Month: February 2024

Initial & Continuing Jobless Claims Surge As Layoffs Accelerate

Initial & Continuing Jobless Claims Surge As Layoffs Accelerate

The number of Americans filing for jobless claims for the first time in the last week was 224k (12k above expectations and 9k above the prior week). That is the highest since November…

Source: Bloomberg

This is the biggest two-week jump in initial claims since the start of 2022 (and this is not seasonal, as this data is already seasonally-adjusted)…

Source: Bloomberg

California, New York, and Oregon saw the biggest increases in initial claims while Illinois and Missouri saw the biggest declines…

Continuing claims also rose, to within a smidge of 1.9 million Americans (which is close to its highest since Dec 2021)…

Finally…

Are we starting to see that impact the claims data finally?

Tyler Durden
Thu, 02/01/2024 – 08:36

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Bipartisan Tax Credit Bonanza


House Speaker Mike Johnson speaks to the press | BONNIE CASH/UPI/Newscom

On Wednesday afternoon, the closely divided House of Representatives passed a much-heralded bipartisan $78 billion tax deal by a wide 357–70 margin.

The tax bill revives and/or expands tax credits for small businesses, families with children, and affordable housing producers.

“The Tax Relief for American Families and Workers Act is pro-growth, pro-jobs, pro-America,” said Rep. Jason Smith (R–Mo.) and Sen. Ron Wyden (D–Ore.), the primary architects of the legislation, in a joint statement reported by Politico. “It’s a strong commonsense bipartisan step forward in providing tax relief for working families and small businesses.”

The most eye-catching part of the bill is its expansion of the Child Tax Credit. The House bill also expands the “refundable” portion of the credit that very low-income families receive, meaning they’ll receive tax credits that exceed the value of their tax liability.

Republicans and Democrats have both supported child tax credits as a simple and direct means of cutting child poverty.

On the other hand, American Enterprise Institute scholars Scott Winship and Kevin Corinth have argued that the design of the tax credit will create work disincentives for low-income families, encouraging them to take part-time over full-time employment or even drop out of the labor force entirely.

“What is a refundable tax credit? It’s welfare by a different name. We’re going to give cash payments, checks, to people who don’t even pay taxes,” said Rep. Thomas Massie, (R–Ky.), per PBS. The Wall Street Journal editorial board called the child tax credit provisions a “trojan horse.”

On the flip side, some Progressive Democrats voted no on the bill because it didn’t expand the child tax credit enough.

The legislation allows businesses to immediately and fully deduct their development and research spending, interest costs, and capital depreciation from their tax bills. That’s earned it support from free market, low-tax groups like Americans for Tax Reform.

The bill also sunsets a pandemic-era employee retention tax credit that’s proven massively more expensive than expected and has been riddled with fraud.

Everyone is going to find something to like and dislike about the House bill. Perhaps the most important takeaway is that it continues America’s long tradition of doing literally all policy through the tax credits.

The bill now goes to the Senate, where it’s expected to have a tougher time passing.

California lawmakers are getting increasingly serious about reparations. On Wednesday, the California Legislative Black Caucus released 14 bills intended to right the wrongs of past racist policies.

The bills are wide-ranging. One would require advanced notice to be provided when grocery stores close in underserved communities. Another would restrict the use of solitary confinement. There’s also a bill that would provide state funding to “specific groups,” which Politico described as potentially unconstitutional.

Interestingly for property rights advocates, the bill would look to reverse past instances of “race-based” eminent domain. That bill would “restore property taken during raced-based uses of eminent domain to its original owners or provide another effective remedy where appropriate, such as restitution or compensation,” said California Sen. Steven Bradford (D–Inglewood), reported Cal Matters.

Notably missing from the package is any sort of cash payments to the descendants of slaves.

The Biden administration’s slow-burning war on gas stoves continues. Earlier this week, the U.S. Department of Energy released a final rule creating new, tougher energy efficiency standards for home appliances that affect both gas and electric stoves.

Earlier versions of this rule could have forced many gas stoves off the market entirely, complimenting local and state efforts to ban gas appliances in new development. The administration’s final rule is more modest. The Washington Post reports it will affect 3 percent of gas stoves on the market.

The Energy Department’s final rule “is less stringent than the initial proposal that would have forced most gas models off the market, there really shouldn’t be any such federal regulatory meddling in the decisions of consumers,” said Ben Lieberman of the Competitive Enterprise Institute. He cautioned that the Biden administration is still working on tougher regulatory standards for more home appliances like dishwashers, washing machines, ceiling fans, furnaces, and water heaters.

Scenes From D.C. 

The normally tranquil mood of the Reason D.C. office was interrupted earlier this week by a shooting just down the block near Dupont Circle. Our crime photographer/managing editor Jason Russell captured the subsequent police activity.

(Jason Russell)

One man, possibly in a vehicle, was shot by another man who drove off, in what sounds like a possible road rage incident. The victim was taken to the hospital with a non-fatal shoulder wound.

Like most cities, D.C. saw a big increase in violent crime during the pandemic. Unlike most cities, our violent crime rate is staying persistently high.

D.C. residents vented their frustrations at city officials yesterday at a community meeting, where the D.C. Attorney General said, failing to read the room, that the city couldn’t prosecute its way out of the crime wave.

D.C.’s weird status as a federal district means that city officials have little control over criminal prosecutions, which are instead largely handled by the U.S. Attorney for D.C. Matthew Graves. Graves gets a lot of blame for declining to prosecute enough crimes.

Quick Links

  • Democrats are putting pressure on Federal Reserve Chair Jerome Powell to bring down interest rates.
  • E.U. leaders agree to a $54 billion aid package for Ukraine.
  • Israel continues its controlled demolitions of neighborhoods in Gaza.
  • For just $8.5 million, you can buy the late Dianne Feinstein’s home in D.C.
  • A new report finds that government overreach led to “chaos” during the pandemic. Who knew?
  • Taylor Swift: Pentagon psyop, or protector of the people?

  • Police who killed an armed homeowner in a wrong door raid won’t face criminal charges.

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Disney Loses First Amendment Claim over Florida’s Cancellation of Special Government District that Disney

From yesterday’s decision by Judge Allen Winsor (N.D. Fla.) in Walt Disney Parks & Resorts U.S., Inc. v. DeSantis; I expect Disney will appeal (see also Adam Schulman’s and Dilan Esper’s analyses of this in April 2022, which proved prescient, and also my April 22 discussion of some alternative arguments):

In 1967, Florida’s Legislature created the Reedy Creek Improvement District (RCID), a special improvement district in Central Florida. The district is perhaps best known as the home of Walt Disney World, which has operated there for decades. And as the district’s largest landowner, Disney has effectively controlled the district’s board, whose members were elected based on land ownership. That changed last year, after the Florida Legislature substantially amended the district’s governing structure. Now, Florida’s Governor selects the board members, subject to Senate confirmation. As a result, Disney no longer controls the special improvement district in which it operates. (That district is now called the Central Florida Tourism Oversight District, or CFTOD.)

This change—which works to Disney’s significant detriment—came after Disney publicly criticized another Florida law, the Parental Rights in Education Act. In Disney’s view, this timing was no coincidence. Disney alleges that the Florida Legislature changed the district’s governing structure to punish it for its speech. The issue in this case is whether the Legislature’s action constituted unlawful retaliation against Disney’s speech in violation of the First Amendment….

“As a general matter, the First Amendment prohibits government officials from subjecting individuals to retaliatory actions after the fact for having engaged in protected speech.” But it is settled law that “when a statute is facially constitutional, a plaintiff cannot bring a free-speech challenge by claiming that the lawmakers who passed it acted with a constitutionally impermissible purpose.” The Eleventh Circuit has “held that many times.” And this settled law forecloses Disney’s claim.

In In re Hubbard (11th Cir. 2015), the Eleventh Circuit relied heavily on United States v. O’Brien (1968), a leading First Amendment precedent. The O’Brien plaintiff burned his Selective Service registration certificate to protest the Vietnam War.  Charged with violating a statute that prohibited knowingly destroying such certificates, he claimed the statute was unconstitutional because its purpose was to suppress free speech.  But the United States Supreme Court rejected his claim.  It noted the “hazardous” nature of inquiring into legislative motive, and it declined to void a statute “essentially on the ground that it is unwise legislation which Congress had the undoubted power to enact and which could be reenacted in its exact form if the same or another legislator made a ‘wiser’ speech about it.” In other words, because Congress could have criminalized burning draft cards for a legitimate reason, the Court would not consider Congress’s actual motivation. It would “not strike down an otherwise constitutional statute on the basis of an alleged illicit legislative motive.”

The Eleventh Circuit applied that clear rule in Hubbard. After Alabama enacted a statute restricting payroll deductions for public-employee union dues, a public-employee union and others brought a First Amendment challenge. They contended the Legislature enacted the law to retaliate against the union plaintiff for its political speech. But on its face, the statute did “not implicate any constitutionally protected conduct,” meaning it was facially constitutional. Plaintiffs’ only basis for their claim was “the alleged retaliatory motive that Alabama’s lawmakers had” in enacting the law. And that was “precisely the challenge that O’Brien, and [Eleventh Circuit] decisions following it, foreclose.” More recently, in NetChoice, LLC v. Attorney General of Florida (11th Cir. 2022), the Eleventh Circuit reaffirmed the principle from O’Brien and Hubbard, explaining that “courts shouldn’t look to a law’s legislative history to find an illegitimate motivation for an otherwise constitutional statute.”

A straightforward application of Hubbard resolves this case. As Disney appropriately acknowledges, the Legislature can determine the structure of Florida’s special improvement districts. Disney does not argue that the First Amendment (or anything else) would preclude the Legislature from enacting the challenged laws without a retaliatory motivation. The laws here, as in Hubbard, do not facially “impinge on any constitutional rights.” And as in Hubbard, the only basis for the claim here is that the Legislature had a retaliatory motive. So as in Hubbard, there is no “cognizable First Amendment claim.” …

Disney argues that notwithstanding Hubbard, “courts frequently inquire into legislative motive to determine whether a facially constitutional statute was enacted for an impermissible purpose.” But it relies on race and religion cases, as well as cases involving statutes designed to regulate speech. Those cases present different issues. See Hubbard (“Our discussion of the O’Brien rule is limited to the context before us: a free-speech retaliation challenge to an otherwise constitutional statute.”). The fact that other types of claims allow evaluation of legislative purpose does not undermine Hubbard‘s application here. Cf. NetChoice (noting that although “in the free-exercise context, it was appropriate to look beyond ‘the text of the laws at issue’ to identify discriminatory animus against a minority religion[,] … NetChoice hasn’t cited—and we’re not aware of—any Supreme Court or Eleventh Circuit decision that relied on legislative history or statements by proponents to characterize as viewpoint-based a law challenged on free-speech grounds”)….

Second, Disney contends that the challenged laws explicitly target it, making Hubbard inapplicable. The Hubbard principle does not apply when “a law is challenged as a bill of attainder.” And although Disney does not challenge the laws as bills of attainder, it labels the laws “attainder-like” and seeks to squeeze into the exception.

Disney primarily relies on the Eleventh Circuit’s earlier decision in Georgia Ass’n of Educators v. Gwinnett County School District (11th Cir. 1988), which allowed a First Amendment retaliation claim. But as Hubbard noted, the county’s retaliatory action in Gwinnett County “explicitly single[d] out a specific group.” The school board explicitly terminated automatic payroll deductions only for the “members of the Georgia Association of Educators … and its local affiliate, the Gwinnett County Association of Educators.” “That fact made O’Brien inapplicable because the O’Brien rule applies only where the law at issue is ‘constitutional on its face.'”

In other words, the Gwinnett County policy was not “constitutional on its face” because it explicitly singled out a discrete group. The law in Hubbard, on the other hand, was “constitutional on its face” because it did not. This was true even though the Hubbard plaintiffs claimed the law “was an unconstitutional act of governmental retaliation against [plaintiff] AEA for its past acts of political expression”—just as Disney claims that the laws here were an unconstitutional act of retaliation against it for its political expression. Thus, this case is like Hubbard and unlike Gwinnett County. See Hubbard (“The facts of [Gwinnett County] limit the holding of the decision to acts of governmental retaliation that explicitly single out a specific group.”).

Disney also argues that even if the laws do not explicitly target it, they come close enough to warrant a Hubbard exception. But there is no “close enough” exception. A law either explicitly singles out a specific group or it does not, and the laws here do not. In arguing otherwise, Disney relies on Judge Posner’s opinion in  Fraternal Order of Police Hobart Lodge No. 121 v. City of Hobart (7th Cir. 1988). But that case—in which a First Amendment retaliation claim failed because the challenged law did not single out anyone—only undermines Disney’s position.

In Hobart, the mayor and city council had adopted an ordinance requiring city employees to work at least 40 hours weekly. The change made no difference to city employees who already worked regular hours, but “it made a big difference to Hobart’s police.” Police officers and their union sued, contending that the mayor and council adopted the ordinance in retaliation for the police’s political opposition. Relying on the O’Brien principle, the court rejected the claim. It rejected an argument that the law “pinpointed” police, noting that “[n]o outside observer reading Hobart’s 40-hour-a-week ordinance would suppose it directed against the police or any other definable group. It does not mention police ….”  Here, similarly, no one reading the text of the challenged laws would suppose them directed against Disney. The laws do not mention Disney.

Disney is left to argue that we should go beyond the laws’ text and see what they do in operation. The principal problem with this argument is that it ignores Hubbard‘s holding precluding retaliation claims against “facially constitutional” laws. But the secondary problem is that the laws’ effects are not limited to Disney. The laws are directed at a special development district in which Disney operates. But as Disney acknowledges, it is not the district’s only landowner, and other landowners within the district are affected by the same laws. As for SB 4-C (the earlier law), it applies to “any independent special district established by a special act prior to the date of ratification of the Florida Constitution,” a category comprising Disney’s district and at least several others.

It is true that the laws did not affect all districts, and it is true (at least accepting Disney’s allegations) that Disney faces the brunt of the harm. But Disney offers no support for its argument that the court is to undertake line drawing to determine just how many others a law must cover to avoid “singling out” those they affect most. Here, it is enough to say—as in Hobart—that the law “challenged in this case is not pinpointed against a named individual or group; it is general in its wording and impact.”

{Although Hobart applied the O’Brien rule to reject the First Amendment challenge, it also offered some practical considerations. Allowing such challenges would subject seemingly all legislation

to invalidation by a federal court upon evidence that the legislation, though on its face concerned only with the most ordinary matters of governmental administration, had actually been intended to punish the legislators’ political opponents, or reward the legislators’ friends with largesse obtained by taxes on their enemies…. The expansion of judicial review of legislation would be breathtaking. Yet the enlargement of the marketplace of ideas would be slight—maybe nonexistent.} …

Third, Disney argues this case is unlike Hubbard and O’Brien because of the strength of the case—the clarity of the legislative purpose. Disney says that “[f]ar from seeking to ferret out some hidden or opaque retaliatory motive, Disney’s retaliation claim rests on the clear, consistent, and proud declarations of the State leaders who urged enactment of SB 4C and HB 9B.” But Disney cites no authority suggesting this is a meaningful distinction. To be sure, Hubbard points to evidentiary difficulties, discussing the likelihood of differing motives of the legislators. But the principle at issue “is founded not only on the difficulty of determining by forensic methods the motives of a collective body, but also on respect for the political process and on simple comity between departments of government.” Regardless, nothing in Hubbard suggests it is inapplicable when there is significant—or even overwhelming—evidence of illicit motivation. It says instead that there is no cognizable claim. Period. “What we are saying is that, as a matter of law, the First Amendment does not support the kind of claim [plaintiff] makes here: a challenge to an otherwise constitutional statute based on the subjective motivations of the lawmakers who passed it.”

At the end of the day, under the law of this Circuit, “courts shouldn’t look to a law’s legislative history to find an illegitimate motivation for an otherwise constitutional statute.” NetChoice (citing Hubbard). Because that is what Disney seeks here, its claim fails as a matter of law….

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What Can Professors Say in Public?

The new issue of the Case Western Reserve Law Review with a symposium on the First Amendment and classrooms has now arrived, and with it my article, “What Can Professors Say in Public? Extramural Speech and the First Amendment.”

From the abstract:

Since the early twentieth century, academics have urged universities to recognize robust protections for the freedom of professors to speak in public on matters of political, social, and economic controversy—so-called “extramural speech.” The U.S. Supreme Court eventually recognized First Amendment protections for government employees, including state university professors, who express themselves about matters of public concern. The Court has indicated that the state should be especially solicitous of the speech of government employees in an academic context, but it has not adequately elaborated on the nature of those protections and how courts and government employers should assess the state’s interests relative to the extramural speech of professors employed at public universities.

This Article describes the state of the existing principles and doctrine surrounding extramural speech and examines the factors that private and public universities can reasonably take into consideration when responding to such speech—and what rationales for suppressing such speech or sanctioning faculty for engaging in such speech are inappropriate. Controversies surrounding the public speech of university faculty have only become more common and more intense in recent years, and both public and private universities need to be more self-conscious about the risk of stifling the intellectual environment of universities and chilling unpopular speech when responding to such controversies. If First Amendment values are particularly weighty in the context of the marketplace of ideas on university campuses, then many of the rationales for disciplining government employees for controversial speech that may make sense in some governmental workplaces should be rejected if applied in the university context.

The article focuses on the balancing test in the Supreme Court’s Pickering doctrine for government employee speech, and how that balancing test should be conducted in the specific context of universities and faculty speech. Although the constitutional test is specific to state universities, it works well for thinking through protections for free expression at most private universities in the United States as well.

From the conclusion:

There are very few occasions when university officials can properly sanction a university professor for his or her extramural speech. . . . Professors may say things in public that are mistaken, offensive, or even repugnant and vile—or they may simply say things that threaten the interests of powerful groups and individuals or run contrary to prevailing sentiment—but general principles of free speech protect their right to say such things and university employers should refrain from penalizing them for such speech. When universities claim that firing professors who say controversial things is justified, courts should stand ready to closely interrogate such claims. When the extramural speech of professors is weighed in a Pickering balance, the university’s legitimate interest should not include an interest in suppressing speech because it is unpopular or uncivil or gives rise to the commotions that unpopular or uncivil speech can trigger.

You can read the whole thing here.

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Stocks Rebound After Powell Hawkamania Sparks Worst Market Rout In Months

Stocks Rebound After Powell Hawkamania Sparks Worst Market Rout In Months

US equity futures rebounded after the worst day for stocks since September, as investors prepared for the next wave of megacap tech earnings while resetting expectations for the timing of Fed rate cuts, which have been pushed back from March to May at the earliest (unless of course there is a new banking crisis). As of 7:50am, S&P 500 futures gained 0.5% following a 1.6% plunge on Wednesday after Powell unleashed Hawkamania on the market during his press conference. Nasdaq 100 climbed 0.6% and awaiting earnings from Apple, Amazon and Meta.It’s the latest update from members of the “Magnificent Seven” stocks that have soared amid aggressive expectations from investors for earnings growth fueled by artificial intelligence applications and easier policy from the Fed. Meanwhile, the epicenter of the new banking crisis, New York Community Bancorp rallied following its record plunge. Interest rates reversed some of Wednesday’s losses with 10Y yields rising 2bps to 3.93% while the dollar was flat, reversing earlier gains.

In premarket trading, Qualcomm shares slipped 1.5% after the chipmaker reported first-quarter results that beat expectations, and provided an outlook for the year. While analysts see signs of a recovery in key markets, the company also warned about high inventory levels. Here are some other notable premarket movers:

  • Align Technology (ALGN) jumps 12% after the dental equipment firm reported fourth-quarter results and first-quarter guidance which beat estimates.
  • Amplitude (AMPL) slips 3% after Morgan Stanley downgraded the stock, saying the valuation doesn’t reflect the increasingly competitive landscape.
  • Arcutis Biotherapeutics (ARQT) drops 6% after the drugmaker filed for a $300m mixed-securities shelf.
  • Canada Goose (GOOS) rises 11% after the parka retailer’s fiscal fourth-quarter revenue outlook exceeded the average analyst estimate.
  • Cardinal Health (CAH) falls 3% after posting quarterly results.
  • MaxLinear (MXL) declines 11% after the semiconductor device company gave a disappointing revenue forecast.
  • Nextracker (NXT) surges 21% after the maker of measuring machines for the solar industry boosted its revenue guidance.
  • Wolfspeed (WOLF) falls 5% after providing a disappointing revenue forecast.

Stocks tumbled on Wednesday after Fed officials signaled they are in no rush to cut rates as they target lower inflation, with Chair Powell saying after Wednesday’s decision he doesn’t think a cut in March is likely. The Bank of England also said more evidence of moderating inflation was needed before it could ease policy, as it decided to keep rates at a 16-year high on Thursday.

“The market got ahead of itself in the last few months and it feels like we will get a respite as rate decreases start to get priced out and we see more rhetoric from central banks pushing back on rate cuts,” said Justin Onuekwusi, chief investment officer at wealth manager St James Place Management Svs Ltd.

Central banks also dominated markets on Thursday where the pound pared its drop against the dollar and UK bonds fell after the BOE announcement. The central bank slashed its outlook for inflation this year and dropped its guidance that borrowing costs may have to rise again. Its decision to hold was a split view among policymakers, with two voting for a hike, six to keep rates unchanged and the first rate cut vote.

Sweden’s Riksbank earlier held rates steady and said it may lower borrowing costs as soon as the first half of the year, pivoting from a tightening campaign. The Swedish krona fell after the decision.

Meanwhile, European stocks are on the back foot as bank shares slide after some disappointing earnings reports from BNP Paribas and ING. The Stoxx 600 is down 0.1%. Adidas AG slumped on lower-than-expected profit guidance. Deutsche Bank AG rallied after announcing a share buyback and higher revenue goal. Ferrari NV rose after the supercar builder beat estimates. While strong numbers from Shell buoyed the energy sector, poor reports from BNP Paribas and ING weigh on bank shares. Here are the biggest movers Thursday:

  • Volvo Car soars as much as 32% after the Swedish firm said it will no longer extend funding to Polestar and is evaluating a restructuring of its holdings in the struggling electric vehicle maker
  • Shell gains as much as 2.8% after the oil major reported results that beat estimates and kept up the pace of buybacks, with analysts positive on the performance of the gas and upstream businesses
  • Evolution shares jump as much as 7% after the Swedish live casino operator reported in-line fourth-quarter trading. Morgan Stanley describes management commentary as “upbeat”
  • Deutsche Bank advances as much as 5.1% after it announced plans for a €675 million buyback in the first half and raised its mid-term revenue target, offsetting an otherwise disappointing 4Q
  • Julius Baer extend gains as much as 8.5%, most since July, amid a call with analysts in which the chairman said meaningful inflows were seen at the end of last year
  • Axfood climbs as much as 9% following its fourth-quarter earnings report, with DNB seeing a positive report with results ahead for all segments apart from its Dagab logistics unit
  • Hexagon rises as much as 6.5%, the most since Dec. 8, after the Swedish industrial software group delivered what DNB Markets describes as a strong print
  • Straumann gains as much as 5.3%, the most intraday since Dec. 14, after the Swiss dental equipment firm’s US rival Align reported estimate-beating results
  • BNP Paribas shares drop as much as 9.8%, the most intraday since March 2023, after the French bank reported 4Q results that missed estimates and lowered its performance targets
  • ING falls as much as 9.6% after the bank reported net interest income for the fourth quarter that missed the average analyst estimate; ING and BNP’s poor reports pull the wider sector downwards, too
  • Roche falls as much as 4.5% after the Swiss pharma giant gave a very weak outlook for 2024. Analysts attribute the softness to significant headwinds from the strong Swiss franc
  • Adidas slumps as much as 9%, the biggest intraday decline since February 2023, after the sportswear maker forecast operating profit for 2024 of about €500m, well below estimates

Earlier in the session, Asian stocks also declined, as Japan and Australia followed the US market lower, while Chinese stocks surged on the government’s latest policy support efforts.  The MSCI Asia Pacific Index declined as much as 0.7% before paring the drop. TSMC, Toyota Motor and Commonwealth Bank of Australia were among the biggest drags. Japanese stocks slid as yen strengthened and Australian shares retreated from Wednesday’s record close after the Federal Reserve pushed back on expectations for US interest rate cuts.

  • Hang Seng and Shanghai Comp were mixed with early upside from stronger-than-expected Caixin PMI data and further support pledges although the gains were limited after the substantial PBoC liquidity drain and the mainland index gradually reversed course.
  • Nikkei 225 retreated amid recent currency strength and with a slew of earnings influencing price action.
  • ASX 200 pulled back from record highs amid weakness in tech and financials, as well as softer data.

In FX, the Bloomberg Dollar Spot Index is up 0.1% while the yen tops the G-10 FX pile, rising 0.1% versus the greenback. The Swedish krona falls 0.8% after the Riksbank left rates on hold and said it may lower borrowing costs as soon as in the first half of the year. The pound falls 0.4% ahead of the BOE decision while the yen was the only gainer against the greenback among its Group-of-10 peers.

  • AUD/USD sank 0.9% to 0.6511, the lowest level since November, on reduced risk appetite; Australia’s stock market tumbled from a record high
  • USD/SEK rose as much as 0.9% and EUR/SEK jumped 0.6%, after the Riksbank said it may lower borrowing costs as soon as in the first half of the year
  • EUR/USD pared a 0.4% loss to trade 0.2% lower at 1.0796 as euro-zone inflation eased less than anticipated at the start of the year
  • GBP/USD fell as much as 0.5% to 1.2627 as traders braced for the BOE decision later Thursday; The central bank is likely to deliver a brighter outlook for the UK economy and reduce its forecast for inflation

In rates, US 10-year yields first rose 3bps to 3.95% but have since erased much of the rise which followed Powell’s comments and the fresh concerns about regional lenders. Bunds are lower as data showed euro-zone CPI slowed less than expected in January. German 10-year yields rise 5bps to 2.21%. The dollar issuance slate includes four names so far; dealers are calling for around $150b of supply in February. US economic data includes January Challenger job cuts (7:30am), 4Q nonfarm productivity and weekly jobless claims (8:30am), January S&P US manufacturing PMI (9:45am), December construction spending and January ISM manufacturing (10am)

In commodities, oil rebounded after the biggest decline in three weeks on Wednesday as investors weighed the risks from any US retaliation to a deadly attack in Jordan against signs of robust American supply. WTI rose 0.8% to trade near $76.50, gold dropped to trade near session lows around $2,033.

To the day ahead now, and data releases include the global manufacturing PMIs for January, along with the ISM manufacturing reading from the US. In the Euro Area, there’s also the flash CPI print for January, and in the US there’s the weekly initial jobless claims. From central banks, the Bank of England will announce their latest policy decision, and we’ll also hear from the ECB’s Centeno and Lane. Finally, today’s earnings releases include Apple, Amazon and Meta.

Market Snapshot

  • S&P 500 futures up 0.3% to 4,885.75
  • STOXX Europe 600 little changed at 485.24
  • MXAP down 0.4% to 165.84
  • MXAPJ little changed at 503.50
  • Nikkei down 0.8% to 36,011.46
  • Topix down 0.7% to 2,534.04
  • Hang Seng Index up 0.5% to 15,566.21
  • Shanghai Composite down 0.6% to 2,770.74
  • Sensex little changed at 71,687.82
  • Australia S&P/ASX 200 down 1.2% to 7,588.19
  • Kospi up 1.8% to 2,542.46
  • German 10Y yield little changed at 2.20%
  • Euro down 0.2% to $1.0798
  • Brent Futures up 0.7% to $81.09/bbl
  • Gold spot up 0.1% to $2,042.31
  • U.S. Dollar Index up 0.39% to 103.68

Top Overnight News

  • Stocks fell in Asia and Europe as investors reset their expectations of when the Federal Reserve will start cutting interest rates and assessed a deluge of corporate earnings.
  • Jerome Powell delivered a clear message to traders eager for the central bank to start slashing interest rates: Not so fast.
  • Euro-zone inflation eased less than anticipated at the start of the year — testing investor expectations that the European Central Bank will begin lowering interest rates as soon as the spring.
  • The US commercial real estate market has been in turmoil since the onset of the Covid-19 pandemic. But New York Community Bancorp and Japan’s Aozora Bank Ltd. delivered a reminder that some lenders are only just beginning to see the pain.
  • The Riksbank held rates steady and said it may lower borrowing costs as soon as in the first half of the year, pivoting from a tightening campaign that tipped the Swedish economy into recession.
  • Donald Trump’s legal troubles have helped him raise millions of dollars from supporters, but paying to defend himself has siphoned $51.2 million from his White House comeback effort in the past year.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mixed after the losses on Wall St owing to banking sector fears and Fed Chair Powell’s pushback against a March rate cut, while Chinese Caixin Manufacturing PMI data topped forecasts. ASX 200 pulled back from record highs amid weakness in tech and financials, as well as softer data. Nikkei 225 retreated amid recent currency strength and with a slew of earnings influencing price action. Hang Seng and Shanghai Comp were mixed with early upside from stronger-than-expected Caixin PMI data and further support pledges although the gains were limited after the substantial PBoC liquidity drain and the mainland index gradually reversed course.

Top Asian News

  • Chinese President Xi urged efforts to accelerate the development of new productive forces and firmly promote high-quality development, while they must strengthen scientific and technological innovation.
  • China’s Finance Ministry said it will implement structural tax cuts in 2024 and support tech innovation and the manufacturing sector. China’s Vice Finance Minister said 2023 tax and fee cuts and rebates totalled CNY 2.2tln, while fiscal policy will help expand domestic demand and they will appropriately increase investment under the central government budget.
  • HKMA maintained its base rate unchanged at 5.75%, as expected.

European equities are mixed with clear underperformance in the CAC40, hampered by losses in BNP Paribas (-8.8%) and Dassault Systemes (-6.6%) post-earnings. European sectors hold a mostly negative tilt; Travel & Leisure is propped up by Evolution (+6.2%) whilst the Banking sector remains hampered by losses in BNP Paribas (-8.8%) and ING (-8.9%). US equity futures (ES +0.3%, NQ, +0.5%, RTY +0.1%) are trading on a firmer footing and finding some reprieve after the prior day’s hefty selling; with the NQ outperforming after Tech-induced losses yesterday and as yields generally edge lower stateside. Click here and here for the sessions European pre-market equity newsflow, including earnings from Shell, BT, Roche, Sanofi, BNP Paribas, Deutsche Bank & more.

Earnings

  • Shell (SHEL LN) – Q4 (USD): Adj. EBITDA 16.335bln (exp. 16.304bln). Adj. Profit 7.31bln (exp. 6.14bln). Adj. EPS 1.11 (0.97); Announces a share buyback of USD 3.5bln. SEGMENTS Integrated Gas 3.963bln (Co. exp. 3.473bln). Upstream 3.088bln (Co. exp. 2.488bln) Marketing 692mln (Co. exp. 708mln) Chemical & Product 83mln (Co. exp. -126mln) *ndex Weightings: FTSE 100 (8.5% – largest). AEX (15.8% – largest) Stoxx 600 (2.0% – 5th largest). Shares +2.7% in European trade
  • BT (BT/A LN) – 9-month update (GBP): Revenue 15.75bln (prev. 15.34bln), adj. EBITDA 6.12bln (exp. 5.95bln). Q3: Revenue 5.34bln (exp. 5.19bln). Reconfirming all FY24 financial outlook metrics. (Newswires) Shares +1.1% in European trade
  • Adidas (ADS GY) – FY23 (EUR): Op. profit 268mln (exp. 290mln; prev. 669mln), Revenue 21.43bln (exp. 21.5bln; prev. 22.51bln). FY24 currency-neutral sales growth view at a “mid-single-digit” rate. Decides not to write off most of its Yeezy inventory. FY24 Op view 500mln (exp. 1.27bln). Says unfavourable currency effects are projected to weigh significantly on the company’s profitability in 2024. (Newswires) Index weightings: DAX 40 (2.6%), Euro Stoxx 50 (1%). Shares -5.1% in European trade
  • Deutsche Bank (DBK GY) Q4 (EUR): Net 1.26bln (prev. 1.80bln Y/Y). Revenue 6.658bln (exp. 6.783bln). FIC Sales & Trading Revenue 1.50bln (exp. 1.65bln); plans a EUR 675mln share buyback alongside a headcount cut of around 3,500. METRICS Corporate Bank (CB) 1.911bln (exp. 1.869bln). Investment Bank (IB) 1.837bln (exp. 2bln). Private Bank (PB) 2.395bln (exp. 2.315bln). Asset Management 580mln (exp. 635mln). Provisions for credit losses 488mln (prev. 351mln Y/Y). Deposits at year-end 2023 at 622mln (+EUR 11bln Q/Q); slightly above the level of year-end 2022. EUR 900mln in proposed dividends, EUR 0.45 per share, planned for 2023, up 50% over 2022. 2025 TARGETS ~EUR 32bln in revenues, with annual growth targets raised to 5.5%-6.5%. ~EUR 20bln in costs, with EUR 1.3bln savings from measures completed. Positioned to accelerate capital distributions; 2025 dividend guidance of EUR 1.00/shr, subject to a 50% payout ratio. OUTLOOK To be provided at the Annual Media Conference at 09:00 CET today. (Newswires) Index weightings: DAX 40 (1.8%). Shares +4.3% in European trade
  • BNP Paribas (BNP FP) – Q4 (EUR): Revenue 10.9bln (exp. 11.4bln). Net 1.07bln (exp. 2.0bln). Sees 2025 ROTE between +11.5-12% (prev. ~12%); announces EUR 1.05bln share buyback; Dividend +18% Y/Y. CET1 ratio 13.2% (exp. 13.3%). ROTE 10.7% (prev. 10.2% Y/Y). OUTLOOK: Affirms CET1 ratio, Net Income, EPS and Cost of Risk guidance. COMMENTARY: “BNP Paribas should continue to grow faster than its underlying economy and to gain market share..”. “Personal Finance and Real Estate initiated in 2023 robust adaptation plans and should return to their nominal profitability as early as 2026” (BNP Paribas). Index weightings: CAC 40 (3.94%). Shares -8.2% in European trade
  • Dassault Systems (DSY FP) – Q4 (EUR): Non-IFRS EPS 0.36 (exp. 0.37), Revenue 1.64 (exp. 1.64). Guides Q1 EPS 0.29-0.30, Revenue 1.49-1.52bln, +7.8% Y/Y. Guides initial FY24 EPS 1.21-1.31, Revenue 6.35-6.43bln, +8-10% Y/Y. (Newswires) CAC 40 (1.5%) Shares -9.7% in European trade
  • Sanofi (SAN FP) – Q4 (EUR): EPS 1.66 (exp. 1.70), Revenue 10.9bln (exp. 11.4bln). Guides initial FY24 Business EPS “-4.5% to -3.5% Y/Y”. Francois-Xavier Roger was appointed CFO and member of the executive committee. (Newswires) Index weightings: CAC 40 (6.8% – 3rd largest), Euro Stoxx 50 (3.7% – 5th largest). Shares -2.1% in European trade
  • ABB (ABBN SW) – Q4 (USD) EPS 0.50 (exp. 0.47). Revenue 8.25bln (exp. 8.105bln). Net Income 921mln (exp. 872mln); Guides operating EBITDA margin to “slightly improve” in 2024 Y/Y; Raises dividend to CHF 0.87/shr (prev. CHF 0.84/shr); Plans share buyback. COMMENTARY: “In the projects- and systems business we expect continued high customer activity, although we face high comparables from last year when large orders came through at a very high level.” “In total, order growth year-on-year should show stronger momentum in the latter part of the year when comparables ease.” “We expect to improve on comparable revenues as well as on Operational EBITA margin, and cash flow should benefit from continued strong operational performance and our continued focus on net working capital efficiency.” “We also plan to continue utilizing share buybacks as a tool to return excess cash to shareholders also during 2024.” (Newswires) Index weightings: SMI (4.8%). Shares +1.7% in European trade
  • Roche (ROG SW) – FY (CHF): Net Income 12.35bln (exp. 14.67bln), Revenue 58.72bln (exp. 59.75bln), Core EPS 18.57 (exp. 18.56). Expects to further increase the dividend, proposing 9.60/shr (exp. 9.53/shr). FY (cont). Pharma Sales 44.6bln (44.8bln). Top-five growth drivers Sales 14.8bln, +4.3bln Y/Y. 2024 Sales rising in mid single-digit range. CEO “… exceeded our guidance for 2023. At the same time, the significant appreciation of the Swiss franc versus most currencies strongly impacted results when reported in Swiss francs. We also made good progress in both our pharma and diagnostics product pipeline.” Index weightings: SMI (16.2%). Shares +4.2% in European trade

Top European News

  • ECB Chief Economist Lane said inflation is a “smaller problem” but it is still a challenge and the ECB needs more confidence that inflation is headed to the 2% target.
  • ECB’s Centeno says if inflation continues on same trajectory in the coming months it is expected that the ECB’s next decision is to cut rates; “if that happens we can start a cycle of normalisation of rates”.
  • ECB’s Herodotou expects rates to start to decline this year but must be a data-based approach; any move must not be too fast or too late
  • Riksbank maintains its Rate at 4.00% as expected; increases monthly bond sale programme to SEK 6.5bln (prev. 5bln; vs SEB exp 7-8bln); Rate can probably be cut sooner than was indicated in November forecast H1 rate cut cannot be ruled out.
  • Riksbank Thedeen says it is possible to have bond sales and to ease policy at same time in principle.

FX

  • USD remains supported post-FOMC as traders scale back March easing bets. DXY has advanced to a high of 103.81 with upside seeing 103.82 from Jan 29th and 23rd.
  • EUR/USD tripped through 1.08 early doors before finding support at 100DMA at 1.0780 and stopping shy of the 13th Dec low at 1.0773; overall unreactive to EZ Flash HICP.
  • Cable has continued to drift lower vs. the USD as has been the case for a lot of other majors but eking out gains with EUR/GBP near a five month low. BoE likely to be the next inflection point for the GBP. A dovish tilt could see Cable open up a test of 1.26 to the downside.
  • AUD’s tough week has continued with some citing disappointing building approvals data. Elsewhere, China remained on the backfoot overnight and Dalian iron ore fell. Low print of 0.6518 is the lowest since the November 20 low at 0.6499.
  • The SEK is softer post-Riksbank which has been viewed as a dovish hold. Losses for SEK vs. EUR relatively minor compared to recent strength which saw EUR/SEK fall from 11.4256 to 11.1956 from mid-Jan.
  • PBoC set USD/CNY mid-point at 7.1049 vs exp. 7.1802 (prev. 7.1039).
  • Brazil Central Bank cut the Selic rate by 50bps to 11.25%, as expected, while committee members unanimously anticipate further reductions of the same magnitude in the next meetings. BCB said this pace is appropriate to keep the necessary contractionary monetary policy for the disinflationary process and the total magnitude of the easing cycle throughout time will depend on inflation dynamics, expectations and projections, the output gap and balance of risks.

Fixed Income

  • USTs are modestly firmer and just off Wednesday’s post-Powell high. Developments have since been light with markets digesting the latest verbal guidance ahead of US data (ISM) and Tier 1 events (BoE) elsewhere.
  • Bund is the clear fixed laggard as it continues to pare Wednesday’s plethora of dovish drivers; though, we remain well above that session’s 134.84 trough with support below from Monday at 134.37.
  • Gilts are a touch softer as the space pares from Wednesday’s dovish US data and hasn’t been too swayed by the Fed as focus is firmly on the upcoming BoE.
  • Spain sells EUR 6.05bln vs exp. EUR 5.5-6.5bln 1.45% 2029, 0.10% 2031, 3.25% 2034 Bono and EUR 516mln vs exp. EUR 250-750mln 2.05% 2039 I/L.
  • France sells EUR 12.988bln vs exp. EUR 11.5-13bln 3.50% 2033, 0.50% 2040, 2.50% 2043 and 3.00% 2054.

Commodities

  • Crude is modestly firmer intraday after both contracts settled lower by almost USD 2/bbl apiece yesterday amid the broader risk aversion. Participants look ahead to the JMMC confab pencilled in for 12:00GMT; currently Brent holds just above USD 82/bbl.
  • Mixed trade across precious metals with spot gold resilient against the firmer Dollar (albeit back under USD 2,050/oz) but spot OPEC+ JMMC not expected to make any policy recommendations, according to Reuters sources; meeting poised to begin at 11:00GMT; sources added that talks on extending or unwinding voluntary cuts are yet to begin succumbing.
  • Base metals are lower across the board as traders digest the watering-down of rate cut expectations by Fed Chair Powell coupled with the recent underwhelming Chinese PMI data alongside the nation’s ongoing property woes.
  • OPEC+ JMMC is not expected to make any policy recommendations, according to Reuters sources; meeting poised to begin at 11:00GMT; sources added that talks on extending or unwinding voluntary cuts are yet to begin
  • Citi says Saudi Arabia’s capacity decision shows that OPEC+ has little room to raise production in the future; expects medium-term oil market fundamentals to get looser, putting downside pressure on oil prices
  • US crude oil production rose 84k BPD in November to 13.308mln BPD (prev. 13.224mln BPD in October), according to the EIA.

Geopolitics

  • US fighter jets targeted 10 unmanned Houthi drones and a ground control centre in western Yemen, while it was also reported that US Central Command said a Houthi anti-ship ballistic missile and Iranian UAVs were shot down in the Gulf of Aden.
  • White House said National Security Adviser Sullivan and UK Defence Secretary Shapps discussed preventing escalation in the Middle East and ongoing efforts to defend against Houthi attacks, while they reaffirmed support for Ukraine, according to Reuters.
  • White House said National Security Advisor Sullivan and Israeli official Dermer met to discuss the flow of humanitarian aid to Gaza and hostage talks, while it also said the US is not looking for war with Iran.
  • US senior cybersecurity official Easterly said the US has ‘found and eradicated’ Chinese cyber intrusions in aviation, water, energy and transportation infrastructure.

US Event Calendar

  • 07:30: Jan. Challenger Job Cuts YoY -20.0%, prior -20.2%
  • 08:30: Jan. Initial Jobless Claims, est. 212,000, prior 214,000
    • Continuing Claims, est. 1.84m, prior 1.83m
  • 08:30: 4Q Unit Labor Costs, est. 1.2%, prior -1.2%
    • Q4 Nonfarm Productivity, est. 2.5%, prior 5.2%
  • 09:45: Jan. S&P Global US Manufacturing PM, est. 50.3, prior 50.3
  • 10:00: Dec. Construction Spending MoM, est. 0.5%, prior 0.4%
  • 10:00: Jan. ISM Manufacturing, est. 47.2, prior 47.4
    • Jan. ISM Employment, est. 47.0, prior 48.1
    • Jan. ISM New Orders, est. 48.2, prior 47.1
    • Jan. ISM Prices Paid, est. 46.9, prior 45.2

DB’s Jim Reid concludes the overnight wrap

Risk assets saw their worst performance in months yesterday, with the S&P 500 (-1.61%) down by the most since September. That came as Fed Chair Powell clearly signalled that a March rate cut was unlikely, whilst we got a fresh reminder about the risk of a market accident, as New York Community Bancorp (-37.67%) reported a loss as they raised their expected loan losses on commercial real estate. That meant the KBW Regional Banking Index (-6.00%) saw its largest decline since the regional banking turmoil last March. And overnight, there’ve been fresh signs of concern, as Aozora Bank (-21.49%) in Japan has just reported losses as a result of US commercial property, which has added to fears that the full consequences from higher interest rates are still yet to materialise, particularly given the amount of debt that needs refinancing over 2024 and 2025. This echoes the “race against time” theme we discussed in our 2024 World Outlook, in that the risk of a funding accident is much higher than usual, since we’ve experienced the most rapid series of rate hikes since the early 1980s. And even if the major central banks are now done hiking rates, the impact of tighter policy is still impacting the economy and markets with a lag, so this is still a very important story as we move through 2024.

Given the Fed’s decision as well, it was an incredibly eventful 24 hours in markets, and the FOMC made some important adjustments to their statement. In particular, they dropped their tightening bias, no longer talking about “the extent of any additional policy firming”, but instead talking about “any adjustments to the target range for the federal funds rate”. However, there was still a more hawkish comment, as it said “the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2% “, offering some gentle pushback on expectations of an imminent rate cut.

In the press conference, Powell repeatedly reiterated this need to get “greater confidence” on the disinflation path, even as it was accompanied by a positive take on the disinflation progress so far. Towards the end of the press conference Powell then delivered an explicit pushback against expectations of a March rate cut, saying that a March cut “is probably not the most likely case” and adding “I don’t think it is likely that the Committee will reach a level of confidence by the time of the March meeting”. Our US economists see this raising the bar for a March cut, but we’ve still got two more CPI prints and CPI revisions still to come by then, so continued progress on inflation could still trigger a cut at the next meeting. See their full reaction note here. Meanwhile on QT, Powell said that the FOMC planned to start “in-depth discussion on balance sheet issues” at the March meeting.

With Powell pushing back on a March rate cut, futures lowered the chance of a cut by March to 35% by the close yesterday. That’s the lowest it’s been in over two months, and is only back up slightly to 37% this morning. Nevertheless, the broader risk-off tone meant that investors are still expecting a similar pace of rate cuts over the year as a whole, with 141bps priced in by the December meeting. And in turn, Treasury yields fell significantly, with the 10yr yield down -12.0bps on the day to 3.91%, whilst the 2yr yield was down -12.8bps to 4.21%.

Of course, the Fed weren’t the only reason that bond yields fell significantly, as the news about NY Community Bancorp had already led to a major decline in yields as investors added to the chance of rate cuts. NYCB had bought most of Signature Bank last year, which was one of the banks that failed in the regional banking turmoil in March 2023, and they reported that loan-loss provision was up to $552m in Q4. In turn, that led to losses for other regional banks, and the KBW Regional Banking Index fell -6.00%, marking its worst daily performance since the turmoil last March. And overnight, Moody’s also said that they were placing NYCB’s credit ratings on review for a downgrade. The losses meant that NYCB was down as much as -46% at the US open, before recovering somewhat to end the day -37.67% lower. And overnight, the focus on banks has continued as Japan’s Aozora Bank (-21.49%) has also slumped after they said they expected to see a net loss of ¥28bn for the fiscal year, having previously forecast a profit of ¥24bn. That was connected to losses on US commercial property.

More broadly for equities, the major indices have seen a very weak performance. The S&P 500 was already trading -0.7% lower before the Fed, and Powell’s pushback on a March cut meant it ended the day -1.61% lower. Small-cap stocks saw even bigger losses, with the Russell 2000 down -2.45%, whilst the Magnificent Seven saw their weakest day since October (-3.05%), led by Alphabet’s -7.50% decline, while Microsoft lost -2.69% after both companies reported results the previous evening.

Meanwhile in Asia, there’ve been losses for the Nikkei (-0.71%) and the Shanghai Comp (-0.50%), although other indices have seen more of a recovery, including the Hang Seng (+0.94%) and the KOSPI (+1.66%), whilst the CSI 300 (+0.11%) has moved off its five-year low from the previous session. Separately, the Caixin manufacturing PMI in China remained at 50.8 in January, which was in line with expectations and a third consecutive month in expansionary territory.

Whilst the banking news had helped push yields lower, that move had got further momentum earlier in the day from a couple of data prints that added to hopes for rate cuts. First, there was the ADP’s report of private payrolls, which comes ahead of tomorrow’s US jobs report for January, and only grew by +107k (vs. +150k expected). And second, the Employment Cost Index for Q4 was up by +0.9% (vs. +1.0% expected), which was the slowest growth since Q2 2021, and added to the signs that inflationary pressures were subsiding.

Otherwise, an important piece of news came from the Quarterly Refunding Announcement, where the US Treasury said that they would be increasing the auction sizes for 2yr and 5yr notes by $3bn a month, with increases for other maturities as well. However, they also added that they did not “anticipate needing to make any further increases in nominal coupon or FRN auction sizes, beyond those being announced today, for at least the next several quarters”, s uggesting that potential changes in funding needs during the year may be accommodated by adjusting Treasury bill issuance. Separately, they said that they’d be preparing for a regular buyback program later this year, and would announce the date of the first regular buyback operation at the May refunding.

Meanwhile in Europe yesterday, sovereign bonds had rallied significantly ahead of the Fed, with yields on 10yr bunds (-10.2bps), OATs (-9.4bps) and BTPs (-6.9bps) all seeing sharp declines. In large part, that followed the news above on regional banks and softer US data, but there were also the flash CPI releases for January from France and Germany, which were beneath consensus expectations. In Germany, CPI was down to +3.1% on the EU-harmonised definition (vs. +3.2% expected), whilst French CPI fell to +3.4% (vs. +3.6% expected), so that contrasted with the upside surprise in Spain the previous day. Finally on European equities, there was a pretty divergent performance by country, but the STOXX 600 just about managed to post a +0.01% gain before the Fed’s announcement, which was a 6th consecutive advance for the first time since July, and meant the index closed at a 2-year high.

To the day ahead now, and data releases include the global manufacturing PMIs for January, along with the ISM manufacturing reading from the US. In the Euro Area, there’s also the flash CPI print for January, and in the US there’s the weekly initial jobless claims. From central banks, the Bank of England will announce their latest policy decision, and we’ll also hear from the ECB’s Centeno and Lane. Finally, today’s earnings releases include Apple, Amazon and Meta.

Tyler Durden
Thu, 02/01/2024 – 08:14

via ZeroHedge News https://ift.tt/Vprzslb Tyler Durden

Dominoes: After NYCB, Shares Of Japanese Bank Implode On Massive US CRE Writedown

Dominoes: After NYCB, Shares Of Japanese Bank Implode On Massive US CRE Writedown

Following a profit warning from New York Community Bancorp on Wednesday, partially attributed to turmoil in the commercial real estate sector, Japan’s Aozora Bank Ltd. slashed the value of some of its US office tower loans by a staggering 50%. 

New York Community Bancorp’s move to slash its dividend and bolster reserves led to a 38% plunge in its shares yesterday, also triggering the largest drop in the KBW Regional Banking Index since the collapse of Silicon Valley Bank last March.

Like rows of falling dominoes, Aozora Bank, the 16th largest in Japan by market value, recorded a 20% plunge in shares on Thursday after reporting a net loss of 28 billion yen ($191 million) for the fiscal year. This was in stark contrast to its earlier projection of a 24 billion yen profit.

Aozora wrote down the value of its non-performing office loans by 58%, including a 63% reduction in Chicago and between 51% and 59% in New York, Washington D.C., Los Angeles, and San Francisco – all of these cities are plagued with violent crime and controlled by radical Democrats. 

US office loans totaled about 6.6%, or approximately $1.89 billion. It said 21 office loans worth $719 million were classified as non-performing. It increased its loan-loss reserve ratio on US offices to 18.8% from 9.1%. 

Several months ago, we pointed out: “Next bank failure will be in Japan.” 

“It’s a shock,” said Tomoichiro Kubota, a senior market analyst at Matsui Securities Co., adding, “The expectation was the worst was over and that the bank had set aside enough provisions.”

For lenders, this development is a major warning sign that a tsunami of office loan defaults could be on the horizon. Many landlords struggle to repay or finance existing loans in an environment with high-interest rates. Some are simply walking away from properties. 

“This is a huge issue that the market has to reckon with,” said Harold Bordwin, a principal at Keen-Summit Capital Partners LLC in New York, specializing in renegotiating distressed properties.

Bordwin said, “Banks’ balance sheets aren’t accounting for the fact that there’s lots of real estate on there that’s not going to pay off at maturity.”

Besides New York Community Bancorp and Aozora Bank, Deutsche Bank noted in fourth-quarter results: 

“Interest rate environment remains key driver for refinancing risk and potential [credit-loss provisions] in 2024 especially in office, with further drivers being ongoing sponsor support and expiring rental agreements.”

Fed chair Powell delivered bad news for the CRE world in yesterday’s FOMC meeting:

Perhaps most notably, the Fed removed the following sentence from the FOMC statement: “The US banking system is sound and resilient.”

The question remains is why the Fed no longer sees “the US banking system is sound and resilient” and could be a clear indication of rumblings in the economy near-term. 

Here’s a warning from Justin Onuekwusi, chief investment officer at wealth manager St. James’s Place: 

“It’s clear that the link between commercial property and regional banks is a tail risk for 2024, and if any cracks emerge, they could be in the commercial, housing and bank sector.” 

To sum up, the CRE/regional bank mess is not over and may even be gathering momentum during an election cycle that could pose challenges for the Biden administration.

Tyler Durden
Thu, 02/01/2024 – 08:10

via ZeroHedge News https://ift.tt/vjmRyqt Tyler Durden

Cable Rallies After ‘Hawkish’ Pivot By Bank Of England

Cable Rallies After ‘Hawkish’ Pivot By Bank Of England

The Bank of England held rates unchanged – as expected – today and while it signaled a ‘pivot’ to possible rate-cuts in the future, the market interpreted Governor Bailey’s comments (echoing comments from The Fed’s Powell) as pushing back the start of said cuts.

“We have had good news on inflation over the past few months. It has fallen a long way,” Bailey said in a statement that accompanied the decision on Thursday in London.

“But we need to see more evidence that inflation is set to fall all the way to the 2% target and stay there before we can lower interest rates.”

The decision marked the widest division on the direction of policy since 2008, with a three-way split of the vote:

  • 6 MPC members voting for keeping rates on hold,

  • 2 members (Haskel and Mann) voting for a hike, and,

  • 1 member (Dhingra) voting for a (25bp) rate cut.

UBS notes that in terms of the forward guidance, the Committee re-iterated that “monetary policy will need to remain restrictive for sufficiently long” while taking out the explicit reference to further tightening if required (“[T]he Committee will keep under review for how long Bank Rate should be maintained at its current level”).

On the basis of this commentary from the BoE, August looks more likely than June given the pressures from wages.

“Despite a vote for an immediate rate cut, it still looks hawkish compared to what was priced in,” said Kamal Sharma, a strategist at Bank of America.

“Looking at the inflation forecast — 2.3% by 2026, they want to signal that we are not there yet on inflation and rate pricing excessive.”

Rate-cut expectations have fallen (less rate-cuts priced in), but June remains fully-priced for 1 cut and 2 cuts by August…

Crucially, Gov Bailey’s opening statement was a dirdct message to the markets (similar to Powell’s):

“If we were to keep bank rate at 5.25% for the next three years, we think it is likely that inflation would eventually fall significantly below target.

But if we were to follow the market rate conditioning path, we think inflation would be above target for much of the next three years.

We need to get the balance right.

We have to keep monetary policy sufficiently restrictive for sufficiently long. Nothing more, nothing less.”

Cable is strengthening modestly on the moire hawkish report…

Finally, we note that the BoE raised its growth forecast for 2024, but even so now sees gross domestic product increasing by just 0.25%. In 2025, it expects an acceleration in growth to a still-modest 0.75%.

Additionally, in its new forecasts, the BOE said it now expects the inflation rate to fall to its target in the second quarter, and be well below that two years from now if it were to leave its key rate unchanged.

That is another signal that policymakers expect to ease monetary policy this year.

Tyler Durden
Thu, 02/01/2024 – 07:50

via ZeroHedge News https://ift.tt/VnpIizy Tyler Durden

Peter Schiff: The Economy May Already Be In Recession

Peter Schiff: The Economy May Already Be In Recession

Via SchiffGold.com,

Recent data have many cheerful about the economy. But according to Peter in his latest podcast, the economy may already be in recession. Here are some of Peter’s biggest causes for concern:

The recipe for GDP growth is a recipe for disaster

The big factor driving the GDP was the increase in government spending. Well, where’s the government getting this money? It’s borrowing it! That’s not a recipe for economic growth – that’s a recipe for disaster!”

Spending increases caused massive increases in national debt and liabilities.

The US national debt currently stands at $34.1 trillion. Total unfunded liabilities tower in the hundreds of trillions, mostly from Social Security and Medicare.

Peter states that this used to be a priority, but is no longer:

Back in the 1980s, 1990s we were still pretending we were going to do something about entitlements —about Social Security, about Medicare, that there was going to be some effort to fix the problem before it blew up… Nobody at this point believes that we’re going to do anything about stopping the bomb from going off. In fact, it’s already gone off. We’ve already passed the point.”

Social Security is officially broke

Social Security trust funds are now liquidating their treasury holdings, putting a massive net drain on the US treasury. 

And it’s getting worse:

[The] drain is getting bigger every day as more people retire whether voluntarily or involuntarily and more people just drop out of the labor force and stop paying taxes.”

Peter explains that many roles are being replaced by AI and automation tools, which don’t help the Social Security fund:

They’re not going to be paying Social Security taxes. Computer programs don’t have to pay into FICA. This this is going to get bigger but given the fact that we have this huge hole in Social Security, we’re bleeding — we’ve got a massive deficit that’s running out of control.”

Peter projects a total depletion of Social Security reserves within the next few years. 

Making matters worse, manufacturing has been in recession

This confounds the administration’s narrative of a healthy economy:

They keep talking about a “Manufacturing Renaissance.” They got the “r” right, except it’s a recession instead of a renaissance.”

The Fed Philly Manufacturing Index has been negative for 18 out of the past 20 months, a manufacturing dark age.

This all begs the question:

How can you talk about a great economy? How healthy can the economy be when a vitally important part, the goods-producing sector, has been in a recession for almost two years?”

There are signs of higher inflation to come

Peter points out that just this week, oil prices rose $5 a barrel and the M2 money supply increased a whopping $100 billion, a significant expansion.

Plus, the Fed won’t deny voters anything this election year.

Peter concludes:

I’m correct that inflation is going to be picking up, it’s going to be weakening the economy. We could see a more meaningful turnaround. Maybe we’ll even get the government to come back and officially acknowledge that we’re in a recession.”

Tyler Durden
Thu, 02/01/2024 – 07:20

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Is ESG Investing In Decline?

Is ESG Investing In Decline?

These days, ESG investments have lost their luster given high interest rates, political backlash, and greenwashing scrutiny.

In 2021 during the pandemic boom, U.S. sustainable funds hit a record $358 billion in assets, up from $95 billion in 2017. But since then, investor interest has waned as higher borrowing costs impact capital-intensive clean tech stocks.

This graphic, created by Visual Capitalist’s Dorothy Neufeld, shows the drop in sustainable fund flows—often considered an indicator of investor sentiment—based on data from Morningstar.

Slowing Demand

In 2023, investor appetite cooled for sustainable investments, as fund flows notched their worst year on record.

Overall, flows sank $13 billion as fund performance lagged behind conventional funds. Adding to this, concerns surrounding the murkiness of environmental, social, and governance (ESG) ratings were put under the spotlight.

As ESG pushback intensified in U.S. politics, at least 165 anti-ESG bills were introduced in 2023. Politicians have claimed that ESG criteria negatively impacts financial returns, but evidence behind that is mixed.

While sustainable funds underperformed traditional funds in 2023, a separate study showed that ESG portfolios had as much as 6% excess returns annually compared to benchmark indexes between 2014 and 2020.

ESG Investments: A Closer Look

One key aspect of ESG funds is whether they hold investments that align with the UN Sustainable Development Goals (SDGs).

Globally, 542 funds with $125 billion in assets are associated with at least one of these objectives. The table below shows the top five SDGs, by ETF assets under management (AUM).

Source: Trackinsight. As of January 7, 2024.

We can see that Climate Action is the highest overall, with companies held in these ETFs making commitments to lower emissions and advance sustainability.

For instance, Home Depot has cut electricity use by over 50% since 2010 in U.S. stores, and aims to use renewables for all of its electricity by 2030. In addition, Microsoft has committed to this goal through a number of initiatives, including providing access to clean water to over one million people across Indonesia, Brazil, India, and Mexico in 2023.

While investor interest has slowed, 35% of advisors said they used ESG funds last year, based on a Journal of Financial Planning survey. As the industry matures, it remains to be seen if ESG investments will see a resurgence, especially if interest rates fall in the coming years.

Tyler Durden
Thu, 02/01/2024 – 06:55

via ZeroHedge News https://ift.tt/dCtM5xv Tyler Durden