Ferrovial gains as much as 2.4% after the operator of London’s Heathrow Airport reported full-year results and a plan to shift domicile to the Netherlands and eventually apply for a US listing
• Euronext shares gain as much as 7.8% after the exchange operator withdrew its offer for investment platform Allfunds, a deal that analysts had questioned
• BNP Paribas shares dropped as much as 4.6%, their biggest decline since June, after Belgium’s Societe Federale de Participations & d’Investissement announced the sale of a 2.7% stake
• Just Eat Takeaway falls as much as 9.3% after failing to offer a gross transaction value forecast for 2023, a move analysts say looks disappointing after peer Delivery Hero did the same

Earlier in the session, Asian stocks were off to a strong start for March after China’s factory activity topped a decade high, spurring investor optimism ahead of an upcoming meeting of the nation’s political leaders. The MSCI Asia Pacific Index rose as much as 1.6%, the most since Jan. 9, lifted by communication and consumer discretionary shares. The Hang Seng China Enterprises Index jumped more than 5%, bouncing back from a recent selloff as strong manufacturing data underscores an acceleration in economic recovery.

“The latest economic data suggest China’s reopening has been working well,” said Nicolas Wang, senior equity advisor at Union Bancaire Privée.  Hopes that a stimulus plan will be announced at the National People’s Congress have been somewhat priced into stocks, according to Union Bancaire’s Wang. Economists expect Premier Li Keqiang — who will deliver his last government work report on Sunday when the annual event kicks off — to outline a target for gross domestic product growth for this year of higher than 5%. Elsewhere in Asia, Taiwan advanced after traders returned from a two-day break, while Japan also edged higher. South Korean market was shut for a holiday.  Asian stocks on Tuesday capped their worst month since September amid concerns over higher US interest rates and ongoing geopolitical risks. Traders no longer view the odds of a Federal Reserve rate cut this year as better-than-even, a shift from what they were expecting just a month ago.

Japanese equities rose, erasing early losses, after gauges of Chinese manufacturing beat economists’ expectations. The Topix rose 0.2% to close at 1,997.81, while the Nikkei advanced 0.3% to 27,516.53. The yen dipped about 0.1% against the dollar. Mitsui & Co. contributed the most to the Topix gain, increasing 3.4%. Out of 2,160 stocks in the index, 1,254 rose and 792 fell, while 114 were unchanged. “In addition to the cheaper yen, Japanese stocks are also benefiting from the rise in China and Hong Kong markets after the release of China’s PMI data,” said Yasuhiko Hirakawa, head of an investment department at Rakuten Investment Management. “Both manufacturing and non-manufacturing PMIs were higher previously expected, and there is positive sentiment toward the strong recovery of China’s economy.”

Australian stocks edged lower with the S&P/ASX 200 index ending 0.1% lower after a volatile session as investors assessed a slowdown in Australia’s inflation and economic growth, and how the data will impact monetary policy.  The benchmark closed at 7.251.60 after swinging between gains and losses, weighed down by banks and property names.  Australia’s monthly inflation eased in January to 7.4%, sending the currency and government bond yields lower. Meanwhile, the economy expanded at a slower-than-expected pace in the final three months of 2022, in a sign that the Reserve Bank’s rapid interest-rate increases are beginning to weigh on activity. In New Zealand, the S&P/NZX 50 index fell 0.2% to 11,876.35.

Stocks in India snapped an eight-day drop, the longest streak in more than three years, as investors looked for value after major benchmarks fell for a third straight month in February.  The S&P BSE Sensex rose 0.8% to 59,411.08 in Mumbai, while the NSE Nifty 50 Index advanced by a similar measure. All of BSE Ltd.’s 20 sector sub-guages closed higher, led by metal and commodity related companies. All 10 companies that are part of the ports-to-power Adani conglomerate ended higher for the first time since the scathing report by US short seller Hindenburg Research was published on Jan. 24. The group is conducting a three-day roadshow this week to restore investor confidence. Reliance Industries contributed the most to the Sensex’s gain, increasing 0.9%. All but two of 30 shares in the Sensex index rose.

In FX, the Bloomberg Dollar Spot Index fell as much as 0.5%, the most since Feb. 14, as the greenback weakened against all its Group- of-10 peers, while the New Zealand dollar was the best performer.

• The New Zealand dollar led G-10 gains, rising as much as 1.3% to $0.6263, the highest since Feb. 17, and the Australian dollar swung to a gain after China’s manufacturing purchasing managers’ index rose to the highest in more than a decade and exceeded economists’ forecasts. The Aussie had dropped earlier and bonds advanced following slower-than-expected local inflation numbers.
  • China’s manufacturing PMI rose to 52.6 last month, the highest reading since April 2012. A non-manufacturing gauge measuring activity in both the services and construction sectors improved to 56.3. Both indexes beat economists’ expectations.  A non-manufacturing gauge measuring activity in both the services and construction sectors improved to 56.3. Both indexes beat economists’ expectations
• The euro gained as much as 0.8% to $1.0662 and European bonds dropped, led by the front end, after stronger inflation figures from Germany. Options traders scaled back their bearish bets on the euro amid money-market wagers that the ECB’s terminal rate will be higher than previously expected
• The pound pared an advance and gilts erased an earlier drop as traders trimmed bets on the peak in the BOE’s key rate. BOE Governor Andrew Bailey cautioned markets against assuming a rates move in either direction, while acknowledging the impact that monetary tightening is having on the economy

In rates, treasury futures narrowly mixed after paring losses during European morning, following wider gains across gilts where front-end outperforms. Treasuries curve pivots around a little-changed 7-year sector with long-end yields richer by more than 1bp vs Tuesday’s close and 2s10s, 5s30s spreads flatter. 10-year TSY yields are little changed around 3.92% day with gilts outperforming by 3.5bp in the sector.  US curve extends Tuesday’s flattening move post month-end. Block flattener in futures adds to long-end outperformance over European session.

In Europe, Bund futures extended losses after the German state of North Rhine-Westphalia saw annual inflation accelerate in February, suggesting an upside surprise in the national reading later today. German 10-year yields are up 6bps while the UK equivalent falls 1bps. Gilts outperform following comments from BOE Governor Andrew Bailey, who said Wednesday that “nothing is decided” on the future path of rates.

In commodities, Crude futures decline with WTI falling roughly 1.0% to trade near $76.25. Spot gold adds around 0.3% to trade near $1,832.

Looking to the day ahead now, data releases include the global manufacturing PMIs for February and the ISM manufacturing reading from the US. From central banks, we’ll hear from BoE Governor Bailey, the Fed’s Kashkari, and the ECB’s Villeroy, Nagel and Visco. Finally, earnings releases include Salesforce and Lowe’s.

Market Snapshot

• S&P 500 futures up 0.2% to 3,983.00
• MXAP up 1.5% to 160.37
• MXAPJ up 2.0% to 521.54
• Nikkei up 0.3% to 27,516.53
• Topix up 0.2% to 1,997.81
• Hang Seng Index up 4.2% to 20,619.71
• Shanghai Composite up 1.0% to 3,312.35
• Sensex up 0.8% to 59,414.51
• Australia S&P/ASX 200 little changed at 7,251.60
• Kospi up 0.4% to 2,412.85
• STOXX Europe 600 little changed at 461.44
• German 10Y yield little changed at 2.71%
• Euro up 0.6% to $1.0642
• Brent Futures down 0.3% to $83.21/bbl
• Gold spot up 0.3% to $1,832.20
• U.S. Dollar Index down 0.40% to 104.45

Top Overnight News from Bloomberg

• China’s NBS PMIs for Feb were very strong, with manufacturing coming in at 52.6 (up from 50.1 in Jan and ahead of the St’s 50.6 forecast) and non-manufacturing climbing to 56.3 (up from 54.4 in January and above the St’s 54.9 forecast). BBG
• After three years of turbulence under the Covid pandemic, China’s leaders are expected to lay out economic goals to get growth back on track, restore confidence and avoid a build-up of financial risks. Economists expect Premier Li Keqiang — who will deliver his last government work report on Sunday when the annual National People’s Congress kicks off — to outline a target for gross domestic product growth for this year of higher than 5%. That’s after the economy expanded just 3% last year, missing the official goal by a wide margin. BBG
• US M2 money supply fell 1.7% Y/Y in January, the largest decline on record and the first time it has contracted in two consecutive months (but, money supply is still 39% higher than it was before COVID, which means the Fed still has plenty of work ahead of it). Barron’s
• Demand for U.S. workers shows signs of slowing, a long-anticipated development that is showing up in private-sector job postings even while official government reports indicate the labor market keeps running hot. ZipRecruiter Inc. and Recruit Holdings Co., two large online recruiting companies, say their data show the number of job postings is declining more than Labor Department reports of job openings. Investors recently hammered shares of those companies after disappointing earnings reports. WSJ
• The European Central Bank should reach its peak interest rate by September, Governing Council member Francois Villeroy de Galhau said. It would be unwise to expect the ECB to quickly reduce borrowing costs after their eventual peak, according to Governing Council member Madis Muller: BBG
• Bundesbank President Joachim Nagel said he supports a more rapid reversal of the ECB’s bond-buying to help tackle inflation, with more large interest-rate increases also a possibility beyond a planned hike this month: BBG
• The White House is coming under increased pressure to give F16 fighter jets to Ukraine (the process to deliver the jets and provide training for them is a long one, and many feel it should be started now). Wa Po
• The prices of new homes in 100 Chinese cities held steady in February versus January having fallen for seven consecutive months, data showed on Wednesday, as a flurry of property market easing measures improved buyer confidence. The flat reading followed a 0.02% decline in January from December, showed data from the China Index Academy. RTRS
• EU negotiators reached a deal to establish a green bond standard, giving investors long-awaited clarity that their money is aligned with the region’s climate ambitions: BBG
• UK house prices fell at their sharpest annual pace since 2012 last month, steepening a downturn sparked by a jump in mortgage rates. The average cost of a home fell 1.1% from a year ago last month after a gain of the same size in January, Nationwide Building Society said Wednesday. It marked the sixth consecutive monthly drop in prices and the first annual decline since June 2020: BBG
• Turkey’s parliamentary and presidential elections will take place as planned on May 14, President Recep Tayyip Erdogan has said, quashing speculation over whether the vote would be postponed following the two deadly earthquakes last month: BBG
• Economists expect China Premier Li Keqiang — who will deliver his last government work report on Sunday when the annual National People’s Congress kicks off — to outline a target for GDP growth for this year of higher than 5%. That’s after the economy expanded just 3% last year, missing the official goal by a wide margin
• Chinese President Xi Jinping welcomed Belarusian leader Alexander Lukashenko, a close Russian ally, in talks watched closely for signs that Beijing is expanding coordination with Moscow and its supporters in their standoff with the West
• BOJ Board Member Junko Nakagawa says that she wants to watch financial markets for a while longer to discern the impact of December’s adjustments to the BOJ’s yield curve control program
• The US crude buildup continues. Inventories increased by 6.2 million barrels last week, API data indicated, in what would be a 10th straight gain if confirmed by the EIA later. In fuel markets, gasoline and distillate stockpiles both eased. BBG

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly positive as the region digested a slew of data releases including the fastest pace of expansion for Chinese Manufacturing PMI in more than a decade. ASX 200 was initially pressured by weakness in telecoms and financials, but later pared the losses as the miss on quarterly GDP and softer monthly CPI data effectively eased some of the hawkish pressure on the RBA. Nikkei 225 lacked firm direction with price action confined to a narrow range around the 27,500 level. Hang Seng and Shanghai Comp. were supported by the blockbuster official Chinese PMI data which printed its highest since April 2012 and Caixin Manufacturing PMI also returned to expansion territory. Furthermore, a surge in tech spearheaded the outperformance in Hong Kong, while advances in the mainland were somewhat moderated by US-China frictions as the Biden administration considers revoking export licenses issued to US suppliers for sales to Huawei and with the US also barring chipmakers from expanding capacity in China for 10 years if they are to receive some of the federal funding from the CHIPS Act. US equity futures (ES Unch.) were uneventful but moved off lows as sentiment in Asia gradually improved

Top Asian News

• Chinese Finance Minister Liu Kun said proactive fiscal policy will be more forceful, while he added that China’s economy will continue its rebound and local governments will see better fiscal conditions.
• BoJ JGB market survey shows the index measuring market functioning deteriorating to -64 for February (prev. -51, Nov.), the lowest on record.
• China’s economy is recovering faster than expected by top officials, suggesting that the government might be restrained in rolling out new stimulus measures this year, according to Bloomberg sources.

European bourses are firmer across the board, Euro Stoxx 50 +0.6%, in a continuation of the APAC handover following strong Chinese PMIs; though, the region awaits mainland German prelim. CPI. Sectors are mixed with Basic Resources outperforming given benchmark pricing while Real Estate names lag following earnings and as yields continue to rise. Stateside, futures are similarly in the green though magnitudes are incrementally more modest given key data points loom. Tesla (TSLA) is reportedly preparing a revamp of its Model Y, via Reuters citing sources; named “project Juniper” with a production start target of October 2024; revamp reportedly includes the exterior and interior of the Model Y. Reminder, Tesla is holding an investor day on March 1st at its Texas facility.

Top European News

• BoE Governor Bailey says he would caution against suggesting either that the BoE is done with hiking rates or that BoE will inevitably need to do more; have to monitor carefully how the tightening already done is working its way through the economy. Further increase in Bank Rate may turn out to be appropriate, but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions. If BoE does too little with rates now, BoE will only have to do more later on. Must ensure that the situation does not get worse through homemade inflation taking hold.. Click here for more detail alongside analysis & reaction.
• ECB’s Villeroy expects growth in France to be slightly positive this year, desirable to reach terminal by the Summer i.e. September at the latest. France’s public debt ratio is not decreasing, unlike that of other major countries within the EZ.
• ECB’s Nagel says further significant rate hikes beyond March may be needed, favours a stepper reduction of the APP portfolio from July. Energy price decline has no essential bearing on the ECB’s medium-term inflation projections.

FX

• Dollar knocked back as punchy Chinese PMIs give the Yuan enough impetus to scale chart resistance, DXY down to 104.270 from just over 105.000, USD/CNY and USD/CNH both under 6.9000 and 200 DMAs.
• Sterling lags as BoE Governor Bailey sounds a word of caution about further hikes or calling time on the tightening cycle.
• Cable sub-1.2050 and EUR/GBP 0.8850+ as EUR/USD extends beyond 1.0665 vs Buck.
• Aussie underpinned by Yuan revival, but gains capped by soft GDP and CPI data.
• PBoC set USD/CNY mid-point at 6.9400 vs exp. 6.9409 (prev. 6.0519)

Fixed Income

• EGBs are softer on the session given initially hot German State CPIs and commentary from ECB’s Nagel; however, Gilts have seen a marked bounce in the wake of BoE’s Bailey.
• Specifically for EGBs, Bunds dropped to a 131.86 trough with the 10yr yield at a fresh 2.72% YTD peak, though they are off-worst given the readacross from Gilts and as the State CPIs overall are more in-line with the prior.
• For the UK, Bailey’s remarks prompted marked two-way action with Gilts/STIRs eventually focusing on the dovish-elements, lifting Gilts to a 100.30+ peak vs a 99.37 initial low.
• Stateside, USTs remain soft within 111.08+ to 111.18 parameters ahead of Final PMIs, ISM Manufacturing and Fed’s 2023 voter Kashkari; yield curve elevated with action much more pronounced at the short-end.

Commodities

• Crude benchmarks have given up initial gains after Tuesday’s firmer settlement, with the initial more tentative European tone vs Asia and the Private Inventory build capping upside.
• Specifically, WTI Apr and Brent May are at the lower-end of USD 76.21-77.74/bbl and USD 82.68-84.20/bbl parameters respectively.
• US Energy Inventory Data (bbls): Crude +6.2mln (exp. +0.5mln), Cushing +0.5mln, Gasoline -1.8mln (exp. +0.5mln), Distillates -0.3mln (exp. -0.5mln).
• Nat Gas futures are firmer in Europe and the US, with technicians focusing on Henry Hub’s 21-DMA while TTF reclaims some last ground after recently dipping below EUR 50/MWh.
• Spot gold and metals more broadly are modestly firmer, benefitting from the softer USD while base metals outperform their precious counterparts following China’s strong PMI releases.

Geopolitics

• Turkish President Erdogan “indicates” that Presidential and Parliamentary elections will be held on May 14th.
• “Russia is concerned about information that a Kiev provocation using radioactive materials could take place near Transnistria”, according to Russian Foreign Ministry Spokeswoman cited by Tass.

US Event Calendar

• 07:00: Feb. MBA Mortgage Applications -5.7%, prior -13.3%
• 09:45: Feb. S&P Global US Manufacturing PM, est. 47.8, prior 47.8
• 10:00: Feb. ISM Manufacturing, est. 48.0, prior 47.4
  • Feb. ISM Employment, prior 50.6
  • Feb. ISM New Orders, prior 42.5
  • Feb. ISM Prices Paid, est. 46.5, prior 44.5
• 10:00: Jan. Construction Spending MoM, est. 0.2%, prior -0.4%

DB’s Jim Reid concludes the overnight wrap

Welcome to March. Since it’s the start of a new month, we’ll shortly be releasing our regular performance review looking at how different assets performed over February. It was a pretty bad month on the whole, with losses across equities, credit, sovereign bonds and commodities. That came amidst growing concern about inflation, which led investors to ramp up their expectations for central bank rate hikes. For bonds in particular it was an awful month, with Bloomberg’s global aggregate bond index seeing its worst February performance since its inception back in 1990 after seeing its best January the month before. See the full report in your inboxes shortly.

That theme of the month continued into the final day yesterday, with another bond selloff thanks to European inflation data that came in hotter than expected once again. Specifically, French inflation hit a multi-decade high of +7.2% on the EU-harmonised measure (vs. +7.0% expected), whilst Spanish inflation unexpectedly rose to +6.1% using the same definition (vs. +5.7% expected). This is clearly not the direction that central banks or investors were expecting them to be moving at this point, so all eyes will now be on today’s German CPI release to see if that’s replicated, ahead of the full Euro Area release tomorrow.

For Germany DB continue to expect the headline rate to fall substantially during 2023. But core inflation is expected to remain elevated during H1 2023 (probably averaging around 5.5%) before starting to ease only gradually in H2. Our economists worry that there remains the risk that overly strong wage outcomes and second round effects keep core inflation in the 5%-plus range for much longer. With regards today’s preliminary print, DB expect the CPI index to rise by c. 0.8% mom, keeping the year-over-year rate unchanged at 8.7%. Core inflation at 5.9% YoY, (+0.7% mom – both DB) will be the main focus. See DB’s Sebastian Becker’s preview and overall German inflation views here. Just after we go to print, but before you read this, the North Rhine Westphalia region will have just published their inflation numbers so have a look out for that as it will give you clues for the national numbers out a few hours later.

Overnight we’ve seen a decent change in momentum for risk as upbeat China data has revived optimism for the reopening trade that has been flagging of late. As I type, the Hang Seng (+3.37%) is sharply up buoyed by a rally in Chinese listed tech stocks with the CSI (+1.36%), the Shanghai Composite (+0.7%) and the Nikkei (+0.16%) all trading in positive territory. Elsewhere, markets in South Korea are closed today for a holiday. In overnight trading, US equity futures have bounced from half a percent losses to be just positive as I type.

The market bounce has been due to the official China manufacturing index growing at the fastest pace in more than a decade with the index advancing to 52.6 in February (v/s 50.6 expected) from 50.1 in January indicating that the world’s second biggest economy improved markedly after the lifting of Covid-19 restrictions in December. At the same time, the official non-manufacturing PMI rose to 56.3 (v/s 54.9 expected) from 54.4 in January, notching the fastest pace of expansion since March 2021. The improvement was seen in the nation’s private gauge of manufacturing activity as the Caixin manufacturing PMI edged up to 51.6 in February (ending six months of contraction) from 49.2 in January. Elsewhere, Australia’s GDP came in weaker than expected in the fourth quarter of 2022 with the economy expanding +0.5% (v/s +0.8% expected), down from the prior’s quarter’s revised reading of +0.7%, hinting that rate hikes are now weighing on the local economy.

Back to yesterday, and with inflation proving more resilient than expected yesterday, investors dialled up the amount of rate hikes they’re expecting from the ECB this year. In fact, overnight index swaps are now pricing in +149bps of further rate hikes by year-end, which implies a very significant chance that the deposit rate will climb as high as 3.9%. That’s pretty astonishing when you consider it was only a year ago (shortly after Russia invaded Ukraine) that there were genuine doubts about whether the ECB would be able to hike at all, and 10yr bund yields briefly moved back into negative territory.

We’ve come a long way since then, with yesterday seeing yields on 10yr bunds (+6.9bps) close at a post-2011 high of 2.65%, even if it was above 2.70% at the intraday peak. It was a similar story across the continent, with yields on 10yr OATs (+6.6bps) at their highest since 2012, and those on 10yr gilts (+2.1bps) at their highest since Liz Truss’ time as PM. Meanwhile at the front-end, 2yr German yields were up +6.3bps to 3.137%, which is something we haven’t seen since 2008. So a day of records across the board.

Over in the US, pricing for the Fed’s terminal rate was up to a new closing high of 5.424% for the September meeting, with the July meeting nearly identically priced. That drove a further repricing of the front end, with the 2yr yield finishing up +3.75bps to 4.816% – its highest closing level since 2007. There was a significant volatility into month-end, with 2yr yields as low as 4.785% just over an hour before the close. 10yr yields finished up +0.6bps to 3.920% (and are +1.17 bps higher overnight), after earlier breaking above the 3.98% mark intraday for the first time since November. Chicago Fed President Goolsbee made his first public speech since taking the position in January. He did not explicitly comment on monetary policy, but warned that policymakers should be careful to take too much of a signal from financial markets.

This backdrop on the rates side meant that equities struggled to gain much momentum, with the S&P 500 moving between small gains and losses all session until finally selling off in the last 2 hours of trading to finish down -0.30% and near the lows of the day. That left the index -2.61% lower over the month as a whole. The losses were driven by a mix of defensives (Utilities -1.7%) and more cyclical sectors (Energy -1.4%). Meanwhile, the small-cap Russell 2000 (+0.04%) and the FANG+ index (+0.08%) of megacap tech stocks were able to just finish above flat, while the Dow Jones ended the day down -0.71%, bringing its YTD decline to -1.48% now. Over in Europe, the STOXX 600 (-0.32%) posted a modest decline, but the broader outperformance of European equities (particularly in the south) held into February, with Italy’s FTSE MIB advancing a further +0.12% yesterday, thus bringing its YTD gain to +15.91%.

Another factor that didn’t help on the rates side yesterday were the increases across a wide range of commodities. For instance, Brent crude oil prices were up +1.81% to $83.89/bbl, just as WTI advanced +1.81% to $76.61/bbl. It was much the same story for metals too, with copper prices up +1.75%, and gold advancing +0.54%. Clearly the European inflation numbers were the main factor behind the rates moves, but declining commodity prices have been a tailwind behind the falling inflation numbers over recent months, and any sign of a reversal would be bad news when it comes to the broader inflation picture.

Back in the US, we had a few lower-tier data prints yesterday ahead of the ISM prints this week. The pattern was generally an underwhelming one for the February releases, with the MNI Chicago PMI unexpectedly falling to 43.6 (vs. 45.5 expected). We also had the Richmond Fed’s manufacturing index, which was another that unexpectedly fell to -16 (vs. -5 expected). Bear in mind the last two occasions it got as low as that were during the Covid-19 pandemic and the GFC, with the latest reading being the lowest since May 2020. And finally, there was the Conference Board’s consumer confidence reading for February, which fell to 102.9 (vs. 108.5 expected), with expectations falling to a 7-month low of 69.7. Could higher yields over the last month have made an impact?

To the day ahead now, and data releases include the global manufacturing PMIs for February and the ISM manufacturing reading from the US. Otherwise, we’ll get Germany’s CPI and unemployment for February, and UK mortgage approvals for January. From central banks, we’ll hear from BoE Governor Bailey, the Fed’s Kashkari, and the ECB’s Villeroy, Nagel and Visco. Finally, earnings releases include Salesforce and Lowe’s.

For the past year, both the Biden White House and the Fed have been desperate to usher in a (mild) recession in the US to break the back of runaway inflation and the wage-price spiral with little success. But judging by the surge in bankruptcy filings, they are about to get their wish.

One month ago, when looking at the recent pace of large bankruptcy filings (those with more than $50MM in liabilities), we noted a troubling trend: in the first month of the year, the number of US bankruptcies topped 20, the highest in any other January dating back to 2010. Back then, 25 filings were seen as the economy was still reeling from the aftermath of the GFC.

The spike in defaults was not a fluke, and according to Bloomberg data, one month later – as of the end of February – no less than 39 large companies had filed for bankruptcy in the US so far this year, as February’s pace matches that of January; the YTD total represents the fastest pace of companies filing for bankruptcy since the immediate aftermath of the global financial crisis in 2009. By comparison, US bankruptcy courts had seen 63 large filings at this point in 2009.

Last week’s seven large filings — those tied to at least $50 million of liabilities — include the liquidation of generic drugmaker Akorn and the Chapter 11 filing of Covid-19 testmaker Lucira Health

This year, some of the most notable bankruptcy filings have been festive retailer Party City Holdco Inc, mattress maker Serta Simmons Bedding LLC, and cryptocurrency lender Genesis Global Holdco. 

The pile of dollar-denominated corporate bonds and loans in the Americas trading at distressed levels rose to $237.2 billion in the week ended Friday, about a 1.63% increase from $233.4 billion a week earlier, according to BBG data.

Some more details from Bloomberg:

• The US accounts for the greatest volume of distressed debt in the Americas

• The media sector had the greatest amount of distressed debt as of the latest week

• Bausch Health Cos. had the most distressed debt outstanding of any issuer as of Feb. 17, data compiled by Bloomberg shows