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MI2 Partners: Global savings – Part II – the fallout (September 20)

Last week in part 1 of his series on global savings, Julian Brigden at MI2 Partners discussed the changing dynamics of supply and demand in global debt markets. In this follow up piece, Brigden assesses the implications of these changes. According to Brigden a mismatch between bond demand/supply threatens higher rate risk premia. Excessive deficits should shift away from monetary to fiscal dominance, pushing R* higher, he says. Central banks may be forced to sacrifice inflation objectives and financially repress markets, says Brigden. He says the fallout would be FX weakness, negative real returns and economic/market volatility. Click here for the full report. Click here if you would like to speak to the analyst.

Stone X: Excess savings have not just disappeared (September 2023)

A recent Fed paper claimed that the COVID excess savings have been depleted, but normalizing the stock of savings at the current rate of 3.8% would take another three years, according to Vincent Deluard at Stone X. Excess savings are everywhere, he says, and bank reserves and money-market funds have surged by $8 trillion. The persistence of excess savings should feed the rebound of inflation and mitigate fiscal tightening in 2024, according to Deluard. Households may cut on discretionary spending because of stagflation but they should pay their credit cards, he says. Banks and consumer finance companies should therefore fare better than Millennial-oriented consumer stocks, says Deluard. Click here for the full report. Click here if you would like to speak to the analyst.

Piper Sandler: What happens when financial, monetary and lending conditions collide? (September 2023)

There is a world of difference between financial, monetary, and lending conditions and how quickly their impact is felt across various segments of the economy and financial markets, according to Michael Kantrowitz at Piper Sandler. Financial conditions’ impact on economic activity has a relatively short lag, while monetary and lending conditions’ impact on economic activity have longer lags, he says. For the first time since 2007, we have tight monetary conditions, high energy prices, and tight lending conditions, says Kantrowitz, and he expects financial conditions to tighten as a result. Tighter financial conditions points to lower equity valuations, wider credit spreads, and leadership in defensive sectors like staples and utilities, he says. Investors have been hiding in quality growth all year, says Kantrowitz, and defense is the next step if the macro picture (especially employment) deteriorates further. Click here for the full report. Click here if you would like to speak to the analyst.

Piper Sandler: Credit condition tightening, and not just at banks (September 20)

Recession-tight bank lending standards are also crimping non-bank lending, and corporate bond issuance, according to Nancy Lazar at Piper Sandler. She warns spreads are poised to widen, with credit conditions clearly pointing to a hard landing. Lending standards lead corporate revenues by two quarters, so expect a revenue decline by year-end, says Lazar. Non-bank lending is already weakening, failing to offset recession-tight commercial and industrial bank lending standards, she says. And bank lending standards also lead non-bank lending, she adds. Fitting with tight lending standards, and higher corporate bond yields, net bond issuance has already slumped, according to Lazar. Higher interest expenses and widening junk spreads, as corporate revenues soften, mean increasing financial stress, she says. Click here for the full report. Click here if you would like to speak to the analyst.

Macro Risk Advisors: Sell what you can, Why US banks are selling down their UST holdings

In this video, Barry Knapp at Macro Risk Advisors says the typical Fed mantra is that its policy affects demand and it can’t do anything about supply. But he says the Fed has clearly had a dramatic impact on the supply of housing. Indeed, Knapp says multifamily housing starts plunged to a 342,000 annual rate in July, compared 601,000 in February prior to the SVB collapse. He says there are 1.01 million multifamily homes under construction, an historic level of divergence which means there is a flood of supply coming in 2024. When the buildings are completed, Knapp says loans need to be refinanced at much higher rates with much softer rental growth. To unlock the supply of credit, the curve needs to disinvert, hence his focus on the 2024 rate cut forecast. Click here for to listen to the recording. Click here if you would like to speak to the analyst.

Apollo: Credit market outlook – high rates and slow earnings growth creating opportunities for credit investors (September 2023)

Apollo’s Torsten Slok has just published his credit market outlook and the three key themes for investors are 1) Up in quality, 2) Large cap, and 3) Low leverage and high interest coverage ratios.

With the Fed on hold well into 2024 and the maturity wall coming, debt refinancings will continue to come in at higher levels of yields.

The bottom line is that the cost of capital has increased significantly, and Fed hikes are biting harder and harder, particularly for companies with weak credit fundamentals. Click here for the full report. Click here if you would like to speak to the analyst.

Quant Insight: Equity investors – you’re watching the wrong part of the bond market (It’s all about bond vol) (September 19)

Last year, macro tourists looked at the bond market and latched onto the inverted yield curve and its role as a lead indicator for recessions, according to Quant Insight. More recently the headlines have followed the back up in bond yields, says the firm. Both can be important, but they are not the critical indicator for equities right now, according to QI. Interest rate volatility is the one to watch, says the firm. Click here for the full report. Click here if you would like to speak to the analyst.

Clocktower Group: Can Commodities “Survive” the China Malaise? (September 20)

The widening divergence between Chinese risk assets and commodities has been confusing to global investors, writes Clocktower Group, who say that the latest commodity strength – especially the oil rally – is mainly a reflection of US economic reacceleration. They suggest the divergence between Chinese equities and iron ore prices is more interesting and may mark a structural change in the economy. That’s because credit-lighter manufacturing is replacing credit-heavy property and infrastructure investment as the main consumer of steel, and so the macro relevance of steel demand to the Chinese economy has declined. Indeed, Clocktower reckon exports are set to pick up given the recovery of external demand, which may continue to offset the impact of property malaise and thus keep metal prices resilient. That won’t be enough to pull the economy out of the doldrums however. Clocktower say that an export-driven manufacturing recovery will not fundamentally solve China’s problem due to the sector’s inability to facilitate an effective credit expansion. Before the fiscal lever is pulled, the worst is likely yet to come for Chinese risk assets, concludes the report. Click here. 

Macro Risk Advisors: A cyclical bull within a secular bear; Commodity bull, equity bear (September 21)

In a first a of a trio of short videos from Macro Risk Advisors, John Kolovos explains the alternating secular cycles in commodity and equity markets. This is bigger picture of course, but what he shows in the chart is that we are now in a commodity bull market (which started in 2020, when oil markets based), and thus looking across market history since 1900 implies an equity bear market. Kolovos also makes some interesting remarks on the commodity space, that based on his technical analysis, would contradict the conventional view that a recession will weigh on commodity prices (The Apollo view above). Click here for the video, and here for the one pager, including the chart.