U.S. Flash PMI: Output grows at fastest rate for over two years in May

The headline S&P Global Flash US PMI Composite Output Index rose sharply from 51.3 in April to 54.4 in May, its highest since April 2022. The 3.1 index point rise (the largest gain for 15 months) signals a marked acceleration of growth midway through the second quarter. Output has now risen continually for 16 consecutive months, with May’s acceleration contrasting with the slowdown seen in March and April.

May’s improved performance was led by the service sector, where business activity surged higher to register the fastest growth for a year, reversing the slowdown seen over the prior three months. Services activity has now risen for 16 straight months. Inflows of new work into the service sector also picked up, having slipped into decline in April, registering one of the strongest gains seen over the past year, though demand was again subdued by a further fall in services exports.

The services sector upturn was accompanied by manufacturing output also expanding at an increased pace in May. Factory production rose for a fourth consecutive month. The latest output gain was still lower than seen earlier in the year, however, thanks to a weaker new orders performance compared to that seen at the start of the year. New orders received by factories declined for the second month running, but at only a marginal pace amid the largest export gain for two years.

Optimism about output in the year ahead lifted higher in both manufacturing and services in response to brighter business prospects, the latter in turn often linked to expansion plans, new products and increased marketing. Customers were also reported to have likewise become more optimistic.

However, although future output expectations improved from April’s five-month low, levels of confidence remained below long-run averages in both sectors. Companies continued to report uncertainty about the economic outlook given the possibility of higher-for-longer interest rates, upcoming elections, and wider geopolitical uncertainties.

Employment fell for a second successive month in May, contrasting with the continual hiring trend seen over the prior 45 months. The overall reduction in workforce numbers was only very marginal, however, and less than witnessed in April, as an upturn in manufacturing payrolls was accompanied by a slower rate of job shedding in services.

While factory jobs grew at the fastest rate for ten months in May, buoyed by rising order books and improved business prospects, services employment has now fallen for two successive months, albeit in part due to staff shortages.

Input prices continued to rise sharply in May, the rate of inflation accelerating to register the second-largest monthly increase seen over the past eight months. Manufacturers reported an especially steep increase, suffering the largest cost rise for one-and-a-half years amid reports of higher supplier prices for a wide variety of inputs, including metals, chemicals, plastics, and timber-based products, as well as higher energy and labor costs. Service sector costs also rose at an increased rate, reflecting higher staffing costs in particular.

Companies again sought to pass higher costs onto customers in the form of higher selling prices, the rate of increase of which accelerated slightly compared to April. However, although still elevated by pre-pandemic standards, the rate of inflation across both goods and services remained below the average recorded over the past year.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“The US economic upturn has accelerated again after two months of slower growth, with the early PMI data signalling the fastest expansion for just over two years in May. The data put the US economy back on course for another solid GDP gain in the second quarter.

“Not only has output risen in response to renewed order book growth, but business confidence has lifted higher to signal brighter prospects for the year ahead. However, companies remain cautious with respect to the economic outlook amid uncertainty over the future path of inflation and interest rates, and continue to cite worries over geopolitical instabilities and the presidential election.

“Selling price inflation has meanwhile ticked higher and continues to signal modestly above-target inflation. What’s interesting is that the main inflationary impetus is now coming from manufacturing rather than services, meaning rates of inflation for costs and selling prices are now somewhat elevated by pre-pandemic standards in both sectors to suggest that the final mile down to the Fed’s 2% target still seems elusive.”

Boost for World Economy as U.S., Eurozone Accelerate in Tandem Surveys point to a fresh acceleration in the U.S., even as growth in the eurozone strengthens

(…) Eurozone business activity in turn increased for the third straight month in May, and at the fastest pace in a year, the surveys suggest. The currency area’s joint composite PMI rose to 52.3 from 51.7.

The uptick was led by powerhouse economy Germany, where continued strength in services and improvement in industry drove activity to its highest level in a year. That helped the manufacturing sector in the bloc as a whole grow closer to recovery, reaching a 15-month peak. (…)

Similar surveys pointed to a further acceleration in India’s rapidly-expanding economy, and to a rebound in Japan, where the economy contracted in the first three months of the year. (…)

John Authers:

Thursday brought news that S&P Global’s version of the purchasing manager index for US combined manufacturing and services had risen to its highest level in two years. While still only at 54.4, where 50 marks the boundary between recession and expansion, this was still taken as disquieting evidence that the Fed’s monetary tightening hadn’t had much effect on the economy. (…)

Investors took a negative view thanks to the last FOMC minutes, published Wednesday afternoon. The main points were that “many” Fed officials had expressed uncertainty over the degree to which policy is restraining the economy (some disagree that the current monetary settings are restrictive), while policymakers agreed this year’s disappointing inflation data meant it “would take longer than previously anticipated for them to gain greater confidence” that it was heading for the 2% target.

This was really no different from what Fed officials had been saying publicly, but it was taken as confirmation that the central bank still expected rates to stay “higher for longer.” Sosnick commented:

Coming on the back of yesterday’s “higher for longer” Fed Minutes, bond traders were in no mood to hear about a strengthening economy. In theory, a stronger economy should be good for companies, and thus stocks, but because we are all so obsessed with the Federal Reserve and other central bank policymakers, we see most stocks trending lower as bond prices fall.

The minutes also chimed with a noticeable move toward more aggressive language by the Fed’s regional presidents. They are usually more hawkish than the central bank’s governors, who are based in Washington, but analysis by Oxford Economics shows the gap is widening:

That could mean resistance if Powell wants to cut rates later this year. It’s hard to see the latest data as truly shifting the balance of probabilities for the economy, but somehow the market is seeing it that way. And thus, fear of Jerome Powell has, at least for a day, overcome hero worship of Nvidia’s Jensen Huang.

Wondering what’s the difference between a Fed governor and a Fed president?

Federal Reserve Governors

• There are 7 members of the Board of Governors appointed by the President and confirmed by the Senate.
• They serve staggered 14-year terms to provide continuity and insulation from political pressure.
• All 7 Governors are voting members of the Federal Open Market Committee (FOMC) which sets monetary policy.
• The Chair and Vice Chair of the Board are also the Chair and Vice Chair of the FOMC.
• The Governors provide leadership and oversight for the entire Federal Reserve System.

Federal Reserve Bank Presidents

• There are 12 regional Federal Reserve Banks, each with its own president.
• The Reserve Bank presidents are not presidentially-appointed, but rather selected by each Reserve Bank’s board of directors.
• Only 5 of the 12 Reserve Bank presidents serve as voting members of the FOMC on a rotating basis each year.
• The New York Fed president is a permanent voting member due to that bank’s importance in open market operations.
• Reserve Bank presidents represent their region’s economy at FOMC meetings and provide insights that help formulate monetary policy.

In summary, the Governors provide national leadership and all vote on monetary policy, while the Reserve Bank presidents contribute regional perspectives with only some serving as voting members of the FOMC at any given time.

Central bankers should acknowledge blind spots in a less certain world, Fed’s Mester says  With the economy in flux following the COVID-19 pandemic and with uncertainty surrounding even basic aspects of how things work, precision may be an enemy.

(…) Given how much is unknown, she said the Fed should build more of that uncertainty into how it talks about policy, focusing less on a baseline or “modal” outlook and more on a handful of the most likely outcomes – or scenarios – that would help the public better focus on how policymakers would react when the economy, as will inevitably happen, does something different than expected.

“If you only communicate the modal view, you’re kind of miscommunicating your actual view about the economy to the public,” Mester said, referring to economic projections made early in the pandemic as an extreme example of how any outlook relies on sets of assumptions that she feels are becoming harder to make. (…)

How do you set yourself up so that you’re well positioned no matter how things go?” Mester said, noting how the initial assumption that rising inflation in 2021 would prove “transitory” delayed interest rate hikes that she feels could have started earlier and proceeded with less risk and drama.

Better communication about how much the Fed doesn’t know, she said, could help avoid that sort of mistake in the future by discussing, be it in each policy statement or in less frequent documents like the biannual monetary policy report to Congress, the most likely economic narratives and the “reaction function” Fed officials would use in response to them.

Getting the Fed’s disparate group of up to seven governors and 12 reserve bank presidents on the same page about that approach may be a challenge, Mester acknowledged. But in her view it would boost the central bank’s credibility to be blunt about the spread of possible outcomes rather than allow more precise public expectations to develop and then be proven wrong.

“Let’s just pick three salient scenarios. There’s going to be one that probably has a little more weight on it … This is what we think is going to happen. However, we have these alternative risks.

“That isn’t a trivial thing to do,” she said, but “that can only enhance your credibility.”

DoubleLine CEO expects imminent US recession, government debt surge

Jeffrey Gundlach, the chief executive of investment management company DoubleLine Capital, expects a U.S. recession as soon as this year, he said on Thursday, as higher interest rates pressure U.S. consumers and companies.

Signals of brewing trouble in the U.S. economy such as rising credit card delinquencies and softer retail sales data suggest the possibility of an economic contraction is more imminent than the risk of an inflationary rebound, he said. (…)

The money manager, often dubbed ‘the bond king’, said he was staying away from the riskiest parts of the corporate debt market such as triple-C rated companies’ bonds as well as private credit investments because he expects companies’ debt defaults to surge. (…)

Goldman Sachs:

We are moving our forecast of the Fed’s first rate cut back one meeting, from July to September. Earlier this week, we noted that comments from Fed officials suggested that a July cut would likely require not just better inflation numbers but also meaningful signs of softness in the activity or labor market data. After the stronger May PMIs and lower jobless claims, this does not look like the most likely outcome.

The timing of the first cut remains a difficult question for a few reasons. First, we continue to see rate cuts as optional, which lessens the urgency. Second, inflation is likely to be much improved by September but hardly perfect and still at a year-on-year rate that makes cutting a less than obvious decision. Third, while the Fed leadership appears to share our relaxed view on the inflation outlook and will likely be ready to cut before too long, a number of FOMC participants still appear to be more concerned about inflation and more reluctant to cut.

Chips Ahoy!

Superpowers led by the US and European Union have funneled nearly $81 billion toward cranking out the next generation of semiconductors, escalating a global showdown with China for chip supremacy.

Superpowers led by the US and European Union have funneled nearly $81 billion toward cranking out the next generation of semiconductors, escalating a global showdown with China for chip supremacy. The surge has pushed the Washington-led rivalry with Beijing over cutting-edge technology to a critical turning point that will shape the future of the global economy. (Bloomberg)

TAIWAN RISK

What could happen in the event of a full-blown invasion? A Bloomberg Economics model based on countries that were invaded or occupied in the past 100 years estimates at least a 40% contraction in Taiwan’s GDP during the first year of war, while the implications for the rest of the world would be staggering:

A war over Taiwan would shock global trade and supply chains, disrupt regional trade, tank global financial markets, and likely trigger Western sanctions on China. If it led to a US-China war, we estimate a conflict would cost the world about 10% of GDP in the first year — almost twice the impact of the global financial crisis or the Covid pandemic.

Taiwan can count on US support for now. Whether it could do so under a Trump presidency is a big question. The former president is not the biggest fan of Taipei, a fact he’s made known publicly. To the power of chips, add political uncertainty in the US. (Reuters)

Fed Officials Saw Longer Wait for Rate Cuts After Inflation Setbacks Minutes of their last meeting revealed some officials were open to raising rates if inflation reaccelerated

(…) While officials continued to think interest rates were high enough to slow the economy and inflation, they signaled they were less certain over the degree to which rates would restrain activity and price pressures, according to minutes of the April 30-May 1 meeting, which were released Wednesday with a customary three-week delay.

An unspecified number of officials “mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such action became appropriate,” said the written account of the meeting. (…)

“Right now, the probability of rate hikes is very low,” Fed governor Christopher Waller said at an event in Washington on Tuesday. While the Fed’s next move was more likely to be a reduction rather than an increase, the central bank doesn’t necessarily need to cut interest rates this year if inflation doesn’t decline as much as officials have anticipated, he said. (…)

“We’re not seeing anything right now that looks like staying here for three or four months is going to cause the economy to go off a cliff,” Waller said on Tuesday.

(Bespoke)

The minutes say that “various participants mentioned a willingness to increase rates further if certain risks to inflation materialized”.  Various???

Also new from the minutes:

• “Although monetary policy was seen as restrictive, many participants commented on their uncertainty about the degree of restrictiveness.”
• “A number of participants noted uncertainty regarding the degree of restrictiveness of current financial conditions and the associated risk that such conditions were insufficiently restrictive on aggregate demand and inflation.”

In Fed speak, in order of magnitude, you get “a couple of participants”, “a few”, “some”, “a number”, “various”, “several”, “many”, “a majority”, “almost all” and “all”.

US Existing-Home Sales Unexpectedly Fall, Prices Stay High Contract closings dropped 1.9% to 4.14 million rate last month

(…) The supply of homes on the resale market increased more than 16% in April from the same month last year to 1.21 million. At the current sales pace, selling all the properties on the market would take 3.5 months. Realtors see anything below five months of supply as indicative of a tight market. (…)

About 68% of the homes sold were on the market for less than a month, up from 60% in March, while more than a quarter sold above the list price.

The NAR’s report also showed properties remained on the market for 26 days on average in April, down from 33 a month earlier and typical during the spring selling season. Sellers received an average of 3.2 offers. (…)

(CalculatedRisk)

FLASH PMIs

Eurozone economic recovery gathers pace as new orders rise at fastest rate in over a year

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, posted 52.3 in May, up from 51.7 in April and signalled an increase in business activity across the euro area private sector for the third consecutive month. (…) Moreover, the rate of expansion was solid, quickening for the second month running to the fastest for a year.

The overall expansion in output was again driven by the service sector, where activity was up for a fourth consecutive month. The pace of growth was unchanged on that seen in April. Meanwhile, manufacturing production continued to fall, extending the current sequence of decline to 14 months. The rate of contraction was only marginal, however, easing further to the weakest in this period of reduction.

New order growth also strengthened in May, driven by a solid expansion in the service sector where the latest increase hit a 13-month high. Manufacturing new business continued to fall, albeit to the least extent for two years. The rise in overall new orders was limited by demand weakness in international markets. New export orders decreased for the twenty-seventh successive month, but here too the pace of decline softened and was only modest.

There were varying trends across the different geographies in May. Germany saw output rise for a second month running, with the pace of growth gathering strength and hitting a one-year high. On the other hand, business activity in France took a step back, falling following a rise in the previous month. The strongest expansion was again seen in the rest of the eurozone, where output increased at a marked pace that was the fastest since April 2023.

As has been the case throughout 2024 so far, employment increased in May as firms responded to new order growth by expanding their workforce numbers. The pace of job creation was modest, but quickened to the most marked since June last year. In line with the picture for output and new orders, the rise in staffing levels was centred on the services sector, with manufacturing employment continuing to fall. The overall expansion of capacity enabled companies to keep on top of workloads, with backlogs of work depleted for the fourteenth consecutive month. The pace of reduction was slightly stronger than that seen in April.

With output and new orders in the manufacturing sector continuing to fall in May, firms in the euro area continued to scale back their purchasing activity midway through the second quarter. Stocks of both purchases and finished goods were also reduced, and to greater extents than was the case in April. A lack of pressure on supply chains meant that suppliers’ delivery times continued to shorten, extending the current sequence of improving vendor performance to four months.

Rates of inflation of both input costs and output prices eased in May, but in each case remained above the pre-pandemic average.

Input costs were up sharply again, with the pace of inflation only slightly softer than seen in April. Once again, the service sector was the principal source of inflationary pressure, with input costs rising rapidly. That said, the rate of services input price inflation eased to a three-year low. Meanwhile, manufacturing input costs decreased slightly again, though to the least marked extent in the current 15-month sequence of decline.

The pace of output price inflation also softened in May, and was the weakest since November 2023. A slower increase in services charges was partially offset by a weaker reduction in manufacturing selling prices. Softer output price inflation was seen across Germany, France and the rest of the eurozone.

Eurozone companies were more optimistic regarding the future path for business activity in May, with confidence the highest since February 2022. Sentiment was also higher than the series average as the economic recovery gained momentum. Stronger optimism was seen across both the manufacturing and services sectors. A jump in optimism in Germany helped to drive up overall confidence, while a renewed fall in output in France dented sentiment there. Confidence in the 12-month outlook for activity was little changed across the rest of the euro area.

Commenting on the flash PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:

“This looks as good as it could be. The PMI composite for May indicates growth for three months straight and that the eurozone’s economy is gathering further strength. Encouragingly, new orders are growing at a healthy rate while the companies’ confidence is reflected by a steady hiring pace. This time, there is also some good news for the European Central Bank (ECB) as the rates of inflation for input and output prices in the services sector has softened compared to the month before. This will be supportive for the apparent stance of the ECB to cut rates at the meeting on June 6. However, the better inflation outlook will be most probably not be enough for the central bank to announce that further rate cuts will follow suit.

“We are heading in the right direction. Considering the PMI numbers in our GDP nowcast, the Eurozone will probably grow at a rate of 0.3% during the second quarter, putting aside the spectre of recession. Growth is mainly driven by the service sector whose expansion was extended to four months. Manufacturing acts less and less as a stumbling block for the economy and optimism about future output has increased further in this sector. With all this in place it seems plausible that GDP growth of almost 1% could be reached this year, and there is even some upward risk.

“Looking for the fly in the ointment? Well, you will find plenty of them, especially in the manufacturing sector. While manufacturers have almost stopped reducing their production levels, inventories of purchased goods and final goods continue to shrink at even faster paces than during the last month. And while the indices for new orders, employment and backlogs of work have all increased, they are still well below the expansionary threshold. Thus, according to our Nowcast calculation, which considers the PMI indices, the recession in the manufacturing sector remains present in the current quarter.

Here’s a longer term chart via Bloomberg:

Japan: Fastest business activity expansion in nine months

Japan’s private sector expansion accelerated for a third successive month to the fastest since August 2023. This indicated that growth momentum continued to improve midway into the second quarter of 2024 and hints at a better Q2 GDP reading, after the disappointing first quarter print. The expansion in business activity remained services-led, but the near-stabilisation of manufacturing output offers hope of growth broadening out later in the year.

That said, overall new orders expanded at a slower pace in May, which alongside a renewed decline in the levels of backlogged work, spells a likely moderation in growth in the coming months. Sentiment levels remained elevated, however, even as confidence slipped to a seven-month low according to the Future Output Index. This signalled that Japanese private sector firms remain optimistic that growth will sustain in the year ahead.

Finally, the rates of input cost and output price inflation both eased in May, preluding softer inflationary pressures across official gauges. A closer look at the sectors reveal that this is services-led, as manufacturers faced rising cost pressures in May, partly attributed to yen fluctuations, which remains an area to monitor.

Euro-Zone Wage Growth Picks Up in Inflation Warning to ECB Negotated pay rose 4.7% from a year ago in first quarter

That’s up from 4.5% in the final three months of 2023 and matches a record set in the third quarter of last year. Most economists had anticipated a drop or a stable reading.

Indications of sustained upward pressure emerged on Wednesday as the Bundesbank said pay in Europe’s biggest economy shot up by 6.2% between January and March, boosted by tax-free one-off payments to compensate workers for soaring living costs.

(…) “However, wage pressures look set to decelerate in 2024. ECB wage-tracker data for the first few months of the year, when most agreements take place, indicate that negotiated wage pressures are moderating.” (…)

More evidence on workers’ pay will be revealed a day after next month’s decision, when Eurostat publishes compensation per employee — a metric ECB Chief Economist Philip Lane has called the most comprehensive indicator of wage pressures. In March, the central bank forecast that growth in that gauge will average 4.5% this year and slow to 3% in 2026. That’s a level it deems broadly in line with its inflation goal. (…)

Canada Bank Watchdog Warns of Housing-Payment Shock by 2026 Three-quarters of residential mortgages to renew by that time

The “payment shock” faced by some borrowers is among the most important risks currently in the financial system, according to the latest risk outlook from the Office of the Superintendent of Financial Institutions, released Wednesday.

The regulator said that 76% of outstanding residential mortgages as of February will be coming up for renewal by the end of 2026. Most worrisome are the 15% of mortgages that have variable rates with fixed payments. Some of those loans are negatively amortizing — that is, the regular payments no longer cover the full interest costs because rates have gone up so quickly, so the principal balance is increasing.

Eventually, those borrowers have to make lump-sum payments or accept much higher monthly outlays, the regulator said.

“We expect payment increases to lead to a higher incidence of residential mortgage loans falling into arrears or defaults,” OSFI said. (…)

Peter Routledge, the superintendent of financial institutions, said the issue of variable-rate mortgages with fixed payments is like a “mouse in the snake” — it’s a sizable problem the banks are slowly digesting, but it still has the potential to lead to outsized losses.

“The good news is that banks and Canadians are managing that problem early, and part of the reason we’ve been vocal about it is to prompt a bit of early action,” Routledge said in an interview on BNN Bloomberg Television. (…)

China asks carmakers to use up to 25% local chips by 2025 Policy push aims to purge foreign automotive semiconductors in coming years

The FT reports that the Ministry of Industry and Information Technology has asked Chinese carmakers to increase their local procurement of automotive-related chips to 20-25% by next year from about 10%. “China also aims to increase local procurement of other electric vehicle components, such as electronic control units, displays, thermal and charging supply systems, Nikkei Asia has learned.”

“The majority of chips used in vehicles, such as for sensors, microcontrollers and power management, do not need cutting-edge production tools and technologies.”

The FT adds that “Semiconductor value per car is forecast to increase to $912 by 2028 from $540 in 2022, with the market size to nearly double to $84.3bn from $43bn over the same period thanks to significantly more electric features, according to chip research company Yole Group.”

More than 30 million cars are sold in China each year and 18% were EVs in 2023 vs 14% in 2022.

G-7 Finance Chiefs Are Once Again Sidelining Their Debt Load Stresa G-7 agenda suggests no appetite for fiscal discussion

Despite a trajectory of rising borrowings and the International Monetary Fund’s declaration last month that “now is the time” to restore sustainable budget policies, that subject doesn’t appear on the formal agenda for G-7 central bankers and finance ministers set to gather in the lakeside town of Stresa. (…)

“Debt is definitely the elephant in the room at this G-7,” said Koen De Leus, chief economist at BNP Paribas Fortis in Brussels and co-author of a new book focusing on public finances, The New World Economy in 5 Trends. “But it’s hard to address this issue now, pre-elections, because there are no easy solutions.” (…)

The IMF’s forecast last month shows the G-7’s debts rising again this year after a post-pandemic trough, and doing so through 2029. The overall deficit will narrow only slightly to 4.6% in that time.

The fund singled out the US, predicting that if current loose policies stay in place, its debt will nearly double within three decades, and will already be just shy of 134% of output within five years.

The UK and France face rising borrowings too, and both countries received advice from the IMF this week to do something about that. (…)

Japan’s pile of borrowings meanwhile is seen stabilizing at the eye-watering level of more than 250% of GDP. Within the G-7, only Germany and Canada will cut down debt.

While each country’s situation differs, common themes explaining the mounting load include rising liabilities linked to aging populations and climate change, increasing defense costs to deter Russian aggression, and limited tolerance among voters for fiscal restraint.

Elections taking place this year in the US and the UK too — just announced for July 4 — as well as the European Parliament ballot in June that is coloring discourse in the region, underscore the difficulty of doing much to fix public finances for now.

Reticence to discuss fiscal challenges isn’t restricted to the G-7. Its larger equivalent, the Group of 20, avoided the matter with intent when meeting in February, after objections by China for a mention in their meeting statement. (…)

Something Just Flipped in the Credit Market for the First Time Since 2020 More risk of downgrades to junk.

While the big story in credit markets has been booming sales of new debt, ultra-low credit spreads and resilient corporate balance sheets as recognized by the billions of dollars worth of bonds being upgraded by rating agencies, the trend may be fading.

The proportion of BBB-rated bonds — those at the lowest tier of investment-grade — that are now on watch for a downgrade has recently surpassed the proportion of debt on watch for upgrades for the first time since early 2020, during the depths of the pandemic.

While “credit fundamentals are generally strong and ratings momentum is positive, the risk of downgrades to high-yield has increased recently,” say Bank of America analysts led by Yuri Seliger. “Moreover, some of the capital structures potentially at risk of a downgrade are large.”

Analysts have for years been warning of a ‘Triple B bubble, or the idea that a swelling amount of investment-grade debt is at risk of being downgraded into junk, or transforming into proverbial “fallen angels” in market parlance.

So far, that’s failed to materialize and 2023 instead market one of the slowest years for fallen angels on record, with just $19.1 billion of US debt dropping from investment-grade to high-yield status, according to CreditSights Inc. data.
Billions of dollars worth of debt sold by BBB-rated companies has instead been upgraded in recent months as companies continued to shore up their balance sheets. And so great has been the surge in upgrades that some analysts have argued that it’s helping to keep spreads, or risk premiums, on corporate debt low despite the highest benchmark interest rates in decades. (…)

Taking advantage of market holiday bias

This test analyzes the performance of the S&P 500 Index solely on the three trading days before and after each market holiday

We will refer to these days as “Holiday Days.” The holidays included are:

*- Before 1971, President’s Day entailed two separate market holidays – Washington’s Birthday and Lincoln’s Birthday

** – Martin Luther King Day became a holiday in 1986

*** – Juneteenth became a holiday in 2022

There is typically an overlap between the three days after Christmas and the three days before New Year’s. Holiday Days account for roughly 19% of all trading days or approximately 1 out of every 5.

• Buying three days before and selling three days after

The strategy followed below is simple: Buy and hold the S&P 500 Index only during the three trading days before and the three trading days after every market holiday starting in December 1933. The chart below shows the hypothetical growth of $1 using the holiday strategy.

But let’s try to put these results into some perspective. The chart below shows the same results as above in a slightly different format – a logarithmic scale. Once again, the key thing to note is the generally consistent nature of Holiday Days’ performance.

The chart below is quite enlightening. It displays the growth of $1 for the S&P 500 Index held only during Holiday Days (black line) compared to the growth of $1 in the S&P 500 Index during all other trading days (blue line).

Despite representing only 19% of all trading days, Holiday Days gained +2,354% versus All Other Days (representing 81% of all trading days), which earned only +2,083%. The bottom line: Holiday Days have delivered more total return in just a fifth of the time.

The table below summarizes daily performance results for Holiday Days separate from performance results for all other trading days.

Key things to note – Holiday Days had:

• A higher % of UP days (54.7% versus 52.0%)
• A significantly higher average and median daily return
• A slightly lower standard deviation of daily returns
• A 3.67-to-1 edge in risk-adjusted return (average daily % divided by standard deviation)

The table below summarizes the performance of the S&P 500 Index during all Holiday Day periods.

Roughly three of every five Holiday Day periods showed a gain, and the average and median gains are greater than the average and median loss.

The next period – around Memorial Day – begins at the close on May 21^st and extends through the close on May 30^th.

The table below displays the Holiday Dates for the remainder of 2024.

Sorry, I am one day late, but the S&P 500 was down yesterday. FYI only.

WHAT DO YOU KNOW?

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

More than half of Americans think the U.S. is in a recession. It’s not.

More than half of Americans — 56% — mistakenly believe the U.S. is currently in a recession and that Biden is responsible for a worsening economy, according to a stunning new poll conducted by Harris for The Guardian. (…)

It looks like inflation and the higher cost of living — indicators not typically part of the recession call by the NBER — could be shaping Americans’ views.

• 70% of Americans said that cost of living is their biggest economic concern, followed by inflation at 68%.
  

• Two-thirds of Americans, including 65% of Democrats, report it’s difficult to be happy about positive economic news when they feel financially squeezed each month.
• 49% believe the S&P 500 is down for the year (it’s up).
• Figuring out the right answers is tough because 64% of Americans say they don’t know who to trust when it comes to learning about the economy. And that number is relatively bipartisan.
• Even if the information on the economy is reported correctly, 62% of Americans think the economy is worse than the media makes it out to be.