Jay Powell warns US recession ‘certainly a possibility’

FLASH PMIs

The U.S. flash PMI is out later this morning. Note how demand for services “slowed sharply” in Europe last month.

Eurozone growth slows sharply to 16-month low in June as demand stalls and price surge continues

The seasonally adjusted S&P Global Eurozone PMI® Composite Output Index fell from 54.8 in May to 51.9 in June, according to the early ‘flash’ reading. While the latest reading indicates an expansion of business activity for the sixteenth straight month, the rate of growth has moderated for two consecutive months to its lowest in the current sequence of expansion.

New orders for goods and services meanwhile stagnated, failing to rise for the first time since the recovery of demand began in March 2021.

Manufacturing led the deterioration, with output falling for the first time in two years. Although only modest in June, the rate of decline of factory output looks set to accelerate in July given a steepening loss of new orders received during the month. New orders for goods have now fallen for two consecutive months, with June seeing the sharpest decline since May 2020.

Growth meanwhile slowed sharply in the service sector, down to its lowest since January to signal a marked deterioration of performance of the sector over the past two months. Inflows of new business in the service sector likewise rose at a much softer pace, with growth down to the second-lowest since the revival of demand began in May of last year.

Looking into further detail within the service sector, June saw the record surge in growth of tourism and recreation enjoyed over April and May falter to a near stand-still. Companies blamed the rising cost of living and a fading of pandemic pent-up demand. The faltering of the consumer rebound in demand for services was accompanied by renewed falls in banking and real estate activity amid tightening financial conditions. Transportation and industrial services growth also slowed, in part reflecting the deteriorating manufacturing environment.

Factory output continued to be constrained by widespread supply shortages, often linked to the Ukraine war and China’s lockdowns, but the overall incidence of delays continued to moderate. Average suppliers’ delivery times consequently lengthened to the least extent since December 2020. However, this easing of supply delays could be in part traced to lower demand for inputs, which stalled in June, contrasting with surging growth seen throughout much of the past two years, in turn linked to the largest build-up of unsold warehouse inventories for over two years.

Overall jobs growth meanwhile moderated to a 13-month low in June as firms in both manufacturing and services scaled back their future expansion plans due to the harsher demand environment and deteriorating outlook.

Business expectations for the year ahead fell to the lowest since October 2020. Manufacturing expectations worsened especially markedly, down to the lowest since May 2020, but future expectations also fell in the service sector to the lowest since October 2020. The gloomier outlook reflected various factors, including headwinds from the rising cost of living, concerns over energy and food supply amid the Ukraine war, tightening financial conditions, ongoing supply chain shortages, often linked to China’s lockdowns, and a broader diminishing of economic growth prospects.

Looking at prices, average charges for goods and services rose sharply again in June. Although the rate of inflation eased further from April’s all-time high to the lowest since February, it remained significantly higher than anything seen prior to the pandemic over the survey’s 25-year history. Rates of selling price inflation cooled in both manufacturing and services.

Input cost inflation also eased slightly, down for a third successive month, yet remained the fourth-highest recorded since comparable data were first available in 1998. Companies again reported upward cost pressures from energy prices, transportation, broad supplier-driven price hikes and rising wage pressures. There was a divergence by sector, however, with manufacturing reporting the weakest input cost rise since March 2021 while the service sector saw the rate of increase accelerate to the steepest since April, in part reflecting the pass-through of prior raw material and energy cost increases to wages.

Looking across the region, Germany reported the slowest expansion, with growth moderating sharply to the weakest since the marginal contraction seen last December, reflecting a renewed downturn of manufacturing output and slower service sector growth. Germany also notably reported a stronger rate of increase of input costs, linked to a record rise in the service sector.

While growth in France outpaced that of Germany, it nevertheless fell sharply to the slowest since January. An especially sharp fall in French manufacturing output was accompanied by much-reduced service sector growth.

Output growth across the rest of the eurozone as a whole meanwhile also slowed further from April’s recent peak, down to the lowest since January, thanks to a near-stalling of manufacturing output growth and the weakest service sector expansion in five months.

U.K.: Business expectations slump to weakest since May 2020 as new order growth loses considerable momentum in June

(…) Demand conditions remained subdued in June, with new order growth slowing for the fourth month running and to a greater extent than seen during May. (…)

The seasonally adjusted index measuring new order volumes across the UK private sector as a whole dropped from 53.8 in May to 50.8 in June, which signalled only a marginal overall expansion and the weakest rate of growth since the recovery began in March 2021. Manufacturing order books were particularly subdued, with this index slightly below the 50.0 no-change threshold and pointing to the weakest performance for two years. UK private sector firms cited hesitancy among clients and squeezed budgets due to rising inflation as key factors holding back demand. (…)

Strong wage pressures added to cost burdens at private sector companies in June. (…)

Exceptionally strong cost pressures resulted in a steep increase in average prices charged in June. The rate of output charge inflation eased to its lowest since February, but remained higher than at any other time in the past two decades. The need to pass on higher energy, fuel and wage costs to customers was widely reported by manufacturers and service providers alike in June. (…)

Japan: Strongest rise in private sector output in seven months

The headline au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index™ (PMI)® eased slightly from 53.3 in May to 52.7 in June, signalling a moderate improvement in operating conditions that was nonetheless the joint-softest since last September. Output rose at the slowest rate in the current four-month sequence of growth while new orders contracted for the first time in nine months. Panel members associated weaker demand to the impact of COVID-19 restrictions in mainland China, which placed additional pressure on supply chains. A further marked lengthening of delivery times exacerbated material shortages and contributed to a sustained, rapid rise in cost burdens that were increasingly passed to clients through a record increase in factory gate prices.

At 54.2 in June, the au Jibun Bank Flash Japan Services Business Activity Index rose from 52.6 in May to indicate the strongest expansion since October 2013 amid the lifting of remaining COVID-19 restrictions on international visitors. At the same time, new business rose at a moderate pace for the second successive month as demand conditions were bolstered by the resumption of activity in the tourism sector. That said, the services sector was not immune to inflationary pressures as businesses recorded a fresh series record increase in input prices. This contributed to an accelerated rise in output prices, which rose at the strongest rate since October 2019.

Germany Warns of Lehman-Like Contagion From Russian Gas Squeeze

(…) With energy suppliers piling up losses by being forced to cover volumes at high prices, there risks a spillover effect for local utilities and their customers, including consumers and businesses, Economy Minister Robert Habeck said Thursday after raising the country’s gas risk level to the second-highest “alarm” phase.

“If this minus gets so big that they can’t carry it anymore, the whole market is in danger of collapsing at some point,” Habeck said at a press conference in Berlin that was called at short notice. “So a Lehman effect in the energy system.” (…)

Habeck said it’s also a signal to Europe to cut energy consumption, talks are planned with partners in the coming days.

The alert stage also gives the government an option of enacting legislation to allow energy companies to pass on cost increases to homes and businesses. Habeck said he was holding off on price adjustments for now to see how the market reacts.

“It will be a rocky road that we have to travel as a country,” he said. “Even if we don’t feel it yet, we are in a gas crisis.” (…)

The crisis has spilled far beyond Germany, with 12 European Union member states affected and 10 issuing an early warning under gas security regulation, Frans Timmermans, the European Union’s climate chief, said in a speech to the European Parliament. (…)

Habeck, who is also vice chancellor, said Russia’s move to cut gas deliveries through the Nord Stream pipeline makes it all but impossible to secure sufficient gas reserves for the winter without additional measures. (…)

• Bridgewater Builds a $10.5 Billion Bet Against European Companies

(…) The world’s biggest hedge fund firm disclosed short bets against 28 companies that include individual wagers of more than $500 million against ASML Holding NV, TotalEnergies SE, Sanofi and SAP SE, according to data compiled by Bloomberg. The total bet is up from $5.7 billion against 18 firms last week, the data shows. (…)

The current wagers are the highest since the firm built a $14 billion position against European companies in 2020 and before that, a $22 billion bet in 2018. The total may be even greater since hedge funds are only required to disclose their biggest bets.

SURVEY SAYS

From the Conference Board’s C-Suite Outlook midyear survey, conducted between May 10 and 24:

Fifty-eight percent of CEOs and 40% of CFOs see a recession in 2022. In fact, 27% of CEOs and nearly 20% of CFOs say that we are already in recession.

Data: FactSet; Chart: Axios Visuals

Apartment List National Rent Report

Rent growth accelerated slightly again this month, with our national index up by 1.2 percent over the course of May, the largest monthly increase of the year. So far this year, rents are growing more slowly than they did in 2021, but faster than the growth we observed in the years immediately preceding the pandemic. Over the first five months of 2022, rents have increased by a total of 3.9 percent, compared to an increase of 6.1 percent over the same months of 2021. Year-over-year rent growth currently stands at a staggering 15.3 percent, but is down slightly from a peak of 17.8 percent at the start of the year.

On the supply side, our national vacancy index ticked up slightly again this month, continuing a streak of gradual easing dating back to last fall. Our vacancy index now stands at 5 percent, up from a low of 4.1 percent, but remains well below the pre-pandemic norm. Rents increased this month in 96 of the nation’s 100 largest cities, though 70 of these cities have seen slower rent growth in 2022 so far than they did last year, and some of the hottest Sun Belt markets are finally showing signs of plateauing growth.

• Only 23% of New Yorkers Can Afford Median Rent — And Prices Are Surging

A city resident needs to make a salary of $110,000 to afford the median asking rent of $2,750 for available apartments, meaning putting no more than 30% of one’s gross income toward housing, according to a recent report by the New York City Department of Housing Preservation and Development. Roughly 23% of full-time workers in New York had six-figure salaries as of 2020. (…)

The median rent in Manhattan soared to an eye-popping $4,000 for new leases on market-rate apartments in May, a 25% year-over-year increase. In addition, there’s a hike coming for residents of New York’s roughly 1 million rent-stabilized apartments. (…)

Nordea:

(…) Core inflation is not getting any better either. Today’s inflation problem began as a surge in goods during the pandemic, fuelled by stimulus checks and lockdowns, but it has now turned into sticky and broad-based services inflation. Prices of components related to housing have the largest weight in the index and are currently rising by 0.6% on a monthly basis. The BLS assimilates changes in these components with a lag, which means that we see these components rising to around 0.7% on a monthly basis and keeping inflation elevated for the next many months. Moreover, the reopening of the economy and the shift back to spending on services rather than goods is likely to push overall services inflation higher – particularly services related to travel and leisure.

Core inflation offers no real relief to the Fed

But Nordea remains hopeful on the consumer:

Strong household balance sheets. Households’ balance sheets have changed dramatically. Of particular importance, the low- and middle-income groups have historically high savings to buffer against rising inflation and borrowing costs. In addition, during the pandemic, households have repaid debt and cut down liabilities, while both financial and non-financial assets have soared – even when considering this year’s decline in financial assets. We suspect households will be more resilient to inflation and interest rates than usual as they can dip into these savings.

Wealth destruction has been massive in this cycle, which is likely to create a drag on consumption.

Source: BCA Research via The Daily Shot

Source:  @hedgopia

There is clearly a reverse wealth effect underway…

And fixed income has not been the usual buffer, has it?

BTW: Notice the yellow line:

Data: Morning Consult/Axios Inequality Index; Chart: Axios Visuals

Canada’s Inflation Surge Continues, Boosting Expectations for Big Rate Rise Annual inflation in Canada accelerated in May toward 8%, reaching a nearly four-decade high and all but locking in market expectations that the country’s central bank will raise rates by three quarters of a percentage point in July.

(…) Canada’s consumer-price index in May increased 7.7% from a year ago, Statistics Canada said Wednesday, after a 6.8% gain in the previous month. The May report eclipsed market expectations for a 7.3% rise, according to economists at the Bank of Nova Scotia. A 48% surge in gasoline prices helped drive inflation to its highest level since January 1983, while the cost of groceries and shelter remained elevated. Nearly three quarters of the goods and services tracked by Canada’s CPI rose 3% or higher in May. (…)

Earlier Wednesday, the U.K. reported a four-decade high in inflation for May, as that country’s CPI increased 9.1%.

Even excluding prices for energy and food, which have escalated since the war in Ukraine, annual inflation in Canada remains in the 5% range. For instance, the average of the Bank of Canada’s preferred measures for underlying core inflation in May rose to a record 4.73%, up from a revised 4.43% in the previous month. (…)

On June 1, the Bank of Canada lifted its policy rate by a half-percentage point to 1.5%, the second consecutive half-point increase. Along with its decision, officials signaled it would consider a rate rise bigger than a half point to tame price increases and anchor inflation expectations. Economists and traders started leaning toward a three-quarter-point increase at the Bank of Canada’s next decision date, on July 13, and those views were solidified after the Federal Reserve raised interest rates by 0.75 point last week. (…)

The Bank of Canada judges the neutral rate to be between 2% and 3%.

May’s rise in inflation “is an unwelcome number,” Carolyn Rogers, the Bank of Canada’s No. 2 official, said Wednesday at an event in Toronto. She added that the central bank anticipated inflation would accelerate in the near term.

The inflation data are “keeping us up at night,” Ms. Rogers said, “and that’s why we’re raising interest rates and we’re raising them quite aggressively.” (…)

• Britain’s Inflation Crisis Deepens, Fueling Strike Action

Canada Posts Fastest First-Quarter Gain in Population Since 1990 The number of people living in Canada rose by 0.3%, or 127,978, to 38.7 million in the first three months of 2022, according to Statistics Canada estimates released Wednesday in Ottawa.

(…) The majority of the gains came from international migration, which remains driver of population and labor growth in Canada. The country welcomed 113,699 immigrants in the first quarter, the highest number in any first quarter since quarterly data became available in 1946. (…)

Prime Minister Justin Trudeau’s government has set an ambitious plan to bring in more than 1.3 million newcomers over the next three years to support the country’s post-pandemic growth. Last year, Canada welcomed more than 405,000 new residents, the largest single-year increase in its history. (…)

Musk Calls Tesla’s Factories ‘Gigantic Money Furnaces’ The electric-car maker’s plants in Germany and Texas are losing billions of dollars, CEO Elon Musk said.

(…) Tesla has faced several setbacks in recent months, including higher supplier and logistics costs amid soaring inflation. Governmental Covid-19 restrictions in China also curtailed output at the company’s plant in Shanghai, which had been its largest by volume.

Tesla this spring launched deliveries of Model Y compact sport-utility vehicles made at its newest plants, but ramping up output from those facilities has proven difficult, Mr. Musk said. He cited battery supply as a key bottleneck.

“Berlin and Austin are losing billions of dollars right now because there’s a ton of expense and hardly any output,” Mr. Musk said. (…)

Given the shift away from goods and excessive goods inventories throughout the system, Western manufacturers could be saying the same shortly.

Crypto looks like something very nasty happening in slow mo. But like Hemmingway once said, things can “happen gradually, then suddenly”…

Crypto Broker Says Three Arrows Capital Hasn’t Repaid $666 Million in Loans

• Crypto Fund Three Arrows’ Troubles Spill Over to Exchange Other lenders, including Genesis and BlockFi Inc., have sought to quell fear amid concerns over contagion risks from Three Arrows. On Tuesday, BlockFi said it received a $250 million credit line from FTX Trading Ltd. 

• Mystery Surrounds $500 Million Outflow From Bitcoin ETF

• Do Kwon’s Crypto Empire Fell in a $40 Billion Crash. He’s Got a New Coin for You. The South Korean entrepreneur’s cryptocurrency empire collapsed last month. Now, despite angry investors and government investigations, he is attempting a comeback.

DeFi-ning Smart Contract Risk

Interesting Odd Lots piece from Bloomberg’s Joe Weisenthal and Tracy Alloway. Remembering 1987!

(…) DeFi came with a similar promise: the potential to earn big yields by lending money to unknown parties using blockchain-based contracts.

In order to make this happen, DeFi typically depends on vast reams of collateral; asking for extra protection in the form of additional assets is one way to make up for the risk of not knowing who you’re dealing with.

You can see just how much collateral in the below charts from a paper released by the Bank for International Settlements this week. It shows collateralization rates on the biggest Defi platforms typically ranging from 120% to 150%. (By contrast, overcollateralization in traditional banking — like the repo market — is something like 102% for a US Treasury).

“Whereas financial intermediaries have, throughout history, focused on improving information processing, DeFi lending in its current form has reversed this trend and tries to perform intermediation without gathering information,” the BIS says. “Instead, it requires borrowers to post collateral.”

So far from solving the problem of “trust,” lots of blockchain-based Defi protocols simply obscured it through the use of overcollateralization. But perversely, that safety net of extra “security” means that when prices start plunging (as they have been) positions can be strained very quickly.

That’s one reason why blow-ups are coming so thick and so fast, with crypto market participants including Celsius, Three Arrows and Babel all coming under stress just this week. As asset prices go down, the value of the collateral underpinning a web of DeFi transactions declines, and that leads to margin calls, liquidation, and eventually, prices falling even more.

In an environment where prices keep falling, smart contracts on overcollateralized positions can add to the volatility, rather than smooth it.

“When a smart contract acts as the liquidating agent in a volatile deleveraging crisis, the lending protocol is acting somewhat similarly to the portfolio-insurance products that amplified the 1987 crash, but executed automatically and programmatically,” explains Michael Breitenbach, a former director at Bank of America Corp.

Of course, this cycle is extremely familiar to anyone in the traditional finance world. Even the most respected, seemingly “safe” institutions get margin calls, or calls to post more collateral.

One of the pivotal moments in the Great Financial Crisis was in the summer of 2007, over a year before Lehman, when Goldman asked AIG to post more collateral on credit default swaps that it had purchased from AIG Financial Products. It was one of the earliest salvos, wherein we saw more and more established institutions demanding cash from their counterparties. And Lehman’s collapse was ultimately preceded by a massive collateral crunch of subprime securities in the repo market.

But the Great Financial Crisis ultimately ended, thanks to two things. One was the Federal Reserve stepping up in its lender of last resort functions, with its alphabet soup of a programs designed to backstop the market. And then the other thing is that at the end of the day, there were some real assets of value to someone, regardless of the cycle.

A bank with actual clients and branches and a loan book is a real asset that might be of value to someone like Warren Buffett. Houses, even in 2008 and 2009, are assets that have some actual real world value to them, because people need somewhere to live.

This all raises the question of what curbs this decline in crypto? And here we come back to one of crypto’s founding principles. There’s no lender of last resort with an unlimited balance sheet that can backstop the whole thing. The closest the industry has ever had to anything like that are the various megawhales that have come in to do the occasional bail-in, when some protocol would get hacked or whatnot (see Axie Infinity back in April). In the recent rout, we’ve seen more calls for them to step in.

But even the richest private sector players have a finite balance sheet. And of course, the appetite to rescue failing entities diminishes in a bear market, when everything is falling apart at once, and when there isn’t much of an incentive to keep it all going with daily fees.

And then also, in this cycle, there wasn’t much that got built that is of obvious permanent value, the way a house is something of obvious value. That’s not to say there aren’t interesting things having been developed, but even the most novel protocols — like automated market makers or DeFi lending platforms mentioned above — mostly existed to facilitate further speculation, which is the very thing that’s going away in the broad bear market for risk assets (not just crypto). (…)

Between the lack of real innovation, the absence of an emergency lender and few cash flow-producing assets, it’s hard to know what curbs the decline.

And we are now reading that some crypto problems are “solved” by other crypto players stepping in with “investments” or crypto loans in a “saving-me-saves-you” kind of deal… Who’s going to hold the bag at the end of the waterfalls?

BA.4/5 is sweeping the globe

Omicron variant, BA.4/5, is gaining traction, causing case, hospitalization, and death curves to trend upwards in many countries. This variant was first detected in South Africa in early 2022 and caught our attention because it had several mutations on the spike protein. Two mutations in particular, called L452R and F486V, caught our attention because we had seen them on previous variants of concern. Recent lab and epidemiological data show BA.4/5 to be driving this wave, in part due to reinfections and infections after vaccination.

In the lab, we see that Omicron is getting better at escaping our first line of defense—neutralizing antibodies. (…) among recently boosted, BA.4/5 does not fully escape immunity. This means, in the short-term, boosters help prevent infection and thus transmission.

Other lab studies show Omicron escapes infection-induced immunity, too. We are particularly worried about recent BA.1/2 infections (first Omicron waves). Data from South Africa found immune escape more pronounced among unvaccinated compared to vaccinated (not boosted) people (5-fold difference). Another study found BA.1 or BA.2 infection among unvaccinated people induced very low levels of antibodies against BA.4/5. Those who were infected and vaccinated did have meaningful protection, albeit at lower levels than before.

Weakening our first line of defense—neutralizing antibodies— will mean more (re)infections. Lab data compliments what we are seeing in the “real world”. BA.4/5 drove a substantial case wave in South Africa regardless of their high level of immunity. Case waves across Europe are now well on their way, too. In the U.K., reinfections are on the rise, even among 60+ year olds.

We don’t have epidemiological data on duration of booster effectiveness against BA.4/5. Data from the U.K. showed that boosters provided strong initial protection against BA.1 or BA.2 infection but quickly diminished to 0% five months later. We expect BA.4/5 to shorten this timeline even more. I’m not confident that our boosters will be able to keep up in protecting against infection with the rate of Omicron mutating. (…)

In South Africa, the BA.4/5 wave contributed to excess deaths, but the rate diminishes with every wave since winter 2021.

In Europe, Portugal is the BA.4/5 leader, with 70% of COVID-19 cases accounting for this new variant. With one of the highest vaccination rates in the world, they largely escaped death from Delta. However, now, after recently reaching their BA.4/5 case peak, excess mortality hit the highest level since their vaccination campaign began.

In Portugal, increase in hospitalizations is occurring mainly in people over 60 years old. In fact, in a recent analysis, unvaccinated people over 80 had a case fatality rate (CFR) of 9.5% (see figure below). Among those with only the primary vaccine series, CFR is 5%; among those with a booster, it is 1.7%. (…)

(Source Here)

The verdict is still out as to whether BA.4/5 is more severe. A recent preprint found that BA.4/5 was more severe for hamsters. In fact, their data suggested that BA.4/5 was going into the lungs more. (Initially, Omicron largely moved disease out of the lungs, which helped it become less severe). Importantly, though, this wasn’t the case using human sera. More research is certainly needed.

BA.4/5 hospitalizations are now making headway in other European countries. The figure from Financial Times below clearly shows the global upswing in hospitalizations as BA.4/5 entered the scene. But, so far, remains much lower than previous peaks.

So where does this leave us in the U.S.? BA.4/5 makes up 35% of new infections and is growing quickly. Unfortunately, patterns in South Africa and Europe won’t tell us much about how things will unfold in the U.S. because we just had a very infectious variant moving through (BA.2.12.1). Other countries did not experience this. We know BA.4/5 is more transmissible than BA.2.12.1, but the epidemiological impact of that difference is not yet known. This is why disease modelers are providing case projections for worse case (below left) and best case scenarios (below right) for cases.

(Twitter JP Weiland)

On a population level, we expect our complex history of infection- and vaccination-induced immunity to continue to protect against severe disease. In fact, it’s reassuring that all-cause mortality in the U.S. reached pre-pandemic levels from March-May 2022. Death certificates are lagged, so I’ll be curious to see if and how excess deaths changed in the past two months during our latest wave. It will also be important to track this by age, particularly among elderly, to ensure we don’t leave people behind in the wake of highly transmissible variants.

(CDC)

Bottom line

This virus continues to mutate to escape our first line of defense causing (re)infections. If you don’t want to get sick, it’s time to leverage other layers of protection, like masking. Thankfully, other immune system mechanisms continue to work to reduce severe disease. The transmissibility of the virus is causing upswings of hospitalizations and deaths among the most vulnerable of our populations. We aren’t out of the woods yet but we are inching closer and closer to a manageable virus.

Did you miss yesterday’s Desperately Seeking The Low?

Chicago Fed National Activity Index Declines Sharply in May

The Federal Reserve Bank of Chicago reported that the Chicago Fed National Activity Index (CFNAI) declined to 0.01 during May following a rise to 0.40 in April, revised from 0.47. It was the weakest reading of economic activity since September of last year.

Smoothing out the m/m volatility, the index’s three-month moving average fell to 0.20 from 0.40 in April. That was the lowest figure since June 2021. During the last 10 years, there has been 76% correlation between the change in the Chicago Fed Index and quarterly growth in real GDP.

Two of the four index’s major components weakened versus April, and two improved. The Personal Consumption & Housing component fell to -0.11 from 0.10. It was the weakest reading since December, down from a high of 0.18 in January. The Production & Income index fell to -0.01 after rising to 0.29 in April. Working the other way, the Sales, Orders & Inventories reading rose to 0.05 last month following three consecutive negative monthly readings. The Employment, Unemployment & Hours figure improved to 0.08 from 0.07.

The diffusion index, which measures the breadth of movement in the component series, fell to 0.27 during May after having reached highs of 0.46 last November and December. Forty-seven of the index components contributed positively to the May index while 38 contributed negatively. (…)

More on the CFNAI here.

Tomorrow we get the flash Purchasing Managers Index. Here’s the Sales Managers Index:

The World Economics SMI report indicates that US business activity is already in contraction mode (SMI < 50). It appears that companies are now shedding jobs.

Source: World Economics via The Daily Shot

DEMAND DESTRUCTION UNDERWAY

Existing-Home Prices Hit Record The median existing-home sale price shot above $400,000 in May, while sales activity slowed under the weight of higher mortgage-interest rates.

(…) The median existing-home price rose 14.8% in May from a year earlier to $407,600, a record high in data going back to 1999, the National Association of Realtors said Tuesday. That rate was up slightly from the previous month. (…)

Sales of previously owned homes slid for a fourth straight month, declining 3.4% in May from the prior month to a seasonally adjusted annual rate of 5.41 million, the weakest rate since June 2020, NAR said. May sales fell 8.6% from a year earlier. (…)

The average rate on a 30-year fixed-rate mortgage was 5.78% in the week ended Thursday, the highest level since 2008 and up from 2.93% a year earlier, according to housing-finance agency Freddie Mac. The May sales data largely reflect purchase decisions made in April or March. (…)

Nearly 60% of the homes sold in May were sold above their list price, according to real-estate brokerage Redfin Corp. (…)

The typical home sold in May was on the market for 16 days, down from 17 days from the prior month, NAR said. (…)

“We’ve seen our traffic really drop off,” said George Hale, president of builder Woodhill Homes in Bend, Ore. “As appreciation has gone up and then you add on the factor of rates going up…it’s just become too expensive.” (…)

(Haver Analytics)

• The World’s Bubbliest Housing Markets Are Flashing Warning Signs Global monetary tightening is squeezing homebuyers, adding risks that a slowdown could ripple through the economy.

(…) The effects are being seen in countries such as Canada, the US and New Zealand, where once-hot residential real estate markets have suddenly turned cold. (…)

An analysis by Bloomberg Economics shows that 19 OECD countries have combined price-to-rent and home price-to-income ratios that are higher today than they were ahead of the 2008 financial crisis — an indication that prices have moved out of line with fundamentals. (…)

Housing markets in New Zealand, the Czech Republic, Australia and Canada rank among the world’s bubbliest and are particularly vulnerable to falling prices, according to Bloomberg Economics. Portugal is especially at risk in the euro area, while Austria, Germany and the Netherlands also are looking frothy. 

In Asia, South Korea house prices also look vulnerable, according to an analysis by S&P Global Ratings. That report noted risks from household credit relative to nominal GDP, the growth rate of household debt and the speed of house-price gains. Elsewhere in Europe, Sweden has seen a dramatic turnaround in housing demand, sparking concern in a country where debt runs at 200% of household income. (…)

• English Home Rental Prices Surge 9% in a Year to Hit Record High
• UK house price growth pushes average above £280,000 for first time
• UK inflation hits 9.1% as food prices jump

High Gas Prices Hit Demand as Drivers Cut Back at the Pump

(…) In the first full week of June, gasoline sales at U.S. stations were down about 8.2% compared with the same week last year—the 14th consecutive week that sales have lagged behind 2021 levels, according to surveys by energy-data provider OPIS.

In the week ended June 10, the Energy Information Administration’s measure of implied demand—an estimate of products supplied to consumers—declined by roughly 110,000 barrels a day from the prior week, to about 9.1 million barrels a day. That figure is down from about 9.4 million barrels a day the same time last year. (…)

The EIA’s estimate for implied demand for months has declined compared with the average for 2017 to 2019, sliding from 99% of that average in late February to 93% by late May, and to 95% in June. (…)

• Biden to Call for Three-Month Federal Gasoline Tax Suspension President Biden is planning to call for a three-month suspension of the federal gasoline and diesel taxes, according to senior administration officials.

BTW, “The average driver of a large SUV — one of the most popular vehicle types in the country — would save about $4.60 a week, according to calculations by GasBuddy.”

• India Tells Oil Companies to Scoop Up Russian Crude The emergence of India as a major buyer of Russian oil has the potential to take the sting out of Western sanctions.
• Energy Investments Aren’t Enough to Bring Down Prices, IEA Says Investment in energy supplies, including clean energy, should jump this year, energy watchdog says. But it won’t be enough to tame prices.

(…) Total energy investment is forecast to rise by 8% this year to $2.4 trillion, above pre-Covid-19 levels. A jump in spending on clean and renewable energy sources comprises the largest chunk of the rise, a promising sign for global efforts to reduce carbon emissions following years of lackluster growth, the IEA said. (…)

Spending on clean energy is expected to exceed $1.4 trillion in 2022, far behind the roughly $2.8 trillion which would be required to meet current climate pledges by 2030 and further still behind the more than $4 trillion that will be needed to achieve net-zero emissions by 2050. Both are targets embraced by Western governments. (…)

Oil and gas investments rose 10% in 2021 but remain below pre-Covid levels, the IEA said. Investment in coal supply rose 10% in 2021 and is expected to rise by a similar amount this year, despite global pledges to move away from the fuel. (…)

• IEA chief warns Europe to prepare for total shutdown of Russian gas exports Fatih Birol says governments should keep ageing nuclear plants open and take other contingency measures
• Yellen Says ‘Stay Tuned’ for Word on Russian Oil Price-Cap Plan

Global Food Inflation Gets Reprieve as Wheat and Oilseeds Tumble

(…) Subdued economies can mean lower fuel use or spur shoppers to cut back on higher-priced foods like meat. Chicago soybean oil is headed for its longest retreat since 2019, Paris rapeseed erased its year-to-date gain and Malaysian palm oil recently entered a bear market as rival producer Indonesia ramps up exports. (…)

Corn, wheat and soybean futures retreated in Chicago, as trading resumed following a holiday weekend in the US. Corn tumbled as much as 5% to $6.9425 a bushel, touching the lowest intraday price since March. Soybeans sunk to the lowest level since February, while wheat slipped below $10 a bushel to touch the lowest price since early April. (…)

A European Union agency cut its outlook for the bloc’s soft-wheat yields to a below-average level in a report on Monday, following spring heat and drought. Dryness will also remain a concern across most of the US corn and soybean belt into early July, according to forecaster Maxar.

FIBER: Industrial Commodity Prices Decline Further

(Haver Analytics)

• The hot commodities rally is cooling off fast as recession fears gain ground and cloud the outlook for demand.

Canadian Shoppers Show Resiliency as Retail Sales Jump

The nation’s retailers recorded a 0.9% sales increase in April, Statistics Canada reported, driven primarily by higher volumes. In May, receipts were up 1.6%, according to initial preliminary estimates also released on Tuesday. (…)

Excluding price increases, retail sales were up 0.9% during the month. (…)

Only six of 11 subsectors posted gains in April. Sales at new car dealerships continued to slump, while purchases at building material stores fell sharply in April — possibly reflecting falling activity in home sales.

General merchandise stores led increases in April, with a 4.2% gain. Receipts at gasoline stations posted a 3% increase, and were up 5.4% in volume terms as prices temporarily dipped during the month. (…) Core retail sales – which exclude gasoline stations and motor vehicle and parts dealers – rose 1.0 per cent.

Growing forecasts for U.S. recession may spell more trouble for stocks  

(…) Morgan Stanley strategists including Michael Wilson wrote Tuesday that an S&P 500 level of 2,900 to 3,100 – roughly 18-23% below where it stands today – would more fully reflect the typical corporate earnings contractions during recessions.

“At this point, a recession is no longer just a tail risk given the Fed’s predicament with inflation,” the Morgan Stanley analysts wrote.

Similarly, strategists at the BlackRock Investment Institute on Tuesday reiterated warnings against buying the dip in stocks, saying many are ignoring the “crushing effect” that central banks’ policy tightening is going to have on growth.

“This dynamic raises serious growth risks, and we now see the U.S. restart of economic activity stalling over the coming quarters,” wrote Jean Boivin, head of the institute, in a report on Tuesday.

While Deutsche Bank’s analysts believe a recession is more likely in 2023, “the risk of an earlier move is clearly building with declining financial conditions, and consumer and business confidence plummeting,” wrote Deutsche Bank strategist Jim Reid.

“It’s hard to see markets recovering in the second half of the year if we see firm evidence of the recession,” he said.

Societe Generale analysts said that while recession was not their base case, a “typical” recession would put the S&P 500 at 3,200 while a 1970s style stagnation with high inflation and low growth would bring stocks down to 2,525. (…)

Bear markets accompanied by recession have tended to be longer and steeper, with a median decline of about 35%, data from Bespoke Investment Group showed. (…)

• Citi offered up today’s recession chatter, saying odds are now nearing 50%. It sees the global economy growing 3% this year and 2.8% in 2023. It also noted that if a recession does occur, it may be a “garden variety” one. The wildcard is, of course, inflation dynamics. (Bloomberg)

Ray Dalio Says Reducing Inflation Will Come at Great Cost

(…) “With debt assets and liabilities as high as they are and projected to increase due to the government deficit, and the Fed also selling government debt, it is likely that private credit growth will have to contract, weakening the economy,” Dalio said.

“Over the long run the Fed will most likely chart a middle course that will take the form of stagflation,” he added. (…)

The Fire Burning Beneath Crypto’s Meltdown Are bitcoin and other crypto tokens crashing because of the usual excesses that accompany advances in finance? Or do they have the sort of fundamental flaws that will see them as historical relics?

(…) Crypto supporters point to previous “crypto winters” that eventually came good again, and say prices will recover. But this blowout and bust is different, because of defi.

In the booms and busts of the past decade crypto prices were pushed up and fell back down based on the level of interest, rather like Pokémon cards or Beanie Babies.

Defi changed everything, by creating a parallel crypto banking system—without any of the limits or safety nets that have been introduced in the real world in response to past busts. Only now are we starting to find out some of the problems, as brokers and lenders freeze withdrawals, multibillion-dollar “stablecoins” designed to hold a fixed value vanish, and wild leverage leads to widespread forced selling.

At the very minimum this suggests the new crypto winter will be worse than the last few. Defi speeded the bubble’s expansion, and now it is accelerating the deflation.

The irony in all this is that part of the original appeal of crypto was the cap on how many bitcoin can ever exist, something supposed to prevent the sort of unlimited money creation that worries many critics of government-issued, or “fiat,” currencies. Rather than unlimited creation of bitcoin, crypto ended up with unlimited proliferation of new tokens. The new structures of intermediaries and defi tools allowed even bitcoin to be reused or lent on, meaning multiple people thought they owned the same token. Lender Celsius Network is an extreme example: Those who deposited bitcoin and other tokens there were promised high interest rates, but have been unable to get their coins—which Celsius lent out—back.

In the 19th century, the Bank of England discovered that the private spread of bills of exchange could overcome limits on official money-printing set by the backing of gold. Crypto owners are finding something similar, as monetary innovation got round their favorite claim, that the value of their bitcoin was underpinned by its protection from debasement. (…)

The hope for crypto is that the speculators who used too much borrowed money are cleared out, the proliferation of tokens is pared back, prices reset lower and the core cryptocurrencies can continue with their grand monetary experiment. Sure, they’re worth less, but survive. (…)

[Bitcoin] failed to take off as a medium of exchange, as it is clunky and costly to use. Other cryptocurrencies are somewhat more practical for transactions, but all suffer from a core problem: The more they are used, the more expensive transactions become as a way to regulate capacity on the network. Like Uber, Bitcoin has surge pricing built in.

“In a way congestion is a feature, not a bug,” says Hyun Song Shin, economic adviser and head of research at the Bank for International Settlements in Basel. For normal currencies “network effects mean the more the merrier, but crypto achieves exactly the opposite, the more the sorrier.”

The BIS on Tuesday laid out a program for taking the best parts of crypto and using them in digital dollars, pounds or other currencies that could be issued electronically by central banks. (…)

Bitcoin holders have discovered that not only is it not a hedge against inflation, it isn’t a haven either. Its price tends to move in line with risky assets, not safe ones. (…)

But in the long run, crypto’s best hope of survival is to come up with some useful function in the real [non-criminal] world. That will require another round of innovation, and there’s no reason to think it will be the existing cryptocurrencies, let alone bitcoin, that will be the winners.

China Sends Warplanes Near Taiwan After US Rejects Strait Claims

• Finland is ready to fight Russia if attacked – defence chief