One month ago, when discussing the “perfect storm” hitting the US auto market, we showed that according to Fitch “More Americans Can’t Afford Their Car Payments Than During The Peak Of Financial Crisis“…

… which was to be expected: after all the latest consumer credit report from the Fed revealed an exponential spike in the amount of new car loans, which increased by more than $2,000 in one quarter, from just over $38,000 (a record), to $40,155 (a new record).

And yet something just didn’t click: if so many subprime Americans were saddled with record amounts of auto loans – on average more than $40K – where were the defaults? After all, the average loan rate for new car loans just hit a 13 year high and will soon rise to the highest level this centiry.

Well, after a lengthy period in which nothing seemed to happen, suddenly the dominoes are starting to fall, and as Bloomberg reports, used car retailer and subprime auto loan lender, American Car Center, told employees the business was closing its doors, just one day after the company had hoped to pull off a funding Hail Mary by selling a $222 million bond (it failed).

According to Bloomberg, the used car retailer, which targets consumers regardless of their credit history (and thus targets almost entirely subprime borrowers who can’t get a loan elsewhere), said in an email to employees on Friday the firm was ceasing all operations, closing its headquarters in Memphis, Tennessee, and that all employees would be terminated by the end of the business day, the people said. It employed about 288 people at its headquarters.

The closure email came a day after the company sent another message to staff saying management and advisors had been working with lenders to improve liquidity and continue operations. American Car Center, which has more than 40 dealerships across 10 states, is owned by York Capital’s private equity group.

The long overdue collapse – the first of many – comes as more Americans are starting to fall behind on their car payments, and the distress cycle is rapidly accelerating.

Think of it as the infamous New Century domino that signaled the collapse of subprime housing… only for cars.

Just before the announcement, American Car Center shelved a bond deal backed by subprime loans citing market conditions despite investors placing orders for the debt. It wasn’t clear why ACC backed down in the last moment as the alternative was liquidation. However, since many more auto subprime lenders will now follow in ACC’s footsteps, we are confident the answer will emerge. 

Meanwhile, we can’t help but be amused by the mindblowing divergence in Wall Street mental models, where on one hand speculation that used car pries are somehow surging has sent risk assets lower driven by fears of a rebound in inflation (remember that spike in the Manheim used car price index?), while on the other companies like ACC and Carvana are either liquidating or on the verge of doing so, simply because the used car auto segment has completely imploded.

Authored by Jonathan Turley,

George Washington University (where I teach) this week became one of the last major universities to drop its mask mandate.

Many students had long declined to follow the mandate, but the decision was met with relief by many at the school.

Yet, some are livid about the lifting of such mandates in various schools.

One is a professor at the University of British Columbia who has participated in roundtable discussions as an expert with Canadian Prime Minister Prime Minister Justin Trudeau.  Dr. Amy Tan is a Clinical Associate Professor in Palliative Care and Family Practice at UBC’s Faculty of Medicine and an Adjunct Professor at the University of Calgary.

She recently issued a blistering attack on those going maskless as being “racist, ableist, and classist.”

The comments raise long-standing concerns that masks have become a vehicle for social and political rather than medical agendas.

Screenshot of a tweet by Dr. Amy Tan published from Feb. 18 2023.

According to media reports , Tan responded to a user who defended labeling non-maskers as “racist.”

The user denounced dropping the mandates and added:

“once again and always – white people, you do not get to say what is or isn’t racist. stop speaking for and over BIPOC.

learn your place, sit down, shut up, and listen to us. your white saviorism is killing us. whiteness is a problem. oof.

(read & listen to James Baldwin! <3)”

Tan appeared to agree and added that “not masking is racist, ableist & classist.” Notably, some experts believe that the mandatory mandates are alarmist.

Recent studies have cast doubts on the efficacy of masks and revealed that even the CDC long harbored doubts on the question. Others continue to challenge those contrary findings as incomplete.

Notably, Tan is not attempting to engage skeptics on the science. Instead she (and others) are attempting to cut off debate by labeling opposing views as revealing a myriad of prejudices. These attacks have largely worked to intimidate many in government, business, media, and academia. Mask efficacy is a debate long suppressed by social media companies and disfavored by many universities. Experts were banned for raising such questions and others labeled conspiracy theorists.

Figures like Tan continue to argue that questioning mask efficacy is to self-identify as a racist, ableist and classist. That is a lot of “ists” for anyone and most academics do not want to risk becoming a target of such attacks. The problem is that the students and the public at large no longer appear to be buying into the mask mandates.

Hopefully, we can still have this long delayed debate at universities without the type of personal, vituperative attacks employed by figures like Tan. If one truly cares about public health, there is nothing to fear from hearing opposing views on the underlying science. People of good faith should be able to disagree on these studies without being allegedly “unmasked” as the Bull Connors of medicine.

Her bio on UBC’s website highlights her work “an advocate for health equity and an anti-racism educator and consultant” with expertise on “culturally-safe and anti-oppressive care with patients and families.” She has been a continuing advocate for mask where both inside and outside buildings.

NASA and SpaceX scrubbed a launch attempt of the SpaceX Crew-6 mission to the International Space Station early Monday morning due to a ground systems problem. 

A last-minute technical issue occurred just two minutes before the 230-foot-tall (70-meter) Falcon 9 rocket, with a Crew Dragon capsule, was expected to lift off from NASA’s Kennedy Space Center in Cape Canaveral, Florida, at 0145 ET. The clock was stopped by engineers “to investigate an issue preventing data from confirming a full load of the ignition source for the Falcon 9 first stage Merlin engines, triethylaluminum triethylboron (or TEA-TEB),” according to the space agency. 

Strapped into the Dragon capsule was a crew of two NASA astronauts, one Russian cosmonaut and one astronaut from the United Arab Emirates. 

SCRUB: Two minutes from launch, an issue with the Falcon 9 rocket’s engine ignition system postpones the Crew-6 mission to the @Space_Station.

More on the cause and when @NASA and @SpaceX could try again as soon as details become available.@news6wkmg: https://t.co/a06XbQrach pic.twitter.com/L4wLUN5Lrw

— James Sparvero (@JamesSparvero) February 27, 2023

“I’m proud of the NASA and SpaceX teams’ focus and dedication to keeping Crew-6 safe,” NASA Administrator Bill Nelson said in a statement. He added: “Human spaceflight is an inherently risky endeavor and, as always, we will fly when we are ready.”

The next launch attempt is at 1234 ET Thursday, pending the resolution of the technical issue that prevented this morning’s launch.

Authored by by Dave DeCamp via AntiWar.com,

Ukrainian President Volodymyr Zelensky said Friday that Ukraine is preparing to launch attacks to recapture Crimea by forming new military units and sending troops to train in other countries.

“There are military steps, and we are preparing for them. We are ready mentally. We are preparing technically: with weapons, reinforcements, the formation of brigades, in particular the assault brigades, of different categories and nature,” Zelensky said at a press conference, according to the Ukrainian news agency Ukrinform.

According to Ukrinform, Zelensky said Ukrainian troops were being sent to train in other countries to learn how to use new weapons. “We have to be ready. Then, there will be corresponding fair de-occupation steps and, God willing, they will be successful,” he added.

Zelensky and other top Ukrainian officials have maintained that kicking Russia out of Crimea is one of their war goals, but Russia controls a good portion of territory to the north of Crimea in the Kherson Oblast. The Pentagon has also assessed it’s unlikely Ukraine can take the peninsula, which Russia has controlled since 2014.

Despite the Pentagon’s assessment, Biden administration officials still say they would support Ukrainian attacks on Crimea. “Russia has turned Crimea into a massive military installation … those are legitimate targets, Ukraine is hitting them, and we are supporting that,” Victoria Nuland, the US undersecretary of state for political affairs, recently said.

The US backing Ukrainian attacks on Crimea would risk a major escalation with Moscow, a fact that even Secretary of State Antony Blinken has recognized by calling the peninsula a “red line” for Russian President Vladimir Putin. 

The Russian leader has shown a willingness to escalate the war over attacks on Crimea, as Russia’s bombardment of Ukrainian infrastructure didn’t start until after the truck bombing of the Kerch Bridge, which connects Crimea to the Russian mainland.

Two German officials note that Zelensky has falsely claimed that Russia fired on NATO territory, with the goal of “trying to drag the US and its allies into the war.”

But no need to fault Zelensky for lying in the hopes of starting WWIII. “In his place, we would do the same.” pic.twitter.com/7nDudVh9sO

— Aaron Maté (@aaronjmate) February 24, 2023

Russia annexed Crimea in 2014 following the US-backed coup in Kyiv that ousted former Ukrainian President Viktor Yanukovych. Polling since then has shown the majority of people living on the peninsula are happy that they joined the Russian Federation.

Tesla published a note on its website explaining the rollout of the $15,000 driver-assistance system (Full Self-Driving Beta) has been “paused” until a new software upgrade can be deployed over the air to address the recent recall of 362,758 vehicles equipped with FSD Beta. 

“Until the software version containing the fix is available, we have paused the rollout of FSD Beta to all who have opted-in but have not yet received a software version containing FSD Beta,” Tesla said. 

The pause affected Tesla drivers who bought FSD but were being vetted by Tesla for Beta approval. Also, no new customers can add FSD Beta while Tesla works on an update to address the National Highway Traffic Safety Administration’s (NHTSA) recall with certain 2016-2023 Model S, Model X, 2017-2023 Model 3, and 2020-2023 Model Y vehicles. 

Here’s what NHTSA said earlier this month about the FSD Beta recall:

The FSD Beta system may allow the vehicle to act unsafe around intersections, such as traveling straight through an intersection while in a turn-only lane, entering a stop sign-controlled intersection without coming to a complete stop, or proceeding into an intersection during a steady yellow traffic signal without due caution.

In addition, the system may respond insufficiently to changes in posted speed limits or not adequately account for the driver’s adjustment of the vehicle’s speed to exceed posted speed limits.

Tesla notes that FSD Beta has features that signal drivers with “visual and audible warnings” to pay attention to the road. Tesla said:

“The driver is responsible for operation of the vehicle whenever the feature is engaged and must constantly supervise the feature and intervene (e.g., steer, brake or accelerate) as needed to maintain safe operation of the vehicle.” 

Tesla also said customers with FSD Beta are not required to take any immediate actions.

As of this morning, Tesla users can still purchase the $15,000 driver-assistance system (but won’t be cleared for FSD Beta). 

Is FSD Beta worth it? 

Authored by Simon White, Bloomberg macro strategist,

Longer-term bond yields continue to reflect an environment where inflation eventually comes back to target, and are not adequately pricing the likelihood it remains elevated and unstable.

PCE deflator data for the US is released today and we will find out how intact the current disinflationary trend is.

The trend looks set to end sooner than expected, with global inflationary forces picking back up as China recovers, reinforcing already sticky domestic inflation. If bond holders start to demand more premium to reflect a higher-inflationary world, yields will rise.

The San Francisco Fed splits up core PCE into a cyclical and acyclical component. The cyclical component is made up of those parts of the PCE that correlate well with the economy, i.e. that the Fed has more influence over with monetary policy, and acyclical is what’s left, i.e. is more globally driven.

Acyclical inflation really boils down to China, with its PPI closely matching it.

Easing in China finally looks to be getting through, with money growth and credit data showing that China is on the cusp of a cyclical upturn. The rise in yields in China shows that this upturn should lead to higher PPI in China, which should boost globally-driven inflation in the US.

Core PCE’s fall has thus far been driven by the fall in globally-driven inflation. Cyclical, aka domestically-driven, inflation is still near its highs, but even if it starts to fall as the lags from monetary policy kick in, it is likely to come when globally-driven inflation is rising again, ending the US’s trend in disinflation.

Adding to troubles, cyclical inflation itself is poised to remain sticky. One of the largest drivers of inflation’s rise was the fastest jump in profit margins seen in decades as firms took advantage of the unique circumstances of the pandemic. Even though margins have come off their highs, they’re likely to remain elevated.

One remarkable feature of the current cycle has been how relatively contained longer-term bond yields have been despite the highest inflation for decades. Term premium has remained well behaved, as the market has not, yet, demanded an extra premium for inflation risks.

But term premium implied by forecasters is already much more elevated than market-implied term premium. Given the inflationary backdrop, there is as yet an unpriced risk bond holders could soon start to demand a higher premium, taking yields higher.

After a shockingly large upside surprise surge (+5.6% MoM)  in December, analysts expected preliminary January durable goods orders to tumble (-4.0% MoM). The actual print came in worse with a 4.5% MoM drop – the biggest drop since April 2020.

Source: Bloomberg

But, everything else was super strong…

Core Durable Goods (ex-Transports) jumped 0.7% MoM (+0.1% exp) – biggest jump since March 2022 (but YoY Core is up just 1.6%)…

Source: Bloomberg

Additionally, the value of core capital goods orders, a proxy for investment in equipment that excludes aircraft and military hardware, increased 0.8% last month after a downwardly revised 0.3% decline in December, Commerce Department figures showed Monday.

The big swing factor was no Boeing orders as non-defense aircraft new orders tumbled 54.6% MoM…

We see the same picture with capital goods (non-defense) orders: Total (incl aircraft) -15.3%, Ex aircraft +0.8%

Core capital goods shipments, a figure that is used to help calculate equipment investment in the government’s gross domestic product report, jumped 1.1%.

So, all in all, this is ‘good’ news for the economy and thus ‘bad’ news for The Fed.

Ukrainian media reports began claiming Sunday that a large explosion rocked Machulishchy airbase in Minsk Oblast in Belarus, with reports saying a Russian aircraft had been damaged. Eyewitness accounts suggested two explosions in the Sunday morning hours. 

“According to preliminary reports, the traffic police stopped the cars in several places around the airbase and checked the trunks and ID of the drivers,” Ukrainska Pravda reported, also citing the presence of emergency vehicles on the scene. But now there appears further confirmation in AFP that a Russian military airplane was likely destroyed at the airfield.

Secret operatives reportedly used drones to carry out the attack, before sneaking back across the border and out of Belarus. Reuters is also as of Monday morning reporting the news.

Belarus’ anti-Lukashenko opposition is now claiming that it was a successful sabotage operation which targeted Russian aircraft. The information has been revealed by officials working under exiled Belarusian opposition leader Svetlana Tikhanovskaya:

“Partisans… confirmed a successful special operation to blow up a rare Russian plane at the airfield in Machulishchy near Minsk,” tweeted Franak Viacorka, a close adviser of opposition figurehead Svetlana Tikhanovskaya.

“This is the most successful diversion since the beginning of 2022,” he added.

The two Belarusians who carried out the operation had used drones, he said, adding that they had already left the country and were safe.

Tikhanovskaya herself also weighed in, saying, “I am proud of all Belarusians who continue to resist the Russian hybrid occupation of Belarus & fight for the freedom of Ukraine.” She’s long carried out her opposition activity in exile from Lithuania and earlier Poland, having also recently been tried in absentia by Lukashenko’s court system.

She further claimed the aircraft was worth 330 million euros, with other opposition media sources identifying that it was an A-50 surveillance plane.

The Russian A-50U “Mainstay” is indeed a very large, expensive surveillance aircraft in operation by the Russian air force, as The Drive details: 

The target here is very important, regardless. The A-50s are very low-density, high-demand assets and are one of Russia’s major advantages over Ukraine in terms of the air war. The A-50 provides general wide-area aerial surveillance and airborne command and control capabilities. Beyond this, and arguably most importantly, they provide the critical ‘look-down’ radar surveillance capability for Russia’s air operations.

“As such, not only can they generate an ‘air picture’ deep into Ukraine, but this also includes detecting low-flying aircraft which far-off ground-based radars cannot see,” the report continues. “This is the currently primary operating regime for Ukrainian aircraft anywhere near Russia’s ‘overlay’ of complex anti-air capabilities that extends deep into Ukrainian-controlled territory.”

Claims Swirl Around Supposed Strike On Russian A-50 Radar Jet In Belarus https://t.co/j1me5JQZmr

— Robert Farley (@drfarls) February 27, 2023

Ukraine along with its Western backers have long accused Belarus of aiding and abetting the Kremlin’s war efforts by allowing its territory to be used as a staging ground for Russian planes, drones, and troops. For this reason, major Russian assets parked in Belarus would indeed be likely targets of Ukrainian and Belarusian exiled opposition sabotage attacks. The A-50 in particular is considered a rare aircraft within the Russian arsenal, given its size and expense.

Below is official footage of the behemoth surveillance plane in action…

If this was indeed a successful sabotage operation to take out such a large, valuable Russian asset, it’s very likely the saboteurs had help from a NATO country’s intelligence agency, perhaps with US, UK, or Polish involvement. This also given the difficulty of what would have been required to pull off such an attack on a sensitive military facility and get away with it.

US index futures jumped after suffering their worst weekly drop of 2023, as traders looked for fresh opportunities to buy stocks while assessing the outlook for growth. S&P 500 futures rose 0.5%, rising just shy of 4,000 by 7:45 a.m. ET after the underlying benchmark fell 1.1% in the last trading session. Nasdaq 100 futures rose by about 0.6% after the tech-heavy gauge tumbled 1.7% at the end of last week. European and Asian stocks also rose; the Bloomberg Dollar Spot Index turned red after retreating from the day’s highs, lifting most Group-of-10 currencies. Treasuries edged lower, mirroring moves in global bond markets. Gold was little changed, oil fell and bitcoin resumed losses after gains overnight

In premarket trading, cancer drugmaker Seagen soared after the Wall Street Journal reported that Pfizer is in early-stage talks to acquire the cancer therapy developer worth around $30BN. Pfizer shares slipped. Here are some other notable premarket movers:

• Best Buy (BBY) shares drop 1.8% after Telsey downgraded the electronics retailer, saying the company’s business is likely to experience a further decline in the near term.
• Fisker (FSR) climbs 7.8% after the carmaker  posted 4Q results and forecast 8% to 12% annual gross margin and potentially positive Ebitda for 2023.
• FuboTV (FUBO) rises 8.2% after posting 4Q revenue that beat the average analyst estimate.
• Focus Financial Partners (FOCS) shares are halted after the company agreed to be acquired by affiliates of CD&R for $53 per share.
• Enphase Energy Inc. (ENPH) shares are up 1.9% after Janney Montgomery upgraded the company to buy, citing attractive valuation.
• Li-Cycle shares (LICY) rise 8% after the firm announced that one of its US subsidiaries had been granted a $375 million loan offer from the Biden administration.
• Lucira Health (LHDX) shares surge 240% after the FDA issued an emergency use authorization for the company’s Covid-19 and flu test.
• Payoneer Global (PAYO) gains 5% after Jefferies initiated coverage with a buy recommendation, saying the payments firm suffered from a “complexity discount.”
• Pulmonx Corp. (LUNG) rises 3.8% as Wells Fargo upgrades to overweight, saying the company’s fourth-quarter results “represent a turning point for the company.”
• Range Resources (RRC) shares slump 7.5% after Pioneer Natural Resources said it was not “contemplating a significant business combination or other acquisition transaction” in a statement Friday evening.
• Seagen (SGEN) shares soar 14% after the Wall Street Journal reported that Pfizer is in early-stage talks to acquire the cancer therapy developer.
• Tegna (TGNA) shares slump 22% after the Federal Communications Commission shelved Standard General’s proposed $5.4 billion buyout of the broadcaster.
• Union Pacific (UNP) shares climb 10% after the rail freight company said it was looking for a new CEO following pressure from a hedge fund.
• Universal Insurance Holdings (UVE) rises 1.8% after Piper Sandler upgraded the insurer to overweight, anticipating strong earnings in 2023 on higher prices and potential tort reform via a bill that seeks to reduce unnecessary litigation
• XPeng (XPEV) shares gain 5% after the Chinese electric-vehicle maker is included in the Hang Seng China Enterprises Index

The S&P 500 has fallen over the past three weeks amid concerns that renewed price pressures will prompt more (and bigger) rate hikes from the US central bank. An unexpected acceleration in the personal consumption expenditures price index boosted expectations for policy tightening, while solid income and spending growth data further allayed fears of an imminent recession. Traders await durable goods data due later on Monday.

Monday’s advance may signal traders are looking “towards the end of the potential bearish correction brought by last week’s decreased appetite for riskier assets, after investors digested the prospect of longer hawkish monetary stances from central banks,” said Pierre Veyret, a technical analyst at ActivTrades.

Others – such as MS permabear Mike Wilson – remained bearish: Wilson said March will see stronger bear-market headwinds for stocks in a note on Monday. Fresh earnings downgrades will weigh on markets, with the S&P 500 potentially sliding as much as 24% to 3,000 points. Wilson also said that those treading into this market risk falling into a “bull trap”, a view echoed by Torsten Slok, chief economist at Apollo Global Management.

“A generation of investors has since 2008 been taught that they should buy on dips, but today is different because of high inflation, and credit markets and equity markets are underestimating the Fed’s commitment to getting inflation down to 2%,” Slok wrote in a note.

Stock markets that had mostly shrugged off forecasts for higher interest rates are finally giving way to a swift repricing of yields. Traders are now pricing US rates to peak at 5.4% this year, compared with about 5% just a month ago, as an acceleration in the Federal Reserve’s preferred inflation gauge dashes hopes for an imminent pause in policy tightening.

Meanwhile, JPMorgan strategists led by Mislav Matejka said last year’s strong outperformance in cheaper, so-called value stocks over growth peers is likely to reverse soon as the economic recovery slows. The next move for investors in the following month or two might be to go “outright underweight value versus growth,” they wrote in a note. Ironically, that comes as JPM initiated coverage of two big US online real estate firms, Zillow Group at overweight and Redfin at neutral, as it forecasts a recovery in the property market.

European stocks also rose as investors are tempted by lower prices following the largest weekly selloff since December. The Stoxx 600 is up 1.2% with tech, retail and consumer products the best-performing sectors. The bounce ignores the surge in German benchmark yields which hit 2.58%, the highest since 2011, on bets the European Central Bank will extend its tightening cycle beyond this year. Here are some of the biggest movers on Monday:

• Shell rises as much as 2.4% after Goldman Sachs upgrades the oil and gas company to buy from neutral, following a strong earnings season for oil majors
• Associated British Foods shares rise as much as 2.7% after the food processing and retailing company said it sees total sales for the first half more than 20% ahead of last year
• Michelin gains as much as 3.1% after Goldman Sachs upgraded the French tiremaker to buy from neutral, noting “underappreciated tailwinds” including lower raw material and logistics costs
• Hennes & Mauritz shares jump as much as 4.2% after Bank of America upgraded the clothing retailer to buy from underperform, citing prospects for a profit recovery this year
• Bunzl shares gain as much as 4.2%, hitting the highest intraday since August, after the distribution group’s results were marginally better than expected across the board, showing business model resilience
• Haleon shares rise as much as 1% after Bloomberg News reported the consumer health business, spun out of GSK last year, is exploring a divestiture of its ChapStick lip balm brand
• PostNL shares tumble as much as 12%, the most since October, after the Dutch delivery firm’s new FY23 Ebit guidance came in 43% below consensus
• Dechra Pharmaceuticals tumbles as much as 18% after the British animal health-care company posted a profit decline in the first half and forecast FY guidance that disappointed

Earlier in the session, Asian stocks declined as traders worry about the prospect of further interest rate increases by the Federal Reserve after an unexpected acceleration of US inflation. Investors were also cautious ahead of a key political meeting in China.  The MSCI Asia Pacific Index dropped as much as 0.8%, led by technology and materials shares. Australia and South Korea were among the worst-performing markets, while Japan bucked the region’s trend following a pledge from the Bank of Japan governor nominee to maintain ultra-loose monetary policy. Chinese and Hong Kong benchmarks edged lower as investors eyed the National People’s Congress meeting starting this weekend. They are showing a preference for onshore stocks over Hong Kong peers amid expectations that more pro-growth policies will be announced.

A strong rally in Asian stocks has hit a wall this month amid renewed worries of US policy tightening and a lack of positive catalysts for Chinese shares. A hotter-than-expected set of data in the Fed’s preferred inflation gauge Friday spurred a hawkish recalibration of expectations for rate hikes, pressuring risk assets. Asian emerging markets will “certainly not be immune” from “spillover risks” of the rebound in US inflation, said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank. Prospects of tighter policy for a longer period “will hold feet to fire for valuations.”

Japanese equities closed mixed, as investors mulled the unexpected acceleration of US inflation data that suggested potential further interest rate hikes by the Federal Reserve. The Topix rose 0.2% to close at 1,992.78, while the Nikkei declined 0.1% to 27,423.96. The yen strengthened about 0.1% after tumbling 1.3% Friday to 136.48 per dollar. Fanuc contributed the most to the Topix gain, increasing 2.9% after it was upgraded at Nomura. Out of 2,160 stocks in the index, 1,478 rose and 591 fell, while 91 were unchanged. “Japanese equities were mainly influenced by the higher than expected US PCE data, and the rising US interest rates would make the environment tougher for growth stocks,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities. “However, compared to US stocks, Japanese stocks are still supported by a weaker yen and this is likely to continue for some time.”

Australian stocks declined; the S&P/ASX 200 index fell 1.1% to close at 7,224.80, dragged by losses in mining shares. The materials sub-gauge dropped the most since Oct. 28, continuing a four-day losing streak, after iron ore slumped.  In New Zealand, the S&P/NZX 50 index fell 0.9% to 11,793.33

In FX, the Bloomberg Dollar Spot Index was steady and the greenback traded mixed against its Group-of-10 peers. Sweden’s krona and the pound were the best performers while the New Zealand and Australian dollars were the worst.

• The euro was steady at $1.0550. Bund yields followed Treasury yields higher after an early drop. the 10-year yield rose to the highest since 2011 as traders are betting the ECB will extend its tightening cycle beyond this year, pushing back expectations for a peak in interest rates into 2024 for the first time. Focus is on speeches by policymakers
• The pound rose 0.2% against the dollar, snapping a three-day decline, to trade around 1.1966 amid speculation of an imminent deal on the Northern Ireland protocol. Gilts yields rose as bets on BOE rates pricing turned higher.
• The yen steadied near a two-month low as currency traders weighed remarks from BOJ governor nominee Kazuo Ueda at his second parliamentary hearing. Ueda said monetary easing should continue in support of the economy’s recovery, a comment that suggests he won’t seek an immediate change in policy if he is approved to helm the central bank
• The New Zealand dollar underperformed its G-10 peers. RBNZ chief economist Paul Conway said inflation is “far too high,” labor market is “incredibly tight”.
• The Australian dollar also tacked lower. RBA chief Philip Lowe’s expectation of further interest-rate rises prompted economists and money markets to narrow the odds of a recession

In rates, Treasury yields reversed a drop to inch up, led by the front end following a wider drop across German bonds, as traders wagered that the European Central Bank will extend its rate-hiking cycle further into 2024. US yields were cheaper by up to 1.7bp in front-end of the curve with 2s10s flatter by almost 1bp; 10-year yields around 3.95%, less than 1bp cheaper vs. Friday session close with Germany 10-year lagging by 3bp vs. Treasuries.  Bund futures are lower as traders push back bets on when ECB rates will peak until 2024 for the first time. German 10-year yields are up 4bps.

In commodities, oil fell as concerns that the Fed will keep on raising rates eclipsed the latest disruption to supplies in Europe and optimism over a demand recovery in China; WTI hovered around $76.30. Spot gold is flat at around $1,810.

Bitcoin is modestly firmer on the session, +1.0%, but off initial best levels and well below 24k. RBI Governor Das said at the G20 that there is now wide recognition of major risk with crypto.

Looking at today’s calendar, we get the February Dallas Fed manufacturing activity, January durable goods orders, and pending home sales; elsewhere we also get Japan January retail sales, industrial production, Italy February manufacturing confidence, economic sentiment and consumer confidence index, Eurozone February services, industrial and economic confidence, January M3, Canada Q4 current account balance. Fed speaker slate includes Jefferson at 10:30am; Goolsbee, Kashkari, Waller, Logan, Bostic and Bowman are scheduled later this week. On the earnings front, Occidental Petroleum, Workday, and Zoom report.

Market Snapshot

• S&P 500 futures up 0.5% to 3,994.25
• STOXX Europe 600 up 1.0% to 462.49
• MXAP down 0.5% to 157.92
• MXAPJ down 0.8% to 511.47
• Nikkei down 0.1% to 27,423.96
• Topix up 0.2% to 1,992.78
• Hang Seng Index down 0.3% to 19,943.51
• Shanghai Composite down 0.3% to 3,258.03
• Sensex down 0.4% to 59,220.58
• Australia S&P/ASX 200 down 1.1% to 7,224.81
• Kospi down 0.9% to 2,402.64
• German 10Y yield little changed at 2.56%
• Euro little changed at $1.0555
• Brent Futures up 0.4% to $83.48/bbl
• Gold spot down 0.1% to $1,809.86
• U.S. Dollar Index little changed at 105.15

Top Overnight News from Bloomberg

• Three quarters of the 1,500 UK business leaders polled by BCG’s Centre for Growth believe the economy will shrink in 2023 but only 20% plan to shed staff, fewer than the 29% who plan to increase headcount: BBG
• Rishi Sunak and Ursula von der Leyen will meet in the UK in the early afternoon on Monday for final talks ahead of an expected announcement of a post-Brexit settlement for Northern Ireland: BBG
• The ECB is very likely to go ahead with its intention to raise interest rates by a half-point when it meets next month, President Christine Lagarde told India’s Economic Times: BBG
• Bloomberg’s aggregate index of eight early indicators suggests China’s economy rebounded in February after the long holiday, although it points to an uneven recovery with strong consumption following the scrapping of Covid rules but lagging industrial activity: BBG
• Macron announced he will visit China in April and hopes to encourage Beijing to pressure Moscow into reaching a settlement of the Ukraine war. SCMP
• New home sales by floor area in 16 selected Chinese cities rose 31.9% month-on-month in February, compared with a fall of 34.3% in January, according to China Index Academy, one of the country’s largest independent real estate research firms. RTRS   
• American companies, including McDonald’s, Starbucks, Ralph Lauren, Tapestry, and others, are expanding in China in anticipation of a consumer-led rebound in the economy as the post-reopening recovery continues. WSJ
• China Renaissance confirmed Chairman Bao Fan has been assisting in a Chinese probe since he disappeared abruptly earlier this month. The investigation is being run by authorities, and Renaissance will “cooperate and assist with any lawful request.” It was reported last week that Cong Lin, the firm’s former president, has been involved in a probe since September. BBG
• BOJ policy – incoming governor Kazuo Ueda says it’s premature to discuss normalization as “big improvements” must be achieved in the country’s inflation trajectory before changes can happen (Ueda says the benefits of monetary easing exceed the costs). RTRS
• Russia has halted supplies of oil to Poland via the Druzhba pipeline, a move that comes one day after Poland sent its first Leopard tanks to Ukraine. RTRS
• US insurance regulators on Monday will meet to consider boosting capital charges on complex corporate loan instruments that some in the industry warn are creating excessive risk. The issue pits insurers backed by large private equity firms such as Blackstone, Apollo Global and KKR — who are increasingly investing in the loans — against traditional life insurers such as MetLife and Prudential Financial, who warn of growing risks. FT
• Pfizer is in early-stage talks to acquire biotech Seagen, valued at about $30 billion, and its pioneering targeted cancer therapies. WSJ
• Hedge fund Soroban Capital Partners is pushing Union Pacific Corp.  to replace Chief Executive Lance Fritz, arguing the railroad has underperformed on his watch, according to people familiar with the matter. WSJ

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded cautiously heading into month-end and a slew of upcoming releases including Chinese PMI data, with headwinds also from the US where firmer-than-expected Core PCE data spurred hawkish terminal rate bets. ASX 200 was negative as participants digested a deluge of earnings and with the mining industry leading the retreat seen across nearly all sectors aside from energy which benefitted from a jump in Woodside Energy’s profits. Nikkei 225 price action was contained by a lack of pertinent macro drivers and with BoJ Governor nominee Ueda’s largely reiterated prior comments at the upper house confirmation hearing. Hang Seng and Shanghai Comp. were choppy with initial pressure amid geopolitical frictions after the G20 finance ministers meeting failed to agree on a communique due to opposition from Russia and China, while National Security Adviser Sullivan also warned there will be a real cost if China provides military assistance to Russia for the Ukraine war. However, Chinese stocks gradually recovered from the early weakness and briefly turned positive with sentiment helped by a continued liquidity injection and after China drafted guidelines to regulate financial support in the housing rental market, although the gains proved to be short-lived.

Top Asian News

• China drafted guidelines to regulate financial support in the housing rental market and began to solicit public opinion, according to China.org.cn.
• Macau dropped COVID-19 mask mandates for most locations aside from public transportation, hospitals and some other areas, according to Reuters.
• BoJ Governor Kuroda commented that he is resolved to keep ultra-loose policy and that the BoJ expects core consumer inflation to slow beyond 2% in both fiscal 2023 and 2024, according to Reuters.
• BoJ Governor nominee Ueda says CPI growth will slow below 2% in fiscal 2023 and that it takes time for CPI to meet the 2% target stably and sustainably, while he added that the BoJ’s current monetary easing is appropriate and that it is appropriate to continue monetary easing from now on as well. Adds, changing the 2% inflation target into a 1% target would strengthen the JPY in the short-term, weaken it long-term. Overshooting commitment is aimed at exerting powerful announcement effects on policy, need to be mindful of risk of inflation overshooting too much. Targeting shorter-dated JGBs than current 10yr yield is one idea if BoJ were to tweak YCC in the future, but there are many other options. Does not think Japan has reached the reversal rate, in which financial transmission channels are hurt so much that the demerits of easing exceed benefits.

European bourses are firmer across the board, Euro Stoxx 50 +1.8%, after a cautious APAC handover following Friday’s selling pressure. Sectors are all in the green with Energy names at the top of the pile, given benchmark pricing and Shell’s upgrade at GS. Stateside, futures are currently posting more modest upside of around 0.5% with Fed’s Jefferson (voter) the session’s main event. Tesla’s (TSLA) German plant has hit a production level of 4,000 per week, three weeks ahead of schedule, according to Reuters.

Top European News

• UK PM Sunak and European Commission President von der Leyen will meet at 12:00GMT/07:00EST in Windsor, according to BBC; if there is a deal, a press conference could be around 15:30GMT. Earlier, UK PM Sunak’s office said UK PM Sunak will meet with EU’s von der Leyen for talks on Northern Ireland Brexit deal late lunchtime on Monday and will hold a Cabinet meeting later on Monday. Furthermore, PM Sunak and von der Leyen will hold a news conference if a deal is reached, while Sunak will also address parliament if there is a deal.
• UK ministers are unlikely to quit re. the Brexit deal, with the likes of Steve Baker and others liking what they are hearing but waiting to see the full text, according to Times’ Swinford; ERG say they would love to back the deal but if the DUP does not back the deal it cannot and won’t support it.
• UK PM Sunak said they are giving it everything they’ve got regarding talks for a post-Brexit deal for Northern Ireland and he will try to resolve the concerns the DUP Party have regarding a new Brexit deal for Northern Ireland. It was later reported that PM Sunak said he won big concessions from the EU, according to The Sunday Times and The Times.
• UK Deputy PM Raab said there is real progress on a trade deal and he is hopeful for good news on the Brexit deal within days, not weeks, and also noted that Northern Ireland’s DUP does not have a de-facto veto over the Brexit deal. In other news, Raab said he will resign if an allegation of bullying against him is upheld, according to Reuters.
• ECB’s Lagarde said headline inflation is still unacceptably high and core CPI is at a record level, while she added that they want to bring inflation back to the 2% target and noted that rate decisions are to be data dependent.
• Magnitude 5.7 earthquake that struck the Eastern Turkey region has been revised to 5.2, according to the EMSC.

FX

• DXY retained a bid between Fib and psychological level within 105.360-070 range; though has erred towards the lower-end of these parameters going into the US session.
• Sterling ‘outperforms’ after a dip through 200 DMA vs Buck on UK-EU NI trade deal optimism, with EUR/GBP within 10 pips of 0.8800 at worst.
• Kiwi flags as NZ Q4 retail sales fall and Aussie feels more contagion from Yuan weakness; antipodeans near 0.6150 and 0.6710 respectively.
• Euro pivots 1.0550 vs the Dollar and Yen pares back from sub-136.50 amidst Fib support nearby.
• PBoC set USD/CNY mid-point at 6.9572 vs exp. 6.9586 (prev. 6.8942)

Commodities

• WTI and Brent are a touch softer though have lifted off overnight USD 75.58/bbl and USD 82.38/bbl lows given the improvement in risk sentiment throughout the European morning.
• Though, the benchmarks are shy of USD 76.82/bbl and USD 83.60/bbl peaks with numerous geopolitical updates factoring into the overall indecisive price action.
• Russia halted supplies of oil to Poland via the Druzhba pipeline, according to PKN Orlen’s CEO. Subsequently, Russia’s Transneft says payment orders for oil shipments to Poland were not issued in the second half of February, no oil flows to Poland currently, via Tass; paperwork for oil supplies to Poland has not been completed.
• Crude oil deliveries via the Druzhba pipeline to the Czech Republic are running as planned, according to Mero.
• Spot gold is little changed with the yellow metal in a tight sub-10/oz range above the USD 1800/oz handle, taking its cue from the similarly cagey USD.
• Base metals are, broadly speaking, firmer following overnight weakness but remain in proximity to the troughs from Friday’s session.

Fixed Income

• Bonds remain in bear clutches after another failed recovery rally.
• Bunds probe new cycle low at 133.61 (session high 134.36) have fallen just shy of key resistance area, associated 10yr at a YTD peak of 2.57%.
• Gilts wane just two ticks below 101.00 and test bids/support into 100.00 and T-note hugs base of 111-07/16 range ahead of US data, Central Bank speakers and crunch UK-EU Brexit talks.

Geopolitics

• Russia’s Kremlin, on China’s peace plan, says no conditions for peace ‘at the moment’ in Ukraine, according to AFP.
• G20 Finance Ministers meeting concluded without a joint communique as China and Russia opposed the draft with the two countries said to be upset by the use of a G20 platform to discuss political matters, according to sources cited by Reuters. India’s chair statement noted that there was a discussion about the war in Ukraine and it reiterated the G20 position on deploring in the strongest terms aggression by Russia, as well as reiterated the G20 position demanding Russia’s complete and unconditional withdrawal from Ukrainian territory.
• Russian President Putin said Russia has taken into account NATO’s nuclear potential and claimed that the west wants to liquidate Russia, according to TASS.
• Russian Wagner Group boss Prigozhin said his fighters captured the village of Yahinde which is north of Bakhmut, according to Reuters.
• US President Biden said on Friday that he is ruling out Ukraine’s request for F-16 aircraft for now but added they have to put Ukrainians in a position where they can make advances this spring and summer. Biden also said he doesn’t anticipate a major initiative on the part of China to provide weapons to Russia and that he hasn’t seen anything in the Chinese peace plan that would be beneficial for anyone but Russia, while he also suggested it is possible that Chinese President Xi did not know about the Chinese spy balloon, according to an ABC News interview.
• US National Security Adviser Sullivan said China has made the final decision regarding providing aid to Russia and has not taken the possibility of providing lethal aid to Russia off the table, while he noted the consequences have been made clear to China and warned there will be a real cost if China provides military assistance to Russia for the Ukraine war, according to an interview with ABC News. There were also comments from Republican lawmaker McCaul that China is thinking of sending drones and other lethal weapons.
• Belarus President Lukashenko will pay a state visit to China from February 28 to March 2. “The visit will serve as an opportunity for the two sides to further promote comprehensive cooperation”, according to Global Times.
• Germany, France, and the UK are considering making concrete security guarantees to Ukraine as an incentive for Ukrainian President Zelensky to engage in peace talks with Russia, according to the WSJ.
• German Defence Minister Pistorius commented regarding the Chinese peace plan and stated that they will judge China by its actions, not its words, according to Reuters.

US Event Calendar

• 08:30: Jan. Durable Goods Orders, est. -4.0%, prior 5.6%
  • Jan. -Less Transportation, est. 0.1%, prior -0.2%
  • Jan. Cap Goods Ship Nondef Ex Air, est. 0%, prior -0.6%
  • Jan. Cap Goods Orders Nondef Ex Air, est. -0.1%, prior -0.1%
• 10:00: Jan. Pending Home Sales (MoM), est. 1.0%, prior 2.5%
  • Jan. Pending Home Sales YoY, prior -34.3%
• 10:30: Feb. Dallas Fed Manf. Activity, est. -9.2, prior -8.4

Central Bank Speakers

• 10:30: Fed’s Jefferson Discusses Inflation and the Dual Mandate

DB’s Jim Reid concludes the overnight wrap

As we close out a tougher second month of the year than the first tomorrow night, Henry pointed out an interesting stat to me on Friday. January was the best January for the Global Bond Ag index this century whereas February so far is on course to be the worst February over the same period. The very strong financial market performance between mid-October and end-January was in our opinion based mostly around US terminal pricing being remarkably stable between 4.75-5.1%. In the previous 9-10 months it was constantly being repriced from around 1% to 5% causing chaos in the financial world.

On Friday, US terminal closed at 5.4%, catching up to DB’s street leading 5.6% forecast. Clearly this has been bubbling up since payrolls (Feb 3), the CPI revisions (Feb 10), CPI beat (Feb 14), retail sales beat (Feb 15), and even things like Manheim used prices spiking higher again in January and February. Last Friday’s core PCE was another important piece of evidence with the 0.6% mom print above expectations of 0.4%. Even though the concern was that it would beat, this added fuel to the fire and markets still struggled to deal with the ramifications with 2yr, 10yr and terminal up +11.6bps, +6.8bps and +5.3bps to 4.814%, 3.943% and 5.40% respectively. 2yr yields are the highest since July 2007 and terminal the highest this cycle.

For core US PCE, the 3m, 6m and 12m annualised numbers are now 4.8%, 5.1% and 4.7% and thus strongly hint at inflation stickiness. With this data it’s tough to rule out a return to 50bps hikes even if that’s not yet the base case. While that uncertainty is there, markets will stay on edge.

In credit we downgraded our tactical bullishness in our “Credit: Rally ends soon” (Jan 30) note (link here) and suggested reducing exposure to dollar credit immediately. The biggest challenge though is when to officially run for the preverbal hills given we’ve had a long standing YE 23 target for HY of +860bps linked into our US recession call by year end. In the near-term we’re a little more relaxed on European credit. Indeed our credit team published a €HY update this morning looking at tight spreads in the face of growing fundamental vulnerabilities and the highest share of bonds rated B or worse in the last 10 years. However with supply unlikely to pick up materially, favourable technicals should keep spreads supported for now. Still, we think concerns about deteriorating credit metrics will eventually prevail and see €HY selling off in H2’23 alongside the US market when signs of a growth slowdown become even more tangible (see here for the full text).

Linked into this view, the recent US data probably makes us more confident of a hard landing given the boom-and-bust nature of this cycle that has been increasingly clear step-by-step over the last 2-3 years. This trend first emerged with the extraordinarily excessive covid stimulus, which in turn led to an enormous spike in the money supply, which brought structural inflation, and was always going to require an immense amount of tightening to control. An immaculate disinflation and soft landing from here would defy all historical precedent. Time will tell if we’re wrong and history needs to be rewritten but this feels a fairly straight forward US cycle to predict.

For this week, with the current sensitivities over prices, all eyes will be on the flash February European CPI releases (France Tues, Germany Weds, Italy and EA Thurs) and labour market data released throughout the week. The CPI numbers follow Friday’s upward revisions for the January report in the Euro Area, where core inflation was revised up a tenth to a new record of +5.3%. We also have the global PMIs (and US ISMs) with manufacturing on the first day of the month (Wednesday) and services (Friday).

ECB speakers will have plenty of opportunity to reflect on the data with at least 8 appearances already scheduled for next week. For a more backward-looking assessment, markets will also have the ECB’s account of the February meeting due Thursday to read through. Our own European economists upgraded their ECB call last week and now see two +50bps hikes in March/May followed by a final +25bps hike in June, which would imply a terminal of 3.75%, up from 3.25% previously (see full note here). Fed speakers are also prevalent as you’ll see in the day-by-day week ahead. There are six FOMC voters and there is a lot for them to chew over at the moment, especially after Friday’s PCE data.

Outside of the ISMs, US data will revolve around consumer and manufacturing activity. That will include the Conference Board’s consumer confidence index tomorrow, Chicago PMI (also tomorrow) and a host of regional central bank indices. Other notable indicators due include durable goods orders today and the advance goods trade balance tomorrow.

Asian equity markets are trading lower this morning with the KOSPI (-1.19%) leading losses across the region while the Hang Seng (-0.75%), the CSI, (-0.21%) the Shanghai Composite (-0.12%) and the Nikkei (-0.19%) all trading in the red. In overnight trading, US stock futures are fairly flat alongside US yields.

Earlier this morning, the government’s nominee for the Bank of Japan (BOJ) Governor, Kazuo Ueda in his speech to the parliament stressed the need to maintain the central bank’s ultra-loose policy to support the Japanese economy despite various market side-effects. Meanwhile, candidates for the BoJ deputy governor (Uchida and Himino) will appear for hearings in the Upper House tomorrow, following this week’s Lower House hearings.

Looking back on last week now, both equities and fixed income retreated as markets priced in further central bank hikes following mounting evidence that inflation was continuing to prove persistent. The selloff gathered pace on Friday, following the aforementioned US PCE inflation data surprising firmly to the upside, with headline PCE at +0.6% (vs +0.5% expected) month-on-month, and +4.7% (vs +4.3% expected) year-on-year. Further adding to the view that inflation is durable, core PCE inflation also came in above consensus, with the month-on-month print at +0.6% (vs +0.4% expected) whilst year-on-year came in at +4.7% (vs +4.3% expected).

This data led markets to swiftly priced in a more aggressive price of rate hikes from the Fed. In particular, there was growing speculation that the Fed might step up their hikes to 50bps again, with a +30.3bps move priced into the next meeting in March, up from +27.5bps at the start of the week. US terminal rate timing is starting to be evenly balanced between July (5.400%) and September (5.401%), rather than the July peak we’ve had for several weeks. It’s also at the highest level of the cycle. The pricing for the July meeting climbed up +11.8bps last week (+5.3bps on Friday), while the September meeting pricing rose +14.6bps last week (+6.9bps on Friday). Expectations also increased for rates remaining higher for longer, with the December meeting now implying a 5.28% rate. This was up +11.0bps on Friday and +21.6bps on the week – marking a fifth consecutive weekly increase.

Renewed expectations of additional hikes by central banks triggered a sell-off in both US and European equities on Friday. The S&P 500 fell back -1.05% on Friday, finishing off the week down -2.67% and marking its worst weekly performance so far this year. The Nasdaq similarly retreated, down -3.33% last week (-1.69% on Friday), its largest weekly down move since mid-December. European equities fell back too, with the STOXX 600 retreating -1.42% last week (-1.04% on Friday).

This sell-off was echoed across fixed income markets, with 10yr Treasury yields up +6.6bps on Friday and +12.8bps over the course of last week. 2yr Treasuries significantly underperformed, as yields rose +11.6bps on Friday and +19.7bps over the week, reaching their highest level since July 2007. It was a similar story in Europe, with the 2yr German yield up +11.7bps on Friday in their largest up move since December and hitting their highest level since October 2008. Over the course of the week, that left them up +15.3bps at 3.03%. In the meantime, 10yr bund yields rose +9.7bps last week (+5.9bps on Friday) to 2.54%, and the German 2s10s curve inverted to -50bps after it fell -5.6bps on Friday, which made up nearly the entirety of the -5.8bps flattening last week.

Finally, commodity markets fell back most of last week before a rally in oil on Friday (WTI +1.23% & Brent +1.16% Friday) left WTI crude down just -0.03% on the week at $76.32/bbl and Brent crude up +0.19% at $82.16/bbl. On the other hand, metals saw continued selling on Friday, with copper futures falling back -3.81% overall (-2.64% on Friday), and nickel down -4.93% last week (-3.33% on Friday). Looking at the market more broadly, the Bloomberg Industrial Metals Index fell back -3.17% over the course of last week (-2.44% on Friday). All this likely down to some concerns that the Chinese reopening isn’t quite as smooth and bouyant as hoped.