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Private and public markets just got Powell’d.

In a time where bonuses are slashed and layoffs loom, the Fed chief’s two-day tour around Congress shows just how much you have to put up with for that $190k bag.

Let’s dive in.

Economy Heat Check

As of 3/8/2023 market close, unless otherwise stated.

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Briefings

• Palantir lands $99.6M deal with US State Department (Reuters)

• US crude stockpiles decreased for the first time in 2023 (WSJ)

• Apple is reshuffling its international sales operations to make India its own region (BBG)

• Reddit is still planning to go public later this year (M)

• The EU is creating a gas buying collective (BBG)

• Poland’s top refiner is weaning itself off of Russian crude oil (BBG)

• Fake sports card scheme led to $800,000 in losses (MarketWatch)

• LME nickel trading remains crippled by crisis (Reuters)

Performance Review

Firm updates your bank may be less inclined to disclose.

• Credit Suisse delays its annual report after a last-minute call from the SEC (CNBC)

• Citigroup to recalibrate investment banking headcount "as required" (Reuters)

• Apollo, Ares and Blackstone edge out banks to offer Carlyle the largest direct loan of its kind ($5.5B) (FT)

• Silvergate Capital, a crypto bank, is shutting down after failed talks with FDIC (WSJ)

• Swaps traders are now pricing in a full percentage point of Fed hikes over the next four meetings (BBG)

• Nomura's crypto spinout acquires top London crypto broker (EF)

• Stripe is raising $6B to resolve an employee tax issue, delaying its public listing. Thrive Capital, General Catalyst, Andreessen Horowitz, and Founders Fund are participating in the round along with Goldman Sachs private wealth clients (Newcomer)

Expectations Reset

The week in review.

Fed Chair Powell blew the door wide open on faster rate moves and a higher peak in interest rates. Powell spoke on the state of the U.S. economy in his semiannual testimonies to Congress on Tuesday and Wednesday. With growing fear of recession, the sessions were tenser than an intern called into a surprise one-on-one.

Persistently strong hiring and consumer spending data are complicating Powell’s attempts to fight inflation. In discussing recent economic releases, Powell noted that the data suggests "the ultimate level of interest rates is likely to be higher than previously anticipated." So far, Powell has seen little evidence of deflation in core services.

Following Powell’s hawkish speech Tuesday, US 2-year yields jumped to almost 5% while the S&P 500 and Dow each fell 1%. Fed swaps have repriced to favor a 50 bps hike in March instead of a 25 bps one.

Consumer credit in January rose just $14.8B, a modest increase from last month's downward revised $10.7B. Despite the growth, it’s a huge miss from the median consensus estimate of $25.4B.

Consumer credit increased at a seasonally adjusted annual rate of 3.7% in January. Revolving credit increased at an annual rate of 11.1%, while non-revolving credit increased at an annual rate of 1.2%. All that in a time of rising rates.

Consumers’ confidence in the economy and their own household finances continues to improve. We can’t all have the luxury of watching Powell’s testimonies (on mute CNBC). As of this month, 45% (vs. 41% last month) of respondents expect their situation to get better. That marks the most optimistic reading since summer 2021.

The 2-year/10-year yield curve is now 100 basis points inverted, for the first time since September 1981. The 2-year Treasury note yield just surpassed 5% for the first time in 15 years.

The shape of the yield curve is a key indicator of the economy’s health (or lack thereof right now). It provides insights into the market's expectations for future interest rates and economic growth.

Even though the curve is more inverted than the aspirational photo at a Beverly Hills butt lift surgeon’s office, Powell tends to care less. To the Fed, the 3-year/10-year yield curve is more intriguing because it suggests the market's expectations for inflation over a longer period.

The Eurozone's economy flatlined in the final quarter of 2022, but the headline masks a more troubling picture of an economy that is evidently struggling. Eurozone GDP flatlined at 0% quarter-on-quarter in the final quarter of 2022. Economists had expected 0.1% growth, which was still below the previous quarter's 0.3%.

It’s a bleak headline accompanied by even more bleak data within the GDP release. Poor household consumption and investment data indicate that growth was weaker than expected. In the year to the end of the final quarter, growth stood at 1.8%. That’s less than the 1.9% economists were expecting, and the previous quarter's reading of 2.3%.

The GDP data show broad contraction across consumption (-0.9% q/q), construction (-0.9% q/q) and business investment other than IPP (-1.1 %q/q), reflecting numerous headwinds. Household consumption saw the largest decline in Q4 2022 since the start of the eurozone in 1999, with the exception of during Covid.

JOLTS job openings have changed little over the last six months. (With all the recession-baiting in recent economic releases, we’ll spare you the splashy headline). January JOLTS job openings came in at 10.82M (exp. 10.55M; 11.23M prev.). The ratio of job vacancies to unemployed workers has been hovering around 1.9.

JOLTS has beaten expectations 27 of the past 29 months, and 5 consecutive months in a row. JOLTS quits rate moved down in January to 2.5%, which is still elevated relative to history but lowest since March 2021. Layoffs and discharges in January marked the third largest rise in 20 years, ex-pandemic.

In other news, the ADP employment report smashed past expectations, with an increase of 242,000 private payrolls (forecast was 205,000).

DEEP DIVE: Brexit Has Re-Entered the Banking Chat

The jewel of UK tech just jilted it for a US IPO. Let’s dive into what that reflects and means for the state of British banking post-Brexit.

The Current Crisis: SoftBank’s Arm

London’s investment appeal is unraveling in its post-Brexit economic environment. Some of Europe’s biggest companies are turning towards the US to list shares — a blow to London’s stature as Europe’s preeminent financial center post-Brexit.

Those leading the trend include SoftBank’s Arm. Arm announced this week that it had decided against selling shares on the London Stock Exchange (LSE) for now. It comes as a major blow to UK politicians who were lobbying the home-grown technology giant ahead of its initial public offering.

The kicker – London worked hard to get the listing, with Prime Minister Rishi Sunak and Arm Chief Executive Rene Haas meeting at No. 10 Downing Street last month. SoftBank founder Masayoshi Son is said to have joined by video call.

For background, UK tech has long considered Arm as a jewel in the industry. Its technology is found in most of the world’s smartphones and is pervasive across the electronics industry. SoftBank acquired Arm for $32B in 2016, with promises that it would create more UK jobs and leave the headquarters where it was.

But Arm isn’t the only ex-girlfriend that’s now ghosting the UK. In recent years, some high-profile companies that have chosen to list on US stock exchanges instead of the LSE include:

• Vtex (VTEX), the London-based enterprise commerce platform that chose to list on the NYSE in 2021.

• Genius Sports (GENI), the sports data company that chose to list on the NYSE in 2021.

• Spotify (SPOT), the Swedish music streaming service that chose to list on the NYSE in 2018.

• Farfetch (FTCH), the UK-based online luxury fashion retailer that chose to list on the NYSE in 2018.

• Adyen (ADYYF), the Dutch payments company that chose to list on the NASDAQ in 2018.

• Allegro (ALGM), the Polish e-commerce platform that chose to list on the NASDAQ in 2020.

• CRH (CRH), the Irish building materials group that chose to list on the NYSE in 2006.

UK Stocks: Why are they opting for US listings?

The recent wave of firms seeking US listings is a broader hit to risk sentiment in the UK. The rationale boils down to five reasons.

Firstly, it makes sense to list where you do the bulk of your business. Let’s take CRH, the Irish building materials group that just announced its US listing, despite being one of the FTSE 100’s biggest companies, for example.

CRH generates over three-quarters of its sales across the Americas. Its rapid expansion in the US means it now generates more revenue from there than anywhere else – and it is also the fastest-growing part of its business.

It’s not nearly the first time that companies have sought additional listings because they make their money in the US. For example, plumbing giant Ferguson moved its primary listing to the New York Stock Exchange in 2022 after a spree of acquisitions meant the bulk of its revenue came from North America, leaving it today with a secondary listing in London.

Secondly, valuations are a key factor. UBS said CRH could experience a “multiple re-rating.” CRH’s US peers trade at a price to earnings ratio of around 25x, but CRH is currently stuck at 14x in the UK.

Thirdly, and staunch Brits will want to skip this paragraph, but it’s no secret that the UK stock market has long underperformed that of the US. For example, the FTSE 100 is up less than 10% over the past five years, while the S&P 500 is up over 45%. The FTSE 250 has even lost ground during that time frame.

Liquidity is just a fraction of what it used to be in the UK. The amount of investment being made in domestic stocks by UK pension funds has dropped considerably in the last 20 years and funneled elsewhere. UK stocks make up less than 5% of UK pension fund portfolios today compared to around half two decades ago.

In other words, even UK investors are shunning the market and see better opportunities abroad.

Fourthly, regulation matters. SoftBank is thought to have picked the US for Arm because of “burdensome” rules in the UK. More specifically, it was turned off by the requirement for listed companies to gain investor approval for all related party transactions. In the US, companies only need to report these transactions without the need of securing approval.

For a bank that couldn’t have been done dirtier by its WeWork accounting, you’d think SoftBank would appreciate some signature British book-keeping and rigor. Instead, it ghosted after looking into the complexity and costs associated with maintaining a London listing.

Plus, the lack of a chip industry in the UK didn’t help its case, especially as the US recently launched a new semiconductor strategy with tens of billions of dollars up for grabs in subsidies. That means the US remains far more attractive to Big Tech, with the UK boasting only a handful of sizable tech stocks on its exchanges.

Last reason, we promise. The US, albeit not yet executed, is underpinning its economic growth plans with programs that will funnel significant sums into technology and infrastructure. The UK, on the other hand, remains the only G7 economy that is smaller today than it was before the pandemic. It’s forecast to be the only one that will contract in 2023, according to both the IMF and the OECD.

TL;DR: The US economy is powering ahead and remains more attractive while the UK struggles to keep up. So for all you tech and finance bros, you can start calling it “soccer” again.

Will more UK stocks jump ship?

There are other companies at risk of jumping ship and heading to the US. There have been reports that oil giant Shell – which has the single biggest weighting in the FTSE 100 at 8.6% - has considered moving the company to the US.

There are also other companies where a US listing makes sense, such as equipment rental giant Ashtead, which makes over 80% of its money from the US. London is also losing big names through foreign takeovers: AVEVA, Avast, Micro Focus, Morrisons and Meggitt. The slump in sterling and lackluster valuations in some areas is only enticing more overseas buyers to the UK as they look to get more bang for their buck.

Should London be worried?

Right now, the US boasts deeper pools of capital and liquidity, higher valuations, less complex and onerous regulations, a starkly better stock market performance and more clarity on the economy than the UK.

Losing existing companies while struggling to attract new ones could be a lethal combination over time. The number of companies trading on the London Stock Exchange has plummeted from over 2,400 at the start of 2015 to below 2,000 today.

The situation leaves the UK geared toward more old-fashioned stocks, such as banks and natural resources, whilst other exchanges are successfully attracting high-growth companies. And that’s not a tea party anyone wants to be left at.

STILL TO COME: Nonfarm Payrolls

The focus post-Powell now shifts to what the February U.S. payrolls report reveals on Friday. Upside surprises to Friday's payroll report could drive a faster and longer tightening cycle.

Forecasts are centered on a more modest increase of 200,000 following January's surprise 517,000 jump that led markets to reprice their interest rate expectations.

Powell’s congressional testimonies had a lot of talk of this “1% increase in unemployment rate.” Given the noise, below are rolling 12-month changes (orange) in the unemployment rate back to the 1940s, with recessions (red).

Meme Bank

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