Quick Comments/What We’re Reading – October 5, 2022

Bianco Research  •  Newsclips  •  October 5, 2022

Hoping for a Pivot



  • Bloomberg – John Authers: Pivot, or Godot? Markets Bet the Waiting’s Almost Over
    Risk is back “on,” and the reason is that hopes for a Fed “pivot” are also back. “Fed pivot” is even trending on Twitter. Two new data points buoyed the notion that the Federal Reserve will soon stop hiking rates and soon afterward start cutting them. First and most important, the Bureau of Labor Statistics’ JOLTS job vacancy numbers for the US dropped very sharply last month…Tightness in the labor market, which puts upward pressure on wages and hence on inflation, is the single biggest factor forcing the Fed to continue its monetary tightening. So this unambiguously improves the chances that the hiking campaign will end sooner rather than later. Less clear, however, is just how much it improves those chances.


As Authers points out above, yesterday’s JOLTS data was the latest reason traders revived their hopes for a Fed pivot. With job opening decreasing and unemployed workers ticking slightly higher, job openings as a percentage of unemployed workers fell. As recently as July there were almost 2 job openings for every unemployed person. That has since fallen to 1.67 jobs for every unemployed person. This metric is certainly one of the more important ones to watch, but is this enough of a change to warrant a Fed pivot?



As James Mackintosh points out below, maybe traders need to stop overreacting to every economic release.



  • The Wall Street Journal – James Mackintosh: Markets Are Stuck in Overreaction Mode

    Investors are behaving like sugar-starved children offered a lollipop, grasping for it with delight only to scream when it is taken away again. On Monday, the sweeties came in the form of some mild bad news on the economy. The Institute of Supply Management’s manufacturing index came in a little weaker than forecast. This prompted an extraordinary rush to buy bonds and stocks as bets mounted that the Federal Reserve would raise interest rates less aggressively. The sugar rush lasted into Tuesday, with bond yields continuing to fall and stocks starting well, boosted by falling job openings, a sign of a weakening labor market. The trouble is that single data points contain little of lasting nutritional value for the markets. The markets risk a tantrum if the lollipops are once again confiscated, as has happened several times in the past few months. Worse still, the whole bad-news-is-good-news pattern will shift back to bad news being bad news once it looks like recession is on the way.

Despite traders’ hopes, Fed officials continue to be as blunt as possible in their intentions:


  • Wall Street Journal – Nick Timiraos: Fed Official Says Inflation Fight Will Take Time, Despite Signs of Progress

    A slowdown in growth this year is likely to ease supply and demand imbalances in labor markets somewhat, Mr. Jefferson said. “We have already seen some indications from survey data, information from transportation hubs, and producer prices that supply bottlenecks have, at long last, begun to resolve,” he said. San Francisco Fed President Mary Daly, in a separate appearance in New York Tuesday, said the decline in job postings could give officials room to fight inflation without causing painful job losses. Ms. Daly said she’s heard from employers that they are posting fewer openings and hiring fewer people, which over time could take some pressure off the labor market. “There’s a lot of room for us to slow the pace of hiring and still not dive into the third and most painful place that everybody fears, which is outright layoffs,” she said.



  • Financial Times – The Jolts jolt

    We’d read the openings numbers more cautiously. Consider the big picture. Inflation is the real target here. It is edging down but still hot, and the Fed has set a high bar (“clear and convincing evidence”) for letting up on rate increases. And even just looking at labour market indicators, normalisation is a ways off. The quits rate, a more reliable measure of tightness than job openings, is still well above pre-pandemic levels. At the pace quits have fallen from their December 2021 peak, it would take 11 months to normalise


Market Stress



  • Financial Times – ‘Someone will get hurt’: Investors and analysts warn on rising market stress
    “When financial conditions tighten this much, everyone is looking for who or what will be the cause for central banks to blink,” said Michael Edwards, the deputy chief investment officer of hedge fund Weiss Multi-Strategy Advisers. “They [the Fed] are determined to get financial conditions tighter, and [because] the economy is very strong . . . they have to use funding markets as the transmission mechanism. So someone will get hurt.” McElligott pointed to the 20 per cent slide in the Japanese yen this year, a sell-off in British sovereign debt in recent weeks, and a smattering of loans stuck on banks’ balance sheets that lenders are unable to offload to investors even with deep discounts, as signs of the strains in markets.


Central Banks Cater to the Markets


  • Bloomberg – The Bank of England Promotes Moral Hazard — Again.
    Back in the 20th century, banks formed the foundation of the global financial system. No more. If there were any doubts about the shifts that have taken place in finance in the past several decades, recent events in the UK should dispel them…No longer is the system based around banks; rather, it is increasingly centered around markets. It’s an important distinction, with wide-ranging implications. When banks served as gatekeepers, central bankers had a simpler life. To fulfill their obligation to ensure financial stability, they served as lenders of last resort to banks – a role they fulfilled extensively during the global financial crisis. By restricting the number of banking licenses, they maintained control of the sector and by extension the financial system…For years, we got used to the concept of moral hazard in banking – the lack of incentive for banks to guard against financial risk given their protection from potential consequences. Post-crisis reform may have tamed that hazard among banks, but it could be spreading elsewhere. A recent regulatory review of the policy response to market turmoil in March 2020 concluded that clients “varied in their level of preparedness for margin calls.” In the event, even the ill-prepared benefited from central bank actions. If that’s the lesson others take away, it will have the effect of incentivizing risk not just in the UK, but everywhere.


Fighting Inflation Takes a Long Toll



  • Bloomberg – Volcker Lesson to Generation QE: Stock Recoveries Can Take Years

    Around Columbus Day, 1979, Paul Volcker, newly installed as head of the Federal Reserve, embarked on the crusade that made him a legend: a no-holds-barred campaign to beat back inflation. On Wall Street, it took the better part of three years to recover. Four decades later, the parallels abound. With inflation approaching double-digits, Jerome Powell’s Fed is engaged in its most powerful monetary tightening campaign since Volcker’s time, raising rates in chunks as stocks and bonds reel. History’s message for markets is a sobering one. Recoveries take time when central banks are against you. Time — and a strong stomach. With equities rebounding this week, investors should recall that as Volcker’s tightening began to bite in 1980, spurring a brief relaxation in its pace, the S&P 500 bounced 43% over about eight months. The gains proved short-lived, and it wasn’t until halfway through 1982 that stocks began a lasting recovery.

  • Bloomberg – Inflation or Recession: Americans Are Divided on Rate Hikes

    The latest in the long list of things Americans are divided on? Interest rate hikes. Half of the country wants to tame inflation quickly, even if it means a recession, according to an exclusive study from the Harris Poll. The other half would prefer avoiding a recession, regardless of inflation ticking higher…About three quarters of Americans who are paying interest express worries about their monthly budgets, due to the jump in rates. 


Asset Managers in Focus


  • Financial Times – Asset managers may regret becoming the new banks
    “We’re seeing a societal focus on asset management and capital markets with a personification that just wasn’t possible 10, 15 years ago,” says Mark Wiedman, head of BlackRock’s global client business. Then, “everybody wanted to know what was happening at the banks. That’s a less interesting story today. And so it’s drifted somewhere else.” Defined benefit pension funds bought LDI products to hedge their risk and they were the ones selling gilts to meet margin calls as prices fell. More broadly, asset managers point out that they do not trade on their own accounts or lend out government-insured deposits. That means they are much less likely to need a rescue than a bank if they sell products that turn out to be riskier than expected. In most cases, the clients will bear the losses, not the fund manager.


The Odds of a Recession


  • Bloomberg – US Stocks Have Just Started Pricing In Recession, Citi Quants Say

    US stocks just posted a rare streak of quarterly declines and are in a bear market, but Citigroup Inc. quantitative strategists say they’re only just starting to reflect the risks of a recession. A team led by Hong Li said equity markets had “turned decidedly defensive” and that they could come under further pressure as they continue to be “heavily driven” by heightened bond market volatility as well as concerns around persistent inflation and a staunchly hawkish Federal Reserve. “We are still in the early stage of positioning for recession” and there’s “more downside risk for the market and the earnings season,” Hong wrote in a note dated Oct. 4. The bearish view echoes similar calls from other investment banks including Goldman Sachs Group Inc. and Bank of America Corp., who are concerned that the S&P 500 has yet to bottom out even as it posted three straight quarters of declines — its first such streak since the global financial crisis.


With the first couple of quarters posting negative GDP, it may seem odd that traders and economists are just beginning to price in a recession. According to Bloomberg’s survey, only 50% of economists expect a recession in the U.S. over the ensuing year. The situation is a bit clearer in the Eurozone, where 73% expect a recession.



Part of the uncertainty among economists is that Q2 GDP growth was only barely negative at -0.6%. Q3 GDP’s advanced release is still a few weeks away, but some are expecting a decent bounce. The Atlanta Fed’s GDPNow measure is currently showing 2.3% growth in Q3.



While a recession is often defined as two consecutive quarters of negative growth, the NBER (the official recession dating committee) takes other metrics into account, namely payrolls. Between the shallow decline in Q2 and the robust labor market, perhaps the hope is the NBER does not officially declare the first couple of quarters as a recessionary period.


More Signs of Stress on the Housing Market



  • Bloomberg – Toronto Home Prices Are Down 17% as Sales and Listings Plunge

    Toronto home prices dipped again in September and have now fallen 17% from their spring peak, as evidence grows that buyers and sellers are growing wary of doing deals. The benchmark price for a home in Canada’s largest city fell a further 1.2% from August, adding to the string of declines that began in April, according to data released Wednesday from the Toronto Regional Real Estate Board. That brought the benchmark price to C$1.1 million (about $813,000), its lowest since last October, the data show. Only 5,038 homes were sold during the month, down 44% from a year earlier.



  • Bloomberg – Singapore Banks’ Mortgage Hikes Near Affordability Tipping Point
    Singapore’s near decade-long spell of low interest rates has ended, with mortgage rates nearing an affordability tipping point that may hit borrowers’ disposable income and dent buyer demand…Mortgage rates above 4% may squeeze borrowers’ disposable income and hurt their ability to cover necessities. It means a 20 to 30-year loan of every S$1 million ($702,000) would require a monthly payment of about S$4,774 to S$6,060, according to BI’s analysis. That compares with the average Singaporean monthly nominal wage of S$5,847. In Singapore, about 80% of people live in public housing where homes normally cost well below S$1 million.



  • Bloomberg – US Mortgage Rates Rise for Seventh Week to Highest in 16 Years

    US mortgage rates jumped to a 16-year high of 6.75%, marking the seventh-straight weekly increase and spurring the worst slump in home loan applications since the depths of the pandemic. The contract rate on a 30-year fixed mortgage rose nearly a quarter percentage point in the last week of September, according to Mortgage Bankers Association data released Wednesday. The steady string of increases in mortgage rates resulted in a more than 14% slump last week in applications to purchase or refinance a home.


Updating the Return to the Office


  • Bloomberg – Working From Home Is Sticking in US as Office Occupancy Stalls

    America’s return to the office remained in limbo last week as occupancy across big cities was little changed, while New York City’s push to get workers back got sidetracked by religious holidays. Average office occupancy in ten US cities for the week ending Sept. 28 declined slightly from 47.3% to 47.2% the previous week, according to card-swipe data from security company Kastle Systems. Half of the cities Kastle tracked showed declines over the period, in particular the New York metro area, where just 43.5% of workers showed up, down from 46.1% the week earlier. The Big Apple’s results were likely skewed by the Jewish holiday of Rosh Hashanah, which closed the city’s schools for two days last week.


Setting aside the fact that Rosh Hashanah may have skewed some of this data in cities like New York this past week, the longer trend shows the return to the office has stalled somewhat in 2022. As of September 28, still less than half of the office space in Kastle’s Back to Work Indices is currently in use. This is only slightly higher than the levels seen earlier this year.



This has put a damper on office REITs (orange), which just took out their March 2020 low.