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Good afternoon,

A clientele whose collateral is “making the world a better place” isn’t as valuable as some bankers thought. But you’ve seen SVB hysteria from every financial journalist and their cat. 

It’s inflation week, with US CPI kicking off inevitable recession hysteria. You can then escape across the pond for England and Europe’s own economic drops.

Let’s dive in.

Economy Heat Check

As of 3/10/2023 market close, unless otherwise stated.

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Bad News Briefings

Market movers like to bury bad news on Friday afternoon, so we've decided to excavate them. 

• Meta plans new layoffs that could match last year’s in scope (~13%) (WSJ)

• Saudi sovereign-wealth fund close to deal for Boeing jets (WSJ)

• Equity REITs plunged in value post-Powell testimony and SVB closure confirmation (SA)

• India considers offline functionality of a digital rupee (CBDC) (Cointelegraph)

• UK PM Rishi Sunak visits the US to unveil Australian nuclear-sub plan with Biden (BBG)

• AMC registers APEs for Antara; CEO Aron advocates for share conversion (SA)

• Lionel Messi invests in a web3 gaming startup (Benzinga)

• Madison Square Garden sues NY Liquor Authority in their escalating spat (BBG)

Performance Review

Firm updates your bank may be less inclined to disclose. 

• Former Goldman Sachs banker sentenced to 10 years in prison for 1MDB scandal (WSJ)

• The former head of Citadel's Surveyor Capital unit is founding an equity hedge fund (BBG)

• Goldman’s top stock trader makes surprise exit (FT)

• Ex-Citi Global Markets trader banned from working in Hong Kong for 10 years after he failed to “discharge his duties as a responsible officer” (BBG)

• Citi is building out its trading floor in Paris after staff rebelled against its original decision to build a single post-trading Brexit hub in Frankfurt (EF)

• Ex-Nomura MD from London resurfaced at a French bank in Paris (EF)

• SVB CEO sold $3.6M in stock days before bank’s failure (Benzinga)

• SVB’s auction block includes VC-focused lender and a wealth unit (BBG)

• Peter Thiel’s Founders Fund withdrew millions from SVB the day before its collapse (BI)

DEEP DIVE: The Death of Petrodollar Dominance

For decades, the world has wanted dollars. That could come to an end soon. 

India’s deal with Russia is another step along the path of the petrodollar coming to an end. Here’s why that matters for the US. 

As much as we try to avoid the government and its policies in this newsletter, every one has its consequences. Some intended, a whole bunch unintended.

That’s what’s on macroeconomists' minds after the report Reuters just dropped. It details the recent oil deals between India and Russia that have been settled in currencies other than dollars.

In the shortest, most over-simplified summary you’ll get on a conflict that’s roped in the global economy: there’s at least one serious unintended consequence of the economic sanctions levied against Russia after its invasion of Ukraine. The erosion of the US dollar’s dominance.

A Briefer on the Oil Trade

The majority of global oil sales are priced in dollars. This ensures a constant demand for the greenback (i.e. US dollar), since every country needs dollars to buy oil. This helps support the US government’s “borrow and spend” policies, along with its massive deficits.

So as long as the world needs dollars for oil, it guarantees demand for greenbacks. That means the Federal Reserve can keep printing dollars to monetize the debt.

But, if that demand were to suddenly disappear, or even shrink significantly, it would create a big problem for the US economy.

Enter: India

India ranks as the number three oil importer in the world. Russia became the country’s leading provider of crude after Europe dramatically cut Russian oil imports in the wake of the Ukraine invasion. India also happens to be Russia’s top oil customer.

While India doesn’t recognize the sanctions on Russia, most of its oil purchases have reportedly complied.

The Group of Seven economies, the European Union and Australia all imposed an oil price cap on Russia on December 5. So Indian importers started to pay for most Russian oil in non-dollar currencies. 

Instead of settling oil trades in dollars, Russia and India have used UAE dirham and Russian rubles. These transactions total “several hundred million dollars,” according to sources quoted by Reuters.

Skirting the US-Sanctioned Price Cap

Yes, the dollar’s pre-eminence has periodically been called into question. And these questions typically die down due to the overwhelming advantages of using the most widely-accepted currency for business.

India’s oil trade, in response to the turmoil of sanctions and the Ukraine war, provides the strongest evidence so far of a shift into other currencies that could prove lasting.

Meanwhile, some Dubai-based traders, paired with Russian energy companies Gazprom and Rosneft, are seeking non-dollar payments for certain niche grades of Russian oil. In recent weeks, these grades have been sold above $60 a barrel price cap. 

But the US put a $60 price cap on Russian crude. 

In the last week, the price of crude oil exported by Russia has hit a three month high. And Russia isn’t the only country drifting away from the petrodollar.

The Downfall of the Dollar 

In January, Saudi Arabia’s Finance Minister began discussions on behalf of the country to trade in currencies other than the US dollar. In Saudi’s perspective, there are “no issues” with discussing how it settles its trade arrangements. 

In other words, Saudi Arabia is less committed to the US dollar than banks are to WFH. Shocker. Saudi’s Finance Minister went on to suggest the euro and Saudi riyal as alternatives. 

Saudi’s rationale? That a move to diversify beyond the dollar would “help improve the trade around the world.”

Enter: China

Beyond Russian sanctions, tensions between the US and China are said to be eroding the long-established norms of dollar-dominated global trade. In other words: when you’re in a fight, even if a passive aggressive one, they may be less inclined to support your stuff. 

Russia holds a chunk of its currency reserves in renminbi, while China has reduced its holdings of dollars. But last September, Russian President Putin announced that Moscow had agreed to sell gas supplies to China for yuan and rubles, rather than dollars.

The Broader Conflict & Consequences

Over the last several years, many countries have made a concerted effort to limit dependence on the US dollar. The economic warfare waged against Russia reveals exactly why.

The US hit Russia with a round of economic sanctions after Russia “recognized” two breakaway republics in Ukraine and announced it would send troops into those regions. President Biden announced additional sanctions after Russia invaded Ukraine.

Leveraging the greenback as a foreign policy tool may be good policy, but it can also accelerate de-dollarization globally. That could even threaten the dollar’s role as the world’s reserve currency. Yes, that’s a worst case, clickbait scenario. 

It’s no secret the US will aid friends in need with upwards of billions of dollars. Similarly, less than favorable relations can find themselves ghosted. That means they’re locked out of SWIFT, the global financial system that the US effectively controls through the dollar.

That is the nuclear option when it comes to economic warfare.

Initially, the US said it wouldn’t block Russia from SWIFT. But then sanctions tightened, and Russia was ultimately locked out of the global payment system.

Diversifying from the Dollar 

It’s no wonder that other countries are becoming wary of relying exclusively on the dollar. Minimizing dollar exposure could mean minimizing the impacts of American foreign policy. 

This is one of the reasons many central banks are stockpiling gold.

The current de-dollarization trend doesn’t directly threaten the dollar’s role as the world reserve currency. Yet. But it could foreshadow bigger problems down the road, especially if the trend continues to accelerate. 

After the Russian invasion, IMF’s Managing Director warned that sanctions on Russia could erode the dollar’s dominance. The thinking here is that it would encourage smaller trading blocs using other currencies. That’s exactly what’s beginning to happen today.

If the demand for dollars were to plunge significantly, interest rates on US Treasury bonds would soar. This would be an untenable situation for a government servicing more than $31T in debt.

So the world isn’t on the verge of dumping the dollar. But there does seem to be an increasing likelihood the petrodollar could face competition from other currencies. And that is another signal the dollar may eventually lose its status as the sole reserve currency. 

Looking Down the Road for the Dollar 

The Trade Deficit is down from the records set last year, but the US is still printing very large Deficits. This means the US is still flooding the world with dollars in exchange for goods.

But if the petrodollar falls, then the rest of the world will be much less willing to absorb the dollars that have been printed at will for over a decade. Those dollars could come rushing back to the US, leading to a massive surge in inflation.

Again: this is the worst-case scenario for the US. But it’s also not a difficult scenario to imagine. Traders are eyeing physical gold and silver, which have historically been the best assets to own in such an environment. 

Or maybe we’ve just watched too much Ron Swanson recently. 

WEEK AHEAD: Signal to Noise

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

• Tuesday: US February CPI (🐂); UK Unemployment (🐻)

• Wednesday: US PPI & Retail Sales (🐻); US NAHB Housing Market Index & MBA Mortgage Applications (🐻); UK Annual Budget (🐂)

• Thursday: US Initial Jobless Claims (🐻); ECB Rate Decision (🐂)

Signals 🐂

US February CPI

Today should put to bed all SVB-related news so you can get back to actual economic programming that kicks off tomorrow. The highly-anticipated February consumer price index report will be released Tuesday morning. 

Few doubt that the US CPI has peaked. The issue at hand is the pace of decline. The year-over-year measure of CPI has slowed every month since last June when it peaked at 9.1%. For the next few months, with the exception of April, the slowdown looks set to accelerate. A 0.4% rise – the projection today – in CPI last month would see the year-over-year pace slow to about 6%. In March last year, the CPI jumped by 1%. 

The bias heading into the report may be that investors are concerned that the Fed could over-tighten, officially kicking off a recession. Economists warn that banks, in particular, could feel even more pain after SVB. Specifically, some worry SVB creates a trend to “sell first, ask questions later.”

Tuesday’s CPI print, paired with last Friday’s jobs report, is the combo the Fed will use to decide how much it will raise rates.

ECB Rate Decision

The hawks are in control of the European Central Bank's (ECB) monetary policy. Inflation readings are elevated, the core rate is at a new cyclical high, and economic activity has picked up. This triple whammy has quieted resistance from those inclined for more restrictive policy. 

In December, forecasts optimistically saw the CPI falling from 8.4% last year to 6.3% this year, 3.4% in 2024 and 2.3% in 2025. The ECB forecast the region's economy will grow by 0.5% this year and 1.9% in 2024. The market isn’t as bullish. The median forecast is for the economy to expand by 0.4% this year and only 1.2% next year.

The ECB is widely expected to raise interest rates by 50 basis points on Thursday, but it’s what comes next that investors will be most interested in. Talk suggests that the EU's strategic goals (digital transition, environmental sustainability, and expanding defense capabilities) will be taken into account at this meeting. 

This makes the new economic projections that are released alongside the decision, and the press conference, arguably the most important things to watch out for.

UK Chancellor Hunt Delivers Annual Budget

The UK drops its spring budget on March 15. And despite our roast of the London Stock Exchange last week, the UK’s somewhat-better growth puts Chancellor Hunt in a better position than a few months ago. 

But room to maneuver is very limited, especially relative to demands. Prime Minister Sunak's two predecessors pushed to drop the corporate plan increase (to 25% from 19% starting next month). Economists expect those efforts to prove ineffective.

Meanwhile, public sector strikes continue. A pay package, perhaps with one-off payouts the government has offered on average (~3.5%), would require more funds. Defense will also be looking for more funds, some of which will assist Ukraine. Lastly, extending the guarantee on household energy will cost roughly £3B.

The budget is unlikely to have much impact on the outlook for the Bank of England, which meets on March 23. Forecasts anticipate a move to the base rate of 4.25%. The terminal rate in the swaps market is about 4.75%.

Noise 🐻

US Initial Jobless Claims

The nonfarm payrolls release came and went, and the US CPI print on Tuesday is the remaining puzzle piece the Fed needs to prepare for their March meeting. In other words: pay attention to the other, sooner report. That’s what investors will track more closely in order to decipher the underlying economic signal. 

The labor market is still strong, but is showing signs it is ready to soften as wages cool. The February jobs data supports ideas that the surge in activity in January was not sustainable, even if more than just a fluke created from benchmark and methodological changes, seasonal adjustment distortions since Covid, and unseasonably warm weather.

US Price Producer Index & Retail Sales Data

While the inflation report will get the majority of the attention, traders will also pay close attention to the February retail sales data. Consensus expects it will reveal consumer spending is weakening. 

Retail sales jumped by 3% in January, after falling by 1.1% in November and December. Economists look for a small gain, but there may be scope for disappointment. The measure used in some GDP models (which excludes auto, gasoline, building material and food services) is expected to fall by 0.3%. That makes the massive gain of 1.7% in January look like an anomaly – it’s the only gain in four months. 

US NAHB Housing Market Index & MBA Mortgage Applications

Housing data is expected to remain weak this week. Even if the Fed were to start cutting rates, affordability will remain an issue, particularly for first-time buyers. 

According to the National Association of Realtors, first-time homebuyers dropped to a record low in 2022, making up only 26% of all buyers, down from 34% in 2021 and a peak of 50% in 2010. As such, some experts are becoming increasingly worried that new home sales volume and prices will continue to head south. This could cause homebuilders to start losing money, tanking stock prices. 

The mortgage purchase applications index took another hit for the week ended February 24th, falling 5.6% from the prior week. The index is down 45% from a year ago – its lowest level since 1995. 

UK Unemployment 

Labor market figures on Tuesday are a standout release across the pond next week, but it’s the spring budget a day later that people will be most interested in. The fact that the UK is not already in recession will come as a big surprise to many. 

One of the benefits of that may be a little extra fiscal headroom for the Chancellor. Giveaways may be few and far between for a number of reasons, which may make holding off more appealing to the government. That being said, the focus within the report will be on wage growth.

Meme Bank

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