Month: June 2023

Note: I will be traveling until June 27, with limited posting whenever possible given limited time, equipment and time zone constraints.

CPI Report Shows Inflation Has Been Cut in Half The consumer-price index rose 4% in May from a year earlier, well below the recent peak of 9.1% last June and down from April’s 4.9%

(…) So-called core consumer prices, which exclude volatile food and energy categories, climbed 5.3% in May from a year earlier, down from 5.5% in April. Economists see core prices as a better predictor of future inflation.

Core prices remain elevated in part because an earlier surge in housing-rental prices continues to show up in the inflation figures. Apartment-rent growth has since cooled significantly—declining to just under 2% over the 12 months ended in May from double-digit increases a year ago. Those price changes will take pressure off inflation, but they take time to show up in inflation data due to the lag in how rent is calculated.

Overall consumer prices increased a seasonally adjusted 0.1% in May from the prior month, down from April’s 0.4% increase. Core consumer prices rose 0.4% in May from the prior month, the same pace as in April and March, suggesting underlying price pressures remain firm.

Rising housing, used-vehicle and food prices drove inflation last month, the Labor Department said. Gasoline prices declined 5.6% in May from April, and other energy prices also dropped.

Fed officials have focused recently on prices for a subset of labor-intensive services by excluding food, energy, goods and housing prices, believing that category could reveal whether wage pressures from the strong labor market are passing through to consumer prices. That category rose 0.24 percentage point in May, close to its average in the two decades before the pandemic, J.P. Morgan economist Michael Feroli said in an analyst note. (…)

Renters Are About to Get the Upper Hand New-lease rents are poised to fall on an annual basis for only the second time since the 2008 financial crisis.

Apartment rent growth is declining fast, shifting the rental market to the tenant’s favor for the first time in years.

The average of six national rental-price measures from rental-listing and property data companies shows new-lease asking rents rose just under 2% over the 12 months ending in May.

That is down from the double-digit increases of a year ago and represents the largest deceleration over any year in recent history, according to data firm CoStar Group and rental software company RealPage. (…)

One of the rent measures, from real-estate brokerage Redfin, already shows asking rents turning negative with a decline of 0.6% in May, compared with the same month last year. The data includes both apartments and single-family rental homes, Redfin said.

A decline in asking rent over a 12-month period has only happened one other time since the 2008 financial crisis, according to some data sources, when the rental market briefly dipped in 2020 because of the outbreak of Covid-19, ending a decadelong streak of rent increases. (…

A historic number of new apartments under construction is also forcing more competition among landlords. That will help slow down rents in some parts of the country, such as the South and Southwest, which are seeing the most construction, housing analysts said. (…)

“There’s certainly a correction taking place,” said Rob Warnock, a researcher at rental website Apartment List. Apartment List reported rents rising under 1 percentage point for the year ending in May.

Relatively high renewal increases are one reason why rent, as captured by official inflation measures, is still shown to be rising at a higher-than-normal rate. The shelter component of the consumer-price index rose 0.6% in May to reach an 8% annual increase.

But new-lease rents, which measure the change in price for apartments available to be leased to new tenants, are considered more of a leading indicator. As new-lease rent prices cool, landlords also are expected to keep dropping how much they ask their existing tenants to pay, said Jay Parsons, chief economist at RealPage.

Property owners who don’t lower renewal rates risk watching too many of their tenants move out, driving up vacancies, which already increased 2.6 percentage points over the course of 2022.

“There’s effectively a cap on how much rents can rise on renewal in today’s market,” Parsons said.

The increases tenants pay to renew existing leases are also going down this year. The typical renter living in a professionally managed apartment building paid 6.5% more to renew their lease in May, according to RealPage. That figure has been falling for 10 months and is down from a peak rate of 11%. (…)

Overall, 48 of the 100 largest U.S. cities are posting negative rent growth for new leases, measured on an annual basis, according to Apartment List.

“It’s a break from the affordability crunch, but it is not an affordability windfall,” Warnock said.

Ed Yardeni shows these charts of the two CPI rent components. Still up more than 8.0% YoY and in the 6% annualized range using the latest 3 months.

Most rent data use new leases which account for less than 10% of all leases. Renewals are a better reflection of the market that the CPI tries to measure. Apartment List has the best data on renewals: we are now well past the year-end seasonal declines in MoM rents. The last 3 months have each been up more than 0.5% MoM, annualizing 6.5%. May was up 0.52% (6.3% a.r.)

So, beyond the positive YoY trends from the base effect, the secular trends are for rents to rise in a steady 6% range which mirrors the trends in wages.

BTW, while everybody focuses on so-called “super-core” inflation, my calculations of “Inflation on Essentials” shows the continued squeeze face by most Americans:

The good news is that the squeeze has become more bearable in the last 3 months:

John Authers: The Great Inflation Scare Reaches Its Final Phase

(…) In all, then, this was not a report that greatly shifts things in either direction. The overriding issue concerns services inflation. To look at the most important drivers that aren’t in the highly variable food and energy sectors, this chart shows the difference between inflation in “owner equivalent rent” — a statistical measure to capture the rise in accommodation costs — and core goods. The latter, thanks to some notorious pandemic horrors such as used cars, shot upwards and drove the initial shock. Now, shelter inflation, roughly a third of the index, is what keeps it at a politically and economically unpalatable level. (…)

The Cleveland Fed publishes “trimmed mean” inflation data, in which the biggest outliers in either direction are stripped out, and an average taken of the rest. This measure has turned down sharply on a year-on-year basis, while the latest month-on-month number, when annualized, implies that inflation is now below 3%, the upper range of the Fed’s target. (…)

The Atlanta Fed, meanwhile, publishes measures that divide prices into those that are “sticky” — meaning harder to adjust — and those that are flexible (such as for gasoline). The central bank’s great concern will be to keep sticky prices from growing out of control. On a year-on-year basis, sticky inflation has turned down but remains very high. However, once shelter is excluded, the trend over the last three months suggests that other sticky price rises are abating. The issue again is primarily shelter. (…)

In line with this, Michael Feroli of JPMorgan notes that core services ex-rent, Fed Chair Jerome Powell’s “super-core,” was up 0.24% month-on-month; “for context, in the two decades before the pandemic, this measure increased 0.23% on average.” And if there’s one startlingly positive news item buried in the data, it concerns the highly politicized but extremely important business of health insurance. Thanks largely to being driven so much by shifting political tides, premiums have had periods of extreme inflation in the decade since “Obamacare” came into effect. The latest data suggest that premiums are down more than 20% over the last 12 months. That might just be a handy spur to consumers’ disposable income if it continues. (…)

The upshot for all this is that the futures market now prices a “pause” for the fed funds rate this week as a virtual certainty, while continuing to retreat from predictions of any significant easing this year. The market’s prediction is now that there will be no net cuts at meetings of the Federal Open Market Committee for the rest of 2023. (…)

In as much as we try to analyse and decipher the CPI and its components, the reality is that core CPI inflation has stabilized in the 5.0-5.5% range, more than double the FOMC’s objective.

Meanwhile, the economy is also benefitting from lower energy prices, down 11.5% YoY in May. For how long?

OPEC Production Slumps as Voluntary Cuts Bite The group accelerated its efforts to tighten the oil market as a handful of the group’s largest members sharply slashed output as planned.

Output from OPEC’s 13 members slumped by 464,000 barrels a day to 28.07 million barrels a day, the cartel said in its monthly market report, citing figures sourced from independent data providers.

The drop suggests the group’s members have largely made good on a pledge announced in April to reduce their collective output. But the figures also show an uptick in production from other members who aren’t party to the plan that could soften the cuts’ impact on oil prices.

OPEC and a collection of Russia-led allied nations—known collectively as OPEC+—pledged in April to reduce oil production by around 1.1 million barrels a day from May onward. Russia said it would extend an already announced 500,000 barrel-a-day production cut. (…)

Saudi Arabia, OPEC’s de facto leader and largest producer, slashed its output by 519,000 barrels a day last month, slightly more than the half-a-million barrel cut it had announced. The United Arab Emirates also cut output by 140,000 barrels a day, largely in line with its agreed voluntary cuts

Kuwait reduced output by 95,000 barrels a day, falling short of its planned 128,000 barrel-a-day cut. Iraq, which had pledged to reduce output by over 200,000 barrels a day, saw its output tick slightly higher as supply disruptions at a major pipeline eased.

Still, the cuts’ impact on oil prices could be undermined as members of the group not party to the voluntary cuts boosted their output. Nigeria and Angola, which have long struggled to meet their output targets due to a lack of investment, lifted their production by 171,000 barrels a day and 54,000 barrels a day in May.

Iran, which is exempt from OPEC’s system of oil production quotas, increased its output by 61,000 barrels a day. Libya and Venezuela, two OPEC members that are also exempt and whose oil industries have been beset by problems, also saw their output inch upward. (…)

Separately, the oil producers group lefts its forecasts for global oil supply and demand largely unchanged. That means the group continues to expect a sharp run-up in demand later this year that supplies will struggle to keep pace with, raising the prospect of higher oil prices.

OPEC expects global oil demand will grow by 2.3 million barrels a day this year to 101.91 million barrels a day. Meanwhile, oil supplies from non-OPEC nations will grow by 1.4 million barrels a day to 72.61 million barrels a day.

The group also made no major changes to its forecasts for global economic growth, which it continues to see at 2.6% this year. China’s economy is forecast to grow by 5.2% in 2023, while the eurozone is expected to grow by 0.8%, in line with earlier forecasts. The exception was the U.S. economy, which OPEC now expects to grow by 1.3% this year, up from last month’s 1.2% forecast.

• Shell pushes up dividend and cuts spending

China’s Recovery Is in Real Peril Now China’s central bank cut its key short-term rate on Tuesday. On top of weak lending data for May, that should be ringing alarm bells.

(…) Chinese banks have suffered in recent quarters from narrowing net interest margins, which make it difficult to boost lending—and growth—without putting profits and balance sheets at risk. If the PBOC now guides its key medium-term lending facility rate lower this week, then the cost of three major funding channels for banks—deposits, the money market and central bank lending facilities—will all have moved meaningfully lower. That will lay the groundwork for actual cuts to borrowing costs for households and businesses.

The problem is that many households, already heavily indebted and viewing a shaky labor market, don’t seem all that inclined to borrow. By 2021, Chinese urban households already had a higher debt load as a percent of their disposable income than U.S. households, according to data from Clocktower Group, a California-based asset manager. Mortgage debt in China has risen rapidly in recent years, in part because Beijing has relied on household borrowing to revive the housing market during previous stimulus episodes. (…)

What this probably means is that more direct fiscal support from the central government will also be needed, one way or another. China’s economy came strong out the gate in the first quarter but it is increasingly clear that repairing the housing sector and the labor market could be a long slog—unless Beijing is willing to act much more decisively, and take on significantly heavier direct debts itself.

The Profit Squeeze Is On American companies’ profitability is worse than headline figures suggest

(…) Refinitiv now estimates that earnings per share among S&P 500 companies were flat versus a year ago. Compare that with April 1, when analysts had expected a 5.1% decline. Even allowing for analysts’ tendency to lowball ahead of earnings season, and for the fact that companies reduced their share count through stock buybacks, that is a significant beat.

S&P 500 sales grew more swiftly, rising 3.6% overall from a year ago (and more, on a per share basis), so profit margins did slip. Plugging Refinitiv’s earnings-per-share figures into sales-per-share figures from S&P Dow Jones Indices, earnings came to 11.8% of sales in the first quarter compared with 13.2% a year earlier. That is still a historically high level of profitability, however. In the prepandemic first quarter of 2019—a good quarter for margins—the margin was 11.6%.

Considering how companies’ labor bills, in particular, keep climbing, this might count as evidence that they have been fairly successful in passing rising costs on to their customers. But other data tell a different story.

The so-called pro-forma results that many companies highlight don’t include many of the charges (often characterized as “one-time,” or “nonrecurring”) that they must include under generally accepted accounting principles, or GAAP.

Use GAAP, and S&P Dow Jones Indices estimates S&P 500 profit margin in the first quarter was 10.8%. And in the fourth-quarter—the quarter when many companies kitchen-sink “one-time” problems, it was 8.6%. Moreover, as The Wall Street Journal recently documented, many companies have been employing earnings-boosting moves that are acceptable under accounting rules, such as reducing depreciation expenses. (…)

Commerce Department figures give a more sobering read on profit margins. Its measure of after-tax corporate profits as a share of gross domestic product—a common proxy for economywide profit margins—came to 8.7% in the first quarter. That was the lowest level since the first quarter of 2016. One factor behind the margin squeeze: Private industry’s wage and salary bill rose by 5.8% from a year earlier.

Separate data, also from the Commerce Department, shows that some of the industries that saw some of the biggest profit boosts from the flurry of buying, and price increases, set off by the pandemic, are now experiencing sharp margin declines. Profits for food producers came to 5.7% of sales in the first quarter compared with 8.2% a year earlier, for example, while metals producers’ margins slipped to 9.5% from 16.1%.

The decline in margins could persist. Analysts’ current estimates show overall revenue for companies in the S&P 500 falling by 0.5% from a year ago in the current quarter, but pro forma earnings per share falling by a steeper 5.4%. Moreover, with demand for workers still high, rising labor costs could outstrip companies’ ability to pass on costs. This could be especially true for the makers and sellers of goods—a much more significant share of employers represented in the stock market than in the overall economy. That is because, even as goods demand, and prices, seem likely to moderate, they must compete for workers with a growing services sector.

Companies might want to sugarcoat what is happening to margins, but for investors it could still be hard to swallow.

FYI:

May ranked as the largest month of buying of US equities since 2010. US L/S net leverage rose to 12 month highs as a result of the buying. Mega-Cap TMT drove the bulk of the buying in North America pushing net exposure to these names to decade highs. Traditional defensive continued to be bought with May being the 4th largest month of buying since 2018. (The Market Ear)

Fed Backs Away From Wages Focus, Bolstering Case for Rate Pause New research, recent commentary downplay wages-prices link

Federal Reserve officials are rethinking their view that wage gains are fueling inflation, a key intellectual shift that bolsters the case for a pause in their tightening campaign this week. (…)

Minutes of the Fed’s May 2-3 policy meeting hinted at a shift. When discussing services inflation in particular, only “some participants remarked that a further easing in labor market conditions would be needed” to bring it down, whereas minutes of the previous meeting in March suggested “participants generally judged” such cooling would be necessary.

“I do not think that wages are the principal driver of inflation,” Fed Chair Jerome Powell told reporters after the May meeting. “I think wages and prices tend to move together, and it’s very hard to say what’s causing what.”

Powell’s remark alluded to a crucial question in the emerging wages-versus-prices debate: Are wages a large driver of inflation, or is it more likely to be the other way around? Public comments from officials in recent months suggest the latter interpretation is gaining a following.

Meanwhile, new research from within the Fed system also supports that thesis.

A statistical analysis suggests faster wage growth has contributed only minimally to faster services inflation in recent years, San Francisco Fed economist Adam Shapiro said in an article published on the bank’s website last month. He noted businesses can “absorb” those costs via lower profits or by using automation and other methods to improve efficiency, adding that “recent evidence shows that wage growth tends to follow inflation, as well as expectations of future inflation.” (…)

“I think wages and prices tend to move together, and it’s very hard to say what’s causing what.” Mr. Powell, what’s the most logical?

• Let’s raise prices, see if it sticks, then lift wages? Or
• Our costs, like wages and energy, are rising, let’s see if we can offset with higher prices?

Or, how about simply asking business people? Like listening to conf. calls from time to time?

And, anybody who reads PMI surveys knows how it flows. Just from May’s surveys:

• In China: “Companies often mentioned that greater operating expenses stemmed from increased prices for labour and raw materials. The further strong rise in costs and improvement in demand conditions led service providers to hike their fees again during May.”
• In the USA: “Companies commonly stated that greater selling prices were due to the passthrough of higher costs to customers.”

Banking Update: Deposits Back to Growth (Moody’s)

After plummeting in March, deposits at small and midsize banks stabilized in April and, as of May, had begun growing. Small banks, as well as their larger counterparts, saw steady deposit growth in May.

Canada sheds jobs for the first time in nine months, unemployment ticks up to 5.2 per cent

• Employment decreased by 17k in May, after +41k in April and below consensus expectations for +21k.
• Job losses were entirely driven by the self-employed workers (-40k). Public employment (+10K) and private sector employment (+13k) rose.
• Employment increased by 23k in the goods-producing sector and declined by 40k in the services-producing sector.
• The unemployment rate increased by 0.2pp to 5.2%, the first monthly increase since August 2022.
• The participation rate ticked down by 0.1pp to 65.5%.
• Population growth was +0.26% MoM in May, the highest growth rate on record.
• Hourly wage growth of permanent employees was +5.1% YoY in May from +5.2% in April. The three-month annualized wage growth declined to 3.5% as the strong February print was dropped out.
• Monthly wage growth edged up to +0.4% from +0.3% in April.

Bank of Canada’s Beaudry Sees Signs of New Era of Higher Interest Rates The risk of high inflation continues to weigh on rate expectations, the official says

A senior Bank of Canada official cautioned it is likely that longer-term real interest rates will remain elevated relative to prepandemic levels and will be higher than Canadians are used to in the coming years.

Speaking a day after the central bank resumed lifting its policy rate amid still-high inflation and a resilient economy, Deputy Gov. Paul Beaudry on Thursday said there remains uncertainty but risks to long-term real rates are tilted to the upside. (…)

Beaudry said there are reasons to believe some of the factors that have weighed on long-term rates may be plateauing and could even change course.

“That makes it unlikely the real neutral rate will fall below prepandemic estimates and creates a meaningful risk that it could go up,” he said in a speech to the Greater Victoria Chamber of Commerce in British Columbia. (…)

“The accumulation of evidence across a range of economic indicators suggests that excess demand in the Canadian economy is more persistent than we thought, and this increases the risk that the decline in inflation could stall. That’s why we decided to raise the policy rate,” Beaudry said. (…)

In his speech, Beaudry noted that long-term interest rates in Canada and most other advanced economies fell steadily in the 25 years before the pandemic, thanks to a mix of aging populations, China and other developing countries joining the global economy, rising inequality and fewer attractive investment opportunities for business.

Those forces, he said, may have peaked and could reverse.

He said that in many countries, large portions of the population are no longer saving for retirement but are now retired, when they typically start spending their savings and could be a source of downward pressure on global saving and upward pressure on real rates. Also, Beaudry said some of the underlying drivers of inequality may be waning and causing less drag on real rates.

Beaudry said that at the same time the transition to a low-carbon economy is creating new investment opportunities in green technology and green infrastructure, while rapid advances in artificial intelligence may suggest a new era of public and private investment that could put upward pressure on real rates.

“In the bank’s view, that makes it more likely that long-term real interest rates will remain elevated relative to their prepandemic levels than the opposite,” he said.

• SNB’s Jordan Puts Switzerland’s Neutral Interest Rate Around 2%

Switzerland’s neutral interest rate may be a bit lower than that of other advanced economies, according to Swiss National Bank President Thomas Jordan.

The rate that neither slows nor accelerates output typically is “in the range of 2%-to-3% in developed countries, while in Switzerland it might be slightly lower,” Jordan told Swiss newspaper Corriere del Ticino in an interview published on Saturday.

While the president added that the neutral rate can only be an estimate, his comments suggest that the SNB might not be finished tightening after a likely 25 basis-point move to 1.75% later this month. (…)

US Will Buy 3 Million More Barrels for Emergency Reserve

The Energy Department announced Friday it planned to purchase 3 million more barrels of crude oil for the Strategic Petroleum Reserve.

A previous solicitation for about 3 million barrels resulted in contracts awarded to five companies, with the oil being purchased for an average price of about $73 per barrel, according to a DOE statement.

The move marks the agency’s attempts to begin replenishing the emergency reserve after it released more than 200 million barrels last year, in part to curb high energy prices. (…)

Nio Cuts Prices on All Electric Vehicles by $4,200 in China

EARNINGS WATCH

Of the 13 pre-announcements since May 26, 2 were positive and 9 negative.

Q2 ends in 2 weeks and guidance has improved compared with Q1. Yet, analysts are now expecting Q2 earnings to decline 5.4%, worse than the -3.9% expected on April 1. Q3e is now +1.7% vs +2.8% an Q4 +9.8% vs +10.5%.

If analysts are right, the earnings recession (ex-Energy) will have lasted 4 quarters. Its expected recovery would more than offset the coming slump in Energy profits.

Trailing EPS are now $220.04. Full year 2023: $220.75e. 12-m forward: $225.49. 2024: $246.68, +9.4%.

Macro Dissonance:  This is an interesting juxtaposition — stock analysts expect earnings to go higher for longer, while the bond market is expecting rate cuts. Usually the Fed only cuts rates if there’s a recession. And at least in this window of history whenever the green line has moved sharply lower an earnings recession follows. Which is all to say, despite a big improvement in sentiment and technicals (that we just documented), the macro is still murky.

@3F_Research

Goldman Sachs:

The S&P 500 has returned 13% YTD, but the rally has masked muted returns for most stocks. The equal-weighted S&P 500 has returned just 3% YTD. The five largest S&P 500 firms (AAPL, MSFT, AMZN, GOOGL, NVDA have rallied by 47% YTD and now comprise 24% of S&P 500 market cap. Excluding those five, the remaining 495 stocks have returned just 5%. However, since the start of June, breadth has widened slightly as the Russell 2000 has outperformed the S&P 500 by 5 pp (+8% vs. +3%).

(…) market breadth has recently narrowed by the most since the Tech Bubble. Following 9 other episodes of sharply narrowing breadth since 1980, the S&P 500 typically traded sideways during subsequent months as rotations continued within the market. In addition to below-average returns, drawdowns have also been larger than average in these experiences. Eventually, however, a “catch up” has been most common, with S&P 500 valuations and prices increasing alongside a reversal of intra-market momentum.

Valuations this year have risen beyond our expectations, but the combination of slowing inflation, healthy growth, and elevated market concentration suggests that the current multiple may persist. If economic growth data remain resilient and inflation continues to soften in line with our economists’ forecast, a declining equity risk premium will likely offset slightly higher real interest rates and support current equity multiples.

The five largest firms collectively trade  at 29x vs. 17x for the other 495 stocks, which trade roughly in line with what had been our forecast for S&P 500 P/E.

The major downside risks to our S&P 500 outlook include an unexpected downturn in growth and stubborn inflation that triggers a hawkish Fed pivot. In a mild recession, we estimate that S&P 500 EPS would fall by 10% to $200, roughly in line with the 13% historical average decline in recessions. This would likely lead to a more moderate decline in the consensus estimates, which typically trough well after equity prices.

Given the recent trajectory of disinflation, we estimate the ability of the Fed to ease in a recession would support a trough P/E multiple of 15x. This 19% multiple contraction and a 9% reduction in consensus 2024 EPS to $223, from $246 today, would lower the S&P 500 to 3400 (21% below today).

If the US economy avoids a recession, inflation will remain as the most obvious downside risk to stocks. Our economists expect core PCE will end the year at 3.7% year/year, still well above the Fed’s 2% target. If the inflation outlook proves more challenging, expectations for a more hawkish path of policy rates would likely weigh on equity valuations.

Ed Yardeni:

This will be a head spinning week. It could also be another rollercoaster ride in the financial markets. Maybe we should go on vacation and come back on Friday following the deluge of economic indicators from Monday through Thursday, and a FOMC meeting on Tuesday and Wednesday to boot. (…)

Ed Yardeni’s advice merits consideration …so I will be on vacation for 2 weeks, posting when possible given less time, limited equipment and a different time zone…

FYI #1:

@tanaz115 via @dailychartbook

FYI #2:

S&P 600 Financials Sectors P/E    S&P 400 Financials Sectors P/E

  

(yardeni.com)

Companies, Big Investors Sell Shares at Fastest Rate in Years There have been more than $24 billion of “follow-on” share sales since the end of April, boosted by the rebound in stocks.

Since the end of April, companies and private-equity firms have sold more than $24 billion worth of stock in so-called follow-on sales, according to Dealogic. More than $17 billion changed hands in May alone, well above the $6.9 billion monthly average last year. The sales were done at smaller discounts than usual, on average, reflecting a robust market.

Nearly half the sales have come from big shareholders like private-equity firms, which have been looking for creative avenues to sell companies—or parts of them—and return the money to the pension funds and others that give them capital. (…)

Intel this month sold more than $1.6 billion of stock in former unit Mobileye, more than the chip giant and its bankers had originally planned. General Electric sold roughly $2 billion worth of stock in its spinoff, GE HealthCare Technologies, while American International Group cashed out of more than $1 billion worth of stock in Corebridge Financial, the retirement and life-insurance business it carved out last year.

Typically, sellers must offer a discount to where shares recently traded in follow-on offerings in order to entice buyers. In 2020 and 2021, when demand for stocks was high, these discounts shrank, averaging 8.4%, according to Dealogic. Since the start of 2022, the average discount for follow-on offerings jumped to around 12%. In May, that discount started shrinking again, compressing to 8.3%, and in June it has been even tighter.

El Niño is back, ushering in record heat

El Niño is officially back after about a four-year hiatus, per the National Oceanic and Atmospheric Administration, Axios’ Andrew Freedman writes.

El Niño, the ocean and atmosphere cycle in the tropical Pacific, holds large sway over global weather patterns. It’s likely to increase global average surface temperatures and lead to an all-time record warm year in 2023 or 2024.

• El Niño will contribute to heat waves, droughts, floods and other weather extremes.
• It is influencing the North Atlantic hurricane season, making for an especially uncertain outlook.

“The global oceans are very warm right now, and I’m afraid that this is putting us into territory that we don’t have much experience with,” said Michelle L’Heureux, chief of Climate Prediction Center’s El Niño-Southern Oscillation team.

• The high cost of an El Niño in 2023 Scientists have announced the start of a potentially strong El Niño climate pattern in June 2023.

(…) Climate scientists have just announced that an El Niño weather pattern has taken hold and will strengthen through to the end of this year and the first months of 2024. And they are warning there is a good chance that it could be a particularly strong El Niño this year.

If that turns out to be the case, then the impacts could be significant. Scientists have already warned that with rising emissions and a strong El Niño there is a 66% chance the world will break through a key 1.5C global warming limit at least one year between now and 2027. But it could also bring damaging extreme weather such as heavy rainfall and flooding to communities in the US and elsewhere this winter.

“We expect El Niño to continue into the winter, and the odds of it becoming a strong event at its peak are pretty good, at 56%. Chances of at least a moderate event are about 84%,” wrote Emily Becker, associate director of the Univeristy of NMiami’s Coperative Institute for Marine and Atmopsheric Studies, on the National Oceanic and Atmospheric Administration’s (NOAA) blog.

The effects of this could also reverberate for some time to come – a recent study by researchers at Dartmouth College, Hanover, New Hampshire, estimates that an El Niño starting in 2023 could cost the global economy as much as $3.4tn (£2.7tn) over the following five years. And they say that following two previous very strong El Niño events in 1982-83 and 1997-98, the US gross domestic product was 3% lower half a decade later than it otherwise would have been. If an event of a similar magnitude was to happen today, it could cost the US economy $699bn (£565bn), they calculated.

It is worth noting that coastal tropical countries such as Peru and Indonesia, however, suffered a 10% drop in GDP following the same El Niño events, the researchers say. They project that global economic losses will amount to $84tn (£68tn) this century as climate change increases the frequency and strength of El Niño events.

“El Niño is not simply a shock from which an economy immediately recovers. Our study shows that economic productivity in the wake of El Niño is depressed for a much longer time than simply the year after the event,” says Justin Mankin, co-author of the study and assistant professor of geography at Dartmouth College.

“When we talk about an El Niño here in the United States, it means that the types of impacts that we’ll see, floods and landslides, aren’t typically insured against by most households and businesses,” says Mankin. In California, for example, 98% of homeowners don’t have flood insurance.

Other economic impacts in the US could include infrastructure damage from flooding, which would lead to supply chain disruption, and poor harvests caused by floods or drought, says Mankin.

While El Niño can bring intense periods of extreme weather to North America, it doesn’t always do so.

During El Niño, winds that usually push warmer water in the Pacific Ocean towards its west side weaken, allowing the warmer water to drift back towards the east and spread out over a larger area of the ocean. This leads to more moisture-rich air above the warmer ocean that alters the circulation of air in the atmosphere around the world. In North America, this typically causes Canada and the northern US to have a warmer, drier winter than normal while the southern states and Gulf coast tend to get wetter conditions, says DeWitt. (…)

El Niño also typically reduces the number of hurricanes in the Atlantic Ocean, but can lead to more hurricanes to the Pacific coast of the US. But all these effects largely depend on the strength of the El Niño that is driving them.

Southern states in the US are the most likely to experience severe impacts, including heavy rainfall and potential flash flooding, DeWitt warns. This would come after several years of drought following three consecutive La Niña seasons. (…)

The strong El Niño events of 1997-98 and 2015-16, for example, brought flooding and mudslides to California. The 1997-98 event was also associated with other unusual extreme events elsewhere in the country, such as severe ice storms in New England and deadly tornadoes in Florida. (…)

More Startups Throw in the Towel Startup shutdowns, fire sales and hard pivots are under way in the face of a venture market downturn.

Fresh capital from venture investors and bank loans is scarce and expensive. Going public is nearly impossible. Some business models that worked when cash was cheap are unsustainable now. That means venture-backed startups are running out of money and facing hard choices.

“The Mass Extinction Event for startups is under way,” said Tom Loverro, general partner at venture firm IVP, in a recent tweet. Loverro said in an interview that none of his portfolio companies has shut down recently, but it is early days in what could be a wave of startup failures. “It’s like the entire industry went out drinking and is now suffering the consequences,” he said about the venture boom of 2021 that he believes is heading for a bust. (…)

The yearly internal rate of return for venture firms was negative 7% in the third quarter of 2022, the lowest value since 2009, according to PitchBook Data. (…)

California startup Zume, which was developing a robotic pizza maker and was once valued at $2.25 billion, recently entered a wind-down process handled by Sherwood Partners, a restructuring firm, according to Sherwood’s co-founder and co-president Martin Pichinson. Zume representatives couldn’t be reached.

Sherwood’s business increased by 50% through April 30 this year compared with the same period last year, Pichinson said. “And the storm hasn’t even started,” he added. (…)

Venture-backed businesses in the U.S. raised $346 billion in venture capital in 2021, according to the PitchBook-NVCA Venture Monitor report. (…)

Startups in the U.S. raised $37 billion in the first quarter of this year, down 55% from the first three months of last year. (…)

North Korea’s Hacker Army Stole $3 Billion in Crypto, Funding Nuclear Program The reclusive regime has trained cybercriminals to impersonate tech workers or employers, amid other schemes, helping fund its defense despite Western sanctions.