After the dismal homebuilder sentiment data earlier in the week, it is no surprise that analysts expected a drop in both housing starts and building permits for November (the latest data) and they were right. While Housing Starts fell 0.5% MoM (better than the 1.8% drop expected) – as incentives dominated inventory liquidation, forward-looking building permits collapsed 11.2% MoM (vs -2.1% exp). That is the biggest MoM drop since the peak of the COVID lockdowns…

Source: Bloomberg

This leaves the total number of housing starts (SAAR) at the lowest since June 2020 for permits…

Source: Bloomberg

Under the hood, this is the 9th straight month of single-family housing unit permits declines. But more notably multi-family permits plunged. On the Starts side, signle-family dropped for 8th month of the 9 while multi-family starts managed a small rise MoM…

Source: Bloomberg

Finally, circling back to the start of this note, we suspect building permits (forward-looking) face significantly more pressure as homebuilder expectations for future sales is at decade lows…

Source: Bloomberg

Is that really what Jay Powell wants?

Via SchiffGold.com,

For months, Peter Schiff, me, and a few others have been saying the economy is teetering on the brink of a collapse.

But nothing has happened.

Are we just wrong?

It would be easy to conclude that we’re crying wolf. But before you write us off, I think you should consider another factor.

Predicting the exact timing of an event is much harder than generally recognizing that an event is on the horizon.

It’s a little bit like forecasting weather. A meteorologist might know that a cold front is coming next week. She can see the changes in the atmosphere. But knowing a cold front is looming and saying it will come through at precisely 10:30 a.m. on Wednesday are two different matters.

I’m certain an economic downturn is imminent because I can see it brewing in the economic atmosphere. But I can’t tell you exactly when the crash will occur. Nor can I predict exactly what will precipitate it.

There is plenty of data out there suggesting that the US economy is already in the midst of a downturn. There are also some tremors under the surface signaling the underlying rot in the economy. For instance, some analysts have already said the volatility in the bond market could force the Federal Reserve to abandon balance sheet reduction. But there is still enough momentum in the economy to allow people to plausibly deny the problems.

Arguments about data aside, as I said when the Fed cranked up interest rates another 50 basis points at its December meeting, my pessimism is rooted in more fundamental dynamics. In a nutshell, this economy is not built to operate in a high-interest-rate environment. And the Fed has now raised interest rates to the highest level since 2007.

Quite simply, the US economy is addicted to easy money. It is addicted to artificially low interest rates and quantitative easing. You can’t take an addict’s drug away without sending him into withdrawal.

In the aftermath of 9/11 and the dot-com bubble bursting, the Fed dropped rates to 1%, at the time, a historically low level. That blew up the housing bubble. In 2004, the Fed began normalizing rates. They peaked at 5.25% in 2006. That precipitated the housing bust and ultimately the financial crisis in 2008.

Today, the Fed has pushed rates within 1% of that level. But there is a major difference between then and now. The bubbles are bigger. There is more debt. There is more malinvestment. If the extent of the bust is commensurate with the extent of the boom, we’re due for a doozy.

To be fair, Peter Schiff and I aren’t the only people worried about a recession. There are a lot of people in the mainstream saying the Fed needs to stop raising rates or it is going to cause an economic downturn. These folks are only half right. It’s not the rate hikes that will cause a recession. The Fed set that stage when it cut rates in the first place.

Economist Daniel Lacalle summed it up perfectly.

In a recent Bloomberg article, a group of economists voiced their fears that the Federal Reserve’s inflation fight may create an unnecessarily deep downturn. However, the Federal Reserve does not create a downturn due to rate hikes; it creates the foundations of a crisis by unnecessarily lowering rates to negative territory and aggressively increasing its balance sheet. It is the malinvestment and excessive risk-taking fueled by cheap money that lead to a recession.”

When you understand these economic fundamentals, it becomes clear that the US economy is heading toward a cliff. But I still can’t tell you exactly when it will plunge over.

A few days ago, I was revisiting the timeline before the 2008 financial crisis and the ensuing Great Recession, and I realized the dynamics were much the same in 2006 and 2007 as they are today.

Peter Schiff, Ron Paul and a few others were warning of a housing bust and financial crisis as the mainstream insisted everything was fine. In fact, up until the point Lehman Brothers went under in the fall of 2008, some people were still insisting everything was fine.

Of course, in retrospect, everything was far from fine as far back as 2006.

And the Fed knew everything wasn’t fine. That’s why it started cutting interest rates in September 2007 — while still insisting everything was fine.

My point here is that everything is fine. Until it isn’t.

The Fed (the drug pusher) has been slowly cranking down the amount of drug it’s giving to the addict. The addict is already feeling the pain but hoping against hope he will get a bigger fix soon. That’s why the markets react with glee every time we get bad economic news or good news on the inflation front. The addict thinks that means the Fed will go back to the status quo – pushing the drugs.

But at its December meeting, the Fed cranked down the drug level even lower.

Jerome Powell keeps saying the Fed can still manage a “soft landing.” But no matter what the pusher says, you can’t take away an addict’s drugs without causing pain. And at some point, the addict is going to go into full-blown withdrawal.

That’s why I’m convinced that at some point in the relatively near future, something big will break. There will be another Lehman-type event that sets off a crash nobody can deny. But when that happens, I can’t say. It could be next week, next month, or even a year from now. Regardless I believe the die has already been cast. It was cast the moment the Fed started running the printing press.

The question is what does the Fed do when this happens? How will it respond when it can no longer plausibly deny the economic chaos? Does go back to giving the addict his drug? Or does it let the addict die?

If history is any indication, the Fed will go back to drugging up the economy. That means inflation wins. And if it doesn’t, you can expect a financial crisis that will make 2008 look like good times.

As Peter Schiff said in a recent tweet, “A pivot will send inflation soaring, which will compound the problem. But if they don’t pivot, we don’t just get a severe recession, we get a worse financial crisis than the one we had in 2008.”

After last week’s CPI and FOMC decision, it was supposed to be smooth sailing into the illiquid, year-end waters as trading desks closed down for the year, and where among those few traders left some expected a Santa rally while others kept pressing their shorts. The BOJ – which was badly been lagging all of its central bank peers in tightening financial conditions – however had other plans, and on Tuesday morning Japan’s central bank shocked the world when it announced it would widen the Yield Control Curve band on the 10Y Treasury from 0.25% to 0.50% on either side, a move which had been viewed as a “when not if” – as markets knew the BoJ would eventually have to realign the “kinked” 10Y point with the rest of JGB curve and fundamentals…

… and begin a gradual policy alignment with rest of world’s already robust tightening, as they had instead continued to ease throughout ‘22 – but this was not seen as today’s business and virtually everyone expected this move to come after the Kuroda term ended in April ‘23, with most expecting a “phase-in” executed in smaller increments over time. So the news that the yield on Japan’s 10Y would be allowed to double from 0.25% to 0.50% came as a shock and sparked cross-asset contagion across the world, sending futures tumbling and bond yields soaring at least initially and briefly halted Japans’ treasury futures.

“Tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels more broadly,” Deutsche Bank analysts told clients, noting the BOJ move had come as markets were “already reeling” from the ECB and Fed’s hawkishness last week.

BOJ governor Haruhiko Kuroda later reiterated at a press briefing that the widening of the yield band was aimed at improving market functioning and smoothing out a distorted yield curve. Still, the abrupt decision risks eroding confidence in the central bank’s messaging after the governor and other board members had repeatedly said a widening of the range would be tantamount to raising interest rates.

As attention turned away from the surge in yields -to the plunge in the dollar,  US stock-index futures managed to recover most of their earlier losses, and as of 730am ET, contracts on the S&P 500 were flat while Nasdaq 100 futures slightly underperformed, falling 0.2% as the yield on 10-year Treasuries extended gains.

Contracts on the S&P 500 had slumped as much as 1.1% earlier after the BOJ’s move triggered concerns among investors already worried about the growing chorus of hawkish central banks: “There are some investors that are doing cross assets, and so if the yen moves — if the foreign exchange moves a lot — they automatically readjust” their equity futures positions, said Michael Makdad, an analyst at Morningstar Inc. in Tokyo.

But the move in stocks was actually relatively modest: the move in JGBs was more powerful, as the yield on 10Y bonds surged to the highest level since 2015…

… and dragged US TSYs along with it amid fears Japanese would be less willing to buy US paper (spoiler alert: the opposite will happen as local pensions start factoring in capital losses amid future YCC expansions) while the biggest fireworks took place in the world of FX, however, where the dollar tumbled as the yen rose: at one point the USDJPY plunged all the way down to 132.0 a 500+ pip move from where the pair was pre-BOJ, and the second biggest move in the past year, lagging only behind the shock US CPI miss repricing in November.

Among US premarket moves, Lucid Group  advanced after the company said it has completed its stock sale program and successfully raised about $1.5 billion.  Here are some of the biggest US movers today:

• Verona Pharma (VRNA US) shares surge as much as 162% in US premarket trading after the drug developer achieved positive results in the Phase 3 ENHANCE-1 trial evaluating nebulized ensifentrine for the maintenance treatment of chronic obstructive pulmonary disease.
• Cryptocurrency-exposed stocks rise as Bitcoin rebounds after falling to the lowest level this month as worries over the path of central bank policy damped moves across risky assets. Riot Blockchain (RIOT US) advances 1.6%, Marathon Digital (MARA US) +0.8%, Silvergate (SI US) +1.9%
• MKS Instruments (MKSI US) stock rises 1.1% on low volumes after it was upgraded to overweight from sector weight at KeyBanc, with the broker saying the company’s strong competitive position should drive growth in semiconductor and advanced packaging.
• Heico (HEI US) shares could be in focus as the aerospace parts manufacturer reported earnings per share for the fourth quarter that matched the average analyst estimate, but did not provide guidance for 2023.
• Keep an eye on Conagra Brands (CAG US) stock as Morgan Stanley upgraded it to overweight, expecting the packaged-food sector to maintain its relative outperformance through 2023 and also raising J M Smucker (SJM US) to equal-weight.
• Beam Therapeutics (BEAM US) is upgraded to outperform from market perform at BMO, which said that the risk/reward on the stock now seems skewed to the upside.
• The insurance lead generation sector is JPMorgan’s favorite across small and mid-cap internet stocks for 2023, with analysts upgrading MediaAlpha (MAX US) to overweight from neutral, and EverQuote (EVER US) to overweight from underweight, while downgrading some advertising-exposed stocks.

Even before the BOJ, US stocks dropped for a fourth session on Monday as traders recoiled at the growing possibility that the Fed will push the US economy into a painful recession after central bank officials vowed to keep raising rates until they’re confident inflation is coming down meaningfully. The S&P 500 closed at its lowest level in more than a month, dragged by declines in big-tech firms including Apple, Microsoft and Amazon.com. As Bloomberg points out, US tech stocks are facing a big technical trial this week, with the Nasdaq 100 Index testing a long-term uptrend in place since 2008, based on a logarithmic scale and weekly data.

“The Fed now knows that the forward-looking indicators are starting to move in their favor,” Hugh Gimber, global market strategist at JPMorgan Asset Management, told Bloomberg Television. “They just want to see that coming through in hard data now and hence they want another few months just to get a clearer sense of the picture, but the direction of travel is much more positive.” Gimber expects a half-point hike when the Federal Open Market Committee meets in February, followed by a raise of 25 basis points in March.

European stocks also erased earlier losses, with the Stoxx 600 trading down -0.20% after tumbling more than 1% earlier. European real estate stocks underperformed; the Stoxx 600 Real Estate subindex drops 3.6% at 9:36 a.m. CET. Biggest laggards include Aroundtown -9.1%, Wihlborgs -4.5%, Balder -4.4%, LEG Immobilien -4.2%, Vonovia -4%, SBB -3.8%. Other notable European movers include:

• Elior shares rise as much as 8.8% after the French caterer said it would buy Derichebourg Multiservices division by issuing new stock. The analysts noted that the equity-financed deal would add scale, boost margins and accelerate the company’s deleveraging.
• Hugo Boss shares rise as much as 6% after Deutsche Bank analyst Michael Kuhn raised the recommendation to buy from hold.
• Engie shares slumped as much as 6.9% after the French utility said it may take a hit of up to €5.7 billion ($6.1 billion) through next year from windfall taxes on soaring power sales and Belgium’s requirements for nuclear plant dismantling.
• Credit Suisse shares decline as much as 3.9% as both Citi and RBC say the troubled lender needs to give greater visibility on its planned strategic overhaul for the stock to recover.
• Petrofac shares drop as much as 10% to fresh record low as the energy infrastructure supplier predicts a full-year Ebit loss.
• European real estate stocks underperformed on Tuesday after a hawkish move from the Bank of Japan, which adjusted its yield curve control program. Aroundtown is the sector’s biggest decliner, falling as much as 11%, after being downgraded to hold from buy at Berenberg.
• Rheinmetall shares fall as much as 5.5% in Frankfurt, extending Monday’s losses, after German Defense Minister Christine Lambrecht set a deadline for the industry to fix defective infantry vehicles.
• Kinepolis shares drop as much as 6.6%, the most in more than a month, after Berenberg lowers its price target and adopts a “more cautious” stance over its FY23/24 estimates.

Earlier in the session, Asian stocks fell as Japanese shares tumbled following a surprise policy tweak by the central bank, while China’s Covid disruptions also hurt sentiment. The MSCI Asia Pacific Index dropped as much as 1.1% before mostly trimming losses. The Nikkei 225 Index slumped 2.5% as the Bank of Japan raised the upper band limit of its yield curve control program, giving the yen a boost. Financial shares in the nation surged while tech and auto stocks slumped in Tokyo. “Usually the weak yen is good for the stock market earnings, and now if you have a stronger yen, it’s going to be a concern for the companies that were doing so well, mainly the exporters and maybe tourism,” said Peter Tasker, co-founder and strategist at Arcus Investment

 “The whole Asian region is dragged down by BOJ’s new policy, which is triggering the short covering of yen,” said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. “Those who borrow yen and invest in other securities” need to unwind positions, he added. Stocks in China and Hong Kong fell for the second day as the reopening rally continued to cool. China reported a pickup in Covid deaths, with analysts expecting the actual toll to be much worse than the official tally. Despite the dismantling of heavy Covid restrictions, activity in key cities has slowed as infections spike, diminishing the economic boost from a reopening.  Investors are contending with slowdown risks in the region in 2023, with China’s path to reopening facing headwinds and doubts about the Fed’s ability to tackle inflation without pushing the US economy into a recession

In FX, the Bloomberg Dollar Spot Index was set a second day of losses as the greenback weakened against all of its Group-of-10 peers apart from the Australian and New Zealand dollars.

• The yen rose by as much as 3.7%, to a four-month high of 132.06 per dollar, while the benchmark 10-year yield surged to 0.444%, the highest since 2015. The BOJ said it will now allow Japan’s 10-year bond yields to rise to around 0.5%, up from the previous limit of 0.25%; details here
• Cross sales into yen hit the Aussie and kiwi with the latter already weakened after data showed business confidence in the nation slumped to a record low. Both Australia’s and New Zealand’s bonds also fell
• The yuan flipped to a gain as the dollar weakened following the Bank of Japan’s hawkish shift. China’s loan prime rates were kept on hold, as expected.

In rates, Treasuries, bunds and gilts yields are off highs reached after BOJ’s yield pivot, though still up about 8 basis points each at the 10-year mark. Treasury futures off worst levels of the day, recouping a portion of losses into early US session after an aggressive cheapening move sparked by Bank of Japan widens the trading band on 10-year bond yields. Into peak selloff 10-year yields topped through 3.70% and onto cheapest levels since Nov. 30, before settling around 3.65% into the US session; the 2s10s spread remains wider by 5bp on the day after reaching steepest since Nov. 16. On outright basis Treasury yields remain cheaper by 1bp to 8.5bp across the curve in a bear steepening move, following wider selloff across JGBs where 10- year yields closed at 0.399% and 2s10s curve steepened 13bp on the day

In commodities, WTI trades within Monday’s range, adding 1.1% to near $75.98. Most base metals trade in the green. Spot gold rises roughly $19 to trade near $1,806/oz. 

In crypto, Bitcoin is firmer to the tune of 1.0%, though once again remains within relatively narrow ranges.

To the day ahead now, and data releases include German PPI for November, US housing starts and building permits for November, and the European Commission’s advance December reading on consumer confidence for the Euro Area. Central bank speakers include the ECB’s Kazimir and Muller. Finally, earnings releases include Nike.

Market Snapshot

• S&P 500 futures little changed at 3,842.50
• STOXX Europe 600 down 0.4% to 424.16
• MXAP little changed at 155.50
• MXAPJ down 1.0% to 502.25
• Nikkei down 2.5% to 26,568.03
• Topix down 1.5% to 1,905.59
• Hang Seng Index down 1.3% to 19,094.80
• Shanghai Composite down 1.1% to 3,073.77
• Sensex down 0.2% to 61,653.10
• Australia S&P/ASX 200 down 1.5% to 7,024.27
• Kospi down 0.8% to 2,333.29
• German 10Y yield little changed at 2.27%
• Euro up 0.2% to $1.0632
• Brent Futures up 0.6% to $80.29/bbl
• Gold spot up 0.9% to $1,804.50
• U.S. Dollar Index down 0.73% to 103.96

Top Overnight News from Bloomberg

• The BOJ’s surprise policy shift is sending shock waves through global markets that may just be getting started, as the developed world’s last holdout for rock-bottom interest rates inches toward policy normalization
• The BOJ’s latest policy shock is cementing the central bank’s reputation for using the element of surprise to achieve its strategic goals
• At least three funds stand to benefit from Japan’s policy move: UBS Asset Management, Schroders Plc and BlueBay Asset Management
• ECB Governing Council member Francois Villeroy de Galhau said the euro-zone economy is unlikely to experience a deep slump as interest rates are lifted to tackle soaring inflation
• The ECB remains “a long way” from achieving its goal of inflation of 2% over the medium term, according to Governing Council Member and Bundesbank President Joachim Nagel
• South African President Cyril Ramaphosa emerged from a ruling party electoral conference with a stronger mandate, yet still has to overcome a series of political hurdles to tackle a daunting economic to-do list
• Hong Kong will further ease social distancing measures, including rules on banquets, ahead of a trip by the city’s leader to Beijing

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks traded lower across the board with the broader risk profile hit by the BoJ’s unexpected tweak to its Yield Curve Control. Nikkei 225 fell over 2.5% as it reacted to the BoJ’s move, with the index briefly dipping under 26,500, although bank stocks soared. ASX 200 was dragged lower by its Tech and IT sectors whilst Banks and Utilities were the better performers. Hang Seng and Shanghai Comp conformed to the downbeat tone across the equity market, with the former seeing its housing stocks slip after the PBoC opted to maintain its 5yr LPR unchanged vs some expectations for a cut.

Top Asian News

• RBA Minutes (Dec): Board considered several options for the cash rate decision at the December meeting: a 50bps increase; a 25bps increase; or no change in the cash; members also noted the importance of acting consistently. The Board did not rule out returning to larger increases if the situation warranted. Click here for the detailed headline
• PBoC maintained the 1yr and 5yr Loan Prime Rates (LPRs) at 3.65% and 4.30% respectively, as expected, according to Bloomberg.
• BoK Governor said the board believes it is premature to cut rates. BoK said consumer inflation is to gradually slow after hovering around 5% for some time; uncertainty is high over how swiftly consumer inflation will slow, according to Reuters. BoK Governor said the risk of USD/KRW rate surging at an unusual pace has decreased.
• China reports five COVID-related deaths in the mainland on Dec 19 vs two a day earlier, according to Reuters.
• Hong Kong Chief Executive Lee said Hong Kong will further ease social distancing measures, according to Bloomberg; subsequently, Hong Kong Health Authorities are to drop the rapid antigen COVID test requirement to enter bars/nightclubs from Thursday, no capacity limit on such venues.
• Japan is reportedly mulling issuing JPY 500bln of green transformation economic transition bonds (GX bonds) in FY23, according to Japanese press Yomiuri.
• Japanese government reportedly looking to issue around JPY 35.5tln of new JGBs for FY23/24, according to Reuters sources.
• PBoC injected CNY 5bln via 7-day reverse repos with the rate maintained at 2.00%; injects CNY 141bln via 14-day reverse repos with the rate maintained at 2.15%; daily net injection CNY 144bln.

European bourses are under modest pressure, Euro Stoxx 50 -0.3%, as the complex lifts off post-BoJ lows in limited newsflow. US futures are moving in tandem with the above, ES -0.1%, ahead of a handful of stateside data prints. JPMorgan lowers its Apple (AAPL) iPhone volume forecasts for the December quarter to around 70mln (prev. forecast ~74mln).

Top European News

• ECB’s Kazimir Says Stable Pace of Tightening Should Continue
• Spain Court Foils Sánchez Bid to Name Judges in Power Clash
• Engie Drops as Taxes, Nuclear Rules Take Multibillion Euro Bite
• Swedish Property Stocks End Brutal 2022 With Tough Reset Ahead
• Germany Cuts Russian Share in Gas Use by More Than Half in 2022

FX

• JPY is the standout outperformer after the BoJ widened the 10yr yield band, sending USD/JPY to a test of 132.00 vs 137.00+ initial levels.
• Amidst this, the DXY has been pushed below 104.00 to the modest benefit of G10 peers across the board.
• Though, the read across from the USD’s downside to peers is being hampered somewhat by the pronounced action in JPY-crosses.
• Elsewhere, antipodeans are the incremental laggards following the ANZ survey and post-RBA minutes, which has a dovish tilt.
• PBoC sets USD/CNY mid-point at 6.9861 vs exp. 6.9862 (prev. 6.9746)

Fixed Income

• Benchmarks have bounced from BoJ induced worst levels with modest assistance from German PPI and UK supply.
• However, core debt is lower by around 100 ticks for Bunds and Gilts, with the German 10yr approaching 2.3% at best.
• Stateside, USTs are directionally in-fitting though magnitudes are slightly more contained ahead of the US session, yields bid across the curve and bear-steepening.

Geopolitics

• North Korea said Japan’s counterattack capabilities are effectively pre-emptive strike capabilities; said Japan’s new security strategy is bringing security crisis in the region. North Korea said it has the right to take “decisive” military measures to protect its rights in response to the changing security environment, via KCNA.

BOJ

STATEMENT

• BoJ unexpectedly tweaked its Yield Curve Control (YCC) in which it widened the 10yr yield band to +/-0.5% (prev. +/-0.25%) and unexpectedly announced it is to increase bond purchases to JPY 9tln/m (prev. JPY 7.3tln/m) in Q1. The BoJ kept its rate unchanged at -0.10% and maintained 10yr JGB yield target of around 0% as expected. The decision on the YCC was unanimous. The adjustment is intended to “improve market functioning and encourage a smoother formation of the entire yield curve while maintaining accommodative financial conditions,” the central bank said. BoJ said it is to make nimble responses for each maturity by increasing the amount of purchases even more and conducting fixed-rate purchases operations when deemed necessary. BoJ maintained its rate guidance. Click here for the detailed headline

GOVERNOR KURODA

YCC:

• Market functionality was decreasing. Domestic market has been hit by volatility abroad. Decision was made today as deteriorating market functions could threaten corporate financing.
• Decision is not an exit of YCC or a change in policy, appropriate to continue easing policy.
• There is no need to further expanding the allowance band, not likely that the market calls for another increase of the yield cap maximum limit.

Broader Policy:

• It is too early to debate the exit to current monetary policy; today’s decision is not a rate hike.
• Won’t hesitate to ease monetary policy further if necessary.
• No intention to hike rates or tighten policy. Not thinking about revising the 2013 gov’t-BoJ joint statement.

OTHER

• BoJ announced an unscheduled bond operation: BoJ offered to buy JPY 100bln in up to 1-3yr JGBs, JPY 100bln in 3-5yr JGBs, JPY 300bln in 5-10yr JGBs and JPY 100bln in 10-25yr, according to Reuters. BoJ to conduct unlimited bond buying in the 1-5yr tenors, according to Bloomberg.
• Japanese Finance Minister Suzuki said it is not true that the government and the BoJ have decided on a policy to revise its joint statement, according to Reuters.
• Japanese Economy, Trade, and Industry Ministry Nishimura said it is important to continue carrying out economic revitalisation based on the joint statement with the BoJ, according to Reuters.
• Japan Securities Clearing Corporation has issued an emergency margin call re. JGB futures.

Commodities

• Crude benchmarks slipping in tandem with broader sentiment initially and in the hours since have pared this pressure and are now posting upside just shy of USD 1.0/bbl.
• Currently, Dutch TTF Jan’23 remains under modest pressure, but is yet to slip below the EUR 100/MWh mark.
• Germany’s BDEW (energy industry association) says it is concerned about the EU gas price cap, it needs monitoring and adjusting if results in too little gas reaching Europe.
• The yellow metal is a handful of ounces above the USD 1800/oz handle while base metals are firmer in action that is for the most part in-fitting with the above risk tone/dynamics.

US Event Calendar

• 08:30: Nov. Building Permits MoM, est. -2.1%, prior -2.4%, revised -3.3%
• 08:30: Nov. Building Permits, est. 1.48m, prior 1.53m, revised 1.51m
• 08:30: Nov. Housing Starts MoM, est. -1.8%, prior -4.2%
• 08:30: Nov. Housing Starts, est. 1.4m, prior 1.43m

DB’s Jim Reid concludes the overnight wrap

We go to press this morning amidst big moves in global markets overnight, since the Bank of Japan have decided to adjust their yield-curve-control policy, which is widely seen as the beginning of a potential end to their ultra-loose monetary policy. That policy has made them a big outlier compared to other central banks this year, having maintained rates at the zero lower bound whilst others embarked on their biggest tightening cycle in a generation. Indeed, it’s important not to underestimate the impact this could have, because tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels more broadly.

In terms of the policy shift, the BoJ announced in a surprise move that Japan’s 10yr yield would now be able to rise to around 0.5%, having been limited to 0.25% previously. In turn, that led to a massive slump in Japanese equities, with the Nikkei down by -2.88% this morning, and those moves lower have been echoed more broadly. Indeed, not only are other indices in Asia pointing lower, including the CSI 300 (-1.64%), the Shanghai Comp (-1.03%), the Hang Seng (-2.19%) and the Kospi (-1.10%), but futures on the S&P 500 are currently down -1.07%, even after a run of 4 consecutive declines for the index already. The one big exception to this pattern of equity losses were bank stocks, with those in the Nikkei surging +4.96% this morning given the potential move away from ultra-low borrowing costs.

Unsurprisingly, Japanese government bond yields have surged on the back of the announcement, with the 10yr yield up +15.5bps this morning to 0.41% after trading around 0.25% for months. But the impact hasn’t been confined there either, with Australian 10yr yields up +19.5bps this morning, and those on US 10yr Treasuries up +8.1bps to 3.666%. In the meantime, the yen has strengthened massively, gaining +2.75% against the US Dollar this morning to 133.22 per dollar.

Even before the BoJ’s overnight announcement, markets had already got the week off to a rough start yesterday, with the bond selloff showing no sign of letting up whilst the S&P 500 (-0.90%) lost ground for a fourth day running. The moves were very similar to last week’s in many respects, with investors continuing to grapple with the prospect that central banks will keep hiking rates into 2023, not least after the hawkish tone from their recent meetings. That theme is only going to be bolstered by the BoJ’s move, which came as a big surprise to markets that were already reeling from the ECB and Fed’s hawkishness last week.

Whilst many investors are still expecting we could get a dovish pivot later in 2023, markets aren’t banking on that for now, with sovereign bonds seeing fresh losses on both sides of the Atlantic yesterday. In terms of the daily moves, yields did come off their highs by the end of the session in Europe, but those on 10yr bunds (+5.1bps), OATs (+4.4bps) and BTPs (+8.5bps) were still noticeably higher by the close. We also saw another round of milestones at the front-end of the curve as well, since yields on 2yr German and French debt both hit their highest levels since 2008. That followed further hawkish rhetoric from ECB speakers over the last 24 hours, with a nod to rate hikes continuing at a 50bps pace. For instance, Vice President de Guindos said that they had “to take additional measures to increase interest rates at a speed similar to that of this last 50 basis-point increase”. In the meantime, Lithuania’s Simkus said he had “no doubt” there’d be another 50bp move in February, and Slovakia’s Kazimir said that “we need to increase the base interest rate significantly higher than today.”

Whilst the continued bond selloff very much echoed last week, one key difference yesterday was that Eurozone bonds were no longer underperforming their international counterparts. For instance, yields on 10yr Treasuries saw a much larger increase on the day of +10.2bps to 3.585%, before their latest moves to 3.666% overnight. Higher real yields led that move yesterday, with the 10yr real yield up +7.2bps to 1.42%, followed by a further move to 1.45% this morning meaning that it’s now risen by over +40bps since its recent closing low earlier this month. And over in the UK, yields saw an even larger increase yesterday, with 10yr gilt yields up +17.3bps on the day to 3.50%. Those moves came as investors moved to price in a slightly more hawkish path for central bank policy rates, with pricing for the Fed’s rate by end-2023 up +5.5bps on the day to 4.413%.

This backdrop of growing concern about the rates outlook proved further bad news for equities, and the S&P 500 (-0.90%) fell to its lowest level in nearly 6 weeks. That’s its 4th consecutive decline, and means that in less than a week since the S&P briefly surged after the downside CPI surprise, the index has now lost -6.91% since its intraday peak. In terms of the drivers, tech stocks were a major contributor, with the NASDAQ (-1.49%) and the FANG+ index (-2.02%) seeing sizeable declines, although the Dow Jones didn’t fare so badly with a -0.49% decline. Europe was also a relative outperformer, with the STOXX 600 seeing a modest +0.27% gain after its -3.28% decline last week.

Elsewhere yesterday, we heard that EU member states had reached a deal to cap gas prices at €180 per megawatt-hour. It’ll apply for a year starting February 15, and follows lengthy negotiations on where the cap should be, with an earlier proposal from the Commission suggesting a €275/MWh level. The cap will also only apply if the difference with global liquefied natural gas prices is bigger than €35/MWh. Against this backdrop, European natural gas futures were down -5.98% yesterday to €109 per megawatt-hour.

On the data side yesterday, we got further evidence that the European economy was outperforming expectations this winter, with the Ifo’s business climate indicator from Germany rising to 88.6 (vs. 87.5 expected), marking its highest level in 4 months. However in the US, the NAHB’s latest housing market index showed that the housing market was continuing to struggle, with a decline in December to 31 (vs. 34 expected). With the exception of April 2020, that’s the index’s lowest reading in over a decade, and means that it’s fallen in every single month over 2022.

Finally, the US Congress are focusing on concluding their 2023 fiscal year omnibus budget package, ahead of the government funding deadline at the end of the week. Senate Minority Leader McConnell said that he expects to review the full text soon and signalled that there would be ample GOP support, indicating there would not be a period of protracted debate with the White House. The provisions are expected to total close to $1.7tr, and include funding for border security, state aid for natural disasters, a realigning of pandemic-era programs, and aid to Ukraine amongst a host of other initiatives and programs. Notably, it does not appear that there will be an increase to the debt ceiling in this agreement, so that’s another event that looks as though it could get some attention in 2023, particularly given the Republicans will control the House of Representatives next year.

To the day ahead now, and data releases include German PPI for November, US housing starts and building permits for November, and the European Commission’s advance December reading on consumer confidence for the Euro Area. Central bank speakers include the ECB’s Kazimir and Muller. Finally, earnings releases include Nike.

By John Kemp, senior market analyst

Investors sold petroleum for a fifth consecutive week but the pace of selling slowed as the balance of risks began to shift to the upside and beaten down prices provided a more attractive re-entry point.

Hedge funds and other money managers sold the equivalent of 15 million barrels in the six most important petroleum-related futures and options contracts over the seven days ending on December 13.

Fund managers sold a total of 236 million barrels over five weeks starting on November 8, according to position records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

The combined position had been reduced to 343 million barrels (11th percentile for all weeks since 2013) down from 579 million barrels (47th percentile) five weeks earlier.

The bout of long liquidation in the three weeks from November 8 to November 29, when long positions were slashed by 147 million barrels has been completed, with longs increasing by 5 million in the last two weeks.

In the most recent week, there were continued sales of Brent (-6 million barrels), U.S. diesel (-7 million) and U.S. gasoline (-5 million) and no change in European gas oil. For the first time in five weeks, however, there was small buying in NYMEX and ICE WTI (+2 million barrels), marking an important shift in sentiment.

From a fundamental perspective, the outlook for oil prices remains mixed.

Production cuts by OPEC⁺, sluggish output growth from U.S. shale, and the eventual re-opening of China’s economy are bullish for oil prices.

But the current business cycle slowdown across North America and Europe plus disruption from China’s exit wave of coronavirus infections are bearish in the short term.

From a positioning perspective, however, the balance of risks has clearly tilted towards the upside, especially in crude oil.

The net position in Brent is just 89 million barrels (4th percentile for all weeks since 2013)…

… and bullish long positions outnumber bearish shorts by a ratio of just 1.95:1 (6th percentile). 

With positions already so bearish, there is considerable scope for investors to rebuild bullish long positions once the news flow becomes more positive or at least less negative, which would likely lift prices in the short term.

Even with the Supreme Court’s temporary block, Towns along the US southern border – particularly El Paso, Texas and Ciudad Juarez in Mexico, are going into panic mode as a Trump-era immigration law is set to expire this week, which could lead to as many as 5,000 or more new migrants per day pouring across into the United States, according to the Associated Press.

On Sunday, El Paso County Judge Ricardo Samaniego told AP that the region, one of the busiest border crossings in the country, was scrambling to coordinate relocation efforts with groups and other cities, and have reached out to state and federal officials for humanitarian aid, as the Trump-era Title 42 is set to end on Wednesday – a rule which has deterred an estimated 2.5 million migrants from coming into the US since March, 2000.

“You have a lot of pent-up pain,” said Dylan Corbett, director of the Hope Border Institute, a Catholic organization helping migrants in both El Paso and Juarez, which started a clinic two months ago. “I’m afraid of what’s going to happen.“

On Saturday, El Paso Mayor Oscar Leeser, a Democrat, issued a state of emergency to gain access to additional local and state resources to help with the surge. The funds will be used to build shelters and provide other ‘urgently needed’ assistance.

Accordingto Judge Samaniego, the order came one day after El Paso officials asked Texas Gov. Greg Abbott (R) in a letter for assistance for the region – which would include taking care of and relocating newly arrived migrants, vs. sending additional security forces.

El Paso officials have been coordinating with organizations to provide temporary housing for migrants while they are processed and given sponsors and relocate them to bigger cities where they can be flown or bused to their final destinations, Samaniego said. As of Wednesday, they will all join forces at a one-stop emergency command center, Samaniego said, similarly to their approach to the COVID-19 emergency.

Abbott has committed billions of dollars to “Operation Lone Star,” an unprecedented border security effort that has included busing migrants to so-called sanctuary cities like New York, Los Angeles and Washington, D.C., as well as a massive presence of state troopers and National Guard along the Texas-Mexico border.

Additionally, the Republican Texas governor has pushed continued efforts to build former President Donald Trump’s wall using mostly private land along the border and crowdsourcing funds to help pay for it. -AP

According to the report, El Paso was the 5th busiest immigration corridor out of the Border Patrol’s nine sectors as recently as March, and jumped to #1 in October ahead of Del Rio, Texas. 

Authored by The Jamestown Foundation via OilPrice.com,

• Turkmenistan is facing a unique set of geopolitical challenges. 

• Turkmenistan’s geological position makes it an object of intense geopolitical competition between East and West.

• China, Iran and Afghanistan have all made inroads in Ashgabat, with Beijing being especially successful, while Tehran and Kabul are making strides as well.

Since gaining independence in 1991, Turkmenistan has attracted only sporadic attention due to its extreme level of isolation from the outside world, which rivals that of North Korea.

As a result of this posturing, developments within the country fly under most radars. Ashgabat remains resolute in this position as it faces high levels of poverty and the threat of an Islamist insurgency from Afghanistan, which serve to spark fears that almost any change in the system might destabilize the situation. This is most likely because of Ashgabat’s much-ballyhooed policy of strict neutrality, a principle enshrined in that Central Asian country’s constitution that has kept it from joining either Moscow-led organizations, such as the Collective Security Treaty Organization (CSTO), or Ankara-led ones, such as the Organization of Turkic States (OTS).

But now all this seem likely to change, as Turkmenistan is becoming the object of intense geopolitical competition between outside powers, East and West, which want the country to become more closely linked to them, and Moscow, which hopes to maintain Turkmenistan’s neutrality to block that from happening. With a new president this year—Serdar Berdimuhamedov replaced his father Gurbanguly Berdimuhamedov in March 2022—Turkmenistan itself has become more active internationally. In part, of course, this reflects what some see as the new leader’s efforts to build his own authority and escape, in part, his father’s shadow. But a more important motivating factor comes from abroad, the result of efforts by powers ranging from China and Iran to Turkey and the European Union to draw Ashgabat into their orbits.

China, Iran and Afghanistan have all made inroads in Ashgabat, with Beijing being especially successful, while Tehran and Kabul are making strides as well (see EDM, December 17, 2021; July 19, 2021; February 10, 2021).

But the more consequential moves on this geopolitical chessboard have been those of the EU and Turkey—and Moscow’s efforts to counter their approaches.

These moves have come with dizzying speed in recent days.

On December 6 and 7, Turkmenistani Foreign Minister Rashid Meredov met with his Russian counterpart, Sergey Lavrov, who stressed that Moscow views Ashgabat as “our closest friend and strategic partner,” words that Meredov reciprocated. But in an indication that Moscow did not make much progress on its hopes to include Turkmenistan in the CSTO or the Eurasian Economic Community, the meeting ended with agreements only on marginal issues, including student exchanges and the opening of representation for the national railway agencies of each country in the other (Mfa.gov.tm, December 6; Minobrnauki.gov.ru, December 6;  Turkmenportal.com, December 9).

Then, on December 11, Terhi Hakala, the Finnish diplomat who serves as the EU’s special representative for Central Asia, traveled to Ashgabat to take part in celebrations of the International Day of Neutrality, marking the 27th anniversary of Turkmenistan’s declaration of that status. While there, as Ashgabat highlighted, Hakala discussed with her Turkmenistani hosts a wide variety of issues all centered on the expansion of ties between Turkmenistan and the EU, thereby redefining the nature of neutrality while celebrating it, an approach that directly contradicts Moscow’s method (Mfa.gov.tm, December 11; Casp-geo.ru, December 15).

On December 14, President Berdimuhamedov together with his father, the former president, hosted Turkish President Recep Tayyip Erdogan and Azerbaijani President Ilham Aliyev at a resort on the shores of the Caspian. That summit, which was originally scheduled more than a year ago but was delayed, has worried Moscow, which feared that it would become an occasion for Turkey to gain a more established foothold in Central Asia at Russia’s expense. Moscow is concerned both by the possibility that Turkey secures Ashgabat’s agreement to join the OTS and the potential expansion of the flow of Turkmenistan’s gas across the Caspian to Turkey—rather than southward across Iran as the Kremlin prefers (Nezavisimaya gazeta, December 13; Casp-geo.ru, December 15).

During the event, Turkey and Azerbaijan did not achieve everything they wanted. Turkmenistan refrained from committing to joining the OTS, leading to jubilation in Moscow (Nezavisimaya gazeta, December 14). Yet, despite efforts by Russian commentators to play down the importance of the session, the three did agree to expand earlier efforts to ship more Turkmenistani gas westward across the Caspian, thus bypassing Russia and helping Turkey expand its influence across the region (see EDM, January 27, 2021). And while Moscow observers suggested that Ashgabat had organized the meeting to directly correspond with the Day of Neutrality and thus reaffirm its independence, where the meeting took place may have been more important than when.

Symbolically, the meeting on the Caspian shows that Ashgabat is looking westward rather than northward to Russia, or southward to Iran; and practically, this location calls special attention to both the resolution of disputes over offshore oil and gas facilities between Baku and Ashgabat and the growing strength of the Turkmenistani navy in the South Caucasus, where it is growing powerful enough to potentially challenge Russia’s long-dominant Caspian Flotilla (Nezavisimaya gazeta, December 9). Taken together, this means that, geopolitically, Turkmenistan today is more in play than it has ever been before.

That must be a matter of concern for Moscow, which has long backed Turkmenistan’s neutrality as the keystone of its efforts to block any expansion of Turkish influence into Central Asia. After all, if Ashgabat does not join Turkish projects, it will be far more difficult for Ankara to project power in the region while making it easier for the Kremlin to continue to implement its traditional divide-and-rule approach there.

In the wake of the three meetings its leaders have taken part in over the past 10 days, Turkmenistan appears likely to continue to insist it is neutral lest it outrage Moscow. Yet, Ashgabat is sure to increasingly redefine that position to mean that it will look beyond the Kremlin for partners. That would be acceptable in most capitals, but it will not be in Moscow, which not only wants Turkmenistan to remain neutral but also to do so in the way that Russia prefers. That this may no longer be possible sets the stage for potentially dramatic moves in the near future, moves that will compel the world to pay attention to Turkmenistan far more closely than it has in the past.

The EU’s European Commission has accused Facebook Marketplace of breaching antitrust rules because the company dominates both social networks and an online classified ads market – and has been “distorting competition” by coupling the two services.

Specifically, the fact that “users of Facebook automatically have access to Facebook Marketplace, whether they want it or not,” is of concern to the EU.

The alleged breach of antitrust rules comes in the form of a European Commission Statement of Objections released on Monday, which said it had informed Facebook parent Meta that a “preliminary view” deemed the company in violation.

A Statement of Objections is the first step the Commission takes when it begins an investigation into what it believes are a violation of E.U. antitrust rules. It does not mean the outcome has been predetermined.

But if an investigation concludes that antitrust rules have been violated, the Commission has the power to impose a fine of up to 10% of Meta’s annual worldwide turnover as well as a prohibition of further rule-breaking behavior. -Variety

“With its Facebook social network, Meta reaches globally billions of monthly users and millions active advertisers,” said Margrethe Vestager, the Commission’s executive VP for competition policy. “Our preliminary concern is that Meta ties its dominant social network Facebook to its online classified ad services called Facebook Marketplace. This means Facebook users have no choice but to have access to Facebook Marketplace. Furthermore, we are concerned that Meta imposed unfair trading conditions, allowing it to use of data on competing online classified ad services. If confirmed, Meta’s practices would be illegal under our competition rules.”

The report also raised concerns that Meta is imposing “unfair trading conditions” on Marketplace competitors who advertise on Facebook and Instagram via ‘onerous terms and conditions,’ which apparently also allow Meta to use data derived from competitors to benefit the Marketplace service – which would infringe on Article 102 of the EU’s Treaty of the Functioning of the European Union.

The Commission says the length of the investigation will depend on various factors, including Meta’s cooperation.

The news is the latest blow for beleaguered Meta, which announced last month it was laying-off thousands of staffers. Last June the E.U. launched another investigation into potential anti-competitive behavior by Facebook, which is still ongoing. Then in August, the Federal Trade Commission in the U.S. filed an amended antitrust complaint against the company after its first was dismissed. -Variety

The move comes just months after the UK’s Competition and Markets Authority (CMA) ordered Meta to sell Giphy, a provider of GIFs – forcing the company to unwind a $400 million acquisition.

Authored by Dave DeCamp via AntiWar.com,

One civilian was killed, another eight people were wounded, and a poultry farm was damaged in Ukrainian shelling in Russia’s Belgorod Oblast, the region’s governor said on Sunday.

“One person died. It is known that the man came to us from Tambov and worked as a contractor on the construction of a poultry farm,” Belgorod Governor Vyacheslav Gladkov wrote on Telegram.

‼️CCTV footage of Ukrainian missile attack in Belgorod, Russia.#UkraineRussiaWar #Ukraine #Putin #Moscow #Ukraina pic.twitter.com/AukZo2h7pm

— WORLD ANALYSIS (@_WorldAnalysis) December 18, 2022

Further he said, “An estimated 14,000 residents are still without power supply. Emergency crews are starting to reconnect the grid to backup power sources.”

Belgorod borders Ukraine and has come under attack throughout the war. Sunday’s shelling came after The Times reported that the Pentagon now tacitly backs Ukrainian strikes inside Russian territory, although there’s no indication US weapons were used in the attack on Belgorod.

When the US provided the HIMARS rocket launch systems to Ukraine, the Biden administration said it received “assurances” that Ukrainian forces won’t use them inside Russian territory. But the US no longer appears to be concerned about how the weapons are used.

‼️Another Video of Explosion in #Belgorod, Russia.
Initially looks like a missile attack.#UkraineRussiaWar #Russia #Moscow #RussiaUkraineWar #UkrainianArmy #Ukraine pic.twitter.com/VtNJEkNNjS

— WORLD ANALYSIS (@_WorldAnalysis) December 18, 2022

“When we give them a weapon system, it belongs to them, where they use it, how they use it, how much ammunition they use to use that system. I mean, those are Ukrainian decisions, and we respect that,” National Security Council spokesman John Kirby said last week.

The Times report said that the US was no longer concerned about Ukrainian attacks inside Russia leading to a major escalation based only on the fact that Moscow hasn’t yet responded with nuclear weapons or attacks on NATO countries.

Map: Belgorod lies about 25 miles north of the Ukraine border.

Authored by Roger L. Simon via The Epoch Times (emphasis ours),

Call it a democracy, call it a democratic republic, call it a constitutional republic, call it anything you want – it doesn’t really matter what America is if there is truth to what Tucker Carlson was reporting the other night via a source who had “direct knowledge” of still-hidden documents concerning the Kennedy assassination, implicating the CIA.

If indeed the CIA was in any way involved in the assassination of JFK on Nov. 22, 1963, then anything that has happened in the public sphere in our country since that day has basically been a hallucination created by an intelligence agency far deeper than most of us—certainly me, since I was never much given to conspiracy theories—ever imagined.

The affairs of the day—RNC chief Ronna McDaniel revealed to be a profligate spender on her own luxury travel, not on Republican candidates; Donald Trump releasing self-aggrandizing NFT pseudo-art as a fundraiser (rest in peace, Johannes Vermeer); even Elon Musk’s exposure of the multiple mendacious censoring creeps behind Twitter, although that has an eerie similarity—pale by comparison to CIA involvement and, therefore, massive coverup for decades in the JFK assassination.

That former CIA director Mike Pompeo declined to appear on Carlson’s show to discuss this is not insignificant. We all know about 51 intelligence officials—John Brennan and others who fallaciously claimed two years ago the Hunter Biden laptop was Russian disinformation. They have to have known otherwise. Now this?

Why are 3 percent of the Warren Commission documents on the assassination still being hidden after those nearly 60 years with all the major players dead, if not to hide something of serious importance from the American public?

It’s time to reconsider Oliver Stone’s “JFK” that, though I admired Oliver’s filmmaking, I originally thought to be a crackpot.

The Kennedy assassination has special ramifications for me because it occurred on my 20th birthday. I was a Dartmouth student at the time and drove down to spend the weekend with my girlfriend at Skidmore (Saratoga Springs, New York) and sat in a motel room stunned and mesmerized watching Jack Ruby shoot Lee Harvey Oswald, live on the black and white television.

I cannot remember seeing anything more inexplicable in my life. How could this have been allowed to happen only hours after the assassination? In retrospect, it becomes even more incredible. In a certain sense, I now feel that most of my adult life, what I have thought was real, has been erased.

Although most of us of a “certain age” have our own personal stories, that’s the relatively minor part. Historically, for our country at large, the Kennedy assassination was a disaster. It led to the ascendance of Lyndon Johnson and his “Great Society” social programs.

What actually occurred because of these programs was the not-so-gradual destruction of the black family, the women having been financially induced via handouts to marry the state instead of the men who normally would have been their husbands. The statistics on the decline of the black family and the rise of single-parent households are well known, as are the results that the black community and the rest of us live through on a daily basis. What becomes of a man, black or white, who no longer has the responsibility of being a father? LBJ was in many ways the godfather of Black Lives Matter, not to mention the hugely sad violence in the streets of our biggest cities, most notably Chicago.

If all this is true, the question becomes how do we get out of this hallucination that is more powerful than, though not unrelated to, the mass formation psychosis described by the Belgian academic Mathias Desmet.

To begin with, we need the full information, every document, and we need it now. Without the public being able to review that last 3 percent we can go no further. We should be calling for that—loudly.

The Everly Brothers perhaps put it best, although in another context.

“Wake up, little Susie, wake up
We’ve both been sound asleep
Wake up little Susie and weep
The movie’s over, it’s four o’clock
And we’re in trouble deep.”