Market Observations - Aug 23, '23
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Econ Brief:?Just five months after the collapse of Silicon Valley Bank and others, Moody’s cut credit ratings on multiple small and mid-sized banks and placed six large lenders on review for downgrade. The report states, “Many banks’ Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital.” The report also noted concerns over the commercial real estate exposure level of small and mid-size banks and pointed out that a mild recession in early 2024 was its base-case scenario for the broader economy. S&P has followed suit, downgrading five regional banks. According to the report, like Moody’s, S&P noted concerns over prolonged elevated interest rates and asset quality risks, especially for those institutions with high exposure to commercial real estate. Despite near-term concerns, however, at least some outlooks were revised to stable in the analysis, reportedly reflecting “improved stability and relatively good funding metrics.”
With trillions in commercial loans coming due in the next 1-3 years, many will be resetting in a significantly higher interest rate environment, eroding not just affordability but valuations. With rising loan-to-value ratios (LTVs), this will require significant additional capital or equity. For some, however, particularly those in many of the traditional downtown urban environments, a lack of population return with the new hybrid work model well established may make the decision for future investment more difficult. Recognizing the shift in need from commercial office space to residential living space, New York City has reportedly announced plans to rezone a section of Manhattan known as Midtown South. The adjustment will allow vacant offices to be converted into as many as 20,000 new housing units. Other cities are considering similar plans as demand for housing rises and the need for traditional office space wanes.
This morning, existing home sales declined 2.2% from 4.16m to 4.07m in July, a 6-month low. According to the median estimates, existing sales were expected to fall by 0.2%. Year-over-year, existing home sales declined 16.6% in July, the 24th consecutive month of decline, albeit up from the 18.9% drop in June. Due to a fall in sales, the months’ supply of existing homes rose from 3.1 to 3.3 months, averaging 3.1 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 1.9% in July from a year earlier to $407k, albeit down slightly from the $410k median price reported in June.
Also this morning, the Richmond Fed Manufacturing Activity Index unexpectedly rose two points to a reading of -7 in August, a seven-month high, still the eighth consecutive month of a negative print. According to the forecast, the index was expected to decline one point to -10 in August.
U.S. Tuesday Market Wrap:?Retail stocks are going on sale.
Shares of Dick’s Sporting Goods fell more than 20%, Macy’s and Kohl’s dropped more than 10%, and Nordstrom, Gap, Best Buy, and Victoria’s Secret were all down more than 5%. Nike shares are on their longest-ever losing streak now at nine consecutive down sessions. What triggered the moves were some ominous signs from quarterly reports: Macy’s said it saw an?uptick in delinquent payments from borrowers on its credit cards.?Dick’s reported that?“inventory shrink”?-- like shoplifting and other stealing -- was an “increasingly serious” problem weighing on its profitability.
Overall, stocks didn’t perform quite so poorly. The S&P index dropped just 0.3%, and the Nasdaq Composite was marginally higher. The Dow Jones shed 174 points or 0.5%. Four S&P sectors closed green. Real estate +0.31% led, and financials -0.93% lagged.
Microsoft submitted a newer version of its Activision bid in an attempt to win U.K. regulatory approval, sending the video game maker’s shares marginally higher.
Icahn Enterprises shares printed a new 52-week closing low as the activist investment firm continues to address short-seller concerns.
Coinbase takes stake in stablecoin firm Circle.?The U.S. cryptocurrency exchange acquired a stake in the issuer of the USDC stablecoin, Circle. The two companies will shutter their joint venture, Centre Consortium, a private governance organization for USDC, as there’s far more regulatory clarity today than when it started in 2018. In addition to this news, Circle plans to launch USDC on six new blockchains between September and October, bringing its total to 15.
Could a payroll revision cause half a million U.S. jobs to vanish??Despite estimates that Wednesday’s government preliminary benchmark revision will impact 500k jobs from growth?through March 2023, average job growth would still be strong at 300k per month. Last year’s government’s employment reports consistently surprised economists to the upside. New samples and data now suggest those numbers were overstated but not enough to diminish the strength of the overall labor market.
Poor European flash PMI pushed an open door, giving the market a new reason to do what it was doing: buying the dollar. The euro has approached necessary support around $1.08, and sterling is approaching the lower end of its two-cent trading range (~$1.26-$1.28). The dollar is consolidating against the yen and holding above JPY145. The Chinese yuan is little changed while the Mexican peso is extending yesterday’s gains.
Despite the poor economic news, equities and bonds are mostly higher. Chinese equities and South Korea were the main exceptions in the Asia Pacific region, while Europe’s SXXP is advancing for the 3rd consecutive session.
U.S. index futures also enjoy a firmer bias ahead of Nvidia earnings later today.
The weak PMIs have sent European bond yields more than 10 bps lower today, and the benchmark Gilt yield is off 13 bps. The 10-year Treasury yield is down 6 bps to 4.26%. European 2-year yields are mostly 7-9 bps lower today, while the 2-year U.S. Treasury yield is hovering near 5%, down about 4bps.
Lower yields are offsetting the stronger dollar to let gold edge higher. It appears to be forming a constructive rounded bottom. A move above $1908, the 200-day moving average, would help lift the tone.
Demand concerns are offset by the private estimate of another drawdown in U.S. oil inventories, and October WTI is being sold back toward the lows set last week (~$78.60). While the low for the month was near $78.30, the (38.2%) retracement of the rally since late June is a little lower (~$77.75), and the next retracement (50%) is around $75.80.
Japan’s preliminary manufacturing PMI stabilized in August and remained below the 50 boom/bust level for the third month. This year, it was above 50 only once and that was in May. It stands at 49.7, up from 49.6 in July. The services PMI rose to 54.3 from 53.8. It was 49.5 last August and 51.1 at the end of last year. The composite stands at 52.6, up from 52.2. Meanwhile, Japan’s subsidies for gasoline and kerosene, which lower headline inflation by as much as 0.5 percentage points, expire at the end of September. There seems to be political will to extend the subsidies.
While the Eurozone’s manufacturing sector continues to contract but at a slower pace, the service sector is contracting, according to the flash August PMI. The aggregate manufacturing PMI has fallen every month since January before edging up in August, but it has not been above 50 since last June. It rose to 43.7 in August from 42.7 in July. The service PMI slowed for the 4th consecutive month and now entered contraction territory at 48.3 from 50.9, a new low for the year. The composite was dragged down to 47.0 from 48.6. It was at 49.3 at the end of last year. The same general pattern is seen in Germany. The manufacturing PMI posted a small gain (39.1 from 38.8) but still is the lowest of the major countries. Last August it was at 49.1. Its service sector is slumped. The preliminary August services PMI stands at 47.3 (down from 52.3). It is the third consecutive decline (peaked in April at 56.0). The composite PMI is at 44.7 (from 48.5). It is the second straight month below 50 and is at the lowest since 2020. If cross-country comparisons are valid, France’s manufacturing sector is not as weak as Germany’s (France’s manufacturing PMI is at 46.4 from 45.1 in July), but the service sector is contracting, though at a slightly faster pace than July (46.7 vs. 47.1) and is weaker than Germany. France’s composite PMI was steady at 46.6. but below 50 for the third consecutive month. The Eurozone economy expanded by 0.3% q/q in Q2, and the median forecast is for a 0.1% expansion here in Q3.
The U.S. sees its flash August PMI and new home sales. BLS will announce the preliminary benchmark revisions to nonfarm payrolls. However, the high-frequency data does not appear to be U.S. rates and the dollar higher. They seem to have taken on a life of their own. We have argued that the U.S. was leading the sell-off in U.S. Treasuries, noting that Japanese investors have been net buyers of foreign bonds since the Yield Curve Control was tweaked last December. More recently, at the end of July (new Japanese portfolio flow data is out tomorrow), the Fed’s custody holdings for foreign central banks have risen by about $20b this month (new report is released Thursday). Yesterday, U.S. rates and the dollar softened in Asia and Europe, but both roared back as the North American session began. The two-year yield settled above 5% for the first time since March 8. The 10-year reached a new high, slightly above 4.36%, before settling near 4.33%. Meanwhile, U.S. bank indices fell for the 7th consecutive session. The index of large banks and the index of regional banks are off about 12.5%-12.7% since the late July highs.
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Crypto Market Rundown:
Bitcoin Mining Startup, Nodal Power, Raises $13 Million to Turn Trash Into BTC?
Ex-OpenSea Head of Product, Nathaniel Chastain, convicted in first NFT insider-trading case, sentenced to three months in jail. He was ordered to forfeit 15.98 ETH ($26,000) and pay a $50,000 fine.
Bitcoin difficulty jumps 6% to a new peak as miners remain confident despite the BTC price dip.?
FTX’s Sam Bankman-Fried pleads not guilty to fraud charges.?
BTC and XRP are the only top projects from 2013 to remain in the Market’s Top 10 (by market capitalization).?
Australia's Central Bank: Australian CBDC may be helpful for payments and tokenization.?
Balancer users withdraw $200 million amid Balancer V2 Pool critical vulnerability threat.?
Mastercard Launches CBDC Partner Program
Binance partners with Moonpay for USD On-Ramping?
European crypto ETP inflows rise after BlackRock + other fund managers Bitcoin filing.?
Crypto exchange EDX Markets partners with Anchorage as its custody provider.?
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