Yield Curve Officially Deeper than your Bonus

Good afternoon,

It’s officially rivalry week as we hear some of the last key economic decisions for this year…and also watch the World Cup semis.

The UK is seeing some of the most extensive strike actions since the Thatcher years, and not because of their football soccer team’s sub-par performance. Croatia is squared to face off against Argentina around the CPI print, and Jerome Powell’s big end to the year will be cut short by France and Morocco kicking off at the same time.

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.

But first, a quick note from The Information.

If you're looking for high quality tech / VC reporting beyond TechCrunch and The Verge, I highly recommend signing up for The Information, where they get a lot of exclusives on major VC fundraises, startup funding rounds, and layoffs. They also have detailed company org charts for those who are looking to breakdown major tech firm corporate structures. Sign up here.

Bad News Dumpster Dive

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

Juul agreed to pay $1.2 billion to settle more than 10,000 lawsuits that accused it of marketing to children and teens (BBG).

FINRA halted Meta Materials’ (MMTLP) stock ahead of its spinoff (Markets Insider).

SEC’s Gensler said the “runway is getting shorter” for non-compliant crypto firms (Reuters)…So there’s still a runway? Cool, thanks for reminding them.

The Biden administration accused Meta Platforms of trying to buy its way to dominance in the metaverse (Reuters).

Elon Musk commented on the Fed..once again, saying: “If the Fed raises rates again next week, the recession will be greatly amplified” (TheStreet). It’s the kind of groundbreaking economic insight from someone who overpays so much for a company that they retired the term “inflation-adjusted.”

TheBlock CEO resigned after failure to disclose loans and financing from FTX and SBF, including Bahaman real estate (TechCrunch).

Broadcom is facing an EU antitrust probe in its $61 billion VMWare deal (Reuters).

Tim Draper says Bitcoin will likely transform El Salvador from one of the poorest countries in the world to one of the richest (Daily Hodl). This is coming from the investor who also said Theranos would likely transform the world.

Biden authorized a new $275 million in military aid for Ukraine (Reuters).

OECD's Cormann said “the global economic outlook continues to deteriorate” (OECD). Given the level of analysis, we checked and can confirm Cormann is not a sophomore intern who spends all his time coffee chatting.

Tesla defended itself in a lawsuit over its self-driving claims. The suit was brought by a customer, whom Tesla attempted to argue with by citing its “mere failure to realize a long-term, aspirational goal is not fraud” (InsideEVs).

Trafigura, the commodities trading firm, is set to hand more than $1.7 billion to its top traders and shareholders after the energy crisis led to a surge in profits (The Guardian).

The Nasdaq won approval to expand the limits on capital raises in direct listings. The new rule will allow a company to sell shares in the opening auction on the exchange at a price outside of the range—up to 20% below and 80% above (Yahoo). It’s exciting news for the three companies looking to list in a bear market.

Carvana halted (Seeking Alpha).

First Gen Z'er elected to Congress, Maxwell Frost, said he's struggling to rent an apartment in D.C (CNBC). The news was announced in a speech timed to have an impact on voters that watch C-SPAN on Friday afternoons. In other words, impress voters likely to turn out for you without your dating pool hearing about it.

An ethics watchdog group has asked the Federal Election Commission to investigate former FTX CEO Sam Bankman-Fried for alleged “serious violations” of election law, citing his admitted contributions of “dark” money to Republican-aligned groups during the primary season (CNBC).

Bank of America believes the U.S. economy will enter a recession around the middle of next year (Fortune). It’s more exciting news for BofA private clients, most of whom are sharply overweight stocks.

Cathie Wood of Ark sold 83 shares of Spotify (Seeking Alpha).

Lululemon reported $1.7 billion in unsold merchandise this third quarter, an 85% increase from last year (Business Insider).

Janet Yellen said Elon Musk’s purchase of Twitter would warrant a government review if deemed to raise national security concerns, walking back her prior comments that played down the need for scrutiny (BBG).

Nearly 40% of Deutsche Bank survey respondents see a negative S&P return of more than 10% next year (TheStreet). It’s bad news for the clients considering pulling their money, given the US Dollar’s correlation to stocks, bonds, commodities and gold has gone to a remarkable extreme of late.

Signal to Noise

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

Signals 

• Housing

• Fed balance sheet

• CPI (12/13)

• Adobe Q4 2022 Earnings (12/15)

• Unemployment

• Bond losses

Noise

• Fed fund hike post-FOMC (12/14)

• China reopening

• Holiday shopping

• USD strength?

• Microsoft Corp. Annual General Meeting (12/13)

• Oracle Corp. Q2 2023 Earnings (12/12)

Signals

Housing:

• Fittingly, median home prices look like a middle finger.

CPI:

• One-year inflation expectations dropped 4.6% to the lowest since September 2021 while five-year expectations remain unchanged.

• The pipeline for PPI remains significantly softer. Based on a 16-month-lagged M2 rate-of-change, PPI (and CPI) are about to lurch considerably lower.

• Producer prices came in above estimates on both headline (7.4% vs 7.2% est) and core (6.2% vs 5.9% est). The PPI is still falling quickly on a year-over-year basis, but upside surprises don't bode well for upcoming CPI prints.

• Energy prices have dropped to their lowest since February 2022, while food prices soared to record highs.

Adobe Q4 2022 Earnings:

• ChatGPT v1, formerly known as Adobe, is set to share its Q4 results this week.

• Adobe (ADBE) appears to be sitting near oversold territory heading into December.

• Adobe’s huge fall from its highs and continued decline is looking more and more like a buying opportunity. ADBE trades 51% from its highs at $330 a share, down from $678 per share last November.

• Adobe has beaten earnings expectations for 15 consecutive quarters. It has also beaten top line expectations for 9 straight quarters. Yet investors have strayed away from tech stocks during the course of the year.

Fed balance sheet:

• Jerome Powell, or the man you can thank for AirBnb fees double the price of your room, is set to announce the latest Fed rate hike this week. The announcement will be as much of a surprise as Ye saying something stupid, so here’s what to actually watch:

• The Fed's balance sheet is at a 52-week low for the first time since Dec 2019, down $340 billion from its peak in April and $133 billion over the last 5 weeks. This is the largest 5-week decline since July 2020.

Unemployment:

• Expect slow growth and higher unemployment. Fewer than half of the economists are looking for rate cuts in 2023. Those who do are looking for the unemployment rate to jump to 5% from 3.7%, and most see rising joblessness and recession as the major cause of the reversal.

Bond losses:

• Be prepared for massive bond losses. The 30-year UST yield has lost -100bps in the past 6 weeks – its biggest loss since 1920.

Noise

Fed fund hike post-FOMC:

• Jerome Powell announcing a 50 basis-point hike is about as shocking as Caleb Williams winning the Heisman.

• Let’s talk the Fed’s yield curve inversion. The Fed's preferred yield curve is the market implied 3-month T-bill yield in 18 months minus the current 3-month T-bill yield.

• After trending lower throughout 2022, the yield curve is now deeply inverted. The 10-year U.S. Treasury yield less the 2-year yield now stands at levels not seen since the 1980s.

• This will be terribly shocking news you’re hearing for the first time for most: it means we’re headed for a recession.

China reopening:

• Goldman Sachs forecasts that China's real GDP growth will rise 1.5 percentage points to 4.5% in 2023, and then to 5.3% in 2024.

• We’re just here so we don’t get fined – please see below chart for the obvious answer.

Holiday shopping

• Remember Black Friday shopping when experts were saying: "Results point to a choppier holiday spending backdrop this year” and “46% of consumers planning on spending less this holiday season; 23% planning to spend the same amount as last year"?

• Now, spending on leisure services has overtaken spending on durable goods relative to pre-pandemic levels.

• The December University of Michigan Consumer Sentiment Index is up to 59.1 vs. 57 est. and 56.8 prior. Current conditions are up to 60.2 vs. 58.8 prior; expectations up to 58.4 vs. 55.6 prior.

• Keep your eyes on household health: Household balance sheet levels remain strong, but estimates show that households have drawn down about 25% of their excess savings so far and will have spent around 60% by end-2023.

USD strength?

• Have we hit peak USD? FX economists believe the US dollar has peaked (below).

• Quarter-to-date performance for the US dollar is the worst since 3Q2010.

Microsoft & Oracle Earnings:

• Across all sectors except healthcare, fewer companies cited "recession" on Q3 earnings calls compared to Q2.

• For the first time in 26 weeks, there were more earnings upgrades last week than downgrades.

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