Breakfast Bites - Growth concerns weigh on markets

Rise and shine everyone.

We got the Fed’s Senior Loan Officers’ Survey Report yesterday and overall, credit standards are still tightening. Add to that, loan demand is also falling. When credit creation drops in an economy, the velocity of money slows down, which when coupled with a slowdown in the money supply means the economy is contracting. We will put a full report on our take of the SLOOS report, today.

Some of that momentum from last week continued into yesterday but, yields have started move up again. The US Equity Futures are trading lower this morning. Bond Yields remain muted with the yield curve at -0.29%. The US Dollar Index has moved up crossing back to $105.7. Gold has pulled back to $1970/oz and WTI is back below $80/bbl for the first time in 9 weeks. Bitcoin is also back under $35k. Growth concerns are fueling fears in the market with rates down, stocks down, oil down and dollar up.

Asia and Australia

• Asian equities traded mostly weaker Tuesday. Losses greatest in Seoul, which reversed much of yesterday's advance, Hang Seng also lost much of what it gained on Monday. Mainland China benchmarks a few points lower by the close. Losses in Australia, Southeast Asia and India. Taiwan saw a modest advance. Japan steeply lower and closed at its trough.

• The Reserve Bank of Australia hiked their cash rate by 25 bp to 4.35% as expected, keeping the door open for further hikes on inflation concerns. They also tweaked their inflation expectations higher to ~3.5% by end-2024 (vs prior forecast 3.25%) and at top end of 2-3% target band by end-2025 (vs prior forecast 2.75%). The Australian Dollar gave up half of it’s gains from last week, while equities pulled back marginally.

• Surprise numbers from China recording a trade surplus of $56.53B, sharply lower than September’s $77.71B surplus.

  • Exports fell 6.4% y/y in October, coming in much worse than the estimate of 3.3% drop and 6.2% decline in prior month.

  • Imports unexpectedly rose 3% y/y last month, versus an estimate of 4.8% drop and 6.3% fall in September, marking first on-year growth since Sep-22.

• Discouraging data from Japan as well this morning with household consumption and wages coming in lower. Household spending is part of private consumption that makes up 50% of GDP. These are important data points for the BoJ and lower numbers are not encouraging for their plan to exit easing.

  • Household spending dropped 2.8% y/y in September, slightly worse than August's 2.5% drop. Biggest declines occurred in discretionary goods categories.

  • Real wages contracted for an 18th month falling 2.4% y/y in September, slightly shallower than August's 2.8% contraction. Nominal wages rose 1.2%, but inflation is eroding purchasing power.

Europe, Middle East, Africa

• European equity markets mostly lower on Tuesday. Markets in the red given backup in bond yields alongside poor China trade data. Consumer services, energy minerals and consumer durables were the biggest laggards.

• Industrial production in Germany sank 1.4% MoM in September 2023, following a downwardly revised 0.1% fall in August and much worse than forecasts of a 0.1% decrease. It also marks the fourth consecutive month of falling industrial production, adding to further evidence of Germany's economic weakness. Biggest downward impact came from the auto sector (-5%), electrical equipment (-4.4%) and pharmaceutical (-9.2%).

• Saudi Aramco has reported 3Q23 results, with operating income coming in at c. US$62.5bn (+10% QoQ and -22% YoY) and net income amounting to c. US$32.9bn (+13% QoQ and -21% YoY). The yoy decline in net income was largely driven by lower crude oil prices and volumes sold, partially offset by lower production royalties and taxes. The company generated free cash flows of c.US$20.3bn for 3Q23, including capex expenditures of the quarter at c.US$11bn (+22% yoy).

• BoE's chief economist Pill said investors not "unreasonable" to predict a rate cut next summer. Pill added that inflation should decline rapidly over coming months. Was clearest signal yet that BoE is near or at the peak of its rate-hike cycle.

The Americas

• Minneapolis Fed President Neel Kashkari said that overtightening monetary policy is preferable to doing too little and that he’s concerned that inflation could tick up again. Prior to the Fed meeting last week, Fed speakers were pleased with financial conditions tightening but, last week a lot of that was unwound with yield moving lower and the market gaining ~6% in a week.

• Canada’s Ivey PMI came in at 53.4, slight improvement from September; employment, supplier deliveries and price indices declined, inventories gained. BoC's Q3 market participants survey showed median forecasts for modest GDP growth this year and next, inflation easing to 2.2% by end of 2024, and BoC rate cuts starting in April.

• We have a busy day of Fedspeak with Barr, Schmid, Waller, Williams and Logan all on the schedule.

Chart of the Day

Growth worries continue to weigh on the markets. The chart below shows the performance of the S&P 500 around Fed pauses and rate cuts, depending on whether a recession materializes in the next 6 months. Markets could be down -14%, if the US has a recession and up +22% if there’s no recession.

Calendars

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