Month: October 2022

U.S. Industrial Production Firms During September

Industrial production increased 0.4% (5.3% y/y) during September after easing 0.1% in August, revised from -0.2%. Production rose 0.7% in July, revised from 0.5%. The level of industrial output during September was a record, and it has risen by roughly one-quarter since the 2020 low. A 0.1% improvement had been expected in the Action Economics Forecast Survey.

By industry group, manufacturing production increased 0.4% in September (4.7% y/y), the same as in August, revised from 0.1%. Durable goods rose 0.5% (6.0% y/y) after edging 0.1% higher in August. Computer & electronic products production gained 1.1% (1.9% y/y) for the second straight month. Motor vehicle & parts production rose 1.0% (19.4% y/y) after falling 1.5% in August. (…)

Utilities output eased 0.3% (+0.5% y/y) in September after dropping 3.3% in August. Mining activity rose 0.6% (+11.1% y/y) in September after holding steady in August.

The capex-sensitive business equipment category increased 0.5% after +0.8% and +1.6% in July and August respectively.

Actually, manufacturing production has significantly trailed orders, presumably because of shortages and delays.

Th U.S. Manufacturing PMI has declined but remains above contraction levels:

But the ISM New Orders index is now contracting. In September, only 5 of the 18 manufacturing industries tracked reported growth in new orders.

New Orders

U.S. Home Builder Index in Marked Downtrend

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo fell 8 points or 17.4% m/m in the October survey (-52.5% y/y) to 38, yet again the lowest level since May 2020. The index is down 57.8% from its November 2020 high of 90. A reading of 44 had been expected in the Informa Global Markets survey.

All three HMI components declined again this month. The index of present sales conditions fell five points or 16.7% (-47.7% y/y) to 45, the ninth decline in ten months. The October level was 53.1% below the record-high of 96 in November 2020. The index of expected sales over the next six months dropped 23.9% in October to 35 (-58.3% y/y), down for a sixth consecutive month. The October value is the lowest level since June 2012.

The index measuring traffic of prospective buyers fell 19.4% (-61.5% y/y) to 25, the seventh consecutive monthly decline.

Among the regions of the country, the Housing Market Index actually rose in Northeast to 48 this month from 47 in September, a 2.1% increase (-34.2% y/y). The other regions all declined, with the largest reduction in the West, -26.5% in the month from 34 to 25 (-70.6% y/y). The index in the South was 41, down 21.2% in the month and 51.2% from a year ago. In the Midwest, the index was 38 in October, down 9.5% in the month and 47.2% in the year.

Biden to Sell More Oil From Strategic Reserve President will also consider more reserve sales this winter

NY Fed’s Service Business Leaders Survey

Activity declined in the region’s service sector, according to firms responding to the Federal Reserve Bank of New York’s October 2022 Business Leaders Survey. The survey’s headline business activity index dropped twenty-one points to -15.5, its lowest level in nearly two years. The business climate index fell thirteen points to -41.6, also a multiyear low.

The employment index rose five points to 13.2, pointing to a pickup in employment growth despite the decline in overall activity. At 57.4, the wages index was little changed, indicating another month of strong wage growth. The prices paid index held steady at 79.5, pointing to ongoing significant input price increases, and the prices received index moved down three points to 39.2.

Conditions are expected to worsen over the next six months. The index for future business activity fell twenty-four points to -7.9, and the index for the future business climate dropped twenty-seven points to -30.2; this marks the first time in nearly two years that both indexes were negative. Employment is expected to grow in the months ahead, and wage and price increases are expected to remain widespread.

Sounds like stagflation in services…supposed to offset lower goods demand.

Last Friday’s update to the Atlanta Fed’s wage tracker (a 3-m m.a.) suggests wage growth might have peaked. Job stayers’ at 5.3% is down from its June 6.1% growth rate and back to April’s. The large gap to job switchers is not preventing the slowdown.

Goldman Sachs’ wage survey leading indicator also points to slower wage growth:

Goldman Sachs analysed the housing rental market to conclude

Asking rents on new leases have decelerated sharply. (…) The best measures slowed to an annualized growth rate of 3% in 2022Q3 (…).

But continuing lease rent growth is likely to run hotter as these units catch up to market rates. We estimate that this catch-up effect boosted annualized continuing lease rent growth to over 8%, driving the strength in CPI shelter inflation, but that these units are still priced 3% below the new lease market rate, on average. Our estimate of the speed of catch-up suggests that continuing lease rents will rise 6% in 2023. Because rent growth is likely to be faster on continuing leases than on new leases, it should be faster in the CPI than in alternative measures.

Based on this analysis and some idiosyncrasies of the CPI measure, we forecast that year-on-year CPI rent and owners’ equivalent rent inflation will rise from 6.8% currently to peak at 7½% next spring before gradually decelerating to just under 6% at end-2023. If new lease rents are instead flat next year, we would instead expect 5% CPI shelter inflation at end-2023. But if the BLS new rent index instead fully catches up to the alternative data, which would also imply a wider gap between new and continuing lease rents, we would expect 7% CPI shelter inflation at end-2023. In both our baseline and upside scenarios, some additional catch-up would spill over to 2024.

Shelter inflation has an outsized impact on every measure of the underlying inflation trend that Fed officials watch. This is likely to keep these measures—core, trimmed mean, median, and sticky price—far above target next year, even if new lease rent growth falls to zero. While the FOMC has signaled an intention to hold the funds rate steady once it reaches a sufficiently restrictive level of 4.5-4.75%, we see some risk that ongoing firmness in these inflation measures could make hiking further the path of least resistance.

• Morning Consult’s Consumer Purchasing Power Barometer warns weaker spending growth may be coming

Morning Consult’s measures of real monthly spending and purchasing power both declined in September, suggesting that more consumers are backing away from and/or trading down on purchases as elevated core inflation continues to strain household budgets. These findings coincided with a decline in real retail sales in September and, based on recent precedent, indicate that official statistics for personal consumption expenditures could also show that growth in real outlays was weaker in September.

Real Consumer Spending Growth

(…) In a reversal from earlier this year, when consumers were most inclined to curb discretionary goods purchases, services categories registered the highest index scores for Price Sensitivity and Substitutability in September. This latest development suggests that recent increases in inflation may be slowing the ongoing reallocation of goods spending to services despite consumers’ best attempts to resume pre-pandemic purchasing patterns.

• Nearly 25% of those surveyed by Morning Consult in September said they’re buying fewer items at the grocery store in order to save money, up from 15% in October 2021.

BTW, last week’s Amazon.com 48-hour “Prime Early Access Sale” replay was rather quiet, generating some $8 billion in gross merchandise sales per Bank of America, some 25% below July’s original. The average ticket size was apparently 22% lower than in July.

• Amazon workers reject union bid in upstate New York. The 406 to 206 vote against unionizing deals a major blow to the Amazon Labor Union. It would’ve been the second Amazon site in the U.S. to unionize. (Axios)
• Freight Operators’ Peak Shipping Season Is Crumbling With retailers overstocked and shipping demand receding, clouds are gathering over U.S. supply chains just as demand should be growing

(…) Trucking bellwether J.B. Hunt Transport Services Inc. on Tuesday evening reported that revenue remained flat in the third quarter compared with the prior quarter at $3.84 billion and that the company anticipates a weakened peak season. Warehousing giant Prologis Inc. is expected to report earnings on Wednesday.

“The growth in U.S. import volume has run out of steam, especially for cargo from Asia,” said Ben Hackett, founder of Hackett Associates and the author of the Global Port Tracker report issued by the National Retail Federation. “Recent cuts in carrier shipping capacity reflect falling demand for merchandise from well-stocked retailers, even as consumers continue to spend.”

The NRF report is one of several measures showing shipping volumes slowing sharply from August to September, signaling waning demand rippling through supply chains even as retailers are lining up goods for the traditional sales season.

The Global Port Tracker report projects that imports into major U.S. seaports will be down 4% in the second half of the year after expanding 5.5% year-over-over in the first six months of 2022.

[Descartes Datamyne]’s report earlier this month said September container imports, measured in 20-foot-equivalent units, were down 11% year-over-year and were off 12.4% from August, an unusually sharp falloff in the months considered the height of the peak shipping season. Container imports from China, where manufacturers of goods including furniture, toys and electronics stuff boxes bound for U.S. retailers, tumbled 18.3% from August to September. (…)

The slowdown in imports is already hitting rail volumes. Average weekly loads carried in intermodal operations, a combined truck-rail service favored by retailers, fell 4.8% year-over-year in September, according to the Association of American Railroads. The volume was also 5.4% below August levels.

Trucking business, too, shows signs of moderating.

FTR Transportation Intelligence said in a report Monday issued through Truckstop.com, a load board matching truckers and available loads, that spot-market business on the West Coast recently fell to its lowest level since May 2020 and that demand in the Southeast “fell sharply after recent strength.” (…)

A wave of crises may be about to break

Global economic and financial risks have intensified over recent weeks and months. A wave of sovereign, currency and banking crises are now in prospect, as Fathom has been warning for some time. In this note, we discuss how these risks developed. (…)

In a sense, the current slowdown in growth is just a ripple from the storm that was the pandemic: a natural consequence of that colossal shock. All major recessions tend to see a rapid recovery, and then a pause — the timing of which tends to be a couple of years after the trough of the recession. The timing of that pause is important: it is a good predictor of financial crisis.

The intuition here is as follows. In the teeth of a major recession, policymakers are highly focused on restoring growth and preventing further damage. They will use whatever tools they have at their disposal and will have an easy time persuading others that that is what is needed. Moreover, international institutions like the IMF will be on their guard to prevent the recession from escalating in emerging economies, ready to turn on the taps of lending or other kinds of support where necessary. Financial crises are rare during recessions, for those reasons. Scroll forward a couple of years, though, through the most rapid part of the recovery and into the pause, and the frequency of financial crises peaks. It’s not the recession: it’s after the recession. The risk of financial crisis is related to the magnitude of the recession, but it peaks a couple of years later. It peaks, in other words, now.

Fathom’s global Financial Vulnerability Indicator (FVI) has been ringing alarm bells ever since the COVID recession about the coming risk of financial crisis. It suggests that the risk of a banking crisis is higher now than it has been at any time since the Great Financial Crisis of 2008/09. Moreover, the proportion of countries in each region at an increasing risk of a banking crisis has also surged, with almost 30 per cent of countries in South Asia and 20 per cent of countries in Sub-Saharan Africa having a greater than one in twenty-five chance of a crisis.

  

Chip Maker TSMC Weighs Expansion in Japan to Reduce Geopolitical Risk Japan has signaled that it would like TSMC to expand in the country beyond a factory already under construction, but no decision has been made and TSMC is studying the feasibility, people familiar with the matter said.

EARNINGS WATCH

We now have 45 reports in, a 69% beat rate and a +4.9% surprise factor. These 45 companies have reported actual earnings down 5.6% on a 7.9% revenue gain.

By comparison, after 48 reports in Q2, the beat rate was 79%, the surprise factor +4.1% and those 48 companies reported actual earnings down 10.5%.

Q3 earnings are now expected up 2.8% (+4.1% on October 7). Ex-Energy: -3.9% (-2.6%).

Q4 earnings are now expected up 5.0% (+5.2% on October 7). Ex-Energy: +0.8% (+1.3%).

John Authers:

(…) sentiment ahead of earnings season is miserable, and indeed as negative as it’s ever been (including during the Global Financial Crisis). Past experience suggests that earnings per share estimates should already be diving, so there’s a big disjunction between money managers on the buy side and brokers on the sell side preparing the estimates:

In such conditions, a positive surprise can have quite a galvanizing effect on a share price. But as it stands, the good news, which helped stocks to another good day on Tuesday, is that almost all hope has been lost.

Stocks Volatility Prompts JPMorgan, Morgan Stanley to Shift Tone

Morgan Stanley’s Mike Wilson says US stocks are ripe for a short-term rally given the absence of an earnings capitulation. It’s an unusual positive call from a long-time bear who correctly foresaw this year’s slump.

In contrast, JPMorgan Chase & Co.’s Marko Kolanovic, among Wall Street’s most vocal bulls, has exhibited more caution for the coming months, citing increasing risks from central bank policies and geopolitics. Kolanovic, in effect, cut the size of his equity overweight and bond underweight allocations. (…)

Morgan Stanley’s Wilson wrote in a note on Monday that he “would not rule out” the S&P 500 rising to about 4,150 points — a nearly 13% upside from yesterday’s close — adding that this would be “in line with bear market rallies this year and prior ones.” Still, the chief equity strategist said he sees the bear market eventually bottoming at around 3,000 to 3,200 points. (…)

Day Traders Go Back to Their Day Jobs As the stock market swoons, individual investors are placing fewer trades at Schwab, Morgan Stanley and Robinhood.

Scientists May Have Just Cracked the Code on Fast Electric Car Charging

(…) A typical EV takes around 30 minutes or more to charge with a high-powered DC fast charger. But today researchers at Penn State University published a study in Nature revealing they have developed an EV battery that, crucially, can charge up to about 70% capacity in roughly 10 minutes. The technology can work for any size of battery, but perhaps the biggest benefit is that it will enable automakers to sell EVs with smaller batteries without triggering consumers’ range anxiety. The faster a battery can charge, the less need there is for big battery packs with long range, since stopping to charge will be no less an inconvenience than going to a gas station. And smaller battery packs also mean cheaper EVs. (…)

The company [EC Power] is building a factory in Pennsylvania to start mass producing the batteries—they say the technology will be commercially available in about two years. (…)

Their approach involved burying thin sheets of nickel foil inside a battery, which could heat the internal components to just the right temperature during charging, helping them to absorb electricity more efficiently—without, of course, overheating the battery and creating a fire risk. “Battery technology has been lagging behind, and its fast charging problem has been a longstanding challenge,” Wang says. “Only now, we’re beginning to crack the code.”

Americans who are working from home have reclaimed 60 million hours they used to spend commuting to an office each day—and they’ve been using the time to get more sleep, according to the NY Fed.

COVID-19 State of Affairs: Oct 18 (Katelyn Jetelina)

(…) It’s incredibly difficult to predict what will happen in the U.S. given that we have such a different immune landscape than other countries. We only have 14.8 million Americans boosted with the fall vaccine—far below what’s needed to divert 100,000 deaths this winter. According to recent models, we are still on track for a fall/winter wave. (…)

(Source: JPWeiland)

From last Friday’s new data update, Northeast has the highest proportion of BQ.1.1, which jumped from less than 1% to 11% of cases. (…)

New York, specifically, has the highest proportion of BQ.1.1—an estimated 25% of cases—in the country. Perhaps more concerning is that it is causing an uptick in hospitalizations. (Keep in mind that reported cases remain flat; these no longer accurately reflect transmission due to at home antigen testing.)

There is very preliminary data (n=1) showing BQ.1.1’s cellular mechanisms are getting close to Delta in regards to disease severity. We need more data, but not a great thing to see.

Bottom line

Cross-country comparisons are less straightforward than ever. However, subvariants are growing, and metrics around the globe are starting to reflect it. COVID-19 transmission is rising in the Northeast United States, which means it’s time to start riding the wave.

Empire State Manufacturing Survey

• Manufacturing activity declined in New York State, according to the October survey. The general business conditions index fell eight points to -9.1.
• The new orders index was unchanged at 3.7, indicating a slight increase in orders
• The index for number of employees was little changed at 7.7, pointing to a modest increase in employment levels, and the average workweek index climbed to 3.3, signaling a slight increase in hours worked. After falling significantly over the prior three months, the prices paid index rose nine points to 48.6. The prices received index held steady at 22.9.
• The index for future business conditions fell ten points to -1.8, indicating that firms do not expect conditions to improve over the next six months. The indexes for future new orders and shipments remained depressed, though employment is expected to continue to increase.

  

Bank of America CEO Says Consumers Are in Good Shape But the bank socked away funds to prepare for a possible recession

The company’s data show that spending growth remains strong in terms of both amounts and number of transactions. Americans are spending in particular on travel and entertainment, which tend to be discretionary items. Deposit balances remain higher than prepandemic levels by multiple times and delinquencies remain low. (…)

Mr. Moynihan’s remarks Monday stand in contrast to other big-bank CEOs, namely JPMorgan Chase & Co.’s Jamie Dimon, who reiterated his belief Friday that an economic “hurricane” is coming. JPMorgan executives said consumers will deplete the extra money in their checking accounts around the middle of next year.

Despite Mr. Moynihan’s optimism, there were some notes of caution. Spending growth, while still high, slowed to 10% in September, versus 12% for the year so far, according to the bank’s metrics. (…)

Use of credit cards (blue) tends to increase when real income growth (black) weakens. The fact that revolving credit rises faster than actual spending (red) is not a sign of a healthy consumer.

In fact, banks are tightening credit standards…

Microsoft becomes latest tech firm to cut staff. (Axios)

MAKE YOUR BETS!

First, the lay of the lands from Haver Analytics:

The 6-month change in Haver’s aggregation of policy rates in advanced economies topped 2% in September. That’s the fastest pace of interest rate tightening in our aggregation’s history, which kicks off in the early 1980s.

Policy rates in advanced economies

One of the factors that is further tightening global monetary conditions is the ongoing appreciation in the US dollar. As our final chart this week suggests an appreciation in the trade-weighted value of the US dollar typically accompanies weaker growth in emerging economies.

Still, the strength of the dollar remains impressive – indeed arguably too impressive – relative to those EM growth fundamentals. This suggests that other factors (e.g. rising risk aversion) have been playing a big role in driving the dollar up.

The US dollar versus EM growth surprises

 

• Forecast for Recession in Next 12 Months Hits 100% in Blow to Biden

The latest recession probability models by Bloomberg economists Anna Wong and Eliza Winger forecast a higher recession probability across all timeframes, with the 12-month estimate of a downturn by October 2023 hitting 100%, up from 65% for the comparable period in the previous update. (…)

While the chance of a recession within 12 months has reached 100% under the model, the odds of a recession hitting sooner are also up. The model forecasts the likelihood of a recession within 11 months at 73%, up from 30%, and the 10-month probability rose to 25% from 0%. (…)

A separate Bloomberg survey of 42 economists predicts the probability of a recession over the next 12 months now stands at 60%, up from 50% a month earlier.

• Economists Now Expect a Recession, Job Losses by Next Year Majority think Federal Reserve will start cutting rates in late 2023 or early 2024

On average, economists put the probability of a recession in the next 12 months at 63%, up from 49% in July’s survey. It is the first time the [WSJ] survey pegged the probability above 50% since July 2020, in the wake of the last short but sharp recession.

Their forecasts for 2023 are increasingly gloomy. Economists now expect gross domestic product to contract in the first two quarters of the year, a downgrade from the last quarterly survey, whereby they penciled in mild growth.

On average, the economists now predict GDP will contract at a 0.2% annual rate in the first quarter of 2023 and shrink 0.1% in the second quarter. In July’s survey, they expected a 0.8% growth rate in the first quarter and 1% growth in the second. (…)

Economists believe that nonfarm payrolls will decline by 34,000 a month on average in the second quarter and 38,000 in the third quarter. According to the last survey, they expected employers to add about 65,000 jobs a month in those two quarters. (…)

Some 58.9% of economists said they think the Fed will raise interest rates too much and cause unnecessary economic weakness, up from 45.6% in July. (…)

Of the economists who see a greater than 50% chance of a recession in the next year, their average expectation for the length of a recession was eight months. The average postwar recession lasted 10.2 months.

For the year as a whole, they expect the economy to grow 0.4% in 2023, through the fourth quarter compared with the fourth quarter of the prior year. In 2024, they see the economy growing 1.8%. (…)

They predict the unemployment rate, which was 3.5% in September, will rise to 3.7% in December and 4.3% in June 2023. Economists’ average forecast for the jobless rate at the end of next year is 4.7%, and they expect it to stay broadly at that level through 2024. (…)

Economists expect home prices to decline 2.2% in 2023, measured by the U.S. Federal Housing Finance Agency’s seasonally adjusted purchase-only house price index. That would mark the first such decline since 2011. (…)

Economists on average expect the Fed to lift the federal-funds rate to 4.267% in December, which implies at least one more increase of 0.5 point that month. They see the federal-funds rate peaking at 4.551% in June next year. (…)

Some 30% of economists expect the central bank to lower rates in the fourth quarter of 2023, and 28.3% expect the next rate cut in the first quarter of 2024.

• Barron’s Big Money poll

Patience in a volatile market like this year’s is a tall order. But it is the recipe for long-term success espoused by institutional investors in Barron’s latest Big Money poll. Big Money respondents are relatively negative about the near-term trajectory for financial markets, but optimistic about opportunities over the longer term, given the most attractive entry points in years for both stocks and bonds.

Our latest survey finds 40% of money managers bullish about the outlook for stocks over the next 12 months, and 30% bearish. The bullish cohort has increased from 33% since the spring edition of the poll, which found a plurality of managers neutral, but the bearish contingent has also grown from 22%. (…)

Barron’s

• JPMorgan’s Kolanovic Trims Risk as He Turns More Wary on Economy

Kolanovic, who has been Wall Street’s most vocal bull this year, cut the size of his equity overweight and bond underweight allocations, citing increasing risks from central bank policies and geopolitics. (…)

Kolanovic, voted the No. 1 equity-linked strategist in last year’s Institutional Investor survey, hasn’t had much success with his bullish calls so far in 2022. Over the summer he maintained that the US stock market was poised for a gradual recovery in 2022 and that the S&P 500 would likely end the year unchanged, repeatedly urging investors to buy the dip. (…)

“We expect the global expansion to continue to display resilience through the middle of next year given an unwind of adverse supply shocks, a material slowing in inflation, and a healthy private sector,” he said.

• BofA Survey ‘Screams’ Capitulation Among Investors

The bank’s monthly global fund manager survey “screams macro capitulation, investor capitulation, start of policy capitulation,” strategists led by Michael Hartnett wrote in a note on Tuesday. They expect stocks to bottom in the first half of 2023 after the Federal Reserve finally pivots away from raising interest rates.

“Market liquidity has deteriorated significantly,” the strategists said, noting that investors have 6.3% of their portfolios in cash, the highest since April 2001, and that a net 49% of participants are underweight equities.

Nearly a record number of those surveyed said they expect a weaker economy in the next 12 months, while 79% forecast inflation will drop in the same period, according to the survey of 326 fund managers with $971 billion under management, which was conducted from Oct. 7 to Oct. 13.

As the earnings season gains traction, 83% of investors expect global profits to worsen over the next 12 months. A net 91% said global corporate profits are unlikely to rise 10% or more in the next year — the most since the global financial crisis — a sign that suggests further downside to S&P 500 earnings estimates, according to the strategists.

Global equities have rallied in recent days amid support from technical levels, changes in UK government policies and a focus on earnings. Hartnett and his team described the rally after a US inflation print last week as a “bear hug.” (…)

Can we learn anything from the dates above?

• July 2000: the S&P 500 peaked in August 2000.
• March 2001: down 24%, the S&P 500 rallied 8% in 2 months before resuming its downtrend.
• October 2001: down 30% from August 2000, another 8% rally over 5 months before cratering to 815 in September, down 46% since August 2000.
• March 2003: The actual low.
• December 2008: the S&P 500 was down 41%. Another 26% drop occurred before the March 2009 low.
• June 2012: Rising market.
• October 2016: Rising market.
• April 2020: Near pandemic low.

Answer: not a dependable contrarian signal.

Bank of Canada Sees Worst Drop in Business Outlook Since 2020

Sentiment among Canadian firms fell the most since the beginning of the pandemic, with inflation expectations among consumers and businesses showing few signs of abating, Bank of Canada surveys show.

The central bank’s business outlook indicator fell to 1.69 in the third quarter, from 4.87 previously. While still positive, that’s the largest deterioration in the confidence of Canadian firms since the second quarter of 2020.

“Many firms expect slower sales growth as interest rates rise and demand growth shifts closer to pre-pandemic levels,” policymakers said Monday in the quarterly business outlook survey. Respondents noted that while they see their input and output prices easing, expectations of overall inflation remain elevated. More than three quarters of firms say inflation will stay higher than 3%, the top of the central bank’s control band. (…)

Most businesses and consumers think a recession is likely within the next 12 months, triggered by large increases in interest rates and high prices that reduces consumption. The two groups also see inflation remaining elevated over the next one or two years before returning to the central bank’s target in the long term.

While both have similar inflation expectations and views on the probability of a recession, they diverge on wages.

The average expected wage increase among businesses has receded, with nearly half not seeing abnormally high wage growth beyond the next 12 months. But consumer expectations for wage growth have increased, with 40% of workers now seeing pay gains of more than 4% over the next year.

With firms expecting demand to slow and resisting large wage increases, consumers said their wages weren’t keeping up with inflation and believed they wouldn’t catch up, resulting in spending cuts and changes in shopping habits. Consumers also see shrinking real wages as the main trigger of a recession.

Most firms said rate hikes aren’t yet holding back their investment plans. But fewer businesses are planning to hire, and some in information technology, engineering and trades are constrained by supply of skilled workers. (…)

• Traders See Bank of Canada Hiking to 4.25% on Hot US Inflation

U.S. could sell oil from reserve this week. (Reuters)

China:

For three days in a row on Oct 10-12, the People’s Daily published three articles emphasizing the importance for China to stick with the “dynamic zero-Covid policy”, sending the clearest signal yet that zero-Covid policy will not be abandoned anytime soon. Our latest high-frequency tracker shows that cities with high-/mid-risk districts now account for 40% of the national GDP, implying continued pressure on consumption and services in October. (GS)

• Rio Tinto warns of slowing iron ore shipments as Chinese construction falters

No recession cover in sovereign bonds (BlackRock)

Recession fears are roiling markets. Investors traditionally take cover in sovereign bonds, but we see this recession playbook as obsolete. Why? First, central banks are hiking rates to try to tame inflation, causing recessions. Second, we don’t see them cutting rates like they typically do in recessions due to persistent inflation. Third, we expect investors to demand more compensation for the risk of holding government bonds amid high debt loads. Result: We stay underweight Treasuries.

In the Great Moderation, a period of steady growth and inflation, central banks would have eased policy on signs of contracting growth. That era is over. Now central banks are set to induce recessions by overtightening policy. In this supply driven recession, high inflation and rising rates may break the fragile equilibrium where investors tolerated surging debt loads and forwent a higher term premium, or compensation for the risk of holding long-term bonds.

The UK offers a glimpse of this. Long-missing bond vigilantes are back as markets question UK macro policy credibility. And financial dislocations have accelerated and amplified the move. The difference between 10-year and two-year gilt yields (orange line in chart) has surged. Yet yield curve moves of German bunds (pink) and Treasuries (yellow) show a muted response not yet pricing in a higher term premium.

We see long-term yields rising across developed markets. Why? Policy, inflation and debt. Central banks in the new regime face a sharper trade-off between growth and inflation than in the past. Yet their forecasts, as well as the International Monetary Fund’s update last week, aren’t acknowledging that the cost of bringing inflation down to targets is triggering recession, in our view. We think central banks will eventually halt rate hikes.

But they won’t have done enough to get inflation all the way back down to target, implying they won’t be able to start easing policy, in our view. Higher policy rates and inflation create a ripe environment for investors to demand higher term premia for long-term bonds.

All of this underscores why the old recession safe-haven playbook doesn’t apply. That’s no mere musing: We see it playing out in the UK in real time. The energy crisis had already put the UK on the brink of recession. The Bank of England (BoE) could exacerbate the pain by hiking rates even more than originally expected to offset fiscal stimulus. Backlash to the planned stimulus has sparked a gilts selloff and led to the finance minister’s resignation.

The BoE’s two-week buying of long-term bonds helped briefly drag down yields, but they spiked anew as the program ended last week. While the government has trimmed its tax cut plans, they have already dented UK fiscal credibility and would still add to the debt build-up during the Covid-19 shock. In this environment, bond vigilantes are back and heralding term premium’s return.

The upshot: We’re broadly underweight government bonds. U.S. bond returns are the most positively correlated to stocks in two decades on a 90-day rolling basis. We expect that correlation to stay positive, erasing bonds’ role as portfolio diversifiers.

We don’t think long-term yields reflect the likely persistence of inflation and higher term premia coming as a result. Higher short-term rates also make the long end less attractive because investors can get decent returns in short-dated bonds with less interest rate risk. We stay underweight U.S. Treasuries. Policy rates would need to hold steady or fall for Treasury returns to flip positive, we find.

Blinken Says China Wants to Seize Taiwan on ‘Much Faster Timeline’

China has made a decision to seize Taiwan on a “much faster timeline” than previously thought, Secretary of State Antony Blinken said on Monday, shortly after China’s leader reiterated his intent to take the island by force if necessary. (…)

“If peaceful means didn’t work, then it would employ coercive means,” he said. “And possibly, if coercive means don’t work, then maybe forceful means to achieve its objectives. And that is what is profoundly disrupting the status quo and creating tremendous tensions.” (…)

Chinese President Xi Jinping used a widely-watched speech on Sunday to say the “wheels of history are rolling on towards China’s reunification” with Taiwan. While peaceful means were preferable, Xi added, “we reserve the option of taking all measures necessary.” (…)

• Xi Says China’s Power Has Increased, Warns of ‘Dangerous Storms’

(…) “China’s international influence, appeal and power to shape the world has significantly increased,” Xi said in Beijing on Sunday in a wide-ranging speech to open the weeklong party congress. Still, he warned of a more unstable international environment, saying China must be prepared for “strong winds and high waves and even dangerous storms.” (…)

Fleshing out his “common prosperity” slogan, Xi adopted tougher language on tackling income inequality, calling to “regulate income distribution and regulate the mechanism behind the accumulation of wealth.” In his 2017 congress speech, Xi only called to “promote a more orderly and reasonable income distribution” and “adjust excessively high incomes.” (…)

Xi also emphasized calls for “self-reliance” in technology, using the phrase at least twice compared with no references in his last congress speech in 2017. (…)