2 Recessions and a Sale

Japan and UK in recession; Buffett sells Apple; Putin prefers Biden

Rise and shine everyone.

There’s a lot going on across the world, even before US markets open. We got news from Japan that they have slipped into a technical recession. That was followed up with news from the UK, also slipping into a recession. While equities reacted to this positively, hoping that this would mean easier central bank policies for both countries, we examine the components of GDP growth and what could happen from here, in more detail below.

US Equity Markets are trading marginally higher this morning after a positive close yesterday with the SPX crossing back above 5000. Yields are lower, the US Dollar is marginally lower. Gold and Bitcoin are higher while oil is pulling back now around $76/bbl.

Look out for US Retail sales number at 8:30am ET, which is supposed to come in negative after last month’s strong December growth. I doubt a miss would cause a reaction similar to CPI day but, it s something to keep an eye on.

Big Stories

Japan in recession

Japan falls into a technical recession with two quarters of back-to-back negative GDP.

Annualized GDP also came in at -0.4%, after -3.3% last quarter.

Private consumption continued to fall while a decline in business spending accelerated and government spending was weak. Exports came in positive because of a weaker Yen (not surprising!)

But the weaker Yen also means imports are more expensive, causing inflation and weighing on prices. Almost 80% of the categories now show accelerating inflation, and food inflation continues to remain high. Real wages are still negative. Fiscal policy & government spending was meant to offset some of that decline but, looks like it wasn’t enough.

This makes the path of rate hikes a little more uncertain. The immediate market reaction was that equities closed higher, as traders price in the idea of continued easy monetary conditions.

On the one hand, the BoJ doesn’t want to hike to early so that quash inflation so much that it become deflation and on the other hand, the Government wants them to hike enough so people can start spending again.

A decision will likely be made after April and the Shunto Spring Wage negotiations but, the BoJ will likely not wait for positive wage growth. They have already hinted though, that hiking will be very gradual, and conditions will remain easy. A recession makes being careful even more plausible.

The UK is also in a recession

The recession is mild and it’s nothing to write home about. But, still it’s technically a recession. A look beneath the surface shows all major sectors were down.

On the expenditure side, there was a falling exports, imports, household spending and government consumption. On the plus side, the fall was offset by an increase in gross capital formation, mostly other buildings and structures.

Full year GDP growth came in positive at mere 0.1% in 2023 compared to 2022.

The immediate reaction was very muted. Equities are slightly lower now, as is the GBP.

Over the last week, we got softer inflation numbers and lower wage growth numbers. While both are heading in the right direction, they still remain higher than other DMs and target levels. (if you remember the charts I posted over the past 3 days).

But, this recession print now puts the Bank of England in a pickle concerning rates by the summer - to cut or not to cut?

My view is that they will wait until the summer - the meetings are 20 June and 1 August. I’m thinking 1 Aug, because this recession is still very mild, in the face of how high inflation remains. By that time they will receive a few more good inflation reports and real GDP growth may actually come in positive.

“Buffett sells Apple”

In other interesting news, the funds published their 13F filings for 31 Dec 2023. This is where all the major funds reveal what they have bought, sold, and maintained. While the information is dated, many people still review this either for new ideas or they start panicking about their holdings.

Case in point - Buffett sold Apple… that’s what the headline reads but, in reality, he sold a sliver of his holdings. To put things in context, he sold 10 million shares and still holds just over 905 million shares. He sold 1.09% of his current Apple holdings, and if you’re still not convinced that he hasn’t lost all faith in Apple, here’s a picture for you.

Chart of the Day

BofA on US Tax Refunds: About $7B of refunds has been refunded in the first two weeks of refund season and refunds are down 57% YoY for the same period. Remember this was quite a big driver of spending last year.

  • U.S. intelligence agencies have raised alarms about Russia's intentions to deploy a nuclear weapon in space.

  • Joachim Nagel of the European Central Bank (Germany) advocated for a cautious approach in determining monetary policy. He emphasized:

    • The lack of concern over not achieving the inflation target immediately.

    • Historical evidence suggests that premature rate cuts pose greater risks than delaying them.

    • Although inflation is trending towards the target, it has not yet reached the desired level.

    • He anticipates inflation returning to 2% by no later than 2025.

  • Luis de Guindos of the European Central Bank (Spain) expressed optimism about the trajectory of inflation and emphasized the ECB's commitment to making data-driven decisions.

  • The German government plans to lower its GDP growth forecast for 2025 from 1.5% to 1.0%, following an announcement by the German Economy Minister, Robert Habeck, about revising the 2024 growth forecast downward to 0.2%.

  • President Putin, when questioned about the U.S. elections, expressed a preference for the 'more predictable' Biden over Trump.

  • Michael Barr from the Federal Reserve mentioned that the Federal Open Market Committee (FOMC) is set to have a comprehensive discussion on balance sheet matters soon, highlighting the necessity for more positive inflation data.


(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)

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