With markets still abuzz over Sunday’s OPEC+ decision to cut oil output by over 1.6 million bpd, which was strategic (the political implications of Saudi Arabia bitchslapping the Biden admin just days after it effectively joined the China-Russia-India axes are unmissable even by inbred Deep State types) as well as tactical (i.e., brutalize the oil shorts, a task made easier since energy is now the second most shorted sector after banks, while CTAs are max bearish and will be forced to cover and chase oil higher from here), below we excerpt from two different perspectives on the OPEC decision, the first one from TS Lombard (it is their view that the output cut “this will deter short sellers and help oil prices settle higher – much like what December’s surprise BoJ tweak to Yield Curve Control did for the yen” but in the long run “sticky oil prices are more likely to weigh on growth than arrest the broad disinflation process already under way”), as well as a second one from JPMorgan’s chief commodity strategist Natasha Kaneva who lays out what she thinks is the “most surprising part of the announcement.”

So without further ado, here is the first take courtesy of TS Lombard’s Konstantinos Venetis who explains why OPEC’s best offense is defense.

Oil prices have jumped following the decision by a Saudi-led group of OPEC members to cut output by around one million bpd starting next month. This will add to the two million bpd reduction agreed by OPEC+ back in October, taking the total to around 3% of global supply.

The cartel is trying to put a floor under crude prices against the backdrop of rising inventories and downside risks to demand as a US recession looms. This move is also meant to send a message to speculators: the bearish skew in futures positioning had become particularly pronounced recently, which goes some way to explaining today’s strong knee-jerk price response. There is also a political angle to the timing of this announcement, coming shortly after US officials effectively ruled out new crude purchases to replenish the Strategic Petroleum Reserve in 2023, underscoring the souring of US-Saudi relations.

Near term, this will deter short sellers and help oil prices settle higher – much like what December’s surprise BoJ tweak to Yield Curve Control did for the yen. In our experience, however, as a rule the recipe for sustainable oil market turnarounds is positive demand surprises, not pre-emptive supply reductions. Just like the production cuts announced in autumn 2022, this essentially amounts to a defensive move in the hope that the world economy skirts a severe economic downturn in 2023.

Given our expectations for a US recession and limited global spillovers from China’s reopening, our sense is that at this juncture sticky oil prices are more likely to weigh on growth than arrest the broad disinflation process already under way. For bonds, this means that spikes in yields on the back of renewed inflation concerns are likely to be short-lived. For equities, firmer oil prices will (if anything) weigh on already falling earnings expectations.

For commodities overall, the glass still looks half empty: we continue to expect rangebound trading in 2023 Q2, albeit with metals’ outperformance over energy starting to erode as the Brent-to-copper ratio mean-reverts higher.

And here is an excerpt from JPM’s Natasha Kaneva laying out what is “the most surprising part of the announcement”:

A day before the OPEC+’s advisory (no policy-making) Joint Ministerial Monitoring Committee was set to meet on April 3, Saudi Arabia and other members of the OPEC+ alliance announced a 1.1 mbd oil production cut. Saudi Arabia pledged a “voluntary” 500 kbd supply reduction, in coordination with Iraq, the UAE, Kuwait, Kazakhstan, Algeria and Oman (Table 1). The cuts will begin in May and last until the end of 2023. Fellow member Russia said the 500 kbd production cut it was implementing from March to June would extend until the end of 2023. Similar to OPEC’s 2 mbd cut last October, we view the current reduction in supply as a preemptive measure, assuring that surpluses that started accumulating in the global oil market since mid-2022 don’t extend into the second half of 2023 as the global economy slows following almost 400 bps of cumulative hikes since 2022.

The most surprising part of the announcement is that it was not made sooner. Since last November our global oil supply-demand balance suggested a strong policy action was needed to keep global oil surpluses in check. For example, the first iteration of the supply-demand balances behind our oil view for 2023 last November resulted in an average 1Q23 Brent price of $78/bbl (WTI at $72/bbl). We believed that the low price level would trigger two policy responses.

• First, the US administration would step into the market to purchase 60 million barrels of oil to partially replenish SPR inventories.
• Second, we believed that to keep the market balanced in 2023, OPEC+ alliance would need to cut its October quota by another 0.8 – 1.0 mbd, effectively slashing production by 0.4 mbd. We estimated that absent policy shift, Brent oil price would be confined to the $70-80/bbl near-term band, with a risk of significantly lower prices were the recent events in the US financial markets to cascade through the regional banking sector.

The combined impact of Sunday’s announcement is ~100 kbd (on annualized basis) less crude flowing into the market than we previously expected. Consequently, we leave our long-standing price forecast unchanged. We missed our 1Q23 price forecast by $3/bbl but still see Brent oil prices averaging $89 in 2Q23, rising to $94 in 4Q23 and exiting the year at $96.

• Cuts are taking place two months later than our initial assumption.The timing of the policy response is paramount, and we previously assumed both the US administration and OPEC would act in the first quarter. Acting later diminishes the impact on overall balances and hence it takes longer for the price impact to take hold.
• With the Biden administration publicly ruling out new crude purchases any time soon, OPEC+ alliance needs to do the heavy lifting to balance the market. On annualized basis, our initial assumption of 164 kbd of SPR purchases this year now stands at zero.
• OPEC’s 1.1 mbd cut to production quotas translates to about 0. 8 mbd decline in real production, by our estimates, assuming OPEC+ sticks with current reference levels for the cuts (see our balances in the back of the note). Annualized, this equates to about 533 kbd of supply reduction, which compares to the 333 kbd cut embedded into our price forecast from last November.
• Russia cuts are real but from a higher base than original guidance, offset by longer duration. Russia is moving ahead with its announced 500 kbd cut but from a much elevated crude output level of 10.2 mbd in February (combined Russian crude and condensate production in February was 11 mbd). This means Russia is now aiming to produce 9.7 mbd in March through December, a much shallower reduction in output than Russia previously indicated, but largely in line with our assumption of 9.6 mbd average. If realized, Russia will overcompensate by extending the cuts by six months from the original June end-date through December. The impact on our balance is about 70 kbd less production from Russia this year, annualized.

More in the full reports from JPM and TS Lombard available to pro subs.

Q1 was a turbulent period in markets, with a surge in volatility (especially in bonds, if not so much in stocks) during March after the collapse of Silicon Valley Bank. That led to fears about broader contagion across the banking system, while the sudden implosion of Credit Suisse led to its acquisition by UBS with guarantees from the Swiss government, and further bank crisis fears. As a result, as DB’s Henry Allen writes in his quarterly performance recap, “some of the daily moves were the largest seen for decades, and the MOVE index of Treasury volatility hit levels last seen at the height of the GFC in 2008.“

By the end of the quarter, the immediate volatility had subsided – in large part due to the market’s near certainty that the Fed’s rate hike cycle is effectively over – but the turmoil led to speculation about whether something was finally breaking after a rapid series of central bank rate hikes. Nevertheless, even with that market turbulence in March, Q1 as a whole saw some incredibly broad gains after the weakness of 2022, with advances for equities, credit, sovereign bonds, EM assets and crypto. The only major exception to that pattern were commodities, with oil prices losing ground in every month of Q1.

Quarter in Review – The high-level macro overview

Q1 started on a fairly positive note, with lots of good news stories in January helping markets to rebound after an awful 2022. For instance, European natural gas prices fell by -24.8% over January, which helped to allay fears about a potential recession. That was echoed among various sentiment indicators, with consumer confidence rising to its highest level in months. Meanwhile in China, the economy’s reopening continued and restrictions were eased, boosting hopes that global growth would be lifted more broadly. This brighter macro outlook meant that plenty of assets began the year very strongly. For instance, the S&P 500 (+6.3%) had its best start to a year since 2019, and Europe’s STOXX 600 (+6.8%) had its best start since 2015.

However, as we moved into February, the tone in markets became decidedly more negative. The main culprit was a series of strong US data releases and higher-than expected inflation, which led investors to ramp up the likelihood of future rate hikes. Indeed, the unemployment rate fell to a 53-year low of 3.4%. This even sparked discussion about the US economy experiencing a “no landing” scenario, where inflation stayed high and growth remained strong, requiring the Fed to take rates even higher.

This trend wasn’t just confined to the United States however. In the Euro Area, data released in February showed core inflation hitting a record high of +5.3% in January. And in Japan, headline and core CPI for January reached their highest level since 1981. This sparked a major sell-off among global bonds, with Bloomberg’s Global Aggregate Bond Index (-3.3%) seeing its worst February performance since its inception back in 1990.

By March, the persistence of inflation saw investors keep ratcheting up their expectations for central bank terminal rates. That was then validated by Fed Chair Powell, who said in his semi-annual congressional testimony that “we would be prepared to increase the pace of rate hikes”, which explicitly opened the door to 50bp moves again. Shortly afterwards on March 8, 2yr yields closed at a post-2007 high of 5.07%, and expectations of the Fed’s terminal rate stood at a new high for the cycle of 5.69%. In the meantime, the 2s10s curve closed at an inverted -109bps that day, which hadn’t been seen since 1981.

But all this changed shortly afterwards, as concern grew about the financial system after Silicon Valley Bank collapsed, raising fears about broader contagion. Credit Suisse then came under investor scrutiny and saw large deposit outflows, which culminated in a purchase by UBS that included guarantees from the Swiss government. This led to significant market turmoil, and investors speculated whether central banks might call it a day on their current hiking cycles, with yields on 2yr Treasuries seeing their largest daily decline since 1982 on March 13. Bank stocks were also hit, with the KBW Bank Index down -17.9% over Q1, despite the broader equity rally.

However, by the end of the month, there were signs that calm was returning to financial markets again. Measures of volatility like the MOVE index and the VIX index had come down substantially, and financial conditions had also eased since the height of the turmoil. And with investors far less concerned about aggressive rate hikes, sovereign bonds put in a very strong performance. In fact, for US Treasuries it was their best monthly performance in 3 years since March 2020, back when investors poured into save havens and the Fed slashed rates and restarted QE.

The big question now, the DB strategist concludes, is whether the turmoil from March proves to be an isolated incident, or whether it proves the harbinger of further shocks ahead.

Which assets saw the biggest gains in Q1?

• Equities: Despite the market turmoil, equities overall saw solid gains over Q1. For instance, the S&P 500 (+7.5%), the STOXX 600 (+8.6%) and the Nikkei (+8.5%) all advanced on a total return basis. Tech stocks were one of the best performers on a sectoral basis, and the NASDAQ (+17.0%) had its best quarter since the Q2 2020. However, given the financial turmoil, banks were one of the weaker performers, and the KBW Bank Index fell -17.9% over Q1.
• Credit: There was a decent start to the year in credit, with gains across all indices in USD, EUR and GBP credit. The strongest gains were seen among GBP IG non-fin (+4.3%) and US HY (+4.2%), whereas the weakest was among EUR Fin Sub (+1.1%).
• Sovereign Bonds: US Treasuries (+3.3%) just experienced their best quarter since the pandemic turmoil of Q1 2020, back when investors poured into save havens and the Fed slashed rates to zero and restarted QE. For Euro sovereign bonds (+2.4%) it was also their best quarter since Q3 2019, and brings an end to a run of 5 consecutive quarterly declines.
• EM Assets: Having struggled in 2022, emerging markets saw a much better start to 2023 across the major asset classes. For instance, the MSCI EM Equity Index was up +4.0%, EM Bonds were up +4.9%, whilst EM FX was up +2.0%.
• Precious Metals: Gold (+8.0%) and silver (+0.6%) prices both advanced over Q1. Prices have been supported by growing demand for safe havens, along with the prospect that central banks might be ending their hiking cycles shortly. That came after some very strong performances in March specifically, with gold up +7.8% over the month and silver up +15.2%.
• Crypto: After significant losses in 2022, crypto-assets rebounded in Q1. Bitcoin had its best quarterly performance in two years, with a +71.7% advance that left it at $28,395. And this was echoed among other cryptocurrencies too, with Ethereum (+51.6%) also seeing a sharp rebound, whilst Bloomberg’s Galaxy Crypto Index was up +59.7%.

Which assets saw the biggest losses in Q1?

• Commodities (except precious metals): Commodities were the only major asset class to lose ground over Q1. For instance, Brent crude oil prices were down -7.1%, marking a third consecutive quarterly decline for the first time since 2014-15. In Europe, natural gas futures were down -37.3% over Q1, building on their -59.6% decline in Q4 last year. And plenty of agricultural commodities also fell back, including wheat (-12.6%), corn (-2.7%) and soybeans (-0.9%).

Finally, here is the visual summary of best and worst performers in March…

… and March.

Authored by Eric Lendrum via American Greatness,

A researcher claims to have found a tool allowing for government intervention in Twitter’s algorithm, upon Elon Musk’s decision to allow the algorithm to become open sourced to the public.

Breitbart reports that Musk honored his promise on Friday by releasing a portion of Twitter’s recommendation algorithm on the website GitHub, where computer programmers often go to share and collaborate on work dealing with open-source code.

Web developer Steven Tey then claimed to have discovered a particular mechanism within the code that allows the U.S. government to make changes to the website’s algorithm.

“When needed, the government can intervene with the Twitter algorithm. In fact, @TwitterEng (Twitter Engineering) even has a class for it – ‘GovernmentRequested,” Tey tweeted, including a link to the code on GitHub.

7. When needed, the government can intervene with the Twitter algorithm.

In fact, @TwitterEng even has a class for it – “GovernmentRequested”

Source → https://t.co/R1rpNHMDuO pic.twitter.com/YmavVJ8szi

— Steven Tey (@steventey) March 31, 2023

Upon purchasing Twitter for $44 billion in October, Musk vowed to increase transparency and loosen restrictions on certain speech and accounts that had been imposed by previous leadership. One of his goals was to make the algorithm open source for public viewing; he later said that “our ‘algorithm’ is overly complex & not fully understood internally,” and that “people will discover many silly things, but we’ll patch issues as soon as they’re found!”

In addition, Tey discovered that the algorithm takes such factors into account as following-to-follower ratio when determining which users to promote; users with a low number of followers but a high amount of followed accounts would be negatively affected.

1. Your following-to-follower ratio matters.

Twitter’s “Tweepcred” PageRank algorithm reduces the page rank of users who have a low number of followers but a high number of followings.

Source ↓https://t.co/CRXVOhYdE9

— Steven Tey (@steventey) March 31, 2023

The algorithm also promotes those who are subscribed to the “Twitter Blue” program, where users must pay $8 a month for a blue checkmark signaling that their account is “verified.” These users are subsequently put into different categories, including “power users,” “Democrats,” and “Republicans.”

The discovery of the government intervention tool is just the latest example of controversy surrounding Twitter’s relationship with the federal government prior to Musk’s takeover. In his signature transparency effort, Musk has been periodically releasing information about Twitter’s past leadership, in the form of screenshots of emails and other forms of correspondence, revealing the levels of collusion between Twitter executives and government officials, often for the purpose of targeting conservative users. The information would be given to independent journalists and shared in extensive Twitter threads, becoming known as “The Twitter Files.”

Update (1208ET): Donald Trump’s legal team thins a New York judge may slap a gag order on the former president, the Daily Mail reports.

“The Trump legal team now thinks that the Manhattan judge will take the unprecedented step of silencing the presidential frontrunner with an unconstitutional gag order tomorrow,” one source told the Mail. “The Trump legal team is considering adding a First Amendment lawyer to the effort to combat this and will fight it all the way.'”

If Trump breaks an imposed gag order, he risks a $1,000 fine and as much as 30 days in prison under New York law.

If a gag order is imposed, a previously announced Tuesday evening speech from Trump’s Mar-a-Lago home may now be in doubt.

*  *  *

As The Epoch Times’ Naveen Anthrapully detailed earlier, former president Donald Trump has confirmed that he intends to appear before a New York court for his arraignment on charges brought against him by Manhattan District Attorney Alvin Bragg.

“ELECTION INTERFERENCE!!!” Trump said in an all-caps April 3 Truth Social post.

“I will be leaving Mar-a-Lago on Monday at 12 noon, heading to Trump Tower in New York. On Tuesday morning I will be going to, believe it or not, the Courthouse. America was not supposed to be this way!” Trump said in another post.

The court hearing for the arraignment will take place at 2:15 p.m. ET when Trump will appear before acting Supreme Court Justice Juan Merchan. This will be the first time in history that a former U.S. president faces criminal charges.

In an interview with CNN on Sunday, Trump’s lawyer Joe Tacopina said that he is yet to see the indictment as it is still sealed.

“We will take the indictment. We will dissect it. The team will look at every, every potential issue that we will be able to challenge and we will challenge, and of course, I very much anticipate a motion to dismiss coming because there’s no law that fits this,” Tacopina said.

A spokesperson for the Manhattan District Attorney’s Office said in a statement on March 31: “This evening we contacted Mr. Trump’s attorney to coordinate his surrender to the Manhattan D.A.’s Office for arraignment on a Supreme Court indictment, which remains under seal. Guidance will be provided when the arraignment date is selected.”

Trump blasted Bragg for subjecting him to criminal charges. “The Corrupt D.A. has no case. What he does have is a venue where it is IMPOSSIBLE for me to get a Fair Trial (it must be changed!), and a Trump-Hating Judge, hand selected by the Soros-backed D.A. (he must be changed!). Also has the DOJ working in the D.A.’s Office – Unprecedented!” he said in an April 3 Truth Social post.

Trump was indicted by a grand jury for his involvement in paying $130,000 to adult film actress Stormy Daniels. The case is believed to rely mostly on testimony from Trump’s former lawyer Michael Cohen.

During an arraignment, formal charges against the accused are read by a judge for the first time. Trump will be asked how he wishes to plead and the judge will decide whether bail is necessary for him to be released.

GOP members have also insisted that the Manhattan District Attorney’s case against Trump is politically motivated. In a letter (pdf) to Republican lawmakers on Friday, Leslie Dubeck, Bragg’s general counsel, called such allegations of political persecution “baseless and inflammatory.”

“Like any other defendant, Mr. Trump is entitled to challenge these charges in court and avail himself of all processes and protections that New York State’s robust criminal procedure affords. What neither Mr. Trump nor Congress may do is interfere with the ordinary course of proceedings in New York State.”

Political Play

Richmond-based veteran political analyst Bob Holsworth believes the Manhattan district attorney’s case against Trump will boost the former president’s appeal for the Republican primaries in the race for 2024 president.

“But this [indictment] is not likely to be the only one. And the question is, as these pile up later this spring and summer, will it open up a lane for someone other than these two?” he said in an interview with The Epoch Times, referring to Trump and Florida Gov. Ron DeSantis.

“We’re in uncharted territory, and I think we’ll see likely twists and turns beyond the immediate impact.”

On April 1, Trump posted the results of a poll on Truth Social which saw 83 percent of respondents willing to vote for Trump in the Republican primary. Second-placed candidate DeSantis only received 13 percent support.

“I have never had so much support and love as I do now against the Radical Left Insurrectionists, Extortionists, Crooked Politicians, and Thugs that are destroying our Country. Thank you, we will MAKE AMERICA GREAT AGAIN!!!” Trump said in an April 3 post.

Over the weekend, and ahead of the OPEC+ output cut shocker, we first reported that short WTI bets had already collapsed by the most in 7 years following last week’s sharp spike in oil prices.

Now, it’s energy guru John Kemp’s turn to report that investors started to pair back short positions in petroleum even before Saudi Arabia and its OPEC+ allies surprised the market by announcing production cuts totalling more than 1 million barrels per day.

As Kemp notes, “the scale of the cuts and the element of surprise is likely to have been intended to intensify the rush of short-covering as well as boost confidence and draw more bullish investors back into the market.“

Hedge funds and other money managers purchased the equivalent of 61 million barrels in the six most important petroleum futures and options contracts over the seven days ending March 28.

This marked a sharp turnaround after fund managers sold a total of 281 million barrels over the two preceding weeks, the fastest rate of selling for almost six years. 

Most of the buying came from the closure of previous bearish short positions (-48 million barrels) rather than initiation of new bullish longs (+13 million).

Buying was concentrated in NYMEX and ICE WTI (+49 million barrels), U.S. gasoline (+14 million), U.S. diesel (+5 million) and European gas oil (+1 million) with sales of Brent (-9 million).

As we also noted over the weekend, while short positions in NYMEX and ICE WTI were slashed (-51 million barrels), no new bullish positions were established and in fact long positions were trimmed marginally (-2 million).

Fund managers seem to have concluded WTI prices had found a floor after touching a 15-month low of less than $67 per barrel on March 17 and were unlikely to fall further in the short term.

Positions were all reported at the close of business on March 28, ahead of the decision by Saudi Arabia and its allies in the OPEC⁺ producer group to cut their output targets by more than 1 million barrels per day on April 2.

WTI Rally Primed

Prior to the most recent week, positioning in WTI had become especially bearish, leaving the market primed for a sharp short-covering rally. Hedge funds had reduced their net position in WTI to just 56 million barrels by March 21, the lowest since February 2016 and in only the 1st percentile for all weeks since 2013.

Funds’ bullish long positions outnumbered bearish short ones by a ratio of just 1.39:1 on March 21…

… the lowest since August 2016 and in only the 2nd percentile.

Positions had become so stretched towards the downside creating conditions for a sharp rebound if and when the news flow become more bullish or at least less bearish.

Even before the OPEC+ announcement, the concentration of bearish shorts and absence of bullish longs seems to have encouraged at least some fund managers to realise profits ahead of the expected recoil.

The announcement will likely fuel even more short covering in the near future, which was probably one of the motivations for the decision, announced on a Sunday to maximise its impact when trading resumed on Monday.

US Gas Positions

Fund managers are becoming less bearish about the outlook for U.S. gas prices following the full re-opening of Freeport LNG’s export terminal.

Hedge funds and other money managers increased their net position in Henry Hub futures and options for the seventh time in eight weeks.

Funds purchased the equivalent of 237 billion cubic feet of gas over the seven days ending March 28 taking total purchases to 1,011 billion cubic feet since January 31.

Portfolio managers still have a small overall short position of 50 billion cubic feet (30th percentile since 2010) but it has been sharply pared back from 1,061 billion cubic feet (7th percentile) at the end of January.

Authored by Daniel Lacalle,

Federal Reserve data shows $98 billion of deposits left the banking system in the week after the Silicon Valley Bank collapse. Most of the money went to money-market funds, as the Bloomberg data shows that assets in this class rose by $121 billion in the same period.

The data shows the challenges of the banking system in the middle of a confidence crisis.

However, as many analysts point out, this is not necessarily the main factor that dictates the risk of a credit crunch. Deposit flight is certainly an important risk. Many regional banks will have to cut lending to families and businesses as deposits shrink, but in the United States bank loans are less than 19% of corporate credit according to the IMF, while in the euro area it is more than 80%. What will generate a credit crunch is the destruction of capital in the asset base of most lenders.

The slump in mark-to-market valuations of all asset classes from loans to investments is what will ultimately drive an inevitable credit contraction.

Credit standards have tightened significantly already, and the credit impulse of the economy, both in the US and euro area, has deteriorated rapidly, according to the respective Bloomberg indices.

Both are below the March 2021 low.

We must remember that credit standards’ tightening was already a reality before the Silicon Valley Bank demise. But the reality check of capital destruction in the financial system’s asset base is far from done.

Start-ups will most likely see the most severe crunch in financing as the tech bubble burst adds to the asset base capital destruction in private equity and venture capital firms, who have delayed all they could the required write-downs and face a sobering reality check. Our internal estimate of capital destruction in the asset base of banks and private equity firms is between a 15% to 25% wipe-out, which is consistent with the average decline in market value over the October 2021- March 2023 period.

Real estate investments all over the US and Europe require a significant re-evaluation now that real estate has underperformed the market for eighteen months, according to Morgan Stanley. The optimistic valuations of real estate and corporate investments in banks’ balance sheets will require a significant analysis and subsequent write-off that leads to much tighter credit standards and stringent investment conditions.

Capital destruction tends to be forgotten in a world used to constant central bank easing, but it is likely to be the main source of strangling of credit to families and businesses as banks and private equity firms deal with the loss of value and weakening earnings and cash flow of investments made at elevated valuations and unreasonable prices. The main challenge this time is that capital destruction is happening in almost every part of the lenders’ asset base, from the allegedly low-risk part, sovereign bond portfolios, to the aggressively priced investments in volatile businesses and bull-market valuations of corporate and venture capital investments. The profitable asset part of banks will likely require important provisions for non-performing loans, a subject that was raised by the Federal Reserve and the ECB months before the banking crisis. Furthermore, as governments will blame the recent collapses on lack of regulation again, it is extremely likely that new rules will be imposed demanding banks to book large provisions recognising losses on the loan book ahead of time.

Even if we assume a modest impact on banks’ balance sheets, the combination of higher rates, declining optimism about the economy and the slump in equity, private investments and bond valuations is going to inevitably lead to a massive crunch in access to credit and financing. It is more than banks. The crunch will come from private direct middle market loans, a decline in high-yield bond demand, while institutional leveraged loans may fall as access to leverage is more expensive and challenging and investment grade bonds may likely continue to see strong demand but at higher costs. The question is not when there will be a credit crunch, but how large and for how long. Considering the size of the famous “bubble of everything “and its slow implosion, it may last for a couple of years even with a central bank pivot, because by now a reverse in monetary policy may only zombify the financial system.

With the beginning of a credit event triggered by the Federal Reserve’s aggressive rate hike cycle, which has already claimed at least three smaller US banks and initiated an unprecedented surge in deposit bank runs, the commercial real estate market might be the next shoe to drop. 

For the fifth consecutive month, Blackstone’s $71 billion real estate income trust (BREIT) has restricted redemption withdrawal requests in March, according to Bloomberg, citing a letter from the PE firm.

Last month investment advisors of high-net-worth individuals asked Blackstone to redeem $4.5 billion from BREIT, but the PE firm only allowed $666 million to be withdrawn, or about 15% of what was requested. In February, advisors tried to pull out $3.9 billion. 

Blackstone limits withdrawals to approximately 5% per quarter. Having already reached 2% monthly caps in January and February, investors were left with a much narrow exit route in March. 

However, should rates keep rising, it is likely that the April redemption flood will continue. 

BREIT is a huge player in the real estate industry, acquiring properties from student housing to apartment complexes and warehouses. The trust was first hit with redemptions limits last December. 

The letter also noted BREIT reserved the right to limit redemptions to prevent massive outflows:

“This structure was designed to both prevent a liquidity mismatch and maximize long-term shareholder value, and is working as planned,” the letter to investors said. “In fact, BREIT has paid out nearly $5 billion to redeeming shareholders since November 30.”

A reason for the concern and stampede to the exit is the prospect of commercial real estate being the next area of turmoil following the regional banking crisis. 

Professional subs have been well aware of these rumblings in two latest pieces, “Hartnett: Commercial Real Estate Is The Next Shoe To Drop” and “State Of Commercial Real Estate: Goldman Expects Sharp Spike In Office Delinquency Rates.” 

Since the Federal Reserve initiated its interest rate hiking cycle, US office REITs have been battered.

And recall last month, Blackstone defaulted on a €531 million ($562 million) bond backed by a portfolio of offices and stores owned by Sponda Oy, a Finnish landlord it acquired in 2018. 

US officials say the verdict is finally in after the government probe into the Chinese spy balloon shot down off the coast of South Carolina on Feb. 4. While Beijing has long insisted it was a benign unmanned civilian airship that accidentally strayed off course, during which time it was observed over sensitive American military installations, a Monday NBC report says it was able to obtain intelligence. 

“The Chinese spy balloon that flew across the U.S. was able to gather intelligence from several sensitive American military sites, despite the Biden administration’s efforts to block it from doing so, according to two current senior U.S. officials and one former senior administration official,” the NBC report begins.

One key question has been whether the balloon’s collection technology was capable of transmitting information back to the Chinese government in real time. There was much speculation at the time that the Chinese would have to physically recover the device in order to access whatever data it may have picked up. 

But US officials now say that Beijing did receive information in real time. “China was able to control the balloon so it could make multiple passes over some of the sites (at times flying figure eight formations) and transmit the information it collected back to Beijing in real time, the three officials said,” the report underscores.

“The intelligence China collected was mostly from electronic signals, which can be picked up from weapons systems or include communications from base personnel, rather than images, the officials said.”

Another interesting aspect which US investigators say they’ve uncovered following much of the balloon debris’ retrieval from the ocean in the aftermath of the shootdown is that it had a self-destruct mechanism.

Officials say it “could have been activated remotely by China,” but also explained that “it’s not clear if that didn’t happen because the mechanism malfunctioned or because China decided not to trigger it.”

🇨🇳💥🇺🇸 Chinese spy balloon gathered intelligence from sensitive U.S. military sites, despite U.S. efforts to block it

The intelligence China collected was mostly from electronic signals, which can be picked up from weapons systems or include communications from base personnel.… pic.twitter.com/pG4hY6HFMG

— PiQ (@PriapusIQ) April 3, 2023

The sources which spoke to NBC attributed intelligence countermeasures deployed by the Biden administration as having successfully blocked the balloon’s ability to gather more intelligence than it did. In some cases this involved the Pentagon acting quickly to halt electronic signals and communications being admitted from sensitive sites. But it flew over US territory for a significant amount of time, having first entered airspace over Alaska on Jan.28.

Despite the report seeking to present President Biden’s response to the balloon saga as somewhat of a ‘success’, the key question which is still unanswered is how the balloon was able to linger over the US unhindered for that long and why there was no Pentagon intervention earlier – especially if it was suspected of being under operation by a foreign adversary with nefarious intent.

Biden previously downplaying the balloon…

FEBRUARY 9: Biden says the Chinese spy balloon — which did, in fact, gather intel from sensitive U.S. military sites — was “not a major [security] breach.”pic.twitter.com/dnMFciOc23

— RNC Research (@RNCResearch) April 3, 2023

Before we look at the main events of this week, a quick recap of this weekend’s highlight: OPEC+ “unexpected”, or rather  expected by some…

Who cuts first: OPEC+ or Fed

— zerohedge (@zerohedge) March 15, 2023

… decision to cut output starting in May that will exceed 1 million barrels a day. Russia agreed to keep production at their current reduced level, while Saudi Arabia will see the largest cuts, slowing production by 500k barrels a day. The White House naturally came out strongly against the move, due to concerns with consumer prices and the inflationary effects of higher fuel costs. It will take some time to see exactly how much this impacts global prices as demand concerns linger, but as DB’s Jim Reid notes, this is another potential factor exerting upward pressure on inflation after largely being an ameliorating factors this year. As we will show shortly, oil prices fell every month for the last quarter, leading to the worst Q1 performance since 2020 when global shutdowns throttled demand. Brent crude futures are starting this quarter up +5.60% to $84.24/bbl, with WTI futures up +5.58% to $79.89/bbl after both initially were more than 8% higher at the start of trading.

So looking ahead to this week, the US jobs report on Friday (when the US and most global markets will be closed for Good Friday) should be the main focus. It will be the last jobs numbers before the next Fed meeting on May 3rd and markets will be looking for signs of cooling in the labor market after 475bps of tightening from the Fed over the last year. The report follows recent strong nonfarm payrolls beats, hotter-than-expected inflation data, and a 25bps Fed hike despite US regional bank concerns. Economists expect nonfarm payrolls to gain +240k (vs +311k in February) and the unemployment rate to remain unchanged (3.6%), while expecting hourly earnings growth to rise modestly to 0.3% from +0.2%. Prior to the Friday’s report, JOLTS (Tuesday) and ADP (Wednesday) data will also be in focus.

Today we will get a sense of how global growth evolved over the course of the month with the release of US ISM manufacturing data later on, followed by services on Wednesday. Coupled with the jobs report, whether the ISM indices also show robust growth, especially in components like employment and prices, will be key to assess economy’s resilience. Still, factors like the recent banking turmoil may not yet feed through to major economic indicators. DB’s US economists see both gauges declining from February levels (manufacturing 47.1 vs 47.7 and services 54.4 vs 55.1).

In Europe, the key data releases include trade balance (Tuesday), factory orders (Wednesday) and industrial production (Thursday) for Germany, industrial production (Wednesday) and trade balance (Friday) in France as well as retail sales and PMIs for Italy. Our European economists overview what the latest prints on those indicators, among others, say about the European economy here, providing context for this week’s readings. Going forward, they underscore the recent banking stress as a new headwind and see risks as being tilted to the downside.

The major data points out of Asia include the China Caixin PMI data and Japan Tankan indices which we highlight below along with Japanese labour cash earnings and household spending on Friday. Friday’s data are expected to show total cash earnings per worker at 0.9% YoY, up from January’s 0.8%, and real household spending down -0.2% MoM vs 2.7% in January.

Courtesy of DB, here is a aay-by-day calendar of daily events

Monday April 3

• Data: US March ISM index, total vehicle sales, February construction spending, China March Caixin manufacturing PMI, Japan Q1 Tankan indices, Italy March manufacturing PMI, new car registrations, budget balance, France February budget balance, Canada Q1 BoC business outlook survey, March manufacturing PMI
• Central banks: ECB’s Vujcic and Simkus speak

Tuesday April 4

• Data: US February JOLTS report, factory orders, Japan March monetary base, Germany February trade balance, Eurozone February PPI, Canada February building permits
• Central banks: Fed’s Mester speaks, BoE’s Tenreyro and Pill speak

Wednesday April 5

• Data: US March ISM services index, ADP report, February trade balance, UK March official reserves changes, new car registrations, Italy March services PMI, Q4 deficit to GDP, February retail sales, Germany February factory orders, France February industrial production, Canada February international merchandise trade
• Central banks: BoE’s Tenreyro speaks

Thursday April 6

• Data: US initial jobless claims, UK March construction PMI, China March Caixin services PMI, Germany March construction PMI, February industrial production, Canada March jobs report
• Central banks: Fed’s Bullard speaks

Friday April 7

• Data: US March jobs report, China March foreign reserves, Japan February labor cash earnings, household spending, France February trade balance

* * *

Finally, looking at just the US, Goldman notes that the key economic data releases this week are the ISM manufacturing report on Monday, JOLTS job openings on Tuesday, and the employment situation report on Friday. There are several speaking engagements from Fed officials, including Governor Cook and presidents Mester and Bullard.

Monday, April 3

• 09:45 AM S&P Global US manufacturing PMI, March final (consensus 49.3, last 49.3)
• 10:00 AM Construction spending, February (GS +0.2%, consensus flat, last -0.1%): We estimate construction spending increased 0.2% in February.
• 10:00 AM ISM manufacturing index, March (GS 47.3, consensus 47.5, last 47.7): We estimate that the ISM manufacturing index fell 0.4pt to 47.3 in March, reflecting the lackluster rebound in East Asian manufacturing activity and a sentiment drag from US banking stresses. Our GS manufacturing tracker edged up by 0.2pt to 47.8.
• 04:15 PM Fed Governor Cook speaks: Fed Governor Lisa Cook will discuss the economic outlook and monetary policy at an event hosted by the University of Michigan. A moderated Q&A is expected. On March 31, Cook said, “On the one hand, if tighter financing conditions restrain the economy, the appropriate path of the federal funds rate may be lower than it would be in their absence. On the other hand, if data show continued strength in the economy and slower disinflation, we may have more work to do…I am closely watching developments in the banking sector, which have the potential to tighten credit conditions and counteract some of that momentum.”
• 05:00 PM Lightweight motor vehicle sales, March (GS 14.5mn, consensus 14.6mn, last 14.9mn)

Tuesday, April 4

• 10:00 AM Factory orders, February (GS -0.7%, consensus -0.5%, last -1.6%); Durable goods orders, February final (last -1.0%); Durable goods orders ex-transportation, February final (last flat); Core capital goods orders, February final (last +0.2%); Core capital goods shipments, February final (last flat): We estimate that factory orders decreased 0.7% in February following a 1.6% decline in January.
• 10:00 AM JOLTS job openings, February (GS 10,300k, consensus 10,500k, last 10,824k): We estimate that JOLTS job openings declined to 10,300k in February.
• 01:30 PM Fed Governor Cook speaks: Fed Governor Lisa Cook will deliver pre-recorded introductory remarks at a Fed conference on economics careers. A Q&A is not expected.
• 06:45 PM Cleveland Fed President Mester (FOMC non-voter) speaks: Cleveland Fed President Loretta Mester will speak at an event hosted by the Money Marketeers of New York University. Speech text and audience Q&A are expected. Mester last spoke on February 24th, noting “The inflation readings are still not where we need them to be.”

Wednesday, April 5

• 08:15 AM ADP employment report, March (GS +185k, consensus +210k, last +242k); We estimate a 185k rise in ADP payroll employment in March, reflecting softening in Big Data indicators and the persistent underperformance of ADP relative to nonfarm payrolls in recent months.
• 08:30 AM Trade balance, February (GS -$68.7bn, consensus -$68.8bn, last -$68.3bn): We estimate that the trade deficit widened to $68.7bn in February.
• 09:45 AM S&P Global US services PMI, March final (consensus 53.8, last 53.8)
• 10:00 AM ISM services index, March (GS 54.1, consensus 54.3, last 55.1): We estimate that the ISM services index declined by 1.0pt to 54.1 in March, reflecting snowier weather, a sentiment drag from banking stresses, and the pullback in our survey tracker (-1.7pt to 51.1).

Thursday, April 6

• 08:30 AM Initial jobless claims, week ended April 1 (GS 240k, consensus 200k, last 198k); Continuing jobless claims, week ended March 25 (consensus n.a., last 1,689k): We estimate that seasonal factor revisions in the upcoming jobless claims report could result in a boost as large as 40-50k to initial jobless claims if the seasonal distortions that we have highlighted over the past year (and that the BLS is aware of; see slide 23 here) are eliminated. As a result, we forecast that initial jobless claims will increase by 42k to 240k in the week ended April 1, though we note that there could be a much less meaningful upward revision if the existing residual seasonality persists.
• 10:00 AM St. Louis Fed President Bullard (FOMC non-voter) speaks: St. Louis Fed President James Bullard will discuss the economic outlook and monetary policy at an event hosted by the Arkansas State Bank Department. Speech text and Q&A with audience and media are expected. On March 28, Bullard said, “In my view, continued appropriate macroprudential policy can contain financial stress in the current environment, while appropriate monetary policy can continue to put downward pressure on inflation…Financial stress has been on the rise since [early March] in the wake of recent bank failures and turmoil. The macroprudential policy response to these events has been swift and appropriate. Regulatory authorities have used some of the tools that were developed or first utilized in response to the 2007-09 financial crisis in order to limit the damage to the macroeconomy, and they’re ready to take additional action if necessary.”

Friday, April 7

• 08:30 AM Nonfarm payroll employment, March (GS +260k, consensus +240k, last +311k); Private payroll employment, March (GS +245k, consensus +223k, last +265k); Average hourly earnings (mom), March (GS +0.35%, consensus +0.3%, last +0.2%); Average hourly earnings (yoy), March (GS +4.32%, consensus +4.3%, last +4.6%); Unemployment rate, March (GS 3.6%, consensus 3.6%, last 3.6%); Labor force participation rate, March (GS 62.5%, consensus 62.5%, last 62.5%): We estimate nonfarm payrolls rose by 260k in March (mom sa). When the labor market is tight, job growth tends to normalize in March from a strong winter pace, and Big Data employment indicators indeed decelerated in the month. We also assume a 40k drag from snowier weather in the Northeast and Midwest. On the positive side, we expect high but falling labor demand to more than offset rebounding layoffs in the information and financial sectors, and we believe the March survey week (ended March 18) was too early to reflect the impact of recent banking stresses. The March seasonal factors have also evolved favorably in recent years and represent a tailwind worth 50-100k, in our view. We estimate the unemployment rate was unchanged at 3.6%, reflecting a modest rise in household employment offset by flattish labor force participation (we estimate unchanged on a rounded basis at 62.5%). We estimate a 0.35% increase in average hourly earnings (mom sa) that lowers the year-on-year rate to 4.32%, reflecting continued but waning wage pressures and neutral calendar effects.

Source: Deutsche Bank, Goldman, BofA

Over the past year, big tech companies have been reducing their workforce, and now this trend extends to the US food sector. According to a Wall Street Journal report on Sunday evening, fast-food giant McDonald’s Corp. is preparing to notify its corporate staff about layoffs early this week in an extensive organizational overhaul. 

Last week, the Chicago-based fast-food chain sent an internal memo to its US employees, informing them that corporate offices would be temporarily shut down during the first half of this week. The email instructed staff to work remotely, allowing management teams to communicate layoff decisions virtually. 

“During the week of April 3, we will communicate key decisions related to roles and staffing levels across the organization,” the memo to employees read. 

McDonald’s also asked employees to cancel all in-person meetings with vendors and other partners at its corporate offices. 

The announcement isn’t a surprise. McDonald’s in January said it would make a “difficult” decision about corporate staffing levels by April. 

“Some jobs that are existing today are either going to get moved or those jobs may go away,” Chief Executive Officer Chris Kempczinski told WSJ in an interview in early January. 

According to the chain’s annual report, McDonald’s employs around 150k people globally in corporate roles and its owned restaurants, with three-quarters of them located outside of the US.

In late January, McDonald’s revealed a slowdown in lower-income customers ordering fewer items. The company has asked all franchisees to raise menu prices slowly, or it would create a price shock. 

It’s anticipated that the number of layoffs could reach into the thousands, adding to the wave of job cuts primarily originating from large tech firms, including Amazon, Google’s Alphabet, Meta Platform, and Microsoft.