Sive Morten
Special Consultant to the FPA
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Fundamentals
After previous "loud" week we've got relative silence - no big amount of data and investors start thinking about coming central banks meeting. Still, there are few important numbers have been released, and most of them are from EU and Germany. In political sphere situation is different - there we have too many events, which we consider, as usual, in our Gold report. Today we will take a look at what is going on in economical sphere. Here is also a lot of things to take a look at.
Market overview
The dollar rose to a near six-month high against a basket of currencies on Tuesday as jitters over global growth, particularly in China, caused investors to flock to the safe-haven U.S. currency. China's services activity expanded at the slowest pace in eight months in August, a private-sector survey showed on Tuesday, as weak demand continued to dog the world's second-largest economy and stimulus failed to meaningfully revive consumption.
The decline in euro zone business activity accelerated faster than initially thought last month as the bloc's dominant services industry fell into contraction, according to a survey which suggests the bloc could drop into recession.
Federal Reserve Governor Christopher Waller said on Tuesday the latest round of economic data was giving the U.S. central bank space to see if it needs to raise interest rates again, while noting that he currently sees nothing that would force a move toward boosting the cost of short-term borrowing again. Financial markets believe the Fed's rate hikes are over. But Waller cautioned against making such an assumption, noting that the Fed has been burned before by data that appeared to show an improvement on the inflation front only to see price pressures come in stronger than expected.
Manufacturing activity in Germany, Britain and the euro zone declined, while their service sectors fell into contraction territory. Also, the U.S. central bank's latest "Beige Book" summary of surveys and interviews released on Wednesday showed economic growth was "modest" in recent weeks while job growth was "subdued" and inflation slowed in most parts of the country.
Although it seems that the "Biege book" is no big deal and almost nobody pays attention to this report, we have to say that this time it was important, because it officially confirms so called "recession" stage in the US economy. If you take into account the natural desire to show that the situation is not so bad, the picture looks quite depressing:
As red-hot U.S. service sector growth accelerated through August, an already alarming gap in economic momentum between the United States on one side and struggling Europe and China on the other has started to widen again. The contrast with a re-accelerating U.S. economy is stark.
China's onshore yuan , on the other hand, slid to a 16-year low versus the greenback, under pressure from a property slump, weak consumer spending, and shrinking credit growth in the world's second-largest economy. China launched a series of policy measures in recent months to revive a stumbling economy after its post-pandemic recovery faltered. Investors remain on the lookout for further support measures from Beijing to revive market confidence.
More data on Thursday further pointed to an overall tenacious U.S. economy. Data showed that initial claims for state unemployment benefits fell unexpectedly to 216,000 in the week ended Sept. 2 from a revised 229,000 the week before. The latest week's numbers were the lowest since February.
European Central Bank (ECB) policymakers warned investors that the decision for a rate increase next week was still up in the air, but a hike was among the options on the table.
Investors are waiting for the U.S. Consumer Price Index reading for August, due Wednesday, especially with oil prices rising. Polls suggest CPI increases 0.5% in August.
Direct lending, a key but expensive source of credit for riskier European firms that banks often shy away from, is running out of steam, a fresh sign that aggressive interest rate rises may be starting to cause funding stress and exacerbate economic pain. Fundraising and deal-making have dropped sharply at European private debt funds, new data shows.
The European private credit industry, which flourished after the 2008 financial crisis as capital-constrained banks cut lending, has raised 26.1 billion euros ($28.02 billion) of new investment so far in 2023, according to data provider Preqin. That represents a 34% drop on the same period last year and follows a record 2022 for capital raised by the sector.
The lending squeeze reinforces expectations that corporate defaults will rise. Fitch Ratings sees a default rate on leveraged loans of 8.5% by the end of 2024, up from 1.7% in July. Private debt funds charge borrowers a hefty premium above benchmark euro zone lending rates, with yields now exceeding 12%, Pictet says.
European companies backed by private capital are now spending around 36% of their earnings before interest and tax on debt payments, up from 23% in 2021, Fidelity International estimates.
The dollar's strength will be difficult to overcome for most major currencies by year-end, according to a Reuters poll of forex strategists who said the risks to their greenback outlook were skewed to the upside. A solid 81% majority of analysts, 43 of 53, who answered an additional question said the risk to their dollar outlook was to the upside, the Sept. 1-6 Reuters poll showed.
WHAT RECENT DATA TELLS US
So, the main news of the week was a sharp drop in industrial orders in Germany by -11.7% per month (for July). Apart from the failure of 2020, which says little about the state of the economy as a whole, since it is associated with covid-19, this is the worst performance since 1976. The optimism associated with the fact that everything seems to have been good in the previous months is not correct in this case. Indeed, the industrial orders indicator is very volatile, but the annual value of industrial production is still in the downturn zone.
Recall that 1976 is the middle of the previous, 3rd CED crisis (Capital Efficiency Drop). And the July collapse suggests that the crisis of European industry has already reached the level of a developed CED crisis. Of course, theoretically, the situation may improve by the end of the year, but there are no economic reasons for this. But the political problems of the European economy have not gone away: the United States will not weaken its pressure in terms of transferring industry from Western Europe to its territory.
With the EU PPI at -7.6% per year — it was lower only in 2009, The 4th CED crisis is coming into full force even in a situation of support for private demand, which did not exist in the 70s.
Euro Area PPI change:
Recent "relief" in the US PMI is a small comfort. With rising bankruptcies and delinquencies, tight loan conditions, dropping of vacancies, drop of US bonds market liquidity and deterioration of real estate market keep low chances on "soft landing". Probably it makes no sense to repeat the same stuff every week. Just take a look at additional pictures below:
And another interesting indicator is the net percentage of banks tightening the standards for providing commercial and industrial loans to large and medium-sized firms in the market. Experts point on some historical threshold level that is reached already:
Besides, BofA shows worrying data, showing that Banks are started accumulate cash, preparing to the worst, while Deposits levels show unstoppable drop. S&P estimated the value of these securities for FDIC-insured banks had more than $550 billion of unrealized losses on their available-for-sale and held-to-maturity securities as of June 30. Banks need higher cash levels to meet liabilities as customers withdraw deposits, and to offset risks such as loan losses as the Federal Reserve keeps interest rates high to cool economic growth and inflation. U.S. lenders are holding onto large piles of cash as insurance against a slowing economy, continuing deposit outflows and looming tougher liquidity rules that could particularly impact mid-sized banks.
Finally to clarify situation, take a look also at this one. 7.6 Trln has to be refinanced within a year with high rate of 5.5%+. Where US Treasury will get 7.6 Trln for refinancing, if they need another ~3 Trln annually just to satisfy government appetite? This is 11 Trln of new 5.5%+ debt, so, what will happen with the interest payments?
And now is most interesting thing. The average rate of US debt now is about 2.8%, which is relatively small still, but it is growing by 8 bps per month:
Closer to the New Year it will speed up significantly. And by the summer it will be generally mind-blowing, if everything goes as it is written above. The markets will need to be completely drained of blood. And then the elections will be on the nose. Collapses and panics should not be allowed. The solution to all such vile problems is... a printer. And media tells as about PMI... it is ridiculous... Markets very soon will meet the cruel reality and all dovish expectations that they see through their rosy glasses will be broken.
And briefly we also have these ones:
And, as a conclusion to our Fundamental part, let's put the quote of Deutsche Bank:
It means that our long term view stands intact. With a unprecedented liquidity draught and coming new spiral of inflation investors very soon will rush to buy US Dollar. This process is already underway. But swan song will last not for too long - closer to 2025 the US debt pyramid will start falling apart. And some radical measures of political kind will be needed. We even will not dare to suggest what they could be. For now and in nearest few months the major thing that we need to know is not to bet against the dollar.
After previous "loud" week we've got relative silence - no big amount of data and investors start thinking about coming central banks meeting. Still, there are few important numbers have been released, and most of them are from EU and Germany. In political sphere situation is different - there we have too many events, which we consider, as usual, in our Gold report. Today we will take a look at what is going on in economical sphere. Here is also a lot of things to take a look at.
Market overview
The dollar rose to a near six-month high against a basket of currencies on Tuesday as jitters over global growth, particularly in China, caused investors to flock to the safe-haven U.S. currency. China's services activity expanded at the slowest pace in eight months in August, a private-sector survey showed on Tuesday, as weak demand continued to dog the world's second-largest economy and stimulus failed to meaningfully revive consumption.
The decline in euro zone business activity accelerated faster than initially thought last month as the bloc's dominant services industry fell into contraction, according to a survey which suggests the bloc could drop into recession.
Federal Reserve Governor Christopher Waller said on Tuesday the latest round of economic data was giving the U.S. central bank space to see if it needs to raise interest rates again, while noting that he currently sees nothing that would force a move toward boosting the cost of short-term borrowing again. Financial markets believe the Fed's rate hikes are over. But Waller cautioned against making such an assumption, noting that the Fed has been burned before by data that appeared to show an improvement on the inflation front only to see price pressures come in stronger than expected.
Manufacturing activity in Germany, Britain and the euro zone declined, while their service sectors fell into contraction territory. Also, the U.S. central bank's latest "Beige Book" summary of surveys and interviews released on Wednesday showed economic growth was "modest" in recent weeks while job growth was "subdued" and inflation slowed in most parts of the country.
Although it seems that the "Biege book" is no big deal and almost nobody pays attention to this report, we have to say that this time it was important, because it officially confirms so called "recession" stage in the US economy. If you take into account the natural desire to show that the situation is not so bad, the picture looks quite depressing:
- Most U.S. counties showed modest economic growth in July and August;
- Most districts reported that price growth slowed;
A rapid slowdown in price growth was observed in the manufacturing and consumer goods sectors (this is probably the serious deflation that we've mentioned earlier); - The growth number of jobs across the country was subdued;
- In some Fed districts, consumers have run out of savings and run into debt.
- Almost in all districts companies have indicated expectations that wage growth will significantly slow down in the near future.
As red-hot U.S. service sector growth accelerated through August, an already alarming gap in economic momentum between the United States on one side and struggling Europe and China on the other has started to widen again. The contrast with a re-accelerating U.S. economy is stark.
China's onshore yuan , on the other hand, slid to a 16-year low versus the greenback, under pressure from a property slump, weak consumer spending, and shrinking credit growth in the world's second-largest economy. China launched a series of policy measures in recent months to revive a stumbling economy after its post-pandemic recovery faltered. Investors remain on the lookout for further support measures from Beijing to revive market confidence.
More data on Thursday further pointed to an overall tenacious U.S. economy. Data showed that initial claims for state unemployment benefits fell unexpectedly to 216,000 in the week ended Sept. 2 from a revised 229,000 the week before. The latest week's numbers were the lowest since February.
European Central Bank (ECB) policymakers warned investors that the decision for a rate increase next week was still up in the air, but a hike was among the options on the table.
Investors are waiting for the U.S. Consumer Price Index reading for August, due Wednesday, especially with oil prices rising. Polls suggest CPI increases 0.5% in August.
Direct lending, a key but expensive source of credit for riskier European firms that banks often shy away from, is running out of steam, a fresh sign that aggressive interest rate rises may be starting to cause funding stress and exacerbate economic pain. Fundraising and deal-making have dropped sharply at European private debt funds, new data shows.
The European private credit industry, which flourished after the 2008 financial crisis as capital-constrained banks cut lending, has raised 26.1 billion euros ($28.02 billion) of new investment so far in 2023, according to data provider Preqin. That represents a 34% drop on the same period last year and follows a record 2022 for capital raised by the sector.
The lending squeeze reinforces expectations that corporate defaults will rise. Fitch Ratings sees a default rate on leveraged loans of 8.5% by the end of 2024, up from 1.7% in July. Private debt funds charge borrowers a hefty premium above benchmark euro zone lending rates, with yields now exceeding 12%, Pictet says.
European companies backed by private capital are now spending around 36% of their earnings before interest and tax on debt payments, up from 23% in 2021, Fidelity International estimates.
The dollar's strength will be difficult to overcome for most major currencies by year-end, according to a Reuters poll of forex strategists who said the risks to their greenback outlook were skewed to the upside. A solid 81% majority of analysts, 43 of 53, who answered an additional question said the risk to their dollar outlook was to the upside, the Sept. 1-6 Reuters poll showed.
WHAT RECENT DATA TELLS US
So, the main news of the week was a sharp drop in industrial orders in Germany by -11.7% per month (for July). Apart from the failure of 2020, which says little about the state of the economy as a whole, since it is associated with covid-19, this is the worst performance since 1976. The optimism associated with the fact that everything seems to have been good in the previous months is not correct in this case. Indeed, the industrial orders indicator is very volatile, but the annual value of industrial production is still in the downturn zone.
Recall that 1976 is the middle of the previous, 3rd CED crisis (Capital Efficiency Drop). And the July collapse suggests that the crisis of European industry has already reached the level of a developed CED crisis. Of course, theoretically, the situation may improve by the end of the year, but there are no economic reasons for this. But the political problems of the European economy have not gone away: the United States will not weaken its pressure in terms of transferring industry from Western Europe to its territory.
With the EU PPI at -7.6% per year — it was lower only in 2009, The 4th CED crisis is coming into full force even in a situation of support for private demand, which did not exist in the 70s.
Euro Area PPI change:
Recent "relief" in the US PMI is a small comfort. With rising bankruptcies and delinquencies, tight loan conditions, dropping of vacancies, drop of US bonds market liquidity and deterioration of real estate market keep low chances on "soft landing". Probably it makes no sense to repeat the same stuff every week. Just take a look at additional pictures below:
And another interesting indicator is the net percentage of banks tightening the standards for providing commercial and industrial loans to large and medium-sized firms in the market. Experts point on some historical threshold level that is reached already:
Besides, BofA shows worrying data, showing that Banks are started accumulate cash, preparing to the worst, while Deposits levels show unstoppable drop. S&P estimated the value of these securities for FDIC-insured banks had more than $550 billion of unrealized losses on their available-for-sale and held-to-maturity securities as of June 30. Banks need higher cash levels to meet liabilities as customers withdraw deposits, and to offset risks such as loan losses as the Federal Reserve keeps interest rates high to cool economic growth and inflation. U.S. lenders are holding onto large piles of cash as insurance against a slowing economy, continuing deposit outflows and looming tougher liquidity rules that could particularly impact mid-sized banks.
Finally to clarify situation, take a look also at this one. 7.6 Trln has to be refinanced within a year with high rate of 5.5%+. Where US Treasury will get 7.6 Trln for refinancing, if they need another ~3 Trln annually just to satisfy government appetite? This is 11 Trln of new 5.5%+ debt, so, what will happen with the interest payments?
And now is most interesting thing. The average rate of US debt now is about 2.8%, which is relatively small still, but it is growing by 8 bps per month:
Closer to the New Year it will speed up significantly. And by the summer it will be generally mind-blowing, if everything goes as it is written above. The markets will need to be completely drained of blood. And then the elections will be on the nose. Collapses and panics should not be allowed. The solution to all such vile problems is... a printer. And media tells as about PMI... it is ridiculous... Markets very soon will meet the cruel reality and all dovish expectations that they see through their rosy glasses will be broken.
And briefly we also have these ones:
- Housing construction in the eurozone is declining at the fastest pace since the beginning of the pandemic.
- Mortgage demand in the US is falling to a 27-year low, despite a 10bp drop in interest rates on a 30-year fixed mortgage to 7.21% this week.
- UK builders are experiencing a sharp decline in orders as rates rise.
- Electricity generation in Germany in the first half of 2023: -11.4% YoY. The German IfW reduces the GDP forecast for 2023 from -0.3% to -0.5%:
- Retail sales in the eurozone have fallen by 1% YoY: real incomes are falling, and households are now spending most of their income on expensive energy, as well as on repaying loans and mortgages, undermining demand for other goods.
- Global industry PMI in Europe: 19 out of 20 sectors recorded a decline in production in August.
- Concerns about inflation spur the Japanese to buy gold. The retail price reached an all-time high, exceeding 10,000 yen per gram.
- A strong US dollar stimulates threats of intervention from Japan.
And, as a conclusion to our Fundamental part, let's put the quote of Deutsche Bank:
It means that our long term view stands intact. With a unprecedented liquidity draught and coming new spiral of inflation investors very soon will rush to buy US Dollar. This process is already underway. But swan song will last not for too long - closer to 2025 the US debt pyramid will start falling apart. And some radical measures of political kind will be needed. We even will not dare to suggest what they could be. For now and in nearest few months the major thing that we need to know is not to bet against the dollar.
