Sive Morten
Special Consultant to the FPA
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Fundamentals
Although NFP report on Friday was important and has shown interesting data, especially about wages rising, still we think that Fitch Agency decision on Monday was more important. Today we take a look at at it from a bit different angle and show you that it has not only economical but political consequences either.
Market overview
The dollar fell on Friday, paring almost all the week's gains, after slowing U.S. jobs growth in July encouraged hopes of a soft economic landing but higher wages suggested the Federal Reserve may need to keep interest rates higher for longer. The U.S. economy added fewer jobs than expected last month. However, solid wage gains and a drop in unemployment to 3.5% signaled continued tightness in the labor market.
Nonfarm payrolls increased by 187,000 jobs last month, the Labor Department's survey of households showed, less than a Reuters' survey of economists who forecast growth of 200,000. Downward revisions in May and June job growth suggested demand for labor was slowing after the Fed's hefty rate hikes. But with 1.6 job openings for every unemployed person, the moderation in hiring might indicate companies are failing to find workers.
The U.S. dollar will hold its ground against most major currencies over the coming three months as a resilient domestic economy bolsters expectations interest rates will remain higher for longer, according to FX strategists polled by Reuters. The dollar is unlikely to give up recent gains in coming months, according to the July 31-Aug. 2 Reuters poll of 70 FX strategists, which showed most major currencies would not reclaim their recent highs for at least six months.
"Do we have more ground to cover? At this point in time I wouldn't say so," said ECB President Christine Lagarde last week after delivering a widely anticipated 25 basis points (bps) rate increase.
Global money market funds attracted massive inflows in the week to Aug. 2 as investors sought safer assets amid a U.S. credit downgrade and weak economic data from the euro zone and China. Investors poured in a net $67.52 billion into global money market funds during the week, marking the biggest weekly net purchase since March 22, according to Refinitiv Lipper data.
Investor caution was sparked after rating agency Fitch unexpectedly cut the United States' top-tier sovereign credit rating to AA+ from AAA on Tuesday, citing fiscal deterioration. Reports this week showed a sharp contraction in factory activity in Europe and a slowdown in manufacturing activity in China, tempering investors' expectations about global growth. The U.S. and the European money market funds drew $58.56 billion and $14.35 billion worth of inflows, respectively
U.S. banks reported tighter credit standards and weaker loan demand from both businesses and consumers during the second quarter, Federal Reserve survey data released on Monday showed, evidence that the central bank's interest-rate hike campaign is slowing the nation's financial gears as intended.
And all this happens on a background of extreme jump of credit cards rates up to 22% and fast rising of national debt interest rates payments in tax revenues of US government.
Meantime, U.S. banks are still heavily using an emergency lending facility set up by the Federal Reserve to help depository institutions meet withdrawal demands. Fed loans via that new facility, the Bank Term Funding Program, ticked up to $105.7 billion as of Wednesday, Fed data released on Thursday showed, from $105.1 billion a week earlier.
It is not surprising because Fed keeps QT, drying liquidity out of the markets, while US Treasury has announced another 103 Bln Bonds auction this week.
Global hedge funds increased their bets that stocks will fall in a week when bonds yields rose after the United States' credit rating was downgraded, a Goldman Sachs report on Friday showed. Hedge funds added 4.6 short positions to each long position from July 7 to Aug. 3. "After three straight weeks of risk unwinds, the overall prime book was net sold on the week," the report said. The bank said its clients are placing bearish bets mainly through indexes and exchange-traded funds, not using particular stocks.
Germany's largest real estate group Vonovia slipped to a 2 billion euro ($2.19 billion) second quarter loss and wrote down the value of its properties by 3 billion euros on Thursday in the latest sign of stress in the country's property sector. After a decade-long property boom, Germany is undergoing a sharp reversal of fortune after an era of cheap money ended.
Germany's real estate sector is mired in its worst crisis in decades, marked by insolvencies, fizzling transactions, falling prices and a stagnation in construction jobs. The company said that the value of its assets fell to 88.2 billion euros in the quarter from the end of March, marking a further writedown of 3.3%. Germany's property industry will ask the government for multi-billion euro support at a meeting with Chancellor Olaf Scholz in September.
Values of city-centre skyscrapers and sprawling malls may take much longer to rebound. And if tenants can't be found, landlords and lenders risk losses more painful than in previous cycles.
Global lenders to U.S. industrial and office real estate investment trusts (REITs), who supplied credit risk assessments to data provider Credit Benchmark in July, said firms in the sector were now 17.9% more likely to default on debt than they estimated six months ago. Borrowers in the UK real estate holding & development category were 4% more likely to default.
___________________________________________________________________
So, last week we've talked about miserable plunge of demand for loans in EU and now we could see the same things in the US - Fed just confirms things that we've showed you couple of weeks ago when we've talked about delinquencies on consumer loans, interest rates raising, decrease of demand for loans and other same stuff. With all this information on the back, it is still unclear why leading research agencies keep talking about soft landing and no recession in observable future. If we take a look at manufacturing and production data, retail sales and PPI - it is obviously could be seen destruction of production sector in EU and the US. Structural crisis is under way. Just take a look at these charts below:
It could be seen that Germany feels particularly bad. It should be noted that all experts paid attention to the growth of Durable good orders in the industrial sector in June by 7%. The only trouble is that this is a rather volatile indicator, which does not reflect the general state of affairs. But by itself, without analysis, it looks beautiful.
The problems in the industrial sector of the USA and the EU are clearly visible (next week there will be information on inflation in July, let's look at the result in the industrial sector), in which there is strong deflation. This cannot but worry the monetary authorities, but it is not very clear how to stimulate the industry: money immediately flows into the financial sector.
It is possible, of course, to stimulate demand, but there are problems here: people prefer to buy cheap Chinese goods. They can be understood, but what should the authorities do? They have already effectively abolished the WTO through a sanctions policy against Russia, and now also cut off China from the world? And then, it will lead to such a sharp decline in the standard of living of the population (in the USA, for sure) that the socio-political consequences will not take long.
In general, the inability to make any specific decision (if you lower the rate, inflation will grow critically, if you raise it, the industry will collapse even faster) creates a complete deadlock. And it is also impossible to do nothing, since the decline of the industry continues. There are no good solutions anymore, but since it's summer, they just wait....
Finally, US imports are falling too, and this usually only happens when the economy is in recession. Weakness in the goods sector is offset by continued growth in the services sector, which is less sensitive to interest rates and accounts for 80% of GDP.
And briefly about job market and inflation. In Telegram channel we've put this week interesting data, showing that with a total employment of 156 million people, 19 million people work in heavily leveraged companies. The reduction of 10-20% of the number in times of crisis is not something out of the ordinary, which we have seen on the example of the same major banks. So with a further increase in the actual cost of financing for these companies, we may well see an increase even in official unemployment figures by 2-3-4%.
And this reduction could happen very soon, because more than 40% of Russell 2000 small cap companies have negative net income. Push a little recession and already more than half of the companies will become unprofitable.
Concerning inflation - you know our position that it is too early to relax and we expect another spiral, starting in August - September. Last week we've discussed situation on crude oil market, that unavoidably will run another prices hike. And other hit has come from China this time. China’s Communist Party and government issued a joint pledge to improve conditions for private businesses in a signal that Beijing wants to bolster corporate confidence as economic growth wanes.
China vowed to treat private companies the same as state-owned enterprises, according to a joint statement from the party’s central committee and the state council on Wednesday. Governments at various levels are also encouraged to invite entrepreneurs for consultation before drafting and evaluating policies. So, the Party turns its face to business to stimulate domestic investment. It remains (which seems to be already happening) only to turn around to face the population in order to break the savings model of behavior (after the covid rape of public consciousness) to stimulate domestic demand and give young people an impulse to work.
This initiative promises in the uncertain future of the coming months-quarters-six months, an increase in consumption of raw materials, and therefore, due to limited demand, an increase in prices for it. For the Fed, this is rather bad news, because with the existing plans for an increase in inflation, everything will get even worse. it seems like all the problems are slowly converging by the beginning of 2024, but if we assume that the process can be controlled (who said JPMorgan failed Signature Bank?), then it would be best to arrange an acute crisis without waiting for this moment. But the level of internal disagreements can affect the pace...
Keep it short - we do not believe in tales about "soft landing", "Fed pivot", "Inflation defeat", "no recession" etc.
FITCH DECISION
No doubts, the prime news is a reduction by the Fitch rating agency of the US rating from the maximum possible AAA to AA+. Formally, because of the size of the debt and budget deficit, as well as "bad management". We can talk for a very long time about the real reasons for this phenomenon, the debt, for example, has definitely grown a lot. By smooth Fitch statement -
showing that credit rating has to be even lower. Fitch evidently tells about coming recession, which is drastically differs to what we've heard for JP Morgan and other so-called experts.
In fact, they tell that the US gradually is turning to "Banana Republic" where nobody responsible for nothing. In next section, Fitch hints that the US is loosing even maths chances to manage its debt. I'm strongly recommend you guys, to read the statement.
But most important thing that Fitch hints on some particular question - saving the Bretton Wood system.
Other words speaking - the currency that other countries use to hold foreign reserves. This is the signal guys - this is the signal to liberal elite to hurry up and start decide problems. We could laugh about "de-dollarization" but not even the destruction or replacement (this will not happen) of the dollar system, but at least just its thorough damage (cutting) through the expansion of the use of the yuan (with all the disadvantages, it is the best currency of the global South), gold, the ruble (despite the fact that Russia has not been particularly engaged in its internationalization) and other "southern" currencies - this is a real threat to the stability of the American economy. If (even partially) it deprives the United States of this very "exceptional financial flexibility", then the vaunted (by J. Yellen) American economy will not stupidly collect bones.
Now, let's translate from bird language into human being one:
But experts suggest that we need to consider such a decision by Fitch from a completely different angle. The fact is that the discussion about which strategic path the American economy should choose has been going on in the US elite for months. Yes, it is not public, but two basic directions have already been formulated quite clearly. Either re-industrialization on the AUKUS platform(at least), or the preservation of the Bretton Woods dollar model with the destruction of industrial and manufacturing sector.
According to the results of 1.5 years of its work in Ukraine, it became clear that the United States needs new sales markets, without which it is impossible to raise the industry. It is for these markets that the fight between the United States and China in Southeast Asia should begin (as many people have already said, in particular, Henry Kissinger). The trouble is that the Biden administration refuses to make decisions. Well, or, not able to.
This is huge markets. In very tight territory, 60-70% of planet population is living. This small circle on the map involves countries with total population around 4 Bln people, with relatively close of Russia, Iran, west Africa and others. Afghanistan has unique ability to provide trade way by land due to very difficult mountain region logistics. Afghanistan is the key to Middle Asia trading region. Taliban want Russia to take part in Trans-Afghan Railway Project - the new transport corridor is supposed to connect the European Union, Russia, Uzbekistan, Afghanistan, Pakistan, India and Southeast Asian countries.
West is loosing Africa continent as well. We expect hot stage of war in Africa in nearest 1-2 years. Here is why Africa has a great economical value despite total poverty and under-developing. Population, labor force, unique nature, raw materials and climate makes Africa next area of potential global economical expansion. All these stuff were in the hands of west neo-colonial doctrine when actual robbing was in a way of getting everything and giving just few grants in a way of help through different social organizations. This keep price of all African resources for the west extremely low. The same as with Russian energy - while it was provided to EU, economy was growing. The new tendency now is on breaking this colonial role by African countries and this is big challenge for Western economy. In fact, this is the question of survival, where US comes in direct clash with China.
Another problem is the US is loosing or maybe already has lost control over Crude oil market. Supply comes around of the US, payments are made not in USD, decision are made without the US under OPEC+ and Russia control and everybody ignores the ceil price.
In this situation, the split of the previously unified liberal (that is, close to transnational bankers, the "Western" global project) elites begins. Because some of them are beginning to realize that the second of the scenarios described above definitely leads to disaster. And there is reason to believe that Fitch's actions are an attempt to warn the remaining slow-wits that decisions need to be made quickly.
If this version is correct, then we will quickly see actions aimed at preparing for the US withdrawal from Western Europe and the Middle East. Yes, there are hints of such a development of events already now, but these are hints that require decryption and interpretation. If we understand the situation correctly, the picture will seriously change in the very near future.
Although NFP report on Friday was important and has shown interesting data, especially about wages rising, still we think that Fitch Agency decision on Monday was more important. Today we take a look at at it from a bit different angle and show you that it has not only economical but political consequences either.
Market overview
The dollar fell on Friday, paring almost all the week's gains, after slowing U.S. jobs growth in July encouraged hopes of a soft economic landing but higher wages suggested the Federal Reserve may need to keep interest rates higher for longer. The U.S. economy added fewer jobs than expected last month. However, solid wage gains and a drop in unemployment to 3.5% signaled continued tightness in the labor market.
Nonfarm payrolls increased by 187,000 jobs last month, the Labor Department's survey of households showed, less than a Reuters' survey of economists who forecast growth of 200,000. Downward revisions in May and June job growth suggested demand for labor was slowing after the Fed's hefty rate hikes. But with 1.6 job openings for every unemployed person, the moderation in hiring might indicate companies are failing to find workers.
The U.S. dollar will hold its ground against most major currencies over the coming three months as a resilient domestic economy bolsters expectations interest rates will remain higher for longer, according to FX strategists polled by Reuters. The dollar is unlikely to give up recent gains in coming months, according to the July 31-Aug. 2 Reuters poll of 70 FX strategists, which showed most major currencies would not reclaim their recent highs for at least six months.
"Do we have more ground to cover? At this point in time I wouldn't say so," said ECB President Christine Lagarde last week after delivering a widely anticipated 25 basis points (bps) rate increase.
Global money market funds attracted massive inflows in the week to Aug. 2 as investors sought safer assets amid a U.S. credit downgrade and weak economic data from the euro zone and China. Investors poured in a net $67.52 billion into global money market funds during the week, marking the biggest weekly net purchase since March 22, according to Refinitiv Lipper data.
Investor caution was sparked after rating agency Fitch unexpectedly cut the United States' top-tier sovereign credit rating to AA+ from AAA on Tuesday, citing fiscal deterioration. Reports this week showed a sharp contraction in factory activity in Europe and a slowdown in manufacturing activity in China, tempering investors' expectations about global growth. The U.S. and the European money market funds drew $58.56 billion and $14.35 billion worth of inflows, respectively
U.S. banks reported tighter credit standards and weaker loan demand from both businesses and consumers during the second quarter, Federal Reserve survey data released on Monday showed, evidence that the central bank's interest-rate hike campaign is slowing the nation's financial gears as intended.
And all this happens on a background of extreme jump of credit cards rates up to 22% and fast rising of national debt interest rates payments in tax revenues of US government.
Meantime, U.S. banks are still heavily using an emergency lending facility set up by the Federal Reserve to help depository institutions meet withdrawal demands. Fed loans via that new facility, the Bank Term Funding Program, ticked up to $105.7 billion as of Wednesday, Fed data released on Thursday showed, from $105.1 billion a week earlier.
It is not surprising because Fed keeps QT, drying liquidity out of the markets, while US Treasury has announced another 103 Bln Bonds auction this week.
Global hedge funds increased their bets that stocks will fall in a week when bonds yields rose after the United States' credit rating was downgraded, a Goldman Sachs report on Friday showed. Hedge funds added 4.6 short positions to each long position from July 7 to Aug. 3. "After three straight weeks of risk unwinds, the overall prime book was net sold on the week," the report said. The bank said its clients are placing bearish bets mainly through indexes and exchange-traded funds, not using particular stocks.
Germany's largest real estate group Vonovia slipped to a 2 billion euro ($2.19 billion) second quarter loss and wrote down the value of its properties by 3 billion euros on Thursday in the latest sign of stress in the country's property sector. After a decade-long property boom, Germany is undergoing a sharp reversal of fortune after an era of cheap money ended.
Germany's real estate sector is mired in its worst crisis in decades, marked by insolvencies, fizzling transactions, falling prices and a stagnation in construction jobs. The company said that the value of its assets fell to 88.2 billion euros in the quarter from the end of March, marking a further writedown of 3.3%. Germany's property industry will ask the government for multi-billion euro support at a meeting with Chancellor Olaf Scholz in September.
Values of city-centre skyscrapers and sprawling malls may take much longer to rebound. And if tenants can't be found, landlords and lenders risk losses more painful than in previous cycles.
Global lenders to U.S. industrial and office real estate investment trusts (REITs), who supplied credit risk assessments to data provider Credit Benchmark in July, said firms in the sector were now 17.9% more likely to default on debt than they estimated six months ago. Borrowers in the UK real estate holding & development category were 4% more likely to default.
___________________________________________________________________
So, last week we've talked about miserable plunge of demand for loans in EU and now we could see the same things in the US - Fed just confirms things that we've showed you couple of weeks ago when we've talked about delinquencies on consumer loans, interest rates raising, decrease of demand for loans and other same stuff. With all this information on the back, it is still unclear why leading research agencies keep talking about soft landing and no recession in observable future. If we take a look at manufacturing and production data, retail sales and PPI - it is obviously could be seen destruction of production sector in EU and the US. Structural crisis is under way. Just take a look at these charts below:
It could be seen that Germany feels particularly bad. It should be noted that all experts paid attention to the growth of Durable good orders in the industrial sector in June by 7%. The only trouble is that this is a rather volatile indicator, which does not reflect the general state of affairs. But by itself, without analysis, it looks beautiful.
The problems in the industrial sector of the USA and the EU are clearly visible (next week there will be information on inflation in July, let's look at the result in the industrial sector), in which there is strong deflation. This cannot but worry the monetary authorities, but it is not very clear how to stimulate the industry: money immediately flows into the financial sector.
It is possible, of course, to stimulate demand, but there are problems here: people prefer to buy cheap Chinese goods. They can be understood, but what should the authorities do? They have already effectively abolished the WTO through a sanctions policy against Russia, and now also cut off China from the world? And then, it will lead to such a sharp decline in the standard of living of the population (in the USA, for sure) that the socio-political consequences will not take long.
In general, the inability to make any specific decision (if you lower the rate, inflation will grow critically, if you raise it, the industry will collapse even faster) creates a complete deadlock. And it is also impossible to do nothing, since the decline of the industry continues. There are no good solutions anymore, but since it's summer, they just wait....
Finally, US imports are falling too, and this usually only happens when the economy is in recession. Weakness in the goods sector is offset by continued growth in the services sector, which is less sensitive to interest rates and accounts for 80% of GDP.
And briefly about job market and inflation. In Telegram channel we've put this week interesting data, showing that with a total employment of 156 million people, 19 million people work in heavily leveraged companies. The reduction of 10-20% of the number in times of crisis is not something out of the ordinary, which we have seen on the example of the same major banks. So with a further increase in the actual cost of financing for these companies, we may well see an increase even in official unemployment figures by 2-3-4%.
And this reduction could happen very soon, because more than 40% of Russell 2000 small cap companies have negative net income. Push a little recession and already more than half of the companies will become unprofitable.
Concerning inflation - you know our position that it is too early to relax and we expect another spiral, starting in August - September. Last week we've discussed situation on crude oil market, that unavoidably will run another prices hike. And other hit has come from China this time. China’s Communist Party and government issued a joint pledge to improve conditions for private businesses in a signal that Beijing wants to bolster corporate confidence as economic growth wanes.
China vowed to treat private companies the same as state-owned enterprises, according to a joint statement from the party’s central committee and the state council on Wednesday. Governments at various levels are also encouraged to invite entrepreneurs for consultation before drafting and evaluating policies. So, the Party turns its face to business to stimulate domestic investment. It remains (which seems to be already happening) only to turn around to face the population in order to break the savings model of behavior (after the covid rape of public consciousness) to stimulate domestic demand and give young people an impulse to work.
This initiative promises in the uncertain future of the coming months-quarters-six months, an increase in consumption of raw materials, and therefore, due to limited demand, an increase in prices for it. For the Fed, this is rather bad news, because with the existing plans for an increase in inflation, everything will get even worse. it seems like all the problems are slowly converging by the beginning of 2024, but if we assume that the process can be controlled (who said JPMorgan failed Signature Bank?), then it would be best to arrange an acute crisis without waiting for this moment. But the level of internal disagreements can affect the pace...
Keep it short - we do not believe in tales about "soft landing", "Fed pivot", "Inflation defeat", "no recession" etc.
FITCH DECISION
No doubts, the prime news is a reduction by the Fitch rating agency of the US rating from the maximum possible AAA to AA+. Formally, because of the size of the debt and budget deficit, as well as "bad management". We can talk for a very long time about the real reasons for this phenomenon, the debt, for example, has definitely grown a lot. By smooth Fitch statement -
showing that credit rating has to be even lower. Fitch evidently tells about coming recession, which is drastically differs to what we've heard for JP Morgan and other so-called experts.
In fact, they tell that the US gradually is turning to "Banana Republic" where nobody responsible for nothing. In next section, Fitch hints that the US is loosing even maths chances to manage its debt. I'm strongly recommend you guys, to read the statement.
But most important thing that Fitch hints on some particular question - saving the Bretton Wood system.
Other words speaking - the currency that other countries use to hold foreign reserves. This is the signal guys - this is the signal to liberal elite to hurry up and start decide problems. We could laugh about "de-dollarization" but not even the destruction or replacement (this will not happen) of the dollar system, but at least just its thorough damage (cutting) through the expansion of the use of the yuan (with all the disadvantages, it is the best currency of the global South), gold, the ruble (despite the fact that Russia has not been particularly engaged in its internationalization) and other "southern" currencies - this is a real threat to the stability of the American economy. If (even partially) it deprives the United States of this very "exceptional financial flexibility", then the vaunted (by J. Yellen) American economy will not stupidly collect bones.
Now, let's translate from bird language into human being one:
But experts suggest that we need to consider such a decision by Fitch from a completely different angle. The fact is that the discussion about which strategic path the American economy should choose has been going on in the US elite for months. Yes, it is not public, but two basic directions have already been formulated quite clearly. Either re-industrialization on the AUKUS platform(at least), or the preservation of the Bretton Woods dollar model with the destruction of industrial and manufacturing sector.
According to the results of 1.5 years of its work in Ukraine, it became clear that the United States needs new sales markets, without which it is impossible to raise the industry. It is for these markets that the fight between the United States and China in Southeast Asia should begin (as many people have already said, in particular, Henry Kissinger). The trouble is that the Biden administration refuses to make decisions. Well, or, not able to.
This is huge markets. In very tight territory, 60-70% of planet population is living. This small circle on the map involves countries with total population around 4 Bln people, with relatively close of Russia, Iran, west Africa and others. Afghanistan has unique ability to provide trade way by land due to very difficult mountain region logistics. Afghanistan is the key to Middle Asia trading region. Taliban want Russia to take part in Trans-Afghan Railway Project - the new transport corridor is supposed to connect the European Union, Russia, Uzbekistan, Afghanistan, Pakistan, India and Southeast Asian countries.
West is loosing Africa continent as well. We expect hot stage of war in Africa in nearest 1-2 years. Here is why Africa has a great economical value despite total poverty and under-developing. Population, labor force, unique nature, raw materials and climate makes Africa next area of potential global economical expansion. All these stuff were in the hands of west neo-colonial doctrine when actual robbing was in a way of getting everything and giving just few grants in a way of help through different social organizations. This keep price of all African resources for the west extremely low. The same as with Russian energy - while it was provided to EU, economy was growing. The new tendency now is on breaking this colonial role by African countries and this is big challenge for Western economy. In fact, this is the question of survival, where US comes in direct clash with China.
Another problem is the US is loosing or maybe already has lost control over Crude oil market. Supply comes around of the US, payments are made not in USD, decision are made without the US under OPEC+ and Russia control and everybody ignores the ceil price.
In this situation, the split of the previously unified liberal (that is, close to transnational bankers, the "Western" global project) elites begins. Because some of them are beginning to realize that the second of the scenarios described above definitely leads to disaster. And there is reason to believe that Fitch's actions are an attempt to warn the remaining slow-wits that decisions need to be made quickly.
If this version is correct, then we will quickly see actions aimed at preparing for the US withdrawal from Western Europe and the Middle East. Yes, there are hints of such a development of events already now, but these are hints that require decryption and interpretation. If we understand the situation correctly, the picture will seriously change in the very near future.
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