CEOs increasingly foresee a “soft landing” for the economy
The breakneck pace of corporate hiring may slow in coming months — but the overall economy remains solid, Axios’ Neil Irwin writes from a Business Roundtable survey of 100+ chief executives of America’s biggest companies.
- The view from the corporate suite is of an economy that can come off its inflationary hot boil — without the plunging sales and mass layoffs seen in recessions.
The quarterly index of overall CEO expectations edged down. The underlying details are most interesting:
- The executives’ expectations for sales were unchanged from Q1, and their capital spending plans ticked up. That’s not what you expect to see in a recession.
- However, fewer CEOs envision increasing their headcount — 33% now, compared to 41% last quarter.
- The share of CEOs who expect their U.S. employment to decrease in the next six months was unchanged from Q1, at 27%, implying no uptick in layoff plans.
But top executives envision a period of muddling along with slow growth, rather than outright contraction.
Corporate bankruptcies highest in 13 years
Corporate bankruptcies this year are at levels last seen back in 2010, when the economy was tentatively recovering from a catastrophic recession, Axios Markets co-author Emily Peck writes from a new report from S&P Global Market Intelligence.
Data: S&P Global Market Intelligence. Chart: Alice Feng/Axios
Up, but not exploding.
- Ten U.S. issuers defaulted on an aggregate $7.2 billion in bonds last month, strategists from Bank of America relay, marking “a significant pickup in pace.” Indeed, May’s 7.3% annualized par-weighted default rate stands far above the realized 2.3% trailing 12-month tally and 3.7% on an annualized three-month basis. Recovery rates, meanwhile, languish at a feeble 27% over the past year, representing the fifth percentile on a long-term basis, BofAML adds, as “single-digit outcomes (i.e., sub 10% recoveries) are piling up.” (ADG)
$1 Trillion Debt Deluge Threatens Market Calm The U.S. government could face borrowing at rates near 6%, up from 0.1% less than two years ago.
Some on Wall Street fear that roughly $850 billion in bond issuance that was shelved until a debt-ceiling deal was passed—sales expected between now and the end of September, according to JPMorgan analysts—will overwhelm buyers, jolting markets and raising short-term borrowing costs. (…)
The calm comes even as short-term bond yields have already jumped in recent weeks, lifted by expectations for the Fed to hold rates higher for longer. The two-year yield finished Tuesday at 4.523%, up nearly 0.8 point from its year-to-date lows seen a month ago. The 10-year ended at 3.699%. (…)
At the same time, regulators are seeking to boost banks’ cash buffers to avoid another banking crisis. Further draining liquidity from markets, the Fed is allowing its balance sheet to shrink.
But even if banks pulled back from short-term funding markets, history suggests Fed officials would quickly extinguish any fires. In September 2019, the central bank unveiled a facility to provide banks with cash even though the rate spike’s cause was unclear. That facility, which brought down rates almost immediately, now exists as a permanent safeguard to help maintain the Fed’s rein on rates. (…)
The best-case scenario, according to strategists, is if money-market funds step up as the primary financiers of this round of bond issuance. Such funds, which invest much of their more than $5 trillion in short-term safe assets, could absorb a sizable chunk of the supply by yanking the $2.1 trillion they have parked at the Fed’s overnight reverse repurchase facility, known as a reverse repo. That would likely limit any blow to broader markets.
To make that happen, however, the government needs to attract them away from the Fed’s highly safe daily facility by offering higher yields on T-bills. When the Treasury issued more than $1.3 trillion of those bonds in April 2020, rates on 3-month bills rose 0.20 percentage point above the secured overnight financing rate—SOFR—a key benchmark for overnight lending.
According to Deutsche Bank analysts, bill yields could widen 0.10 to 0.15 point above SOFR this time around but are unlikely to go higher. Potentially complicating the comparison, analysts say, is this issuance comes at a time when markets lack the central bank’s support.
Given the Fed offers 5.05% at its reverse repo rate facility—which would increase if it upped the fed-funds target range—the U.S. government could be stuck borrowing more than $1 trillion at rates approaching 6%. (…)
Buy Now, Pay Later Is Boosting Sales. But Signs of Users’ Stress Are Emerging.
(…) With living costs up from a year ago and interest rates rising, the appeal of BNPL options has only gone up. In 2022, the share of online purchases using BNPL grew by 14% compared with a year earlier, according to Adobe Analytics, the data analytics arm of Adobe. In the first two months of this year, the order share was up by 10% from a year ago, the data show. (…)
Shoppers, who continue spending at a steady clip, are using the BNPL option to delay payment not only on discretionary goods but also to buy necessities like groceries, Adobe Analytics said, with the share of these BNPL orders growing 40% in the first two months of this year compared with a year earlier. What’s more, BNPL users, which accounted for some 17% of consumer borrowers between the first quarter of 2021 and the first quarter of 2022, were 11 percentage points more likely than non-BNPL borrowers to have a delinquency of at least 30 days on their credit records, according to a March report from the Consumer Financial Protection Bureau. (…)
Credit Card Loans & Delinquency Rate
Return of Student Loan Payments Will Stretch Household Budgets With the pandemic-era pause set to end, many Americans will struggle to cover their expenses.
The legislation to raise the debt ceiling, which was signed by President Joe Biden Saturday, included a provision that ends the three-year pause on required student loan payments. Now, those bills are set to resume at the end of August.
That will add an expense for millions of people already grappling with stretched household budgets. More than 15% of borrowers were behind on payments before the pandemic pause, a figure that’s expected to further increase if bills resume without any debt relief.
Even if Biden’s plan to forgive up to $20,000 per borrower survives the Supreme Court, no more than 45% of borrowers will have their debt wiped out completely, leaving the rest with a sudden increase in monthly bills.
For many, there just isn’t enough money to go around, especially considering the average monthly payment before the pandemic was almost $400 per borrower. (…)
China Exports Drop More Than Expected, Fueling Growth Risks
Overseas shipments shrank 7.5% from a year ago to $284 billion, official data showed Wednesday, worse than the median forecast for a 1.8% drop. Exports to most destinations contracted, with double-digit declines to places including the US, Japan, Southeast Asia, France and Italy.
Imports declined 4.5% to $218 billion, better than an expected drop of 8%, leaving a trade surplus of $66 billion. Chinese purchases from most regions declined in May, with contractions of more than 20% in imports from Taiwan and South Korea — a sign of weakness in global electronics demand. (…)
One sustaining bright spot for Chinese exporters was the continued strength of global demand for Chinese cars, with total vehicle shipments hitting a record for any single month of $9 billion. One of the drivers of the recent surge in car exports has been the popularity overseas of Chinese electric vehicles, although shipments of other types of cars has also been rising. (…)
Slowdown Threatens Indian Economy Even as Its Rich Keep Spending
(…) India grew by 6.1% in the three months ended March compared to a year earlier, well beyond the 5% estimate of economists surveyed by Bloomberg, driven mainly by increases in services exports and government spending. It expanded 7.2% for the fiscal year through March, continuing a post-pandemic recovery that outstrips major peers.
But Nomura Holdings Inc., HSBC Holdings Plc, Standard Chartered Plc, Goldman Sachs Group Inc. and others say growth will decelerate this fiscal year, with Nomura seeing it falling to 5.5%. The banks pointed to other factors, such as the impact of rising borrowing costs on spending, and slowing global growth affecting exports. (…)
Private consumption fell 3.2% in the three months ended March from the previous quarter. This may be due to reduced spending by the urban middle class, which should come as a concern for the country’s growth, said Rupa Rege Nitsure, chief economist at L&T Finance, the commercial and personal finance arm of India’s largest construction company. (…)
The global economic recovery will be dogged by persistent inflation and tighter monetary policy, according to the Organisation for Economic Co-operation and Development. The Paris-based group sees world growth at 2.7% this year and only a modest pickup to 2.9% in 2024, both below the 3.4% average in the seven years before the pandemic. It’s a headache for central banks as they continue to battle stronger-than-expected core inflation. “Of course central banks need to remain vigilant and weigh both sides of the risk,” OECD chief economist Clare Lombardelli said.
Let the Fed’s Bank Capital Games Begin Rules were already due to be tweaked for big banks, but now regional lenders face major changes.
(…) What is clear is that the backroom battle to influence the final figure is getting underway, with the Wall Street Journal reporting Monday that “larger banks” could face an average increase of 20%, according to its unidentified sources. That seems on the large side, especially for the biggest banks. Similar changes in Europe and limited forecasts of US bank analysts so far have come up with much smaller numbers.
This scary sounding 20% figure is likely just the opening salvo in a negotiation set to play out over the next year. However, the outcome could be larger than expected because of serious toughening up of rules for regional lenders after this year’s banking crisis. (…)
Exactly what is needed to bolster the system is going to be fought over from now until the rules are finalized, probably in the first half of 2024. Barr’s first set of proposals is due out in the coming weeks – some think any day now – and those will be studied and debated in the months ahead.
For the largest banks, few analysts have made explicit forecasts because of the lack of any guidance at all so far from the Fed. In Europe, the answer regulators came to was set to add 1 percentage point to capital ratios of big lenders from January 2025, according to Kian Abouhossein, analyst at JPMorgan Chase & Co. However, as the results are turned into law, they are being watered down and the final impact is expected to be smaller. Whatever the result, it’s going to be far less than a 20% rise.
For the regional US banks, there will be a raft of changes, not only to capital but also to liquidity requirements and some accounting practices. Erika Najarian, analyst at UBS Group AG, estimates that the increased in capital demands will likely force them to lift their common equity ratios to a range of 10%-10.5% from an average of 9.5%.
The other changes will cut these banks’ profitability — Najarian estimates returns on equity will drop by 2 to 3 percentage points once all the extra regulation is in place. Some of this will be down to smaller banks being forced to hold more liquid assets that can be sold quickly and to be put through full annual stress tests. They will also have to deduct from their capital any losses from the falling market values of bonds they hold that are available for sale. These are things that big US banks and all European banks already do. (…)
US tightens crackdown on crypto with lawsuits against Coinbase, Binance The top US securities regulator sued cryptocurrency platform Coinbase, the second lawsuit in two days against a major crypto exchange, in a dramatic escalation of a crackdown on the industry.
(…) The SEC accuses Binance and its CEO Changpeng Zhao of operating a “web of deception”.
If successful, the lawsuits could transform the crypto market by successfully asserting the SEC’s jurisdiction over the industry which for years has argued that tokens do not constitute securities and should not be regulated by the SEC. (…)
“If the SEC prevails in either case, the cryptocurrency industry will be transformed.” (…)
Almost Daily Grant quotes a Grant’s Interest Rate Observer March 5, 2021 analysis:
(…) “Management’s professed lofty indifference to money making to one side, the Coinbase C-suite is very much focused on its own bottom line. No company executive is subject to a lock-up, and it will be insiders, not the enterprise itself, selling shares in the [upcoming] listing.” Sure enough, corporate higher-ups unloaded $2.7 billion of stock on day one at an average price of $328 per share, compared to about $52 this afternoon.
FYI
Merck & Co. sued the US, referring to new legislation that forces drugmakers to negotiate prices as “extortion.” The White House said the law was on its side. 