The Market Environment Gets Messi

Good afternoon,

The Fed is getting ready to raise rates as high as 5.1% before ending its inflation battle, and BlackRock is getting ready for a recession “unlike any other.” Messi’s Argentina ran more circles around France’s defense than SBF’s mom running to deliver his vegan meals in prison.

Let’s dive into the market news buried Friday afternoon (and just Friday afternoon, weekends we're giving custody back to you), and preview the news you actually need to care about for the week ahead.

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Bad News Dumpster Dive

Market movers like to bury bad news Friday, so we've decided to excavate them. 👀 = degree of sus.

👀👀👀

• Tesla plans to announce an EV plant in Mexico as soon as next week (BBG)

• Amazon workers will go on formal strike for the first time in the UK (CNBC)

• Britain’s housing market is headed for its worst slump since the global financial crisis (CNBC)

  • UK rents rose twice as fast as wages in the past year (BBG)

• Binance’s auditor deleted its proof-of-reserves assessment, which found its Bitcoin reserves were overcollateralized (CoinDesk)

• Panama made a shock announcement to intervene in a privately run copper mine after talks for a new tax arrangement collapsed. Yet Quantum Minerals continues to mine the massive Cobre Panama open-pit, despite a government order to close commercial operations. President Laurentino Cortizo has asked not to be named in discussing private information (BBG)

👀👀

• Goldman Sachs plans to cut as many as 4,000 jobs (~8%) as it struggles to reach profitability targets (Semafor)

• Puerto Rico’s financial oversight board filed a plan to restructure about $9 billion of power utility debt after failing to reach a deal with bondholders, signaling the agency’s five-year bankruptcy will take even longer to resolve (BBG)

• Nancy Pelosi backs adding TikTok government device ban to funding bill (Reuters)

• About 270,000 home buyers who bought during this year’s housing market already owe more than their house is worth (Yahoo)

• Rent prices fell 0.4% in November, the largest month-over-month drop since Zillow started tracking this data in 2015 (Axios)

• U.S. households have lost nearly $7 trillion in net worth this year (Reuters)

• Binance’s CZ lost big in 2021, sharing that SBF bought out CZ’s $2.1B stake in FTX – all with all in FTT tokens – which are now worthless (CNBC)

👀

• Fed's Mester sees rates rising more than most policy makers have anticipated (Reuters)

• FIFA reportedly denied Ukrainian President Volodymyr Zelensky’s request to share a message of peace during the World Cup final (CNN)

• A US judge threw out a lawsuit against Kim Kardashian and Floyd Mayweather that charged the two with backing a "pump and pump" crypto scam (BBG)

• Almost four in five US employees fear losing their job during a potential upcoming recession (BBG)

• US Treasury Secretary Yellen announced the world is facing “serious economic headwinds” (Reuters)

• Fed's Daly isn’t as optimistic as the markets on inflation, saying “risks are still on the rise” (BBG)

• The defense bill that the Senate passed Thursday rescinds the military Covid vaccine mandate (AP)

• Indonesia’s mandate to use more palm oil for producing biofuels and lower reserves in Malaysia will continue to support the tropical oil in the coming months (BBG)

• Remote workers refusing to return to the office in San Francisco are behind a $728M hole in the city’s budget (Fortune)

• Mauritius will raise prices for households with heavy power usage by 19% to 29.5% from February due to higher production costs (BBG)

Signal to Noise

Next week’s market outlook and whether you should actually care.

Signals 

• Bullish bond market

• Jobless claims

• Home builders' index

• China’s COVID Zero pivot

Noise

• Personal income and spending data for November

• M&A EOY Push

• Bank bonus szn

• U Mich’s December survey revisions

Signals

Bullish bond market

If you ignore last week’s volatility more than Adidas has been ignoring Kanye, corporate-bond buyers have mailed it in towards their biggest quarterly gains since 2020’s COVID rebound.

It’s a rally that has even the numbers-not-client-facing VP scratching his head. The Treasuries market is warning of an almost certain recession in the US. And the ECB acknowledged last week that a “shallow economic slump” has probably already begun (shocker). This outlook has even the one analyst who religiously tips 25% worried investors may have gotten ahead of themselves.

The concern: consider yield spreads on US investment-grade corporate bonds. During each of the past three US recessions, that measure soared to more than 200 basis points over Treasuries (BBG). The closest it got this year was 165 basis points, and it has since slid back to 131. It’s the same for US junk bonds (i.e. the debt that’s most vulnerable to a downturn). Their spreads are averaging just 445 basis points, compared to recession-era peaks of at least 900.

Credit markets are expected to go out this year the same way as most partners – on a high note, until they hit the New Year and have their bonus pool cut by over half. Strategists anticipate the market will see spreads widening in the first half of next year.

Jobless claims

The only thing the holidays make more volatile than your alcohol budget are jobless claims. Weekly jobless claims are volatile — especially around the holidays — and frequently subject to revision. The number of first-time claims for unemployment benefits fell to 211,000 last week, though economists were expecting claims to be 230,000. That meant a drop of 20,000 from the previous week’s total (upwardly revised to 231,000) – the lowest level since September.

Watch US wage growth, which is on track to fall back to pre-pandemic levels by the second half of next year, according to jobs platform Indeed.

NAHB home builders' index

Housing is off to a hot start this week, with the NAHB housing market index release Monday, housing starting Tuesday, and MBA mortgage applications Wednesday. Weakness is expected across building permits, housing starts, existing home sales and new home sales.

Despite the bleak housing news above (sorry if you skim, the TL;DR is above), homebuilding stocks are ending the year strong. The Homebuilding Industry Index surged relative to S&P 500 lately, with its ratio now at its highest in a year.

China’s COVID Zero pivot

China’s reopening has investors shifting money out of fixed-income assets and into riskier investments like stocks. In case you needed an example of just how bearish the market has been, equities are officially the risky asset on the street, apparently. But this rush of cash out of China’s domestic bond market will put a key corner of the country’s financial system at risk.

The exodus of retail investors pulling their money from so-called wealth management products (WMPs) has triggered one of the steepest selloffs in the domestic market since 2015. In brief, WMPs buy bonds and other relatively safe assets. More importantly, WMPs are one of the primary buyers of bonds issued by local government financing vehicles. They’re the same local entities that played a crucial role in funding China’s roads, bridges and subways in recent years — straining what is already a $1.6 trillion pile of debt.

Increasing bond-market pressures last week prompted Chinese regulators to ask the nation’s biggest insurers and lenders to buy bonds offloaded by WMPs. The catch: buy them using their own balance sheets. We expect them to have about as warm a response to the request as your MD asking his NYU daughter to start paying her own West Village loft rent.

Noise

Personal income and spending data

Personal income and spending data releases this week are expected to give us the same thing they have this calendar year – absolutely nothing. The data for November is expected to show a decline in the core inflation rate to 4.6%, the lowest since October 2021. Personal income is anticipated to soften but still remain positive. Meanwhile, consumer confidence is expected to slightly improve.

M&A EOY Push

In case you’re that analyst whose entire personality has become ranting about Elon Musk and SBF, buckle into your $6k livestreaming chair because: deal making is down.

Despite the typical desire to close out open deals by end of year for all intents and (tax) purposes, this year, banks are stuck with billions of dollars of risky corporate loans. It marks a hangover from deals underwritten in a lower-rate environment, which are unlikely to back sizable new transactions until well into 2023.

So in case you were developing a sliver of sadness for your Morgan Stanley friends getting their bonuses slashed, not to worry. They proved their worth with advice to clients to “take profits before the Bear returns in earnest.”

Thanks for that gleaning insight, guys. Expect the research report in Q2 2023 that breaks the news inflation isn’t transitory.

Bank bonus szn

If the above wasn’t hurtful enough to MS egos, Main Street outperformed Wall Street significantly in 2022. JPMorgan, Citigroup and Bank of America are all expected to decrease bonuses by ~30%. Not to be outdone, Goldman's resident DJ Sol is weighing cuts of 40% and upwards.

There are plenty of reasons why bankers won’t miss 2022, but here’s one more: about 140 debt offerings — bonds, loans and asset-backed securities — worth at least $75 billion were pulled this year. That’s only marginally below the combined total for the two previous years.

University of Michigan’s December sentiment survey revisions

Last week’s second consecutive US CPI miss punctuated a broader negative swing in global inflation surprises over the last few months. The University of Michigan’s December sentiment survey, to be revised next week, found consumers expect 4.6% inflation over the next year, also the lowest in more than a year. Global inflation data are now undershooting expectations.

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