18 November 2022
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US large-cap S&P 500 closed 0.31% DOWN 🔻 Tech-heavy Nasdaq Composite closed 0.35% DOWN 🔻 Pan European STOXX Europe 600 closed 0.46% DOWN 🔻 HK’s Hang Seng Index closed 1.15% DOWN 🔻 Japan’s Nikkei 225 closed 0.35% DOWN 🔻
Recession Ahoy! Rate hikes so far have had “limited impact”!UK Falling Down a £55bn Fiscal HoleHardcore Blue Ticks and a Super-app
📖 MoneyFitt EXPLAINS
🎓 Inverted Yield Curves
📊 IN THE MARKETS
The red-hot US labour market continues to burn brightly, with the number of Americans filing new claims for unemployment benefits falling last week. Together with the previous day’s good retail sales report, this suggests a resilient US economy which – if needed – can weather more, not less, tightening (meaning higher interest rates) in the Fed’s bid to bring inflation down to 2% from levels now 3-4 TIMES that.
Well-known but faded American department store chain Macy’s popped 15% on October quarter earnings driven by strong luxury sales that beat analyst expectations like a well-paid, rented mule, with EPS (earnings per share) of 52 cents vs forecasts of just 19. It also raised its forecasts on demand for strong high-end clothing and beauty products. Macy’s market value of US$6 billion is a tiny fraction of the likes of Target and Walmart. But it does have the coveted single-letter stock ticker: M! (Meanwhile, Bath & Body Works, not to be confused with meme princeling Bed Bath and Beyond, did even better and surged 25.2% after it turns out that analyst forecasts weren’t even half what the company eventually delivered.)
Recession Ahoy! Rate hikes so far have had “limited impact”!
Bulls will see a looming recession as a sign that the Fed will make a “dovish pivot,” while bears will see… a looming recession.
Various senior Fed officials have been out sharing their analysis of the economy in recent days, with the latest being James Bullard of the St Louis Fed, a voting member this year. He said that the Fed needs to keep raising rates to 5.00 – 5.25% “at a minimum” and perhaps above 7% (from 3.75 – 4.00% now) as tightening so far’s “had only limited effects on observed inflation”.
While his remarks were read as “hawkish” today, they’re in line with what Powell said after the last Fed meeting and what we reported Vice Chair Lael “Data Dependent” Brainard and Governor Christopher “Calm Down” Waller saying in Tuesday’s MFM. Along with similar comments from non-voting Minneapolis Fed boss Neel Kashkari, it was enough to let traders trim some positions in slightly directionless stocks trading overnight. But the bond markets reacted all week by driving the yield curve 🎓 to MINUS 66 basis points (or 0.66%) for a fresh 40-year low, reflecting expectations of a coming recession.
(Some prefer to track the difference between yields on 10-year Treasuries and 3-month bills, which has accurately predicted every US recession since 1955. That’s also gone negative for a couple of days. Each time it’s done that, a recession has followed over the next two years.)
UK Falling Down a £55bn Fiscal Hole
The UK’s running an underlying budget deficit of £100bn, a level where public finances risk becoming unsustainable. To be confident of cutting this back, the UK’s finance ministry (“HM Treasury”) calculates it needs to cut borrowing by about £55bn.
On Thursday, the UK finance minister (“chancellor”) announced that £30bn of spending cuts and £25bn of tax rises were needed to restore Britain’s credibility and tame inflation, which was 11.1% in October, a 41-year high. As a result, households will see living standards down 7% over the next two years, the steepest fall on record, wiping out the previous eight years’ growth with high inflation eroding real wages.
“It is a recession made in Russia, a recovery made in Britain.” All of the pain is, apparently, thanks to an “international crisis” with none of it self-inflicted.
Not really helping matters, and in an awesome display of No SHIB Sherlock, The BoE Governor, pointed out that the UK is suffering a worse economic performance than its rivals because of Brexit and a stark drop in the size of the workforce since the Covid pandemic.
Hardcore Blue Ticks and a Super-app
In a memo to his remaining staff, Elon Musk told them they have until 5pm on Thursday to commit to “extremely hardcore” work or get a 3-month severance package. Personally, he’s going the other direction and said “I expect to reduce my time at Twitter, and find somebody else to run Twitter, over time.”
Meanwhile, “Punting relaunch of Blue Verified to November 29th to make sure that it is rock solid.” Basically, you’ll be an ‘official’ celeb or company if enough verified people follow you, while unpaid legacy Blue check marks will be removed over the next few months.
The $8 fee, which barely moves the needle given Twitter’s billion-dollar annual interest bill, is geared towards regaining advertiser trust in the platform. But it’s also possible that it’s just his first move to get users used to putting money into Twitter and therefore getting a foot in the door to turn it into the (WeChat-like) super-app he thinks it can be.
(The OG super-app WeChat is owned by Chinese tech giant Tencent, which recently began a new round of job cuts. Tencent boss Pony Ma is looking to offset a slowing China by focusing on global expansion through majority stakes in overseas gaming companies. After results in which sales fell for a second straight quarter, the company is returning capital to its shareholders by distributing its stake in food delivery firm Meituan as a dividend.)
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📖 MoneyFitt EXPLAINS:
🎓 Inverted Yield Curve
All US government-issued bonds are seen to be very safe (“risk-free”) and are watched closely as an indicator of broad investor sentiment. If investors are confident, they will prefer to be in riskier but higher return stocks and vice versa.
The difference between bonds with a maturity of two years and ten years is known as the yield curve and typically the yield on the 2-year is lower than that of the 10-year because there is more uncertainty further out (anything could happen!) than in the nearer future.
But when the 2-year is above the 10-year the yield curve is said to be “inverted” and many economists take it as a reliable sign of a recession ahead in the next 1-2 years.
One interpretation is that investors see that short-term rates are so high in the short term that it will trigger a recession and that the response will be to lower rates to stimulate the economy in the future (not literally in ten years from now, but some time later.)
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MoneyFit Morning Archive (to 07-Nov-22)
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