(belly BID, weak mfg data o/n, Chinese stocks SOAR on C19 spec)while WE slept; monthly performance review; demographics to limit US growth outlook;
Good morning … I apologize for radio silence past few days. Whatever that was came in like a wrecking ball but medication has now kicked IN and we’re onwards and upwards. I can only say that I don’t believe it to be COVID or the flu (and was shocked / not shocked) the doctors had little interest in even testing for it. Whatever it was / wasn’t seems under uncontrol SO back TO the daily grind … where overnight, Chineses shares RIPPED HIGHER on spec of COVID ZERO EXIT (BBG via yahoo) … This rumor has since buried other leads such as the RBA hikes 25bp as expected, says inflation now forecast to peak at 8% … S Korea exports fall at the fastest rate since August 2020 … A UK Treasury source tells the BBC that “everybody will need to contribute more in tax if we are to maintain public services”
… here is a snapshot OF USTs as of 700a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are higher (belly leading) after a brace of weak manufacturing/export readings out of Asia last night while the RBA tapered their latest hike to 25bp. DXY is lower (-0.65%) while front WTI futures are higher (+1.6%). Asian stocks were paced higher by China (Hang Seng China Enterprises index +5.5%) on hopes for a loosening/end of Covid Zero policies, EU and UK share markets are all higher (SX5E +1.6%, FTSE 100 +1.5%) and Es futures are showing +0.9% here at 6:45am. Our overnight US rates flows saw better buying for much of the Asian session before Treasuries dipped off the highs after the London open on real$ selling there. Overnight volumes were ~ average overall except in 7yrs (227%) if my newly updated volume sheet reads right...…3mo versus 18mo forward 3mo Bill curve: Bloomberg wrote this morning that this favored 'recession warning' curve of the Fed's is on the cusp of going inverted (~8.5bp away). We'd guess that it'll be inverted by tomorrow's close.
… and for some MORE of the news you can use » IGMs Press Picks for today (1 Nov) to help weed thru the noise (some of which can be found over here at Finviz).
From the Global Wall Street inbox are a few items which may be funtertaining. I’ll begin with a large German banks monthly performance REVIEW
… Which assets saw the biggest losses in October?
Treasuries: Although there’s been plenty of speculation about a pivot, by the end of the month investors were still pricing in a more aggressive tightening cycle from the Fed than they expected at the start, and Treasuries were down -1.6%. That was driven in particular by the upside surprise in the September CPI report, where yearon-year inflation was still running at +8.2%.
Same shop with an updated view on yield curves and messages,
Broadening curve inversions broadly consistent with mid-2023 recession
Last week the spread between the 10-year Treasury yield and 3-month bill yield (3m10s) fell into negative territory for the first time during this cycle. In doing so, it joined the 2s10s slope, which has been consistently inverted since July. With the Fed forward spread likely to also invert in the coming months, all three yield curve slope recession indicators we follow will soon be flashing red.
We document the historical distance between inversion and recession across these different indicators. Historically, the shortest distance on average is between inversion in 3m10s and recession. In keeping with the accelerated pace of the post-pandemic business cycle, a recession around mid-2023 (our baseline) is consistent with the shortest historical timespans between inversion and recession.
Our "all in" model currently sees ~2/3 probability of a recession over next 12 months
As we’re attempting to read some of the sellside skating to where THEY think the puck is gonna be, Goldilocks chimes in on different angle and with differerent sports analog
Supply Chains and Inflation: Short-Term Gains, Long-Term Pains?
Today’s inflation problem started to rear its head a year and a half ago, as the pandemic brought lockdowns, shipping gridlock, and shortages that resulted in the worst supply chain disruptions in decades and surging goods inflation. Supply chain disruptions and core goods inflation have started to abate, but investors have begun to worry that recent trade developments and reshoring efforts could reignite inflationary pressures.
… we compare the potential inflationary impact of two opposing impulses: a near-term deflationary impulse from the continued normalization of supply chain disruptions vs. the risk of a longer-term inflationary impulse from the reorganization of supply chains.
The normalization of supply chains has allowed inventories to rebuild—the economywide inventory-to-sales ratio has now closed 40% of the gap vs. pre-pandemic levels—which in turn has slowed inflation. An update of our inflation model for supply-constrained categories suggests that there is still substantial durable goods inflation normalization yet to come as well as some payback in the pipeline: we expect that the inflationary impulse to year-over-year core PCE inflation from those categories will fall from +60bp today to -45bp at end-2023.
Underlying those forecasts is an assumption that supply-constrained goods categories should eventually return to their mildly deflationary pre-pandemic trends, which on net contributed -25bp to core PCE inflation prior to the pandemic. But that assumption would be at risk if companies invest in supply chain resilience at greater cost.
So far, the costliest strategy for improving supply chain resilience—reshoring production to the US—appears limited to the semiconductor industry. Construction of computer-related manufacturing facilities is now running at almost triple the pre-pandemic pace and employment at semiconductor facilities has increased 5% over the last year.
Despite semiconductors being 40-50% more expensive to manufacture in the US vs. in other countries that are major semiconductor producers, we estimate that the boost to aggregate prices of higher production costs from producing semiconductors domestically instead of importing them would likely be extremely limited, even in extreme scenarios, because imported semiconductors only represent 0.3% of the final value of consumer prices. However, further escalation in trade tensions could result in temporary shortages of semiconductors if domestic production can’t ramp up quickly enough or if reshoring spreads to other industries, both of which would pose larger inflationary risks.
Moving along TO a weekly outlook from BLK,
Central banks tightening from all sides;
• We see central banks on a path to overtighten policy. Their balance sheet reductions up selling pressure on government bonds, so we’re underweight.
• We think rates will – and may already have – hit levels that make recessions foretold. That isn’t yet reflected in earnings and market pricing, in our view.
• The Federal Reserve is set to raise rates by 0.75% for the fourth consecutive time. U.S. jobs data will be closely tracked for signs of the labor market cooling.
But WAIT they had more … last week’s reminder
Demographics limit U.S. growth outlook
… Not only is the worker shortage key to understand current high inflation and the difficult choice facing the Fed, it will also be central to the future evolution of the U.S. economy.
Slowing population growth, coupled with an ageing population, will mean the available workforce expands much more slowing in the coming 20 years than it did in the past 20. If the productivity of each worker continues to increase at the same rate, annual GDP growth could average around 1.8% in future, compared to 2.6% in the past.[v] See the Worker shortage = slower growth chart. That’s significant: the U.S. economy has never grown that slowly over a 20-year period since data began in 1920.
This isn’t a problem unique to the U.S. In fact, populations are ageing even more rapidly elsewhere – like China, which may also be less able to compensate that ageing with an inflow of working-age migrants or greater productivity: one reason why we think China is entering a slower growth phase.
Finally, this one about sums it all up ahead of risk events of the FOMC, NFP and elections next week…
… THAT is all for now. Off to the day job…