SignalPlus Morning Briefing 2 Aug 2023
US economic data disappointed very slightly on the weak side, starting with theJOLTS job data showing 9.582mm job openings vs expectations of 9.6mm, with a corresponding drop in the quits rate to 2.4%, matching the lows of the past 2 years. More importantly,?the key “jobs per unemployed” ratio remained steady at 1.6x, remaining at cycle lows since 2021, though still extremely elevated by historical standards.
Furthermore, ISM Manufacturing missed at 46.4 vs 46.9 expected, and underlying composition was mixed with increases in new orders and production versus decreases in employment. However,?a bigger drop in prices paid coming in at 42.6 vs 44 was seen as a risk positive, as asset classes continue to welcome any continued disinflationary signs they can see.
On the credit side, the?Fed’s Senior Loan Officer Opinion Survey (SLOOS) showed that lending standards tightened once again in Q2 and at a slightly faster pace. 51% of banks net tightened lending standards for large and medium firms (46% last Q), while 49% of tightened versus smaller firms (vs 47% last Q).?Banks continue to blame a worsening economic outlook as the main reason for tightening lending standards, which interestingly stands somewhat contrary to the public market’s interpretation of the recent string of strong data. Furthermore, demand for loans were also weak for the quarter, along with the willingness to extend loans to consumers.
Net-net,?credit lending standards are at the tightest levels seen during the late Dot-com, Lehman, and Covid-slowdowns, and are expected to subtract between 0.5 to 1% of GDP over the next 2 quarters. However,?unlike those previous episodes, stocks have barely paid any heed to the tightening in credit conditions, thanks to continued positive expectations in corporate earnings, decent ‘hard’ economic data, and heavy expectations of Fed rate eases in 2024 to keep risk sentiment highly buoyed. Interesting times indeed.
Most of the price action was centered on US treasuries yesterday, which saw 30-year yields rising to the highest levels since November, on the back of the continued adjustments in JGB yields post the YCC-tweak, as well as the?US Treasury Department announcing a large than expected ramp up of long-dated bond issuance?to fund its widening budget deficits.?The Treasury increased its net borrowing estimate in Q3 to $1 trillion, well above its $733 billion estimate in May.?Additional quarterly financing information, including individual auction sizes, will be announced later today in the US session.
30yr Treasury yields broke above its YTD highs at 4.08%, and rose as much as 10bp higher on the day to 4.11% to register the highest yield print since last November. With inflation prints continuing to moderate and the market turning more certain of Fed cuts in 2024, the bond market has recently been more susceptible to bear-steepening sell-offs, with focus starting to shift towards long-end supply indigestion.
To further ‘rub salt in the wound’,?Fitch Ratings announced after the market-close that it has cut its long-term foreign-currency issuer rating on the US to AA+, stating “the repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management”.?As a result, the US now has two AA+ ratings from the S&P and Fitch, and a single AAA rating remaining from Moody’s.
While the headlines sound ominous,?we would caution against any over-reaction against the headlines, as the S&P’s last rating cut back in 2011 actually led to a drop in US yields and a rise in the USD as a counter-intuitive “flight to quality” reaction. The modern financial market remains squarely focused on monetary policy and system liquidity, not US credit-worthiness, so we would be surprised to see any lingering and negative price impact on bond yields from this action alone.
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In crypto, the summer doldrums is very real as?Bitcoin’s spot trading volume in July reached the lowest levels since early 2021, basically making a full round-trip back to where activity was before crypto entered the mainstream conscience. Price volatility continues to crater on subdued interest, with realized 5d vol in BTC dropping well below the Nasdaq, S&P 500, USD, as well as gold. Historically, Bitcoin volatility has struggled to stay at such relatively depressed levels for any extended period, and we hope the same is true this time as we exit the summer holidays and into year-end.
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