CB LEI: Down 0.3% in February, Still Pointing to Risk of Recession 11th consecutive MoM decline
“The LEI for the US fell again in February, marking its eleventh consecutive monthly decline,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Negative or flat contributions from eight of the index’s ten components more than offset improving stock prices and a better-than-expected reading for residential building permits.
While the rate of month-over-month declines in the LEI have moderated in recent months, the leading economic index still points to risk of recession in the US economy. The most recent financial turmoil in the US banking sector is not reflected in the LEI data but could have a negative impact on the outlook if it persists. Overall, The Conference Board forecasts rising interest rates paired with declining consumer spending will most likely push the US economy into recession in the near term.”
The 6-m m.a. has had a few false signals at much lower levels…
…but the 12-m m.a. is another indicator that has never failed since 1960.
“Mommy, is this data dependency?”
Amazon to Cut 9,000 More Jobs Amazon said it will cut 9,000 additional corporate jobs across units that include its cloud-computing and advertising businesses, a sign cost-cutting is extending into all aspects of its operations.
(…) “Given the uncertain economy in which we reside, and the uncertainty that exists in the near future, we have chosen to be more streamlined in our costs and head count,” Mr. Jassy said, noting that the layoffs come after Amazon completed its annual planning process.
The company previously said it was slashing 18,000 positions.
Waves of job cuts have roiled the tech industry. Amazon is the latest company to enact more job cuts than previously expected. Last week, Facebook parent Meta Platforms Inc. said it would cut roughly 10,000 jobs over the coming months, its second wave of mass layoffs. (…)
Since 2022, layoff tallies at tech companies have reached about 300,000 workers, according to Layoffs.fyi, a site tracking job cuts in the industry. (…)
Amazon Chief Executive Andy Jassy said in a message to employees on Monday that the company’s cloud, advertising and video-game-play streaming Twitch businesses would be the main target for the latest cuts. Advertising has been one of Amazon’s fastest-growing businesses and now generates nearly $38 billion a year in revenue for the company. And the Amazon Web Services cloud segment is twice as large while still growing at double-digit rates. It also now accounts for all of Amazon’s operating earnings after the company’s retail side lost nearly $12 billion last year. (…)
ONLINE SALES & GOODSFLATION (YoY)
- Job Listings Abound, but Many Are Fake In an uncertain economy, companies post ads for jobs they might not really be trying to fill
(…) In a survey of more than 1,000 hiring managers last summer, 27% reported having job postings up for more than four months. Among those who said they advertised job postings that they weren’t actively trying to fill, close to half said they kept the ads up to give the impression the company was growing, according to Clarify Capital, a small-business-loan provider behind the study. One-third of the managers who said they advertised jobs they weren’t trying to fill said they kept the listings up to placate overworked employees.
Other reasons for keeping jobs up, the hiring managers said: Stocking a pool of ready applicants if an employee quits, or just in case an “irresistible” candidate applied. (…)
“They’re posting jobs with the intention of hiring, but not anytime soon,” he says, adding that some companies posting jobs now might not be aiming to hire until the third or fourth quarter. (…)
“It’s better for you to hedge by leaving some of those job openings up,” she says. (…)
Companies might also be reluctant to take down ads, Mr. Garlock adds, because “we don’t want to signal we’re slowing down, so we’ll let these things ride.” (…)
Indeed says it has recently seen more employers dial back their recruiting efforts. Job postings on the site have fallen by 11% since the start of 2023. (…)
The chart plots the BLS job openings (through January) and Indeed job postings (through March 10). The dash line is openings pre-covid. Job openings seem set to drop 10% in February-March. If 20% of openings are ghost jobs, real openings are actually back to pre-pandemic levels, while the number of unemployed Americans is up 4%.
JOB OPENINGS
(…) The carnage extends far beyond technology. Out of all the cuts where the share of jobs axed was reported or could be derived, the median tech layoff sent 10% of the company’s employees packing. In the communications, financials, health care, real estate and energy sectors, the median layoffs were as big or bigger, even though the total job losses were smaller. In health care, for example, the median reduction in workers was 20% across more than 120 layoffs, driven by massive cuts at small startups like Rubius Therapeutics Inc., which let go of more than 80% of its staff in November.
The consumer discretionary sector has eliminated over 108,000 roles, as demand falters and sales at outlets like Amazon fall short of expectations. Goldman Sachs Group Inc. and other big banks cut thousands of jobs despite glimmers of hope on Wall Street of a soft landing. (…)
Overall, the layoffs have been remarkably concentrated. Almost half of the job cuts were carried out by just two dozen companies, including big names like FedEx, Ikea and Philips.
@fkronawitter1
A Not-So-Funny Thing Happened on the Way to the Terminal Rate The Fed’s next move and beyond.
(…) While it’s true that SVB was an outlier in terms of the mismatch between its highly run-prone funding base and longer-duration asset composition—and therefore its troubles were idiosyncratic—a close look at trends among FDIC-insured banks over the past 15 years shows that what happened at SVB is indicative of a system-wide phenomenon. The nearby charts show that from 2008 up until the pandemic, a moderate and steady stream of new deposits led to relatively small quarterly changes in securities holdings, while the Fed’s cautious post-crisis monetary policy regime helped to keep the change in unrealized losses (and gains) manageable.
But all that changed when the pandemic hit in 2020. In the first two years of the pandemic, banks got a massive influx of nearly $5.2 trillion dollars in new deposits, of which fewer than $2 trillion were FDIC insured. The unprecedented growth in deposits was no accident: it was the direct result of the coordinated fiscal-cum-monetary helicopter drop of liquidity.
So, what did banks do with this money? Loan demand was weak because the economy was still depressed, so loan and lease balances only rose by about $730 billion. With few lending opportunities, banks deposited $1.9 trillion in cash at the Federal Reserve, and used most of the rest of the deposit deluge to buy around $2.25 trillion in securities, 87 percent of which was U.S. Treasury or Agency MBS securities.
This, too, was no accident: bank liquidity regulations (e.g. Liquidity Coverage Ratio and liquidity stress testing) dictate that banks have to hold a high amount of high-quality liquid assets like cash or Treasurys or Agency mortgages. To say that buying these liquid, credit-risk free securities was welcomed by regulators would be an understatement. Initially these securities were held as available for sale but when Treasury yields bottomed in the summer of 2020, more were moved into the held to maturity bucket to shield them from negative marks.
The unrealized losses arrived in force when the Fed started to raise rates in March 2022 and the yield curve shifted up. Meanwhile, the Fed’s abrupt transition from quantitative easing to quantitative tightening caused bank deposit inflows to reverse, forcing some banks to seek more expensive sources of funding and reckon with large unrealized losses on their securities. With only $10 trillion out of $19.2 trillion in total bank deposits insured by the FDIC, depositors (and now regulators) are rightly concerned about what this all means.
With this context, we can see that the easing of terms on the Fed’s discount window and the creation of a new Bank Term Funding Program (BTFP) were not just a forceful response to the SVB bank run, but also a way to address possible similar scenarios that may play out across the banking system. The facilities will unlock access to substantially more liquidity for banks while shielding them from needing to take adverse marks on underwater bond positions (unrealized losses on securities positions of FDIC-insured banks totaled $620 billion as of Dec. 31).
Meanwhile, the weekend news of UBS’s takeover of Credit Suisse and the announcement of daily auctions through the Fed’s dollar swap lines with foreign central banks should help to calm fears of a wider global conflagration.
While these measures will buy time for banks and regulators to work through the problem, funding market stress will lead to tighter credit conditions for the economy. Loan rates, terms and underwriting standards are going to tighten for bank customers and bank profitability will take a hit, particularly for mid-size and small banks as they boost deposit rates and replace lost deposits with more expensive funding sources. For their part, regulators seem to be trying hard to avoid expanding FDIC coverage beyond the current $250,000 limit, but if conditions continue to deteriorate, they may be left with no other choice.
How does the Fed move forward on the policy front? Two weeks ago the Fed appeared to be teeing up a 50-basis point hike at this week’s meeting, but we think a move of that size is now off the table. Instead, we expect another quarter point hike, which is 75 percent priced in by the market. The European Central Bank decision to deliver a 50 basis point hike last week will also provide air cover, with Fed Chair Jerome Powell likely to note—as President Christine Lagarde did—that monetary policy tools will stay focused on monetary policy objectives, namely bringing inflation back to target.
At the same time, Chair Powell will reiterate that regulators have put in place a very robust liquidity backstop for banks, and they have confidence in the capital, asset quality and liquidity profile of the American banking system. The Fed’s messaging will likely draw a contrast between the conditions that led to the Global Financial Crisis (GFC) and today, highlighting tighter macroprudential oversight that has been put in place, but questions will rightfully be asked how, despite the lessons learned in the GFC, SVB and Signature Bank could collapse so suddenly.
The Fed will also have to acknowledge, however, that it still has more work to do on taming inflation and cooling off the labor market, which is why we think a quarter point hike is more likely than pausing. A pause (or even a premature cut in rates) runs the risk of signaling that the Fed is not serious about fighting inflation and could backfire if the market interprets it as a sign of even greater financial stability concerns.
For this reason, we expect the updated dot plot to convey a baseline path of several more quarter-point rate hikes in 2023. We expect Fed officials will pencil in additional 25 basis point hikes at the May and June meetings, which would bring the projected terminal rate to 5.5 percent. Whether the market believes this—or the Fed ultimately can deliver it—will largely depend on how wide the current banking crisis spreads.
While we expect to see a lot of volatility in and around the next several Federal Open Market Committee meetings, we are also looking further down the road to the debt limit battle that looms this summer. Banking sector problems have created a political opportunity for even more finger pointing and blame shifting, and some lawmakers seem prepared to test the Treasury-Fed backup plan to prioritize debt service payments to avoid a default on the national debt.
Despite all this political brinksmanship, eventually we will get a debt limit resolution, and what comes next may be just as important for the banking system. That’s because Treasury will need to issue hundreds of billions of dollars in T-bills to replenish its depleted cash balance, which is currently being run down because Treasury has exhausted its legal borrowing authority.
As Treasury’s cash balance ramps up by a half trillion dollars or more this fall, some liquidity will likely be drained out of the banking system as well as the Fed’s Overnight Reverse Repo Facility. This could further disrupt banks, but regulators believe that the BTFP, discount window, and the Federal Home Loan Bank System will be there to provide a liquidity backstop.
Regulators are committed to protecting the banking system, but other weaknesses will continue to be revealed as quantitative tightening proceeds. The Fed’s battle against inflation has gotten harder and lonelier as the sharp rise in interest rates has started to bite. Nevertheless, this is a battle it has pledged to win, even if there is collateral damage.
We continue to anticipate a recession starting as early as midyear, and the economic slowdown will ultimately help the Fed achieve its inflation-fighting goals. As all of this plays out, investors will be well served by being appropriately vigilant in their security selection, duration positioning, and asset allocation decisions. To that end, the events of the past week have shown that investment-grade fixed income can outperform equities, consistent with our expectation that fixed income will rebound and a negative stock-bond correlation will reappear in 2023.
Fund Managers’ Biggest Fear Is Now a Systemic Credit Crunch It’s replaced stubborn inflation as the key risk for increasingly pessimistic investors, according to a BofA survey.
The most likely source of a credit event is US shadow banking, followed by US corporate debt and developed-market real estate, according to the poll, which canvassed 212 fund managers with $548 billion under management. A credit event was chosen by 31% of participants as the biggest threat. (…)
Moreover, the poll showed investor sentiment is “close to levels of pessimism seen at lows of past 20 years,” wrote Hartnett, who was correctly bearish through last year, warning that recession fears would fuel a stock exodus. Fund manager survey positioning and sentiment is “the only key measures in ‘capitulation’ territory so far.” (…)
The likelihood of a recession is rising again for the first time since November, with BofA’s survey showing a net 42% of participants expecting a slowdown over the next 12 months. Meanwhile, expectations for stagflation have remained above 80% for 10 months in a row. In the survey’s history, “investors have never held such strong conviction about the economic outlook,” Hartnett wrote. (…)