Low Jobless Claims Show Labor Market Stays Robust Worker filings for unemployment benefits rose to a seasonally adjusted 198,000 last week but were still historically low, showing that the broader labor market remains robust.

Initial jobless claims, a proxy for layoffs, increased by 7,000 to a seasonally adjusted 198,000 last week, the Labor Department said Thursday.

The level of claims fluctuated earlier this month, but broadly remains low. The four-week average of weekly claims, which smooths out volatility in the weekly numbers, ticked up by 2,000 to 198,250. Weekly claims have remained near the 2019 prepandemic average of about 220,000 for several months. (…)

Through March 24, job postings on Indeed have declined 9.5% since the last BLS Job Openings data (January). The horizontal black line is the BLS Job Openings prepandemic.

• Fewer companies are talking about labor shortages, but more firms are mentioning job cuts.

Source: @M_McDonough, @TheTerminal, Bloomberg Finance L.P.

Fed Officials See More Work on Inflation Despite Bank Strains

The comments from the three regional Fed presidents Thursday echoed remarks from Chair Jerome Powell last week that policymakers will not shrink from their responsibility to restore price stability despite banking strains.

“Inflation remains too high, and recent indicators reinforce my view that there is more work to do, to bring inflation down to the 2% target associated with price stability,” Boston Fed President Susan Collins told a conference hosted by the National Association for Business Economics in Washington. (…)

Minneapolis Fed President Neel Kashkari, who votes on policy this year, said it was premature to judge what impact the banking turmoil will have on the economy but the Fed also needs to focus on lowering inflation.

Kashkari, who was at the center of the government’s response to the 2008-2009 financial crisis, said banking stresses tend to last longer than policymakers initially expect. But he also noted that inflation was too high and that the services sector, excluding housing, has yet to slow down despite a series of aggressive interest-rate increases by the Fed over the past 12 months. (…)

“If inflation persists, we can react by raising rates further,” [Richmond Fed President] Barkin said. “It was only a few weeks ago that some were calling for a 50 basis-point increase.”

CFOs Modestly Upgrade Economic Outlook Despite Labor Market, Inflation Concerns

Financial decision-makers became slightly more optimistic about the U.S. economy and increased their expectations for real GDP growth in 2023, while citing labor availability and inflation as the most pressing concerns for their company, according to the results of The CFO Survey, a collaboration of Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta.

The survey, which closed on March 10, found that CFO optimism about the U.S. economy was 55 on a scale of 0 to 100, modestly higher than last quarter but well below the historic average of about 60. Additionally, CFOs revised upward their expectations for real GDP growth over the next four quarters to 1.4 percent from 0.7 percent in the prior survey. Moreover, the probability respondents assigned to negative year-ahead economic growth fell from 31 percent last quarter to 19 percent this quarter. (…)

The business spending picture has deteriorated somewhat. The share of firms that decreased spending (excluding capital expenditures) in the past 3 months rose to 23 percent, an increase of 5 percentage points from last quarter’s survey and nearly twice the share of firms that had decreased spending in a survey conducted this time last year.

For capital expenditures, the share of firms planning investments has also edged lower over the past year. Among companies not planning to invest at all in the next six months, most cited ample capacity, and the share of these CFOs noting unfavorable financing conditions increased to 24 percent, up from 14 percent in Q3 2022 and 7 percent a year ago.

In a series of special questions on energy, roughly three-quarters of firms noted that their costs associated with energy usage increased since the start of 2022. Most of these firms noted that increased energy costs decreased their profitability. Only about 20 percent of respondents indicated passing the majority of their cost increases on to customers.

  

  

Revenue growth expectations for 2023 rose from 5.0% to 7.2% while price expectations declined from 5.4% to 5.2%. Not what the Fed wants.

Economy-wide total business sales grew 7.7% in Q4’22 but slowed to 5.0% in January.

S&P 500 companies grew revenues 5.8% in Q4 but analysts are forecasting +1.7% in Q1’23, -0.1% in Q2, +1.2% in Q3 and +3.9% in Q4. Recall that the S&P 500 index is heavily weighted on the goods economy.

If the wage bill actually comes in at +7.1%, goods producers and distributors will find it difficult to maintain profit margins this year.

Fed’s Emergency Loans to Banks Fall in Sign of Easing Turmoil

US institutions had a combined $152.6 billion in outstanding borrowings in the week through March 29, compared with $163.9 billion the previous week.

The latest figures suggest efforts by policymakers to stem contagion following a string of bank collapses is working, though banks are still borrowing much more than is typical during periods of low stress. (…)

Foreign central banks tapped the Fed’s Foreign and International Monetary Authorities repurchase agreement facility for $55 billion in the week through March 29, data show. That’s after it reached an all-time high of $60 billion the prior week.

South Korea Cuts Chip Production Most Since Global Financial Crisis as Demand Cools Production dropped 41.8% YoY, worsening from a 33.9% fall in January. Inventories increased by 33.5% and factory shipments fell 41.6%, adding to signs of continued weakness.

• Japan will tighten curbs on exports of chip technology following months of lobbying by the US to limit China’s access.

Eurozone Core Inflation Hits Record High The headline inflation rate fell sharply in March but policy makers worry the search for bigger profits may keep other prices rising

(…) The European Union’s statistics agency said consumer prices in the eurozone were 6.9% higher in March than a year earlier, a decline from the 8.5% rate of inflation recorded in February and the lowest in just over a year. Economists surveyed by The Wall Street Journal last week had expected to see a decline to 7.1%. (…)

The core rate of inflation however, which excludes volatile food and energy prices, rose to 5.7% from 5.6%, reaching the highest level since records began in 2001. (…)

Some ECB rate setters are now also looking at the inflationary potential of widening profit margins, with one official warning of a “profit-price spiral.”

“Opportunistic behavior by firms could also delay the fall in core inflation,” said Fabio Panetta last week.

ECB President Christine Lagarde has echoed that concern, saying that a refusal on the part of business owners—not just workers—to accept a decline in their real incomes could entrench high inflation. (…)

Eurozone wages rose at an annual pace of 5.1% during the last quarter of 2022, the fastest rise since records began in 1996, with the exception of the second quarter of 2021, which was boosted by one-off pandemic-related effects.

Encouraged by an unemployment rate that fell back to a record low of 6.6% in February, some workers seeking larger pay rises have resorted to strikes. In one of Germany’s biggest walkouts in decades, a large-scale transport strike brought large parts of the country to a standstill on Monday as two labor unions sought raises of 10.5% and 12% respectively. (…)

China’s Consumers Extend Economic Rebound A gauge of activity in China’s services sector reached its highest level in more than a decade in March, a sign that Chinese consumers are heading back to stores and restaurants following the end of strict Covid-19 controls.

(…) China’s official purchasing managers index for nonmanufacturing sectors, which include services and construction, rose in March to 58.2 from 56.3 in February, its highest level since May 2011. A subindex focused just on the services sector reached 56.9, its highest level since March 2012.

China’s PMI for the manufacturing sector declined to 51.9 in March from 52.6 in February, according to figures published Friday by China’s National Bureau of Statistics. Still, the index remained comfortably above the 50 mark that separates an expansion from contraction, and beat the 51.3 forecast made by economists polled by The Wall Street Journal. (…)

Still, for many economists, a range of indicators suggest keeping up the current momentum won’t be straightforward. Chinese families continue to sock away savings and are rushing to repay mortgage loans. Households’ bank deposits are climbing, rising by 6.2 trillion yuan, the equivalent of $903 billion, in January alone, a new monthly record.

Private businesses appear reluctant to hire and invest, reflecting the scars of Covid-19 and regulatory clampdowns on sectors including tech and education. During the first two months of the year, private investment in machinery, buildings and other fixed assets grew by only 0.8% from a year earlier, much weaker than the 5.5% growth in overall fixed-asset investment. (…)

BofA Says Investors Poured $508 Billion Into Cash This Quarter

(…) More than $100 billion have flocked into money-market funds in the past two weeks alone, they said. (…) Assets in US money-market funds have now reached a record $5.2 trillion, according to data from the Investment Company Institute, with more than $300 billion of that added in the three weeks to March 29.

• 2nd wave of deposit outflows on it’s way Barclays: “We expect flows into money market funds to grow by several hundred billion dollars…we are in a midst of a two-stage shift…the second stage is emerging now…” (The Market Ear)

Barclays

Citigroup sees global profits shrinking 5% in aftermath of banking turmoil

Citigroup equity strategists flagged a likely 5% contraction in global profits this year as turmoil in the banking sector raises the risk of a recession. (…) The ongoing confidence crisis could limit banks’ risk appetite and reduce the flow of credit, they warned, downgrading the global financial sector to “neutral.” (…)

• Jim Bianco:

Narrative building that the banking crisis is now over because the S&P 500 has just about retraced all its losses. Someone tell the bank stocks as they are unable to rally …

… and someone tell the other 492 stocks in the S&P 500 as they are collectively down on the year. Eight stocks are keeping the YTD gains in the S&P 500 positive.

Will history rhyme again?

David Rosenberg reminds us:

1. On April 2nd, 2007, New Century Financial was shuttered. The mantra was that this was a one-off “idiosyncratic” event, much like you hear today, and the S&P 500 bounced back 1% the day after and by 6% right through June 20th, 2007
2. Two Bear Stearns hedge funds failed on June 20th, 2007.
3. The Fed cut rates 50 basis points on September 18th, 2007 and the S&P 500 soared 3% that day and tacked on another 3% to the October 9th highs.
4. Bear Stearns fail on March 16th, 2008 and the Fed, over a weekend, orchestrated a shotgun JP Morgan takeover that triggered an immediate 4.2% surge in the stock market.
5. September 6, 2008: Fannie and Freddie are placed in conservatorship — and bang! Investors immediately bid up the S&P 500 by 2% in response.Always the treatment, never the malady that required the triage.
6. October 3, 2008: TARP 1 was passed and the Pavlov Dog market jumped +5.4% in one day!
7. The U.S. government announce an additional $250 billion capital purchase program on October 8th — as investors waded through the details, they ended up taking the market up nearly 12% from October 9th to October 13th.

As Warren Buffett famously said, “what we learn from history is that people don’t learn from history.”

Recall that in 2008-09, inflation was not a factor so the Fed was free to cut rates, which it started to do in September 2007.

Equity valuations were quite reasonable until Bear Stearns failed in March 2008 (#4). The S&P 500 had lost 12% from its June 2007 high.

Valuations per the Rule of 20 peaked in August 2008 at 21.7x (19.2x on conventional P/E). The S&P lost another 50% after. Currently, the R20 P/ is 23.1 while the conventional P/E is 17.6. Inflation is 5.5% and the Fed wished it could be friendlier.

Small Banks Are Losing to Big Banks as Deposits Shift The collapse of a pair of lenders in rapid succession is testing Americans’ faith in the regional and community banks that supply credit to a big chunk of the nation’s entrepreneurs and businesses.

(…) The 25 biggest U.S. banks gained $120 billion in deposits in the days after SVB collapsed, according to Federal Reserve data. All the U.S. banks below that level lost $108 billion over the same period. It was the largest weekly decline in smaller banks’ deposits in dollar terms on record.

Meanwhile, more than $220 billion has flowed into money-market funds over the past two weeks, according to data from Refinitiv Lipper.

The panic has subsided, but the deposit swings could have long-lasting repercussions for the communities served by smaller banks.

Banks need deposits to make loans; if deposits fall, lending is almost sure to follow. What’s more, the recent turmoil could spur banks to start paying depositors higher interest rates, crimping earnings and further cutting into their lending capacities. And the speed of the recent deposit runs—customers withdrew $42 billion from SVB in a day; Signature lost $18 billion—has bankers stockpiling cash.

The likely result, analysts and central bankers said, is a credit crunch. (…)

The U.S. has thousands of small and midsize banks, a vestige of when laws prohibited banks from operating across state lines.

The number of smaller banks has declined by more than 9,000 over the past three decades, largely through mergers. When the local bank disappears, people and businesses in their communities often find credit goes away too. (…)

Banks with less than $10 billion in assets accounted for nearly 43% of small loans to businesses outstanding at the end of 2022, according to Prof. Cole’s analysis of federal banking data. The 13 largest banks, by contrast, accounted for less than 23% of small- business loans, much of which represents credit-card balances, he said. (…)

Smaller banks are rewriting their playbooks to account for the dramatic change in customer behavior they witnessed at SVB and Signature. The runs on the two banks happened in hours, not days or weeks—an unforeseen consequence of the confluence of social media and smartphone banking. Executives now feel they must prepare for the worst-case scenario.

That means increasing available borrowing against assets and increasing cash on hand—in some cases, bank executives said, to cover 100% of their uninsured deposits. (…)

Larger banks must also prepare…

• Get Ready for a Slow-Motion Banking Crisis Though the Fed and FDIC have stopped contagion from SVB for now, smaller banks could face pressure for years to come

(…) Compared with the past, the bigger problem for banks isn’t the asset side of their balance sheets but the liability side. (…)

Unless federal insurance is extended to all deposits, this suggests small and medium-size banks could be in for a prolonged period of pressure on their deposits, which could in turn force them to be acquired, or limit their lending. It won’t be a crisis in the usual sense of the word. But the end result may be the same.

• How much of SVB deposits did startup banks vs. big banks get?

A company called Kruze Consulting that provides outsourced financial management for startups — accounting, tax, fundraising help, etc. — tallied where Silicon Valley Bank (SVB) deposits of their clients went. This is a decent proxy for what happened to $42 billion in deposits that left in a bank run that leveled SVB. Big banks won but startups did ok. Here are a few takeaways.

– Big banks got 61% of the deposits, with JP Morgan Chase getting most of that (50%).

– Startup banks got 29%.

– This 29% went to 2 key banking startups: Mercury (20%) and Brex (9%).

– Big banks win for people’s perceptions of stability and FDIC insurability.

– Startup banks aren’t actually banks, which seems bad in the headlines but has benefits in reality.

– Startup banks are backed by FDIC insured banks.

– Because of this, startup banks can offer more FDIC insurance when they’re backed by multiple FDIC-insured banks.

– For example, Brex offers up to $6 in FDIC insurance.

– And Mercury offers up to $5 in FDIC insurance.

– Also these 2 firms have a far superior software user experience than big banks. (…)

A $3 Trillion Threat to Global Financial Markets Looms in Japan Japan’s super-easy monetary policy sent a flood of domestic money overseas. Investors are bracing for what comes next.

Bank of Japan Governor Haruhiko Kuroda changed the course of global markets when he unleashed a $3.4 trillion firehose of Japanese cash on the investment world. Now Kazuo Ueda is likely to dismantle his legacy, setting the stage for a flow reversal that risks sending shockwaves through the global economy.

Just over a week before a momentous leadership change at the BOJ, investors are gearing up for the seemingly inevitable end to a decade of ultra-low interest rates that punished domestic savers and sent a wall of money overseas. The exodus accelerated after Kuroda moved to suppress bond yields in 2016, culminating in a mountain of offshore investments worth more than two-thirds Japan’s economy.

All this risks unraveling under the new governor Ueda, who may have little choice but to end the world’s boldest easy-money experiment just as rising interest rates elsewhere are already jolting the international banking sector and threatening financial stability. The stakes are enormous: Japanese investors are the biggest foreign holders of US government bonds and own everything from Brazilian debt to European power stations to bundles of risky loans stateside.

An increase in Japan’s borrowing costs threatens to amplify the swings in global bond markets, which are being rocked by the Federal Reserve’s year-long campaign to combat inflation and the new danger of a credit crunch. Against this backdrop, tighter monetary policy by the BOJ is likely to intensify scrutiny of its country’s lenders in the wake of recent bank turmoil in the US and Europe.

A change in policy in Japan is “an additional force that is not being appreciated” and “all G-3 economies in one way or the other will be reducing their balance sheets and tightening policy” when it happens, said Jean Boivin, head of the BlackRock Investment Institute and former Deputy Governor of the Bank of Canada. “When you control a price and loosen the grip, it can be challenging and messy. We think it’s a big deal what happens next.”

The flow reversal is already underway. Japanese investors sold a record amount of overseas debt last year as local yields rose on speculation that the BOJ would normalize policy.

Kuroda added fuel to the fire last December when he relaxed the central bank’s grip on yields by a fraction. In just hours, Japanese government bonds plunged and the yen skyrocketed, jolting everything from Treasuries to the Australian dollar.

“You’ve already seen the start of that money being repatriated back to Japan,” said Jeffrey Atherton, portfolio manager at Man GLG, part of Man Group, the world’s biggest publicly traded hedge fund. “It would be logical for them to bring the money home and not to take the foreign exchange risk,” said Atherton, who runs the Japan CoreAlpha Equity Fund that’s beaten about 94% of its peers in the past year. (…)

The BOJ has bought 465 trillion yen ($3.55 trillion) of Japanese government bonds since Kuroda implemented quantitative easing a decade ago, according to central bank data, depressing yields and fueling unprecedented distortions in the sovereign debt market. As a result, local funds sold 206 trillion yen of the securities during the period to seek better returns elsewhere.

The shift was so seismic that Japanese investors became the biggest holders of Treasuries outside the US as well as owners of about 10% of Australian debt and Dutch bonds. They also own 8% of New Zealand’s securities and 7% of Brazil’s debt, calculations by Bloomberg show.

The reach extends to stocks, with Japanese investors having splashed out 54.1 trillion yen on global shares since April 2013. Their holdings of equities are equivalent to between 1% and 2% of the stock markets in the US, Netherlands, Singapore and the UK. (…)

• BOJ’s Key Policy Architect Signals Yield Curve Tweak May Come as a Surprise

The bank shouldn’t communicate its policy decision in advance including any changes surrounding its yield curve control program, as it’s decided by a policy board meeting, Uchida said in response to questions in parliament Wednesday. 

“Due to the nature of the yield curve control, it’s hard to get markets price in a change beforehand,” Uchida said.

Uchida’s remarks are likely to keep market players on high alert over surprise adjustments from the BOJ. Some have already concluded that any tweak in the yield control has to be a sudden move, if the central bank is to avoid the risk of a massive bond sell off by indicating changes in advance. (…)

• Japan PM Kishida sets eye on wage rises as focus of ‘new capitalism’

Japan will draw up a plan in June on “new capitalism”, focusing on wage increases, innovation and resolving social problems through support for start-ups, Prime Minister Fumio Kishida said on Wednesday.

“First of all, we will aim to compile guidelines by June with regard to labour market reform including reskilling workers and facilitating labour turnover,” Kishida told a panel tasked with implementing the plan.

Kishida first launched the idea of a “new capitalism” when he became prime minister in 2021, pledging to fix distortions in the world’s third-largest economy, and signaling a shift away from reflationary policy, saying there was no growth without redistribution.

He said he called it “new capitalism” because of the need to solve downsides such as widening inequality.

By pushing structural wage increases, Kishida said on Wednesday Japan would strive to narrow wage differentials between domestic firms and rivals overseas, while taking different economic situations into account.

Kishida places human capital investment at the core of his growth strategy as rapidly-aging Japan faces an acute labour crunch as its working-age population shrinks.

Under pressure from Kishida, major companies have concluded their annual labour talks with average wage increases of 3.8% for the next fiscal year, the biggest rise in about three decades, although the outlook seems less positive for workers at smaller companies, which account for almost 70% of the workforce.

Salaries have been virtually unchanged since the late 1990s and are now well behind the average for the OECD group of rich countries.

Manufacturing wage growth rates: Japan vs USA

Spain’s inflation almost halves to 3.1% as European energy prices slide Bigger than expected fall comes ahead of German and French data

• Selling price expectations point to a rapid decline in Germany’s CPI.

Source: Longview Economics via The Daily Shot

The sharp drop in oil and natural gas prices could also cause an inflation surprise in the U.S.. Lower energy costs amid slowing overall demand could incite businesses to keep price increases below what would normally be dictated by rising wage costs.

But maybe not in March. S&P Global’s March flash Services PMI:

Input prices rose markedly again in March, despite the rate of cost inflation softening to the second-slowest since October 2020. Firms’ pricing power was buoyed by stronger demand conditions, as they raised their selling prices at the sharpest rate for five months.

Canada: Federal watchdog endorses longer mortgage amortizations for troubled borrowers The guidelines are aimed at fairness and consistency in relief offered to struggling borrowers, and the plan was highlighted in the federal budget

FYI: