Goldman Says Treasury Will Drop Under Its Cash Minimum June 8-9

• Janet Yellen doubts the US can pay all its bills by June 15, telling NBC that getting to that date is “very difficult.” Goldman economists said they see the Treasury’s cash levels below the bare-minimum $30 billion mark by June 8 or 9, or sooner. They assigned a 30% chance of a deal this week and the same odds “shortly before” the deadline. (Bloomberg)

Jerome Powell Keeps June Interest-Rate Pause in Play Fed chair says banking strains could mean rates don’t have to rise as much to tame inflation

(…) “Until very recently, it has been clear that further policy firming would be required. As policy has become more restrictive, the risks of doing too much versus doing too little are becoming more balanced,” Powell said Friday at a conference hosted by the central bank. (…)

Earlier, New York Fed President John Williams presented research at the conference showing the Covid-19 pandemic didn’t change estimates of a “neutral” interest rate that neither stimulates nor restricts demand, a finding with important implications for how high officials may raise rates to slow the economy.

Between the 2008 financial crisis and the 2020 pandemic, Fed officials and economists had concluded the neutral rate of interest—or the level that balances supply and demand when the economy is operating at full strength—had declined sharply. That, together with weak growth following the crisis, ushered in a period of historically low interest rates.

Williams said a widely followed model used to estimate the inflation-adjusted neutral rate of interest showed “there is no evidence that the era of very low natural rates of interest has ended.”

If estimates of the neutral rate of interest shifted higher, officials could conclude that the rates needed to slow inflation would be considerably higher. If those estimates haven’t changed, then the fed-funds rate might be expected to return to less than 3% if the Fed succeeds in bringing inflation down to its 2% target over the next few years. (…)

• Fed Official Is Open to Forgoing June Rate Hike Minneapolis Fed President Neel Kashkari said he could support holding interest rates steady at the central bank’s next meeting.

• Economists push back expected Fed rate cut to 2024, NABE poll shows

Economists now believe the U.S. central bank, which is debating whether it needs to raise rates again, will lower its targeted policy rate in the first quarter of next year, according to the survey released by the National Association for Business Economics.

In February, survey respondents saw the Fed cutting rates in the final three months of this year. Forecasters maintained their view on the peak level of the Fed’s benchmark overnight interest rate, which jibes with the central bank’s current target range of between 5% and 5.25%.

The NABE survey showed respondents split over whether the U.S. economy would fall into recession, although the poll’s median view sees modest levels of growth prevailing through 2024, with an expected 0.4% rise between the fourth quarter of 2022 to the final three months of 2023.

Respondents upsized their estimate of inflation in 2023, seeing the consumer price index up by 3.3% from the last quarter of 2022 to the final quarter of 2023, according to the survey. In February, respondents expected inflation would be up 3% over the same period.

The survey also found upgraded outlooks for the job market, with respondents now saying they expect an average 142,000 jobs to be gained per month, up from 102,000 in the February survey. The jobless rate, currently at 3.4%, is projected to average 3.7% this year, down from 3.9% in the February poll.

(Factset)

Updated r* Estimates from the NY Fed Suggest Incrementally Dovish Policy Risk

This morning [Friday] the NY Fed relaunched their estimates of the natural rate of interest (otherwise known as r*) that had been suspended since 2020. The new estimates update the Holston-Laubach-Williams (HLW) model to account for the unusual economic dynamics during the pandemic. The updated r* estimates are similar to prior estimates during the pre-pandemic period but imply a modest decline in r* since 2019, and in a speech accompanying the data’s release NY Fed President John Williams noted that the model’s estimate of r* would fall more significantly to zero by end-2024 if the economy evolves in line with current Blue Chip forecasts. We have previously noted several reasons why the HLW model estimates may have limited implications for the appropriate near-term policy stance, but the new estimates and the model-implied outlook might suggest some incremental dovishness if FOMC officials factor them into their policy decisions. (Goldman Sachs)

The NY Fed report is here.

US bank deposits and credit slip in latest week, Fed data shows

Deposits at all U.S. commercial banks slipped last week and overall credit provided by banks edged lower as well, Federal Reserve data released on Friday showed.

Deposits in the week ending May 10 totaled $17.10 trillion on a nonseasonally adjusted basis, down from $17.16 trillion a week earlier, the Fed’s weekly snapshot of the banking system’s assets and liabilities showed. Deposits, which had dropped substantially after the collapse in March of Silicon Valley Bank, were down at large banks and little changed at smaller ones.

Meanwhile, credit provided by banks dropped to $17.32 trillion from $17.37 trillion a week earlier, led by a decline in securities holdings. Loans and leases saw modest declines.

Deposits are not fleeing out, even at smaller banks:

And loans are not falling much. They are actually up since SVB, even at smaller banks:

• Private equity steps up lending as US banks pull back The turmoil facing U.S. regional banks has prompted some lenders to step back, leaving space for investors such as asset managers, private equity (PE) funds and insurers to lend more.

(…) “We expect to grow further by filling the void that regional banks are leaving as they pull back from certain types of lending,” said Dan Pietrzak, co-head of private credit at KKR, which manages $76 billion in credit funds. Pietrzak sees “attractive” assets in auto and consumer lending. (…)

“We see U.S. commercial banks retreating from real estate lending,” in some cases because regulators have instructed banks to reduce their exposure, said Andrea Balkan, managing partner overseeing Brookfield Asset Management’s real estate finance funds. “It’s times like this when we have a unique ability to grow.”

Investors providing private credit comprise 12% of the $6.3 trillion U.S. commercial credit market, according to Fitch Ratings. That compares with regional banks, which account for $4.5 trillion in loans, or 40% of the U.S. total. (…)

Shadow banks, as the private creditors are known, are able to lend with fewer regulatory hurdles. While private credit funds have grown swiftly, the risks they pose to the financial system appear limited, the Federal Reserve wrote in a report this month.

The International Monetary Fund painted a different picture, warning in April that the expansion of private credit may have added vulnerabilities to the financial system and called for more supervision of non-banks. The lack of public information about the loans makes it difficult for markets and regulators to measure risks “until it is too late,” the fund wrote. (…)

PE firms have more than $1 trillion that could be deployed on credit deals, Christopher Sheldon, KKR’s co-head of credit and markets, estimated in a recent paper. (…)

“You’ll start to see other areas becoming attractive, including auto lending, small & medium enterprises (SME) and consumer lending, fund financing,” Greg Olafson, president of Goldman Sachs Asset Management’s alternative investments business.

• US regional bank stocks fall after Yellen says more bank mergers necessary

Auto Dealers Finally Have Cars to Sell Again Some brands are getting heavier on inventory than others as shoppers’ concerns about rising interest rates put a dent in demand.

Buyers are finding a bigger selection of models to choose from this spring selling season, in large part because of easing supply-chain woes and more stable factory output.

The replenished inventory also is shaping up to be an important test for car companies, many of which have said in recent years they would keep availability permanently constrained. Some brands, such as Jeep and Buick, are already getting heavy on stock, according to industry data. If supplies get bloated, it could put an end to the lofty prices and big profits the industry has enjoyed since the pandemic’s early days, analysts say. (…)

Overall, dealerships had about 1.8 million vehicles in transit or on lots at the end of April, a 50% improvement compared with the same period in 2022—but still about half the stock available two years before, according to data from industry-research firm Wards Intelligence.

U.S. auto sales have remained resilient, mostly because of pent-up demand, and even picked up in the first quarter of this year as inventory levels improved. Buyers are also still paying historically high prices—the average vehicle sold for about $46,000 in April—and the amount of discounting on the car lot remains well below prepandemic levels, according to data analytics firm J.D. Power. (…)

Micron Stock Tumbles as China Says Chips Are Security Risk Chinese regulators said its products failed to pass a cybersecurity review.

Beijing warned operators of key infrastructure against buying the company’s goods, saying it found “relatively serious” cybersecurity risks in Micron products sold in the country. The components caused “significant security risks to our critical information infrastructure supply chain,” which would affect national security, according to the statement from the Cyberspace Administration of China, or CAC. (…)

The tech sector has become a key battlefield over national security between the two largest economies, with Washington having already blacklisted Chinese tech firms, cut off the flow of sophisticated processors and banned its citizens from providing certain help to the Chinese chip industry. In a statement, the US Commerce Department said Beijing’s conclusion had “no basis in fact” and Washington will continue to try and limit industry disruptions with its allies. (…)

The move brings fresh uncertainty to the other US chipmakers that sell to China, the world’s biggest market for semiconductors. Companies like Qualcomm Inc., Broadcom Inc. and Intel Corp. deliver billions of chips to the country, which puts the components inside electronic products that are shipped all over the world. (…)

Micron derived nearly 11% of its revenue from mainland China in its last fiscal year. Sanford C. Bernstein said the worst hit to revenue would reach that level, but a “more realistic impact will be low-single digit percentage and only in the near term.”

CHINESE DOMINOS

A Poor Province in China Splurged on Bridges and Roads. Now It’s Facing a Debt Reckoning. Guizhou has sent out pleas for help with its finances and investors think Beijing will have to step in

Cracks have been showing in the finances of Guizhou, a southwestern province with jaw-dropping landscapes and some of the world’s highest bridges. It was one of China’s fastest-growing local economies over the past decade—thanks in large part to its heavy spending on infrastructure development.

More than 110 state-backed entities known as local government financing vehicles in Guizhou have outstanding bonds, which in many cases were issued to help pay for the construction of bridges, highways and tunnels. Including these entities, the provincial government had the equivalent of $388 billion in outstanding debt by the end of 2022, about 1.3 times its gross domestic product last year, according to Wind, a financial data provider. (…)

On May 16 the finance bureau of Guiyang, the capital city of Guizhou, made another public admission of its dire debt situation in a 2022 work report. “In recent years, Guiyang has done everything possible” to resolve its debt risk through write-offs and converting government debts to state-owned enterprises’ debts, the government said in the report. These technical methods “have been basically exhausted,” it said. “Debt risks may occur at any time if funds are not available in a timely manner,” it added. It also disclosed a hidden debt of approximately $5.5 billion based on a preliminary tally. The article was also quickly taken down.

What Beijing ends up doing to resolve Guizhou’s debt issues will have ramifications for investors and banks across China that own a lot of local government debt. Economists and analysts have warned that debts have reached unsustainable levels in many parts of the country, and that central-government bailouts could be needed to prevent problems from snowballing.

Chinese authorities largely stood aside over the past two years as the country’s largest property developers slid into financial distress, causing losses for investors and many businesses and depressing the land sales that were a big source of revenue for many local governments. There was also no government rescue earlier on for debt-laden HNA Group, a large airlines-to-hotels conglomerate that went into bankruptcy. Some state-owned Chinese companies that weren’t deemed to be systemic risks have also failed. (…)

China’s Politburo in April said local governments need to strengthen their debt management and “strictly control new hidden debts,” signaling that their borrowing needs to be reined in. (…)

Over the years, smaller local banks and local branches of big banks have lent heavily to these local governments. “It’s absolutely a problem. It is channeling the problems in the real economy to the financial sector and eventually could pose a threat to financial stability,” said Tianlei Huang, a research fellow at the Peterson Institute for International Economics.

Chinese local governments had roughly $5.3 trillion of debts outstanding as of early May. Those numbers don’t include the debt of the local government financing vehicles, which are considered off-balance-sheet liabilities that governments are also on the hook for.

Goldman Sachs estimated the total interest-bearing debt of Chinese LGFVs to be around $8.5 trillion in a recent report. The International Monetary Fund put the figure at $10 trillion. (…)

The Covid-19 pandemic and the housing downturn hit the province hard. Land sales slumped after many property developers ran into liquidity problems, hurting a major source of income for local governments. Stringent Covid restrictions on people’s mobility affected the amount of traffic on Guizhou’s roads and bridges, and their toll collections. (…)

• China’s $23 Trillion Local Debt Mess Is About to Get Worse What happened in cash-strapped Hegang points to a long economic slog for the rest of the country.

(…) Hegang represents just the tip of the iceberg of a local government debt problem that’s making investors increasingly nervous and that threatens to be a drag on the world’s second-largest economy for years to come. Goldman Sachs Group Inc. estimates China’s total government debt is about $23 trillion, a figure that includes the hidden borrowing of thousands of financing companies set up by provinces and cities.

While the chance of a municipal default in China is relatively low given Beijing’s implicit guarantee on the debt, the bigger worry is that local governments will have to make painful spending cuts or divert money away from growth-boosting projects to continue repaying their debt.

“Many cities will become like Hegang in a few years’ time,” said Houze Song, an economist at US think tank MacroPolo, noting that China’s aging and shrinking population means many cities don’t have the workforce to sustain faster economic growth and tax revenue.

“The central government may be able to keep things stable in the short term by asking banks to roll over local governments’ debt,” Song said. Without loan extensions, he added, “the reality is that over two thirds of the localities won’t be able to repay their debt on time.” (…)

A fiscal restructuring can be triggered in one of two ways: if interest payments on a municipality’s bonds exceed 10% of its expenditure, or if local leaders deem it’s necessary. China-based Yuekai Securities Co. estimated that as many as 17 cities had bond interest payments of more than 7% of their budgeted expenditure in 2020, meaning they are close to breaching that 10% threshold. The cities are mainly in poorer provinces like Liaoning in the northeast and Inner Mongolia up north. (…)

Problems are evident in other cities as well. Shangqiu, a city of 7.7 million people in China’s central Henan province, made headlines recently after almost shutting down its only bus service. In Wuhan and Guangzhou, proposed cuts to pensioners’ medical benefits prompted rare street protests earlier this year. Civil servants in wealthy cities like Shanghai are reportedly having their pay slashed. In Guizhou province, officials have begged Beijing for a bailout. (…)

EARNINGS WATCH

• 2023 EPS estimates have improved for the top 10 S&P 500 stocks but not for the bottom 490. via @WarrenPies, @3F_Research

• The ratio of the equal-weighted to market-cap-weighted S&P 500 indexes is down sharply since the banking crisis started on March 8. The former is down 2.5%, while the latter is up 5.0% (chart). (Ed Yardeni)

• Also from Ed Yardeni:

                                                                           S&P 500     IT     S&P ex-IT

• Forward revenue growth:        4.7%     -0.3%     5.8%
• Forward earnings growth:      -4.4%     -7.4%    -0.1%
• Short Squeeze: On the other hand, we’re seeing heavy shorts in overall aggregated US index futures (net speculative positioning) — on a similar scale as was seen in the early-2000’s as the bear market was ending… but also similar to 2007 when the bear market was just getting started. The bullish take is that a short squeeze could take the market higher. (Callum Thomas)

Source:  @topdowncharts Topdown Charts

CB Leading Economic Index: Forecasts Mild Recession by Mid-2023

The latest Conference Board Leading Economic Index (LEI) for April dropped to 107.5 from March’s revised figure of 108.2. This is the 13th consecutive monthly decline, the longest streak since 2009, and the lowest reading since September 2020. Today’s reading represented a 0.6% month-over-month decline, consistent with the forecast. (…)

In my post Economic Perspectives: 24 April 2023: Re-Acceleration!

The widely forecast U.S. recession has failed to materialize so far as the economy experienced rolling recessions in housing (strong) and goods production (mild) offset by recovering services.

That may explain why a historically reliable indicator such as the CB LEI has yet to deliver on its recession signals. The LEI has 10 indicators; 5 of the 7 nonfinancial components are goods-related plus 1 of 3 financial components, the goods-dominated S&P 500 Index. (…)

So, in an economy where goods now weigh half as much as services, goods-biased indicators can be misleading when services and employment stay reasonably firm.

Philly Fed Manufacturing Index: Overall Decline Continues

The latest manufacturing index came in at -10.4, up 20.9 from last month, marking the index’s ninth negative reading in a row. The six-month outlook was down 8.8 points from last month and remains in negative territory for the third straight month at -10.3. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion.

From the report:

The indexes for new orders and shipments both increased for the second consecutive month but remained negative. The index for current new orders rose 14 points to -8.9, and the current shipments index edged up 3 points to -4.7. 

On balance, the firms reported a decline in employment. The employment index fell from -0.2 to -8.6, the index’s third consecutive negative reading. Over 15 percent of the firms reported a decrease in employment, and 7 percent reported an increase; most firms (76 percent) reported no change. The average workweek index was little changed at ‑7.7.

In this month’s special questions, the firms were asked to forecast the changes in prices of their own products and for U.S. consumers over the next four quarters. Regarding their own prices over the next year, the firms’ median forecast was for an expected increase of 4.5 percent, unchanged from when this question was last asked in February.

The firms reported a median increase of 6.0 percent in their own prices over the past year, down from 7.0 percent in February.

The firms’ median forecast for the rate of inflation for U.S. consumers over the next year was 5.0 percent, up from 4.0 percent in February. Over the long run, the firms’ median forecast for the 10-year average inflation rate was 3.3 percent, up from 3.0 percent in February.

BTW:

Philly Fed index below -25 accurately predicted a recession since the 1970s We’re already at -31.3 (@GameofTrades_)

Also a “goods” index.

Home Prices Post Largest Annual Drop in Over 11 Years U.S. existing home sales, which make up most of the housing market, fell 3.4% in April from the prior month to a seasonally adjusted annual rate of 4.28 million.

April sales fell 23.2% from a year earlier.

The national median existing-home price fell 1.7% in April from a year earlier to $388,800, the biggest year-over-year price decline since January 2012, NAR said. Median prices, which aren’t seasonally adjusted, were down 6% from a record $413,800 in June. Home prices have fallen the most in the western half of the U.S., while prices continue to rise from a year earlier in many eastern markets. (…)

Nationally, there were 1.04 million homes for sale or under contract at the end of April, up 7.2% from March and up 1% from April 2022, NAR said. (…)

The number of homes for sale is up from a year ago because houses are sitting on the market longer. But the number of new listings in April fell 21% from a year earlier, according to Realtor.com. (…)

The share of first-time buyers in the market was 29% in April, up from 28% a year earlier. About 28% of April existing-home sales were purchased in cash, up from 26% in the same month a year ago, NAR said.

The typical home sold in April was on the market for 22 days, up from 17 days a year earlier, NAR said.

@calculatedrisk

US Jobless Claims Tumbled Last Week After Fraud-Inflated Jump

Applications for US unemployment benefits fell by the most since 2021 after fraudulent claims in at least one state boosted the numbers in previous weeks.

Initial unemployment claims fell by 22,000 to 242,000 in the week ended May 13, Labor Department data showed Thursday. On an unadjusted basis, claims decreased by the most in two months, to 215,810, largely due to a drop in Massachusetts. (…)

Massachusetts accounted for nearly half of the nationwide increase in unadjusted claims in the week through May 6, and state officials said it was mainly due to fraud. Kentucky has also found an increase in the number of “imposter” claims, according to its website. (…)

Continuing claims, which include people who have received unemployment benefits for a week or more and are a good indicator of how hard it is for people to find work after losing their jobs, edged down to 1.8 million in the week ended May 6.

The Rise and Fall of Pandemic Excess Savings

(…) despite a rapid drawdown of savings in recent months, there is still a large stock of aggregate excess savings in the economy—some $500 billion.

The distribution and allocation of excess savings and wealth across the income distribution suggest that households on average, including those at the lower end of the distribution, continue to have considerably more liquid funds at their disposal compared with the pre-pandemic period. We expect that these excess savings could continue to support consumer spending at least into the fourth quarter of 2023.

This outlook is uncertain depending on, for example, whether households have developed a preference for higher savings, significantly shifted their spending patterns, or substituted other sources of income for the expired pandemic-era cash inflows. (…)

Aggregate personal savings versus the pre-pandemic trend

Source: Bureau of Economic Analysis and authors’ calculations.
Note: Excess savings calculated as the accumulated difference in actual de-annualized personal savings and the trend implied by data for the 48 months leading up to the first month of the 2020 recession as defined by the NBER.

Cumulative drawdowns reached $1.6 trillion as of March 2023 (red area), implying there is approximately $500 billion of excess savings remaining in the aggregate economy. Should the recent pace of drawdowns persist—for example, at average rates from the past 3, 6, or 12 months—aggregate excess savings would likely continue to support household spending at least into the fourth quarter of 2023. This outlook can be possibly extended into 2024 and beyond if, for instance, drawdown rates moderate or household preferences for savings increase.

This dynamic in excess savings associated with the pandemic period is remarkably unlike any past recessions. Figure 3 plots the monthly accumulation of excess savings since the onset of past recessions, where each of their respective pre-recession trends are calculated in the same way as described earlier for the pandemic episode.

Aggregate excess savings following onset of recessions

Source: Bureau of Economic Analysis and authors’ calculations.

The rapid accumulation and subsequent drawdown of excess savings following the onset of the pandemic recession contrasts sharply with the gradual increase in excess savings observed in past recessions. For many recessions, excess savings appears to plateau after three or four years instead of quickly reverting toward their respective pre-recession trends, as seen in the post-pandemic curve.

One exception is the Great Financial Crisis of 2008, which was followed by an extended period of personal savings rising above trend. Voinea and Loungani (2022) attribute this rise to households slowly making up for the wealth and asset values lost during the 2008 crisis.

The stark contrast between the pandemic recession and prior recessions holds true when the data are adjusted for inflation, as well as when we look at excess savings as a share of trend savings or as percent changes from pre-recession periods. (…)

  Fed Officials Suggest June Rate Rise Will Be Close Call Federal Reserve officials indicated the decision to raise interest rates at their meeting next month was shaping up as a close call, with another policy maker Thursday hinting she would support an increase.

Dallas Fed President Lorie Logan, a key centrist on the Fed’s policy-setting committee, suggested that barring further weakness in the economic outlook, she would be prepared to lift the benchmark federal-funds rate by a quarter percentage point at the central bank’s June 13-14 meeting. (…)

Ms. Logan said she didn’t see enough evidence that inflation was firmly on track to reach the central bank’s 2% target because much of the recent improvement has come from falling energy prices and because tight labor markets could continue to support income and spending growth that fuels higher inflation. (…)

“The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet.” (…)

Separately, Fed governor Philip Jefferson highlighted arguments on Thursday that could be used to justify holding rates steady or raising them again in June.

“On the one hand, inflation is too high, and we have not yet made sufficient progress in reducing it,” he said during remarks at an insurance conference in Washington. But Mr. Jefferson, who was nominated last week by President Biden to serve as the Fed’s vice chair, said economic activity was slowing due to the Fed’s rate rises, and he expected it to cool further this year.

“History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates,” he said. (…)

Over the past week, two other officials—Fed governor Michelle Bowman and Cleveland Fed President Loretta Mester —have said they also don’t think the Fed has made enough progress on inflation to justify pausing rate rises.

Two other Fed presidents, Austan Goolsbee of Chicago and Raphael Bostic of Atlanta, have suggested they would have been open to pausing rate increases at the May meeting or would prefer to do so at the June meeting to better assess the effects of the Fed’s recent increases.

John Authers sums up this week’s “Fed speaks”:

Quincy Krosby, chief investment strategist at LPL Financial, said that the speakers had “seemingly been tasked with sending a message to the markets.” The message, she said, was that the Fed “at  this point, has no plans to cut rates this year, but is now also introducing the possibility that another rate hike could be forthcoming at the June 13-14 meeting.”

Bank of Canada’s Macklem says inflation coming down despite April gain

(…) “Inflation has come down. It is coming down. We expect it will continue to come down,” Macklem said when asked about the inflation figures published this week, adding that April inflation “did come in stronger than we expected.”

Before Macklem spoke, money markets had seen an 80% chance for a hike in July. After, that dropped to 60%.

Earlier, the Bank of Canada said it was increasingly worried about the ability of households to pay off their debts and is seeing signs of financial stress among some home buyers. (…)

The share of indebted households behind on payments for at least 60 days has been increasing since mid-2022 but remains below pre-pandemic levels, the bank said.

“In light of higher borrowing costs, the Bank of Canada is more concerned than it was last year about the ability of households to service their debt,” it said in an annual report on the health of the financial system.

“While most households are proving resilient to increases in debt-servicing costs, early signs of financial stress are emerging,” particularly among recent home buyers, according to the so-called Financial System Review.

About a third of mortgage holders saw an increase in payments compared with February 2022, just before borrowing costs started to rise.

By the end of 2026, almost all mortgage holders will face higher payments, the bank said, as homeowners renew deals. (…)

• Bank of Canada says mortgage payments could spike as much as 40 per cent

David Rosenberg posted this chart last March:

• Canadians should not expect BoC to return to low rates, Macklem says Warns that historically low borrowing costs are a thing of the past with ‘transition period’ ahead

How El Niño Could Scramble Commodity Markets 

The hard-to-predict climate pattern, when powerful, can usher in intense drought or rainfall, upend output from the world’s breadbasket regions, and whipsaw the prices of commodities. Brazilian sugar producers, American grain farmers and international traders are bracing for the phenomenon. But the cyclical shift in ocean temperatures can just as easily be a dud.

El Niño occurs when trade winds moving west across the Pacific Ocean weaken and warmer-than-normal water sloshes toward the west coast of the Americas. Meteorologists at the National Oceanic and Atmospheric Administration on Thursday gave 80% odds of at least a moderate El Niño appearing in the Northern Hemisphere by year’s end, with a 55% chance of a strong event. (…)

Nonfuel commodity prices have historically risen about 5.3% globally within a year of the pattern beginning, according to the International Monetary Fund. As surface temperatures warm in the eastern Pacific, turning La Niña into El Niño, droughts in parts of Asia can curb production of Indian sugar, Malaysian palm oil and Australian wheat. In South America, wetter weather can boost farms or cause floods that disrupt harvest seasons.

The U.S. has previously experienced a mix of El Niño impacts, with more precipitation in southern states and hotter, drier weather in the Plains. (…)

In South America, there is a fine distinction between additional rain that can nurture crops and deluges that can overwhelm them. (…)

So far this year, global benchmark prices for the raw sugar that ends up in sodas and processed foods have surged more than 30%, reaching their highest level in 11 years, according to FactSet. (…)

In the U.S., growing swaths of wheat-producing Plains states such as Nebraska, Kansas and Oklahoma are battling what the U.S. Drought Monitor describes as extreme or exceptional drought. Many farmers have abandoned scorched land in droves, and the U.S. Department of Agriculture expects them to harvest the smallest portion of acres planted with winter wheat since 1917. Benchmark prices for hard red wheat, often used in baked goods, have jumped about 10% this month. (…)

Federal projections of a record corn harvest and bountiful soybean haul have pushed down prices for those commodities, and traders are betting that favorable weather will continue driving declines. The price of benchmark corn futures has dropped 13% from the beginning of the year, while soybeans are down more than 8%.

“The risk is all the speculators get caught on the wrong side [of the trade] and the weather pattern completely surprises everybody,” said Shawn Hackett, an agricultural analyst who advises food producers, traders and hedge funds. (…)

John Authers: This Equities Rally Is Running on Hope and a Story The world-changing narrative around AI has hooked up with the Fed’s determination to provide liquidity, even during a rate-raising cycle.

(…) The first-quarter earnings season is about to wind down, with only a handful of companies left to report, and the verdict is in. They were largely better than expected. But then, little had been expected of them.

Deutsche Bank Research strategists under Binky Chadha analyzed over 175 earnings calls commentaries and found that many companies found themselves in a “solid” business state despite macroeconomic headwinds. What helped, perhaps, is that they were braced for the worst — or at least a modest recession — which has prompted many firms to put measures into place when the economy does fall into one.

Companies sounded a bit less concerned about inflation than they had been, and were quick to say that the stresses in the banking sector were confined to a narrow group. They “took pains” to distinguish this from the Great Financial Crisis in 2008. Overall, this was a tone of guarded optimism, but earnings are still down from a year ago. And while estimates for the next 12 months did shift upward, that’s largely because they had fallen so far since last summer. (…)

“Funding and liquidity, not earnings/fundamentals, are the year-to-date drivers of the S&P 500 rally,” Harvey said. (…)

But there is at least some reason to think that the Fed is keeping liquidity flowing through the system, even if it’s keeping rates high to try to battle inflation. (…)

There’s one final ingredient to explain this year’s rally, and in particular the performance of the last few days: artificial intelligence. It’s causing bona fide excitement, and that shows up in startling stock moves. Points of Return detailed last week how references to AI were beginning to have the same impact that mentions of Bitcoin or dot-coms had in previous generations. This week’s latest example comes from an ultra-bullish interview that Jensen Huang, the CEO and founder of the chipmaker Nvidia Corp., gave to CNBC on Wednesday:

We have reinvented computing for the first time since the IBM System 360, 60 years ago. There’s a trillion dollars worth of data center infrastructure installed in the world based on that old method of doing computation. Now we have accelerated computing, and we have the killer app for generative computing: generative AI.

Big bold claims like this tend to transport some of us back 25 years to the dawn of the internet age, when similarly transcendent forecasts were being made, and even Alan Greenspan allowed himself to believe in a “new economic paradigm.”

The interview had the kind of effect on Nvidia’s share price that we might recall from 1999 and 2000 as well. (…) Nvidia’s stock has risen 112% for the year so far, and is closing in on its all-time high from 2021.

The company is seen as a critical supplier of the chips that will be needed to fuel AI, just as Cisco Systems Inc. was once propelled higher by the belief that its routers would make it critical to the infrastructure of the growing internet. (…)

Cisco stock currently trades 14% below its peak from 2000; that’s mostly because the multiple of sales that investors will pay has dropped from 44 to 3.6 over that time. Nvidia now sells at 29 times its sales. (…)

Just for fun:

• The first chart (CPMS/Morningstar) plots Price/Sales for CSCO and NVDA:

Price to Sales

• P/S ratios are meaningless without Earnings/Sales (net margins). CSCO’s margins had jumped from 20-22% in 1996 to 36% in 2000. NVDA’s margins are currently forecast at 42%, up from the 30% range pre-pandemic.

Net Margins

• The next two charts display Price/CF and CF margins. NVDA’s P/CF on trailing CF is over 100x. Its CF margins have been rising until mid-2022, peaking at 46%, and are now 30%.

• CSCO’s P/CF also exceeded 100x in 2000 when its CF margins were 36%. Margins have stabilized between 25% and 30% but its P/CF is now 14.7x.

Nasdaq Outperforms The DJIA By a Bull Market (Bespoke)

Every day it seems the gap just keeps getting wider, and today the YTD performance spread between the Nasdaq and the DJIA widened out to over 20 percentage points – or the equivalent of the traditional threshold for a bull market. 

As of Thursday afternoon, the Nasdaq was up 20.4% YTD while the DJIA was barely hanging above the unchanged line with a gain of 0.3%.

Since the Nasdaq launched in early 1972, there have only been three other years where the index outperformed the DJIA by more than 15 percentage points YTD through 5/18, but 2023 is on pace to go down as the only year where the performance gap exceeded 20 percentage points. (…)

(Bespoke)