Daily News Snapshots
Draghi’s ECB Consigned to History as Hawks Seize Policy Controls https://www.bloomberg.com/news/articles/2022-06-09/draghi-s-ecb-consigned-to-history-as-hawks-seize-policy-controls?srnd=economics-vp
For the first time, hawkish officials are taking control of the ECB and are steering the wheel. What began as a lone push by Klaas Knot of the Netherland little more than three-weeks ago, to a half point interest rate hike morphed into the campaign of monetary tightening for the Euro zone unveiled by the president Lagarde on Thursday.
The change course not only marked as a shift in assessment of price threat bearing down on the Euro region, but also as a rebalance of power within the governing council. The coterie of officials whose opinions favoring more restrictive policy were frequently disregarded when Draghi was in charge, drawing a line under an era which the former president’s stance dominated.
The sudden shift however was criticized by Peter Praet, who served as ECB chief economist under Draghi. He said such changes should’ve been accompanied with better communication if rate hike hurts the integrity of Euro area with blowout on bond yields of indebted members.
Yellen Sees High Gasoline Prices Persisting https://www.wsj.com/articles/yellen-sees-high-gasoline-prices-persisting-11654814767
Treasury secretary Janet Yellen said elevated gasoline prices near $5 per gallon are likely to persist but she doesn’t see a slowing in the U.S. economy slipping into recession.
Disruptions in the global oil market caused by Russia war against Ukraine and subsequent sanctions are likely to keep oil prices elevated. Yellen said Biden decision to release oil from the strategic petroleum reserve was the administration main tool to put downward pressure on prices.
Still, while acknowledge that higher inflation and risk of economic slowdown persist, Yellen said she doesn’t believe the U.S. would see a recession in the near term. The U.S. economy contracted in the Q1 of the year. The Federal reserves of Atlanta estimates that the economy will grow at 0.9% annual rate at the second quarter, significantly slower than last year’s pace.
China’s Moderating Inflation Leaves Room for More Easing https://www.bloomberg.com/news/articles/2022-06-10/china-factory-inflation-moderates-as-commodity-prices-cool?srnd=premium-asia
China’s inflation moderated in May as global commodity prices cooled and consumer demand weakened leaving rooms for authorities to ease monetary policy and add stimulus to shore up the economy.
Producer price index rose 6.4% last month, weakest pace since March 2021. CPI meanwhile rose 2.1% just under the forecast consensus of 2.2%.
How China Is Reviving Tools for Hedging Credit Risk https://www.bloomberg.com/news/articles/2022-06-05/how-china-is-reviving-tools-for-hedging-credit-risk-quicktake?srnd=economics-vp
Chinese regulators have returned a tool that they used to try to restore domestic investor confidence that last time onshore credit market ran into trouble: derivatives hedge against default
Construction and property sales has been the biggest growth engine since President Xi took office a decade ago. in 2020, China tightened financing rules for developers to crack down on reckless borrowing fearing that a collapse of real estate market would under the entire financial system. But many developers are short on liquidity to cover liabilities. A sales slump that began during the pandemic aggravated the liquidity crisis. Ripple effects of the default of China’s largest developers Evergrande hit other developers such as Sunac China. As of June 1st, every Chinese firms defaulted in 2022 has been a developer except E House China Enterprise, which is a real estate services company.
Private companies still face cash crunch because of the slumping home sales & higher interest rates & closed off of the offshore bond market for many builders. Regulatory measures have underwhelming results. For example, the attempt to encourage banks to increase support for M&A found little resonance. Now regulators are encouraging tools to re-energize to provide investors with ways to hedge their credit risk to restore confidence and help private firms raise funds in the bond market.
Instead of CDS, you have CRMW in China (Credit risk mitigate warrants). CRWM offers insurance against default linked to specific bond or loan obligation, while CDS can be linked to issuer or various debt.
Private developers including Longfor Group, SeaZen, Midea real estate have been on the front line selling domestic bonds protected by risk hedging derivatives signaling regulatory support in the sector. As of June 1st, 54.8bn yuan of CRWM have been sold in the interbank market. 20.5bn were sold in 2021 up from 11.6bn in 2020. But it is still a tiny amount compared to China onshore bond market, which is valued at 138.2trn yuan.
Sellers of CRMW bears the credit risk. There is current 34 sellers with China Zheshang Bank, China bond Issuance, and Bank of Communications topping the list. Most are state owned banks and brokerages.
Facebook Rethinks News Deals, and Publishers Stand to Lose Millions in Payments https://www.wsj.com/articles/facebook-rethinks-news-deals-and-publishers-stand-to-lose-millions-in-payments-11654812251?mod=hp_lead_pos5
Meta platform’s Facebook is reexamining its commitment to paying for news. Promoting some news organizations to prepare for potential revenue short all of tens of millions of dollars.
Meta’s platform Facebook is reexamining its commitment to pay for news. The company is said to paid average annual fees of more than $15mm to Washington Post, over $20 million to New York times, and over $10mm to Wall Street Journal. Facebook dedicated news section, which curates a selection of articles to readers on the platform. And Facebook pays publisher to feature their content without paywall in 2019 as part of a three-year deal.
Facebook hasn’t provided publisher with any indication that it plans to renew the partnership in their current form. There’s rumor that the company is looking to shift its investments away from news and towards products that attract creators to compete with Byte Dance. The company is also investing heavily into the metaverse.
From Walmart to Gap, Which Retailers Have the Most Excess Inventory? https://www.wsj.com/articles/from-walmart-to-gap-which-retailers-have-the-most-excess-inventory-11654776000?mod=hp_lead_pos11
Target warned that profit would drop because it needs to cancel orders with vendors or offer discounts to clear out unwanted goods.
The announcement was latest sign that many big retailers are struggling to match supply with demand, as inflation squeezes shoppers and discretionary and the shift of spending to travel and entertainment. Many retail chains benefited during the pandemic when shoppers used savings and stimulus checks to stock up on goods.
Clothing retailers are also stuck with items that they don’t want. Shoppers have shifted away spending from casual wear in demand during the pandemic, which catches some apparel retailers off guard.
Home improvement retailers Home Depot and Lowe’s also reported inventory growth has outpaced sales.
Stock Losses Accelerate Ahead of Friday Inflation Report https://www.wsj.com/articles/global-stocks-markets-dow-update-06-09-2022-11654759968?mod=hp_lead_pos2
U.S. stock benchmarks posted their biggest declines in more than three weeks Thursday as investors awaited inflation data that will help determine the pace of the federal reserves interest rate increase this year.
S&P closed down -2.4% posting its biggest decline in more than three weeks as investors await inflation data that will help determine the pace of interest rate increase this year.
Amazon Plans to Pull Out of $7.7 Billion Race for Cricket Rights https://www.bloomberg.com/news/articles/2022-06-10/amazon-plans-to-pull-out-of-7-7-billion-race-for-cricket-rights?srnd=premium-asia
Amazon is planning to withdraw from the competition for the rights to stream Indian premier league cricket match. The rights had been estimated to fetch an unprecedented $7.7bn. Amazon had already invested more than $6bn in the country this year. Amazon’s surprise pullout leaves the field to Reliance, Disney, and Sony to compete to bolster its position within the 1.4bn Indian consumer market.
State Street Says It’s Not Seeking a Deal With Credit Suisse https://www.bloomberg.com/news/articles/2022-06-09/state-street-says-it-s-not-pursuing-any-deal-with-credit-suisse?srnd=deals
State Street has said its not pursuing any acquisition or business combination with Credit Suisse.
Calendar Events Today:
8:30am Consumer price index
8:30am Core CPI
10:00am Consumer sentiment
10:00am 5-year inflation expectations
Commentary:
Economics Calendar:
Busy on economic calendar today. Consumer price index for the month is expected to print at 0.7% compared to prior print at 0.3%. Year-over-year CPI on the other hand is expected to cool off and print at 8.2% vs. last month’s 8.3%.
U Michigan’s consumer sentiment index expects consumers to recoup on previous lost confidence and print at 59 vs. 58.4.
Consumers’ lives are worse off without a doubt compared to prior year; real household assets declined, more consumers are tapping into credit card and accessing debt to sustain their lifestyle amidst the elevated prices in groceries and gas prices. Consumer sentiment to print improved compared to prior month is likely wishful thinking.
Soft landing is still possible if CPI prints inflation data begins to slow down, which will likely allow the feds to take pause after another 50bps raise in July.
Equity Market:
Nasdaq closed significantly lower than prior day -2.7%, at 12,269. The decline was rough. It is possible that the tech index gaps up at open tomorrow. We think the index may have at least 200 points of headroom, or 12,500. It may not hold at said level, however. It all depends on the CPI data. The decline yesterday was led by the previously heavily shorted names, more short positions were entered following the recovery of prior days, e.g., $PDD -9%, $MELI -9%, $PTON -8%, etc.
Hang Seng index may see some more choppy sessions. Overall offers good risk/reward buying opportunities at the 21,500 or below. China has a bigger economic problem. The liquidity gap has not resolved. But its not here yet. There’re short-term trading opportunities for Chinese names to run.
Rates Market:
We continue to see a bear flattening as 2s run at a more rapid pace than the 10s. 10y2y spread once again narrowed. Nothing much to say.