By Jane Foley at Rabobank

Shanghai has eased some of its Covid restrictions following the lead of Beijing, Shenzhen and Guangzhou, all of which have relaxed curbs in recent days in response to recent protests.  The news has provided support to risky appetite, leading Asian equities higher despite the poorer tone of today’s China’s November Caixin PMI data release.  That said, US and European futures have retained a mixed tone. 

Risk appetite was wrong footed by the strength in the US non-farm payrolls report on Friday.  Not only was the headline increase in payrolls stronger than expected at 263K, but earnings were also firm.  Hourly earnings rose by a surprisingly strong 0.6% m/m in November.  This was the biggest rise since January and gains were broad-based across sectors.  Bearing in mind the slower pace of activity noted in the US ISM report the previous day, this hinted at a stagflationary tone.  Treasury yields spiked and equity indices plunged in response to Friday’s Labour report, though the markets settled into the close and treasuries still ended higher on the week. 

Friday’s remarks from Chicago Fed President Evans underpinned the perception that the robust US labor market data are unlikely to up-end the expectation that the FOMC will move back to a 50-bps incremental rate hike when its meets next week.  That said, the continued tightness of the labour market should focus attention on the persistence of core inflation and the duration of the Fed’s policy response.  It is our view that the Fed will need to hold rates at the terminal rate until 2024. 

If President Biden was unapologetic last week about the protectionist tone of the US’s Inflation Reduction Act, European Commission von der Leyen has indicated that the EU is prepared to follow the same cue.  European politician and companies have been quick to point out that tax credits and subsides for products such as electric vehicles, which form the basis of the new law, give US-based companies an unfair advantage and could tempt business away from Europe.  Von der Leyen has suggested that “new and additional funding at the EU level” should be assessed and that the EU should “take action to rebalance the playing field”. 

US/EU relations have been going through a sour patch. Additionally, European Council President Michel may be about to stir up some dis-harmony within the bloc. The FT has reported that Michel is calling for a renewed debate on common financing within the EU.  His concerns relate specifically to the differing abilities of member nations to support industries embattled by the energy crisis.  His remarks coincide with today’s commencement of the EU’s ban of seaborne Russian oil imports.  Opec+ yesterday promised to be ready to take immediate action to stabilise the global oil market, if necessary, though it decided against making any changes to its production targets for the time being. 

On Friday, G7 nations together with Australia agreed to a USD60/b price cap on Russian seaborne crude after Poland gave its support.  The price cap is due to take effect from today or very soon afterwards.  Poland had pushed for the cap to be as low as possible to squeeze revenues to Russia and to limit Moscow’s ability to finance the war in Ukraine. Russian Deputy PM Novak called the move a gross interference which was in contradiction to free trade.  He stated that Russia is “working on mechanisms to prohibit the use of a price cap instrument” and that the country will only sell oil and petroleum products to those countries under market conditions”. 

In the UK strike action remains a feature.  Every day in December is expected to be marred by action of some sort over pay. Weekend talks between unions, train operators and the government had been labelled ‘constructive’, though a deal still proved to be elusive. Nurses and postal staff are among the other key workers due to take strike action this month. While UK political backdrop retains a calmer air since the start of PM Sunak’s premiership, neither the economy nor this own party are proving easy to manage.  Last week saw the opposition Labour party extend its majority in a Chester by-election. This news coincided by news that senior Tory Javid will not stand as an MP at the next election. A slew of Tories has already indicated they will throw in the towel at the general election rather than face the possibly that the party could be in opposition for some years.

Week ahead

A 50 bp rate increase from the BoC is expected on December 7.  On the margin this may further support expectations that the Fed will also feel more comfortable with the same size move on December 14.  Among this week’s US releases are final November PMI and durable goods data but also the December University of Michigan sentiment index and November PPI inflation.  The latter is expected to show a tapering off in the rate of price pressures, albeit at still uncomfortably high levels.  The European data calendar also contains final PMI readings.  In addition, German factory orders are due.  ECB speakers today include President Lagarde and Chief economist Lane is due to be heard later in the week before the blackout period descends ahead of the policy decision on December 15. Comments from ECB’s Villeroy yesterday indicate his preference for a 50-bps hike next week.  Up until recently market expectations pointed to a significant risk of a 75 bp move.  The RBA meets tomorrow and another 25-bps rate hike looks likely, though weaker than expected October CPI inflation data have focussed attention on the possibility that the bank may favour smaller incremental moves going forward. 

After the ugly manufacturing data, Services surveys suggests the pain in the US economy is spreading fast. US Macro surprise data has stalled in the last month and S&P Global’s Services PMI confirmed its flash print, falling from 49.3 in September to 46.2 in November. That is the fifth straight month of contraction in the Services PMI.

Of course, it wouldn’t be right if we didn’t get a farcical jump in the The ISM Services print just to “baffle em with bullshit”. ISM Services rose from 54.4 to 56.5 in November (well above the drop to 53.,4 expected)…

Source: Bloomberg

The ISM Services data remains the only signal still showing expansion (but we note that it also fell in November to its weakest since the COVID lockdowns)

Source: Bloomberg

Despite the hotter than expected ISM print, new export orders collapsed…

Source: Bloomberg

And somehow the ISM services jumped with 6 components weaker…

The S&P Global US Composite PMI Output Index posted 46.4 in November, down from 48.2 in October to signal a solid decline in private sector business activity. The fall in output was driven by a faster decrease in service sector activity and a renewed downturn in manufacturing production.

Source: Bloomberg

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

“The survey data are providing a timely signal that the health of the US economy is deteriorating at a marked rate, with malaise spreading across the economy to encompass both manufacturing and services in November.

The survey data are broadly consistent with the US economy contracting in the fourth quarter at an annualized rate of approximately 1%, with the decline gathering momentum as we head towards the end of the year.

“There are some small pockets of resilience, notably in the tech and healthcare sectors, but other sectors are reporting falling output amid the rising cost of living, higher interest rates, weaker global demand and reduced confidence. Struggling most of all is the financial services sector, though consumer facing service providers are also seeing a steep fall in demand as households tighten their budgets.

“A striking development is the extent to which companies are increasingly reporting a shift towards discounting in order to help stimulate sales, which augurs well for inflation to continue to retrench in the coming months, potentially quite significantly.“

So it appears S&P Global analysts finally discovered the reverse bullwhip effect we have been discussing for months.

After Powell’s words sparked panic-buying – and dramatic easing of financial conditions – some are wondering if The Wall Street Journal’s Nick Timiraos’ report this morning is an attempt top jawbone back the market’s dovish perception.

Federal Reserve officials have signaled plans to raise their benchmark interest rate by 0.5 percentage point at their meeting next week, but elevated wage pressures could lead them to continue lifting it to higher levels than investors currently expect.

…

brisk wage growth or higher inflation in labor-intensive service sectors of the economy could lead more of them to support raising their benchmark rate next year above the 5% currently anticipated by investors.

Timiraos comments come right after the Fed’s pre-meeting ‘blackout’ began over the weekend.

Timiraos’ comments pushed terminal Fed rate expectations higher…

And sparked selling in bonds and stocks. Treasury yields are higher (but obviously not in the same range as Friday’s chaos)…

The S&P mechanically retraced all of Friday’s losses, tagged the stops and has sunk since with futures now testing back below the 2090-day moving-average…

Specifically, Timiraos confirms what most Fed speakers have been saying:

They want to guard against raising rates too little and allowing inflation to resurge, or raising them too much and causing unnecessary economic weakness, according to recent public comments and interviews.

…

Some officials could seek to push through another half-point rate rise in February because they see a greater risk that inflation won’t decline enough next year. Without signs of slower hiring, they could worry that inflation could pick up again.

So why is the market still pricing in earlier and more rate-cuts next year? And will the next Fed statement crush that hope once again?

Authored by Yves Smith via NakedCapitalism.com,

Disgraced crypto chief Sam Bankman-Fried has been talking to reporters, including at the New York Times (the famed Andrew Ross Sorkin Dealbook interview), the Financial Times, and the Wall Street Journal. Despite the fact that it’s generally seen as a very bad idea to say anything about your past conduct when you are a litigation target, and likely for a criminal case, and SBF has said his lawyers are opposed to talking to the press, SBF is nevertheless swanning about on his media tour.

Even though SBF got a bit of pushback from Sorkin on the question of co-mingling of funds when SBF tried playing, “Oh it was sort of allowed and anyway things were a mess,” he and other reporters didn’t probe very hard once they got his next layer of excuses: “Oh I didn’t mean to do anything bad, I don’t have access to records any more and my memory is fuzzy, and I really didn’t have anything to do with Alameda.”

Here is the Financial Times’s recap from over the weekend:

Core to Bankman-Fried’s account of how FTX ended up with a roughly $8bn shortfall of client assets was excessive lending by the exchange to Alameda, which ploughed the money into venture capital investments and doomed bets on digital tokens.

Bankman-Fried deflected the FT’s questions about the excessive borrowing and soured investments that ultimately sank Alameda, blowing a hole in FTX’s finances, and would not be drawn on the legal consequences he may face. He said he deliberately avoided getting involved in Alameda’s trading and risk management to avoid conflicts with his position as chief executive of FTX, and neglected to monitor the risk they posed to the exchange.

Got that? $8 billion hole at the hedge fund Alamada. We are supposed to believe that the was the result of FTX lending to Alamada and then Alameda doing stoopid things that burned up a lot of dough. Oh, and even though SBF is responsible for (at best) crappy controls at FTX that allowed Alameda, we are also supposed to believe SBF’s claims that he was not involved in what was happening at Alameda.

Aside from the wee problem that SBF owned 90% of Alameda and had its detailed financial information as recently as March, Alameda made $3.3 billion of loans to SBF, $1 billion as a personal loan, and $2.3 billion to a 100% SBF-controlled entity, Paper Bird, that is outside the FTX-Alameda bankruptcy.

So Alameda made $4.1 billion in loans to cronies, mainly SBF, and we are to believe that SBF had nothing to do with that?

I am at a loss for the failure to purse the question of what happened to the $3.3 billion SBF borrowed. This is already in the public domain. Yes, no doubt more will be revealed as the bankruptcy process winds forward. But help me. This is not hard.

Mark Karpelès compiled an FTX entity list, which confirms that Paper Bird is a “top” company, which is consistent with SBF being its sole shareholder. The bankruptcy filing states that Paper Bird owned 75% of FTX International.1 However, that does not make it part of the FTX bankruptcy. In fact, Paper Bird filed for its own bankruptcy, the same date at FTX did, with separate counsel: Adam Landis of Landis Roth & Cobb while the lead attorney for FTX is James Bromley of Sullivan & Cromwell.

Notice we have not heard anything about these lavish loans in SBF’s “Oh poor confused me and I feel sorry for all my chump victims too.” Since SBF seems unduly eager to try to ‘splain himself, it would improve appearances in the eyes of public opinion and perhaps later a court, if he could honesty say, “I scrounged up what I could liquidate readily and used to to try to save the company.” If that had happened, that would also mean any investor recoveries, however meager, were due in part to SBF trying to shore up his enterprise.

I have seen no claim in the press or the bankruptcy filing that SBF either did or expressed willingness to put his own money into FTX when it was collapsing. The failure of SBF to spend any of his own funds to salvage his empire no doubt contributed to its demise. If he’d put up say $3 billion of the $8 billion supposedly needed, there is a remote possibility that his napkin-doodle balance sheet would have been forgiven: “If SBF is willing to stake that much of his personal money on the odds that he can rescue FTX, there must be some real value in there despite the mess.”

And it would not be hard for a merely mildly dogged interviewer to press SBF on this topic: “You took $1 billion in personal loans from Alameda. When did that happen? You said in your Financial Times lunch earlier this year and then more recently that you had only $100,000 in bank. So where did the $999,900,000 or more go? Was it invested in real estate? Gambled away?”

Remember, he can’t play “I don’t remember” and act like he can’t get the information. This was personal money, under his control, and he still has unimpeded access to those records. The reporter could follow up: “If you don’t remember, could check your personal accounts and get back to us?” And if he demurs again, drive the knife in: “This will probably come out in court anyhow since the creditors will be looking into fraudulent conveyance. So this isn’t something you will be able to hide.”

Then an interviewer could follow a parallel line of questioning with Paper Bird. There SBF might give bafflegab about venture investments or crypto speculation, so if I were a member of the press, I’d start with the personal loan first since he has much less wriggle room there. Not being able to explain what happened to $1 billion, which is the route SBF is likely to take, is not a good look.

Separately, yours truly is becoming slightly more optimistic that SBF might wind up facing a real prosecution, as opposed to one designed to find as little as possible. From the Wall Street Journal:

In Cyprus, the country’s securities regulator is complaining that Mr. Ray’s decision to place FTX in bankruptcy has stymied investigations and is preventing European customers from getting their money back…In Turkey, authorities have seized the assets of FTX’s local subsidiary, an affront to Mr. Ray’s efforts to sweep FTX’s assets into the chapter 11 process in Delaware….

On Nov. 28, the chairman of the Cyprus Securities and Exchange Commission voiced concern about the bankruptcy process in a letter to Mr. Ray, a copy of which was seen by the Journal. FTX’s European arm, FTX EU Ltd., was licensed in Cyprus, allowing the crypto exchange to offer services elsewhere in the European Union’s single market….

The Cyprus securities regulator has ordered the company to return the money to customers, but the company has been unable to comply because its bank accounts are frozen by the chapter 11 process, the chairman said.

Mr. Theocharides also reminded Mr. Ray “that unlawful use of clients funds might constitute a criminal offense.”…

Trouble might also be brewing for Mr. Ray in Turkey, where regulators have already decided to take control of FTX’s domestic subsidiary’s winding-down. On Nov. 19, Mr. Ray said FTX had identified a number of subsidiaries with valuable franchises that could be sold to raise cash for the company’s creditors. One of them was FTX’s wholly owned Turkish subsidiary, FTX Turkey Teknoloji Ve Ticaret AS, where the company had found nearly $3.1 million in assets when it filed for bankruptcy, according to court papers.

Four days later, though, the financial crimes board of Turkey’s Treasury Ministry said it had confiscated the assets of FTX Turkey on suspicion that customer deposits were transferred or taken abroad through fraudulent transactions and that nonexistent crypto assets were sold to customers. Istanbul’s chief prosecutor began a criminal investigation into Mr. Bankman-Fried and other people associated with FTX, the ministry said.

So far, the Cyprus regulator is just whining, but his criminal offense remark is arguably a shot at Ray, not just SBF. By contrast, Türkiye is saddling up. And remember, as SBF keeps running his mouth and the bankruptcy court unearths more information, they will soon have plenty of promising material.

Both Cyprus and Türkiye have bilateral extradition treaties with the US. Federal prosecutors and regulators hate being upstaged by state counterparts; that’s why state enforcement actions regularly have the effect of rousing formerly somnambulant authorities.

It would be staggeringly embarrassing for the Department of Justice to make no filing against SBF or only a very weak and limited one, and then have jurisdictions seen as less than upstanding (that’s why SBF chose them, after all) making forceful cases that SBF had violated their laws. That pressure, which at least from Türkiye seems to be genuine, will force the DoJ to do more than dial its investigation of SBF in.

Update:

Tesla shares have been on a rollercoaster ride this morning. 

First, Bloomberg cited multiple sources that said the company’s Shanghai plant was set to reduce output. On that news, shares dropped more than 5%. 

Now there’s a report from the Shanghai Securities Journal denying BBG’s report — calling it “false information.” 

REPORTS THAT TESLA CUT DECEMBER OUTPUT AT SHANGHAI PLANT BY OVER 20% IS “FALSE INFORMATION” ACCORDING TO SHANGHAI SECURITIES JOURNAL CITING TESLA CHINA SOURCES

— zerohedge (@zerohedge) December 5, 2022

And now Reuters. 

And Reuters:

TESLA CHINA: MEDIA REPORT OF DECEMBER OUTPUT CUT AT ITS SHANGHAI PLANT UNTRUE https://t.co/I9125WSCFt

— zerohedge (@zerohedge) December 5, 2022

Shares have since rebounded. 

… and how long until Musk tweets about Bloomberg’s reporting?

* * * 

Tesla shares slid as much as 5% in premarket trading after a report said that slumping Chinese demand would result in lower production levels at the company’s Shanghai factory. 

Bloomberg sources said Tesla’s Shanghai factory is preparing to reduce production by 20% from full capacity, the same as the factory ran between October and November.

Shares of Tesla fell 4.55% to $186 premarket around 0730 ET. 

Bloomberg noted:

The trimming marks the first time Elon Musk’s EV maker has voluntarily reduced production at its Shanghai plant, with previous reductions caused by the city’s two-month Covid lockdown or supply chain snarls. 

Recent price cuts and incentives such as insurance subsidies, along with shorter delivery times, suggest demand has failed to keep up with supply after an upgrade doubled the plant’s capacity to about 1 million cars a year.

Shanghai factory produces around 85,000 vehicles per month during full production. But demand is heavily waning as price cuts and incentives such as insurance subsidies fail to attract new customers. Short delivery times are another sign that Model 3 and Model Y demand slumps. 

“Without more promotions, new orders from the domestic market will likely normalize to 25,000 in December,” Junheng Li, chief executive officer of equity research firm JL Warren Capital LLC, wrote in a note last month, adding current production couldn’t entirely be absorbed by exports. 

Tesla faces increased competition from local EV companies, such as BYD Co. and Guangzhou Automobile Group.

Bloomberg failed to point out that the planned production cut comes ahead of the Chinese New Year. Most factories shutter production lines, and workers are sent home for about two weeks. 

Bloomberg data from this morning also shows that the company’s Gigafactory in Shanghai delivered 100,291 vehicles in November, marking a new monthly high. 

Cumulatively, the factory has produced more than 650,000 vehicles in the first 11 months of this year and its sales are predicted to reach 750,000 for the year.

That figure would far exceed last year’s production of 484,130.

Authored by Katabella Roberts via The Epoch Times,

House Minority Leader Kevin McCarthy (R-Calif.) vowed on Sunday that the fiscal 2023 National Defense Authorization Act (NDAA) will not move forward unless the military’s COVID-19 vaccine mandate ends.

Speaking on Fox Business Network’s “Sunday Morning Futures,” McCarthy said that lawmakers are working through the $817 billion national defense bill with the hopes of lifting the vaccine mandate among military personnel.

The mandate has been in place since August 2021.

“We will secure lifting that vaccine mandate on our military because what we’re finding is, they’re kicking out men and women that have been serving,” McCarthy said, noting recruitment shortfalls.

“That’s the first victory of having a Republican majority, and we’d like to have more of those victories, and we should start moving those now.”

According to Defense Department data, 3,717 Marines, 1,816 soldiers, and 2,064 sailors have been discharged for refusing to get vaccinated against COVID-19, although a small portion has been allowed to remain in service owing to religious or medical waivers.

As of Dec. 1, over 11,500 members of the Army, Army National Guard, and Army Reserve have declined to get vaccinated against COVID-19, Axios reported, while 97 percent of the Army’s active personnel received the shot.

Army Missing Out on Recruitment Goals

Various military bodies have been struggling to meet their recruitment goals in part over the vaccine mandate, with the U.S. Army reaching just 75 percent of its recruitment goal of 60,000 for this year, according to Army Secretary Christine Wormuth.

McCarthy also said on Sunday that he had spoken with President Joe Biden last week and “laid out very clearly what the difference will be with the new Republican majority.”

When asked if the NDAA will move forward if the vaccine mandate is not lifted, McCarthy confirmed it will not, pointing to his meeting with Biden. The NDAA, which lays out the annual budget and expenditures of the U.S. Department of Defense, has become law every year for six decades.

“I’ve been very clear with the president, the president worked with me on this,” said the lawmaker, who is the Republican nominee for the next speaker of the House of Representatives.

The White House confirmed on Sunday that it is considering McCarthy’s proposal to scrap the military’s requirement that personnel are fully vaccinated, despite Defense Secretary Lloyd Austin on Dec. 3 vowing to continue imposing the mandate.

One day prior, Pentagon press secretary Brig. Gen. Patrick Ryder also promised to keep the mandate in place, citing U.S. national security.

“Leader McCarthy raised this with the president and the president told him he would consider it,” White House spokesperson Olivia Dalton told Reuters. “The secretary of defense has recommended retaining the mandate, and the president supports his position. Discussions about the NDAA are ongoing.”

Republicans have been calling on the Biden administration to scrap the vaccine mandate for military personnel, claiming that the move, which has been inundated with lawsuits, has hurt the National Guard’s ability to recruit troops.

US stock futures fell on Monday as investors weighed the outlook for economic growth against the possibility of a softening in the Federal Reserve’s policy, or in other words, whether bad news is again bad news. At the same time, and just one week after China was swept by violent anti-covid zero protests, Chinese stocks in listed in the US rose sharply after Hong Kong-listed peers rallied and the offshore yuan strengthened past the key 7.00 level after Chinese authorities eased Covid testing requirements across major cities over the weekend. The financial hub of Shanghai scrapped PCR testing requirements to enter outdoor public venues such as parks or use public transportation starting Monday. Hangzhou, home to tech giant Alibaba dropped obligations to enter most public venues including offices and supermarkets, while Shanghai also eased rules.  As a result, Hong Kong’s Hang Seng Tech Index closed at session highs, soaring some 9.2%, the biggest jump since Nov. 11, after China eased Covid testing requirements across major cities over the weekend.

Meanwhile in the US, Nasdaq 100 futures were down 0.4% by 7:30 a.m. in New York, while S&P 500 futures dipped 0.5%. The indexes shrugged off a hotter-than-expected jobs report on Friday as investors and erased almost all early losses as they remained optimistic that the Fed would slow the pace of interest rate hikes at its meeting this month. The dollar remained near session lows, boosting most Group-of-10 currencies. Treasury yields climbed across the curve. Oil advanced after OPEC+ kept its 2 million production cut and amid growing signs China is reopening, while gold was little changed. Bitcoin rose more than 1%, gaining for a second day.

The S&P 500 is on course for its biggest fourth-quarter gain since 1999 as signs of a cooling in US inflation have led to a pullback in bond yields, but market participants warn the outlook for next year remains uncertain amid the risk to corporate earnings from the specter of a recession.

Among notable moves in premarket trading, US-listed Chinese stocks extended their torrid rally as easing Covid curbs in major Chinese cities fueled optimism that Beijing is hastening the shift away from its Covid Zero strategy; Alibaba rose 5.2%, Baidu +5.6%, Pinduoduo +5%, JD.com +5.6%, Bilibili +16%, Nio +6.3%, XPeng +11%. Cryptocurrency-exposed stocks rose as Bitcoin extended gains for a second day. Tesla slipped as much as 4.8% after a Bloomberg News report said that the electric vehicle maker planned to lower production at its Shanghai factory. Here are the other notable premarket movers:

• Activision Blizzard rises 2.3% after Bloomberg News reported that Microsoft is ready to fight for its $69 billion acquisition of the video gaming company if the US Federal Trade Commission files a lawsuit seeking to block the deal.
• Marathon Digital and Riot Blockchain lead cryptocurrency-exposed stocks higher as Bitcoin extends gains for a second day. Marathon Digital +4.9%, Riot Blockchain (RIOT US) +2.8% and Coinbase  +2.3%
• Keep an eye on airlines’ shares as Morgan Stanley says 2023 could be a “Goldilocks” year for air travel, boosting earnings beyond current expectations, as the broker upgrades United Airlines to overweight and cuts Allegiant Travel to equal-weight.
• Alaska Air is initiated with a buy recommendation at Citi, saying the carrier has attributes to offset headwinds facing domestic airlines in 2023. Additionally, the broker begins coverage on JetBlue with a neutral rating.
• Watch Terex as Deutsche Bank cut its rating to hold from buy on recent outperformance, saying that it’s best to stay defensively-positioned on US industrial stocks into 2023.
• Keep an eye on Ameris Bancorp and Atlantic Union (AUB US) as Piper Sandler resumed coverage on US mid-Atlantic and southeast banks, saying the two lenders are its preferred larger-cap names with both at attractive entry points.

“Despite an increasingly optimistic end to the year, the main indexes seem unlikely to recover their lost ground and the current rally may be too little, too late,” said Richard Hunter, head of markets at Interactive Investor. Moreover, “doubts still linger” on how much more the Fed will still need to raise interest rates and the impact of higher-for-longer inflation, he said.

Morgan Stanley strategist Michael Wilson said the year-end rally he had predicted had now run its course and investors are better off booking profits from here on. He sees an “absolute upside” for the S&P 500 at 4,150 points — about 2% above current levels — which could be achieved “over the next week or so.”

Notable other US headlines:

• WSJ’s Timiraos writes that Fed officials have signalled plans to hike by 50bp at the December gathering, though elevated wage pressures could lead them to continue increasing rates to levels higher than investors currently expect.
• Delta Air Lines (DAL) confirmed it reached an agreement in principle for a new pilot contract after it offered a 34% pay increase to pilots over 3 years, according to Reuters.
• Apple (AAPL) supplier Foxconn (2317 TT) expects full production at its COVID-hit plant in China to resume from late December to early January, while the Co. and the local government are pushing hard on the plant’s recruitment drive but many uncertainties remain, according to sources cited by Reuters.
• Moldova’s central bank is to conduct an extraordinary meeting on Monday to assess its main policy indicators including the policy rate, according to Reuters.
• Iran’s Attorney General announced that Iran abolished its morality police and is considering changing hijab laws following the protests, according to WSJ.

Euro Stoxx 50 falls 0.2%. FTSE 100 outperforms peers, adding 0.3%. Here are some of the biggest European movers today:

• Tech investors Naspers and Prosus both gain more than 5% in Johannesburg trading Monday after Chinese authorities accelerate a shift toward reopening the economy.
• European mining stocks in focus as metals advance after Chinese authorities eased Covid testing requirements across major cities over the weekend. Rio Tinto and Glencore shares rise as much as 3.7% and 2.4% respectively.
• Credit Suisse shares climb as much as 3.7% in early trading after the Wall Street Journal reported that Saudi Arabia’s Crown Prince Mohammed bin Salman is preparing to invest in the Swiss lender’s investment-bank unit.
• Grifols shares rise as much as 6.5% in early trading after Morgan Stanley raised to overweight from equal-weight on the expectation that 2023 will be a “strong growth year” supported by accelerating plasma collections and early signs of declining donor fees.
• Bayer shares slide as much as 2.8%, the most in about a month, after Bank of America cut its recommendation for the German agropharmaceutical giant to neutral on the company’s lack of catalysts after a 2022 outperformance.
• FlatexDEGIRO shares fall as much as 38%, the biggest intraday drop since its 2009 listing, after the online brokerage firm cut its revenue forecast and said it was working on measures to address shortcomings in some business practices and governance identified by a BaFin audit.
• German catering equipment company Rational sinks as much as 9%, making them the worst performer in the Stoxx 600, after Bank of America initiated coverage on the stock with an underperform recommendation, citing a “demand crunch” in 2023.
• Swedish Orphan Biovitrum shares drop as much as 2.2% after Morgan Stanley downgrades the stock to equal-weight from overweight.

Asian stocks rebounded, inching closer to bull market territory, as Chinese equities resumed their rally on further relaxation of Covid rules in Asia’s biggest economy. The MSCI Asia Pacific Index climbed as much as 1.4%, led by communication services and consumer discretionary shares. Benchmarks in Hong Kong led gains in the region with the Hang Seng Tech Index soaring more than 9% and the Hang Seng China Enterprises Index up roughly 5%. Morgan Stanley upgraded China to overweight.

Investors cheered latest signs of China pivoting from its strict virus rules as authorities eased Covid testing requirements across major cities over the weekend, including the financial hub of Shanghai. The move fueled gains in reopening stocks in China and its neighboring countries such as South Korea. Markets were closed in Thailand for a holiday. The moves coincided with growing bullish calls from Wall Street banks on Chinese equities, with more market watchers calling a bottom in the nation’s shares. Morgan Stanley upgraded China stocks to overweight from an equal-weight position held since January 2021, while abrdn’s Asia Pacific chief executive Rene Buehlmann urged investors to “go back” into Chinese markets.

Elsewhere, stock benchmarks were mixed with gauges in Japan and South Korea trading lower while those in Australia, Singapore and Vietnam rose.  After falling for much of the year, Asian stocks staged a dramatic rally in the past few weeks with a surge in foreign inflows into emerging Asian shares, supported by the dollar’s weakness and expectations for a slowdown in the Fed’s hikes.  The key Asian stock benchmark still remains about 17% lower so far this year, on course for its worst annual performance in more than a decade.

A closer look at Japanese stocks reveals that they ended mixed as investors gauged the impact of China’s shift toward reopening and US employment data. The Topix fell 0.3% to close at 1,947.90, while the Nikkei advanced 0.2% to 27,820.40. Toyota Motor Corp. contributed the most to the Topix decline, decreasing 1%. Out of 2,164 stocks in the index, 741 rose and 1,304 fell, while 119 were unchanged. “Japanese stocks are a bit weak at the moment as economic indicators are becoming a little more globally skewed,” said Mamoru Shimode, a chief strategist at Resona Asset Management. 

Australian stocks rose: the S&P/ASX 200 index rose 0.3% to close at 7,325.60, led by gains in mining and real estate shares, as traders bet on further reopening of the Chinese economy from Covid restrictions.  Shares of iron ore miners and steel companies were among top performers advancing as commodity prices rallied on China reopening bets.  In New Zealand, the S&P/NZX 50 index rose 0.3% to 11,677.75.

Stocks in India ended flat on Monday as investors likely took profits in recent outperformers, while the focus shifts to the central bank’s monetary policy announcement later this week. The S&P BSE Sensex ended flat at 62,834.60 in Mumbai, while the NSE Nifty 50 Index was also little changed, as both indexes overcame declines of as much as 0.6% each. The key gauges rose for eight consecutive sessions before declining on Friday. The Reserve Bank of India’s rate-setting panel will commenced its three-day meet Monday for the monetary policy to be announced on Wednesday. All of the economists surveyed by Bloomberg expect the benchmark lending rate to be increased, with the median estimate for a 35 basis points hike. Polls in India’s Gujarat, also the home state to Prime Minister Narendra Modi, end today and results will be announced on Dec. 8. Investors will be watchful of the outcome as the results will indicate Modi’s popularity for national elections next in 2024. 

In rates, treasuries are mixed as the curve bear flattens with 2s10s narrowing 1.6bps as US trading day begins, extending the flattening move unleashed Friday by stronger-than-estimated November employment data. All Treasuries apart from the very long end fell, with the largest decline seen in the belly of the curve, as traders added to Fed hike wagers ahead of US ISM services numbers for November. Yields remain inside Friday’s ranges, though inverted 2s10s reached -81.4bp, new low for the cycle. 2- to 7-year yields higher by 3bp-4bp on the day, 30-year lower by ~1bp; 10-year higher by ~2bp at 3.50% Most European 10-year yields are lower, led by UK as expectations for BOE rate hikes are pared. IG credit issuance slate blank so far, however dealers expect $10b-$15b this week and $20b for December. Three-month dollar Libor fell for a third straight day, longest streak since February, to 4.72343%.

The Bloomberg Dollar Spot Index snapped a four-day drop as the greenback rose 0.1%. CAD and AUD are the strongest performers in G-10 FX, JPY and GBP underperform. ZAR (1.7%) leads gains in EMFX.

• The yen underperformed all its Group-of-10 peers while the Australian and Canadian dollar were the top gainers as commodities got a boost on hopes that China is engineering a gradual shift away from its strict Covid Zero policy. Chinese stocks and the yuan also rallied.
• The yuan strengthened past the key 7 per dollar level after Shanghai and Hangzou relaxed Covid testing rules. Hong Kong dollar surged to the strongest level since June 2021. Te onshore yuan extended gain to 1.5% to 6.9450 per dollar, the most since Nov. 11 as reopening optimism continues to boost the currency. 
• The euro steadied after rising to a fresh five-month high of $1.0585. Euro options bets suggest a run above $1.06 before FOMC meeting. Bunds, Italian bonds swung between modest gains and losses amid a slew of ECB speeches.
• The pound slipped after posting four consecutive weeks of gains. Money markets eased BOE rate-hike wagers after policy-maker Swati Dhingra said in a newspaper interview that interest rates should peak below 4.5%. The central bank will conduct bond sales later on Monday

In commoidties, Crude benchmarks have been choppy, but are ultimately firmer post-OPEC+ and as the Russian oil cap comes into effect at USD 60/bbl. Brent rises 1.8% near $87.15 while WTI Jan was at 81.50/bbl, with the latest easing of China’s COVID controls also factoring. OPEC+ ministers formally endorsed the output policy rollover and will hold the next JMMC meeting on February 1st, while it vowed to stand ready to adjust oil output to stabilize markets. Russian Deputy PM Novak said they will not operate under the oil price cap even if they have to cut production and the price cap may affect other countries as well, while he added that they are working on mechanisms to ban supplies which are capped. Russia is analysing the price cap imposed by G7 and allies on its oil and made preparations for this, while it will not accept the oil price cap, according to state news agencies citing the Kremlin. Russia’s Kremlin, on price cap, said Russia is preparing a decision and will not recognise the price cap; price cap will destabilise global energy market but will not affect Russia’s ability to sustain the military operation in Ukraine.

US economic data include November final S&P Global US services and composite PMIs (9:45am), October factory orders and November ISM services (10am)

Market Snapshot

• S&P 500 futures down 0.3% to 4,062.75
• STOXX Europe 600 little changed at 442.85
• MXAP up 1.1% to 159.66
• MXAPJ up 1.7% to 521.41
• Nikkei up 0.2% to 27,820.40
• Topix down 0.3% to 1,947.90
• Hang Seng Index up 4.5% to 19,518.29
• Shanghai Composite up 1.8% to 3,211.81
• Sensex down 0.1% to 62,798.89
• Australia S&P/ASX 200 up 0.3% to 7,325.60
• Kospi down 0.6% to 2,419.32
• German 10Y yield little changed at 1.85%
• Euro up 0.2% to $1.0555
• Brent Futures up 1.9% to $87.16/bbl
• Gold spot down 0.0% to $1,797.23
• US Dollar Index little changed at 104.47

Top US News From Bloomberg

• ECB Governing Council member Francois Villeroy de Galhau said it’s too early to discuss where interest rates will peak, saying the monetary-tightening process should be carried out at the appropriate pace
• The ECB should raise borrowing costs by at least a half-point this month to curb surging consumer prices, according to Governing Council member Gabriel Makhlouf
• ECB Governing Council Member Mario Centeno said “everything indicates” that the peak of inflation may be reached in the fourth quarter
• “Decisive monetary tightening must continue” as inflation persists above target, Croatian Central Bank Governor Boris Vujcic told the newspaper Jutarnji List, weeks before the Balkan nation joins the euro zone
• The US dollar has erased more than half of this year’s gains amid growing expectations the Federal Reserve will temper its aggressive rate hikes, and as optimism grows over China’s reopening plans
• Swedish central bankers are divided on the prospects for bringing inflation back to its target after a string of interest-rate increases, minutes from the bank’s latest policy meeting show
• Emerging-market central banks face a Catch-22 where plunging economic growth means they can’t keep monetary conditions tight, but elevated inflation doesn’t allow them to halt rate hikes either
• OPEC+ responded to surging volatility and growing market uncertainty by keeping its oil production unchanged
• The world’s worst- performing major currency looks poised for an impressive turnaround in 2023 as its two key drivers — a hawkish Federal Reserve and dovish Bank of Japan — swap places in the eyes of some investors
• The BOJ may achieve its inflation target in 2023 as the cost of living has consistently exceeded market expectations this year, according to Takatoshi Ito, a contender to replace Governor Haruhiko Kuroda in April
• The PBOC injected a record monthly amount into state policy banks in November to help spur infrastructure spending and boost a struggling economy
• Turkish inflation slowed for the first time in over a year-and-a-half, though measures to revive the economy ahead of elections in 2023 may keep it elevated for some time

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks traded mostly positive as Chinese markets led the advances on reopening optimism after several large cities further loosened COVID-19 restrictions, although the gains for the rest of the region were limited after Friday’s mixed post-NFP performance on Wall St and a further deterioration in Chinese Caixin Services and Composite PMI data. ASX 200 was higher with the index supported by strength in mining and energy as underlying commodity prices benefitted from the China reopening play. Nikkei 225 was indecisive and just about kept afloat throughout the session with price action contained by a lack of pertinent drivers to propel the index closer to the 28,000 level. Hang Seng and Shanghai Comp shrugged off the weak Chinese PMI data with risk appetite supported by reopening hopes and as the PBoC’s previously announced RRR cut took effect, while developers were boosted after reports last week that China’s top four banks intend to issue loans for domestic developers’ overseas debt repayments.

Top Asian News

• Chinese Caixin Services PMI (Nov) 46.7 vs. Exp. 48.0 (Prev. 48.4); Composite PMI (Nov) 47.0 (Prev. 48.3)
• Several Chinese cities accelerated the loosening of COVID-19 restrictions over the weekend including Shanghai and Shenzhen which scrapped requirements for commuters to present PCR tests for travelling on public transport, while apartment complexes in Beijing indicated that those that tested positive could quarantine at home, according to FT.
• China could announce 10 supplementary COVID measures as soon as Wednesday, via Reuters citing sources; could downgrade COVID to category B management as early as January. Subsequently, Shanghai scraps COVID testing requirement at more public venues from Tuesday, according to Bloomberg.
• PBoC is reportedly expected to reduce the amount of open market operations towards the end of the year to avoid excess liquidity, according to China Securities Journal.
• Morgan Stanley upgraded MSCI China to overweight from equal weight and said the ROE is likely to rise to 11.1% by end-2023, according to Reuters.

European bourses are under modest pressure, Euro Stoxx 50 -0.2%, following on from fairly contained action in futures overnight. In APAC hours, Chinese stocks were the marked outpeformers given the loosening of COVID restrictions, though the region’s PMIs slipped. Stateside, futures are are in-fitting with European peers and are under slight pressure, ES -0.3%, with specific developments light during the Fed blackout window. Tesla (TSLA) reduced Shanghai output by up to 20% due to sluggish demand, according to Bloomberg; output cuts set to take effect as soon as this week, sources state. Foxconn (2317 TT) November sales -11.4% YY. Q4 outlook expected in-line with consensus. November was the month most affected by COVID; due to off-peak seasonality and COVID November revenue declined MM.

Top European News

• BoE’s Dhingra said higher interest rates could lead to a deeper and longer recession which is what she thinks they should all be worried about, while she sees few signs that demands for higher wages are raising the risk of a wage-price spiral, according to the Observer.
• Confederation of British Industry warned the UK will fall into a year-long recession next year as a combination of rising inflation, negative growth and declining business investment weigh on the economy, according to FT.
• UK Conservative Party Chairman and Minister without Portfolio in the Cabinet Office Zahawi said the government is looking at bringing in the military if strikes go ahead in various sectors including the health sector, according to Reuters and Sky News.
• UK RMT union rejected the Rail Delivery Group offer and demanded a meeting on Monday to resolve the dispute, while UK Transport Secretary Harper said the situation is disappointing and unfair to the public, according to Reuters.
• ECB’s Villeroy said that inflation should peak in H1 next year and that he favours a 50bps rate hike at the December 15th meeting, while he added that rate hikes will continue after that but cannot say when they will stop and he expects to beat inflation by 2024-2025, according to Reuters.
• ECB’s Makhlouf sees a 50bps increase at a minimum at the December (15th) meeting, expects the eventual magntude to be 50bp; have to be open to policy rates moving into restrictive territory for a period in 2023; pre-mature to be talking about the endpoint for rates
• EU Commission President von der Leyen said the US Inflation Reduction Act is raising concerns in Europe and there is a risk it could lead to unfair competition, close markets and fragment supply chains that have already been tested by the pandemic, while she added that competition is good but it must be a level playing field and that they must take action to rebalance the playing field where the IRA or other measures conduct distortions, according to Reuters.

FX

• DXY bid despite an earlier move to 104.10 lows, with the index recovering to 104.75+ parameters amid favourable technical levels US yields.
• Action which has been felt most keenly against the JPY, USD/JPY testing 135.50 at best from an initial 134.10 low, action which has offset the Yuan’s impact on the USD.
• Yuan outperforms given the latest easing of COVID restrictions and source reports pointing to additional measures being forthcoming.
• AUD the next-best ahead of the RBA policy announcement with a 25bp hike expected.
• Both EUR and GBP were unreactive to the latest PMIs, with hefty OpEx in EUR/USD of note for the NY Cut; though, GBP has felt the USD’s bid more keenly, sub-1.2250 at worst.
• PBoC set USD/CNY mid-point at 7.0384 vs exp. 7.0368 (prev. 7.0542)

Fixed Income

• Core benchmarks are experiencing choppy trade, but retain an underlying bid with Bunds surpassing touted 142.17 resistance and Gilts briefly breaching 106.00.
• A move which leaves USTs lagging slightly with corresponding yields bid, though the curve is mixed and action is once again most pronounced at the short-end ahead of ISM & Factory Orders.

Commodities

• Crude benchmarks have been choppy, but are ultimately firmer post-OPEC+ and as the Russian oil cap comes into effect at USD 60/bbl.
• Currently, WTI Jan & Brent Fed are pivoting USD 81.50/bbl and USD 87/bbl respectively, with the latest easing of China’s COVID controls also factoring.
• OPEC+ ministers formally endorsed the output policy rollover and will hold the next JMMC meeting on February 1st, while it vowed to stand ready to adjust oil output to stabilise markets, according to Reuters and FT.
• Iraqi Oil Minister said OPEC members are committed to the agreed production rates until the end of 2023 and the Algerian Energy Minister said the decision to keep output unchanged is appropriate to market fluctuations. Kuwaiti Oil Minister said OPEC+ decisions are based on market data and ensure its stability, while he added the impact of slow global economic growth on oil demand is a cause for continuous caution, according to Reuters.
• G7 and Australia announced on Friday that a consensus was reached on a price cap for Russian seaborne oil at USD 60/bbl which will enter into force on December 5th or very soon thereafter and they will ‘grandfather’ any revision of the price cap to allow compliant transactions concluded beforehand. Furthermore, US Treasury Secretary Yellen said that the price cap will immediately cut into Russia’s most important source of revenue and preserve stable global energy supplies, while a senior Treasury official stated that the price cap will create an anchor for Russian oil and has already driven prices lower, according to Reuters.
• Ukrainian President Zelensky’s chief of staff commented that the price cap on Russian oil should be capped to USD 30/bbl, according to Reuters.
• Russian Deputy PM Novak said they will not operate under the oil price cap even if they have to cut production and the price cap may affect other countries as well, while he added that they are working on mechanisms to ban supplies which are capped.
• Russia is analysing the price cap imposed by G7 and allies on its oil and made preparations for this, while it will not accept the oil price cap, according to state news agencies citing the Kremlin.
• Russia’s Kremlin, on price cap, said Russia is preparing a decision and will not recognise the price cap; price cap will destabilise global energy market but will not affect Russia’s ability to sustain the military operation in Ukraine.
• EU countries cut their gas demand by a quarter last month despite a fall in temperature which shows an effort in reducing the reliance on Russian energy, according to FT.
• Moldova’s Deputy PM Spinu said they will not pay a 50% advance to Gasprom by December 20th for its December gas supplies, according to Reuters.
• Spot gold has pulled back below USD 1800/oz and now resides in proximity to its 200-DMA at USD 1795/oz while base metals remain bid, but have eased from initial best levels.

Geopolitics

• US Defense Secretary Austin accused Russia of deliberate cruelty in its war in Ukraine and that it was intentionally targeting civilians, according to Reuters.
• US Director of National Intelligence Haines said they expect a reduced tempo in Ukraine fighting to continue in the coming months, while she added that Russia is not capable of indigenously producing munitions they are expending, according to Reuters.
• US Indo-Pacific Commander Aquilino said it is in China’s strategy to encourage nations like North Korea to create problems for the US and he is not optimistic about China doing anything helpful to stabilise the Indo-Pacific region, according to Reuters.
• N.Korea has fired around 130 artillery shots off its East & West Coast, via Yonhap; Subsequently, N. Korean military says the firing of artillery shells was a warning to S. Korean military action, via KCNA.

US Event Calendar

• 09:45: Nov. S&P Global US Composite PMI, est. 46.3, prior 46.3
• 09:45: Nov. S&P Global US Services PMI, est. 46.1, prior 46.1
• 10:00: Oct. Durable Goods Orders, est. 1.0%, prior 1.0%
  • Durables-Less Transportation, est. 0.5%, prior 0.5%
  • Cap Goods Ship Nondef Ex Air, prior 1.3%
  • Cap Goods Orders Nondef Ex Air, prior 0.7%
• 10:00: Oct. Factory Orders, est. 0.7%, prior 0.3%
  • Factory Orders Ex Trans, prior -0.1%
• 10:00: Nov. ISM Services Index, est. 53.3, prior 54.4

DB’s Jim Reid concludes the overnight wrap

Although there is little question that I feel fully aware that someone has cut my back open with a knife within the last few days and sawed off some bone inside, I feel remarkably mobile and spritely. However, I’m trying not to appear too mobile as I’ve been signed off housework for a few weeks as I’m not supposed to bend, twist or lift. Don’t waste a crisis as they say. I also resisted any urge to celebrate England waltzing into the last 8 of World Cup last night. Still plenty of time for it to go spectacularly wrong. No need to stress the back needlessly at this stage!

As the World Cup builds to the business end of the tournament, we welcome in a week with limited US data and one with the Fed now on their blackout period ahead of next week’s FOMC. In fact, could it actually be quite a quiet week ahead? Famous last words in a year like this, but next week should be much more interesting than this week given that we also have US CPI and the ECB meeting to go alongside the Fed.

The data we do see in the US starts today with the ISM services index (DB forecast 53.9 vs 54.4 in October) and ends with PPI and the UoM consumer confidence number on Friday with the latest inflation expectations numbers included.

Elsewhere we’ll also get CPI and PPI from China (Friday), industrial production from Germany (Wednesday) and trade data from key economies.

While central bank speak will be sparse, Lagarde speaks today and for this week some attention will shift to Canada and Australia. The former meet on Wednesday and as a reminder, their last meeting’s dovish tilt spurred a pivot trade in the US on the back of expectations the Fed would mimic the message. So this meeting may be a driver of sentiment more broadly. The consensus is split on Bloomberg between 25bps and 50bps which makes it interesting. The Reserve Bank of Australia will also decide on policy tomorrow, and consensus expects a 25bp rate hike that takes the cash rate to 3.1%. Wednesday will also likely see the Reserve Bank of India downshift to 25bps after three 50bps hikes. So by midweek we’ll have a better feel for whether these central banks are trying to downshift. The full day-by-day week ahead is at the end as usual on a Monday.

Staying on the topic of where central bank rates are going, payrolls from last Friday merit some closer attention. The headline (263k vs 284k last and 200k consensus) and private (221k vs. 248k last and 185k consensus) payrolls numbers beat with unemployment steady at 3.7%. However, market focus was squarely on the upside surprise to average hourly earnings (+0.6% vs. +0.5% last and +0.3% consensus) which boosted the year-over-year growth rate by a couple of tenths to 5.1% vs consensus at only 4.6%. This big upside miss got our economists digging into the data and they found that the response rate for the establishment survey, which measures nonfarm payrolls, hours and earnings, was just 49.4%, well below the normal 65-70% range and the lowest since 2002. So it feels like you could see decent sized revisions. In addition, our economists found that most of the upside surprise to AHEs was due to the transportation and warehouse sector, which showed a +2.5% monthly gain – over five standard deviations above the average and by far a record increase. Information services AHEs (+1.6% vs. Unch.) also showed an unusually large gain that was about 2.5 standard deviations outside of the average. Combined, the unusually large increases in these two sectors likely boosted overall AHEs by around one to two tenths in their view.

Nevertheless, income growth from our economists’ payroll proxy was still up 7.6% compared to a year ago and inflation is not going to be coming down to trend with labour markets like this. There is more and more evidence that the supply side is normalising on the inflation front but it’s seems inconceivable that inflation can normalise overall when we see the type of employment numbers we saw last week, not just from the employment report but also from the JOLTS data which still pointed towards a tight labour market.

Indeed, in Powell’s mid-week speech which caused a major bond/rates rally, he did cite the latest JOLTS data as still showing a large imbalance between supply and demand for labour, referencing the roughly 1.7 job openings for every unemployed worker. Powell also noted that for “the principal wage measures that we look at, I would say that you’re one and half or two percent above that (which is consistent with two percent inflation over time)”. So it’s fascinating that at the moment the market is focusing squarely on the very strong likelihood that we’ll ratchet down to ‘only’ a 50bps hike next week and extrapolating that level of dovishness rather than focus on any risks that the terminal rate could end up being nearer say 6% than 5%. Indeed Larry Summers was doing the rounds over the weekend suggesting that markets were likely under-pricing terminal and seemingly being more comfortable suggesting a peak nearer 6 than 5%, even if he wasn’t specific over a particular number.

In terms of weekend news OPEC+ decided to keep production at current levels as expected. This follows the EU decision on Friday, after months of negotiations, to cap the price of Russian crude at $60 per barrel, starting today. This morning in Asia trading hours, oil prices are trading higher with Brent crude futures (+0.82%) trading at $86.27/bbl and WTI futures (+0.83%) at $80.64/bbl following China’s further easing of its Covid Curbs.

Elsewhere, Shanghai and Hangzhou have followed other Chinese cities in easing some Covid restrictions over the weekend. They announced that from tomorrow, they will remove the requirement to have a PCR test to enter outdoor public venues and to use public transport. Chinese equities surged on the news with the Hang Seng rising +3.3% in early trading to its highest since mid-September, leading gains across the region with the CSI (+1.60%) and the Shanghai Composite (+1.55%) also rallying. Outside of China, the Nikkei (+0.01%) is struggling to gain traction this morning whilst the KOSPI (-0.51%) is slipping back slightly. In overnight trading, US stock futures are indicating a negative start with contracts tied to S&P 500 (-0.14%) and the NASDAQ 100 (-0.17%) edging lower. Meanwhile, yields on 10yr USTs (+4.55 bps) have climbed higher, trading at 3.53% with the 2s10s curve at -79.15 bps as we go to press.

Data out from China today showed that services activity contracted further in November as Covid restrictions continued to restrain growth, with the Caixin China services PMI falling to a six-month low of 46.7 from 48.4 in October. Elsewhere, the final estimate of Japan’s services PMI fell to 50.3 from October’s 53.2, hitting the lowest since August as cost pressures remained acute. The composite PMI contracted to 48.9 in November from 51.8 a month earlier.

In FX, the Chinese currency strengthened to 6.96 against the US dollar, moving below 7 for the first time since mid-September on hopes of reopening.

Recapping last week now and for the second week running major sovereign bond markets and equity indices rallied, after perceived dovishness from Fed Chair Powell in his last remarks before the December FOMC communications blackout period, troubling global growth data, and further confirmation of China moving on from the strictest form zero Covid policies that have plagued global supply chains.

Treasury and Bund yields fell over the week, a largely parallel shock to the already inverted US yield curve while Bund yields flattened slightly. All told, 2yr Treasuries fell -18.1bps (+4.4bps Friday) while 10yr yields were -19.1bps lower (-1.9bps Friday). 2yr Bunds fell -8.7bps, though climbed +8.0bps Friday, while 10yr yields were -11.8bps lower after climbing +4.2bps Friday following the US jobs report. But note that 10yr US yields fell c.7bps after the European close and c.15bps lower than their highs for the day just after payrolls were released.

Terminal Fed Funds fell c.8bps on the week but were first c.6bps higher pre-Powell’s speech and then c.22bps lower into payrolls, before climbing 8bps after and into the close for the week.

A second straight week of falling discount rates led to a second straight week of decent equity performance. The S&P 500 climbed +1.13% (-0.12% Friday) with the more rate-sensitive NASDAQ outperforming, up +2.09% (-0.18% Friday). One area of weakness was bank stocks, where the S&P 500 banks sector fell -2.03% (-1.04% Friday) as slower growth and flatter curves weighed. Performance was more mixed in Europe, but the STOXX 600 still managed to post a +0.58% weekly gain (-0.15% Friday), while the regional indices took their cues from the World Cup: the DAX fell -0.08% (+0.27% Friday) with Germany failing to reach the knockout round again while the CAC and FTSE 100 increased +0.44% (-0.17% Friday) and +0.93% (-0.03% Friday), respectively.

Authored by Bruce Wilds via Advancing Time blog,

The potential of a recession is not the problem, a deep inflationary depression should be a far greater concern. Higher interest rates combined with a tightening money supply, rising energy prices, the threat of war, and de-globalization create a toxic brew. Many of us argue we are already in a strong downturn and the statistics and data simply haven’t caught up to where there reflect this. 

While we may deny it, we are all in the same boat and it is leaking. The debt we have seen growing has become a bubble. This is the consequence of governments continuing to print money rather than dealing with problems. It has become clear, if nothing else, we need to make better bad choices. Under the notion, we are all in the same boat and it has a massive leak many people may soon find the answer is not only to bail out those in trouble but to “bail in” or take money from those depositing money in banks to keep them afloat, but that is a story for another time. 

The ability of a country to achieve a soft economic landing by leveraging up like crazy is no longer available to most countries. This means expanding credit and pumping money into the system. Most countries have been there and already done that, In short, they no longer have that tool in their toolbox. Not only does every dollar or yuan of stimulus create less economic growth it feeds the inflation monster by debasing the currency. In short, the chickens are coming home to roost and a major distraction is needed to take our eyes off the situation that has developed.

Inflation is far worse than the CPI indicates. Here in America, the purpose of the consumer price index (CPI) is to reflect just how much inflation is eating into both our incomes and our savings. Since many people can’t handle the truth, the government understates inflation by using a formula based on the concept that evolved during the first half of the 20th century that misleads us into thinking it will remain manageable. 

The Social Security Administration recently announced that due to inflation an 8.7% cost of living adjustment (COLA) would be given next year. This translates to an additional $140 per month for the average Social Security recipient. That goes on top of a substantial 5.9% COLA for 2022. The 2023 increase is the biggest in 40 years. Back in 1981 when the COLA was 11.2%. The increase will add around $100 billion of spending per year and at the same time increase the cost of the program.

As far as, how bad inflation or the coming economic situation is it going to get, it is hard to say. We should remember things often bend before they break, and sometimes they can bend a great deal while we deny just how close we are to them breaking. When you have idiots in charge making bad decisions and ignoring reality problems can rapidly accelerate. People that have studied this issue for years, even decades, such as Alasdair Macleod, head of Research for GoldMoney generally hold little in the way of answers for the common man. 

This is because the common man has little interest in overall economics other than getting by. Macleod attempts to educate the average person and advocates for sound money. He does this by attempting to demystify finance and economics. Macload’s accumulated experiences have convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. This drives his mission to warm and educate the public in layman’s terms about what governments do with money and how to protect themselves from the consequences. 

Many of us hold a view of financial devastation that may prove far more civilized than what may eventually unfold on the ground. In a recent video,  https://www.youtube.com/watch?v=PqJtUOT_IGw&t=699s he uses his background as a stockbroker, banker, and economist to give us some insight as to how bad decisions lead to horrible outcomes. Still, it is questionable how much his advice can help us when the financial system implodes. 

Then there is the idea held by the more ridged folk that gold is and will remain the only true money. This extends to the idea the “banksters” manipulate the price of gold to keep their fiat in play. This group claims that when all is said and done and the fiat system collapses, gold will return to its rightful role as money in the minds of the populace. It’s just that most people think paper currency is money since they have never been taught the difference between currency and money. This is why “gold bugs” tout owning gold as the answer to economic survival.

It could be argued the ridged idea that gold is the only money is as outdated as the buggy-whip. Some of us prefer paid-for real estate or some other real asset over trying to hide gold that does not generate an income from the government and others that wish to steal from us. Often the one thing those of us suspicious of fiat currency do agree on is that staying away from paper promises and the stock market is very important. Part of our reasoning is that mega-cap companies are far from their 2020 lows and most likely stock markets have a long way to fall.

Such a fall would take its toll on the wealth effect furthering its shift into reverse. Consumer sentiment indicates the margins of consumer discretionary companies will be compressed going forward. Without a doubt, bank credit remains the backbone of lending across the world. Adding to our problems is that we live in a consumer-driven economy and once a consumer falls behind on payments it is a “bitch” getting back on track. Many people today do not have the money management skills or tenacity to dig their way out of a financial hole. Today, credit spreads have not yet moved to reflect the true risk of default.

Expect Financial Assets To Suffer Most From Defaults

Containing the swings between deflation and inflation is the test before us, this means walking the fence and not falling off either side. When the system is highly leveraged, as liquidity contracts, the potential of a debt crisis becomes overwhelming. Blame it on Putin, blame it on covid, blame it on climate change, blame it on Trump, blame it on Powell or Biden. Whatever and whoever those in power and the media choose to blame, one thing for certain and that is they will never blame themselves. The system is theirs to exploit not something to take responsibility for. 

At the same time, he highlights the risk we all face in the case of a debt crisis, Macleod explores what might happen if fiat currencies collapse. What is now being referred to as “Bretton Wood 2.0” would constitute a total reshaping of currencies and the financial system. This would be hashed out, decided upon, and forced upon us by those making the decisions, most likely behind closed doors. This would dictate how we move forward. Needless to say, this would or will carry with it a huge impact on society. Over the years as the financial sector in America and across the globe grew faster than manufacturing the world became overly credit dependent. This means that as credit and liquidity dry up, the rest of the economy will shrivel. 

Authored by Daniel Lacalle,

There are many mistakes in the G7 agreement to put a cap on Russian oil.

The first one is that it does not hurt Russia at all. The agreed cap, at $60 a barrel, is higher than the current Urals price, above the five-year average of the quoted price and higher than Rosneft’s average netback price.

According to Reuters, “the G7 price cap will allow non-EU countries to continue importing seaborne Russian crude oil, but it will prohibit shipping, insurance, and re-insurance companies from handling cargoes of Russian crude around the globe, unless it is sold for less than the price cap”. This means that China will be able to purchase more Russian oil at a large discount while the Russian state-owned oil giant will continue to make a very healthy 16% return on average capital employed (ROACE) and more than 8.8 billion roubles in revenues, which means an EBITDA (earnings before interest, taxes, depreciation and amortization) that more than doubles its capex requirements.

This misguided cap is not only a subsidy to China and a price that still makes Rosneft enormously profitable and able to pay billions to the Russian state in taxes.

It is a big mistake if we want to see lower oil prices.

With this cap the G7 have created an unnecessary and artificial bottom to old prices. The G7 did not want to understand why oil prices have roundtripped in 2022: Competition and demand reaction. By putting a $60 a barrel cap, which is a bottom price, the G7 have almost made it impossible for prices to reach a true bottom if a demand crisis arrives. On the one hand, the G7 has taken 4.5 million barrels a day, the estimated Russian oil exports for 2023, out of the supply picture with a minimum -and maximum- price, but additionally has made OPEC keener on cutting supply and raising their exports’ average realized oil price higher.

China must be exceedingly happy. The Asian giant will secure a long-term supply at al attractive price from Russia and sell refined products globally at higher margins. Sinopec and Petrochina will find enough opportunities in the global market to secure better margins for their refined products while guaranteeing affordable supply in a challenging economic situation.

When I read this news about “price caps” I wonder if bureaucrats have ever worked in a global competitive industry. They may have not, but they certainly employ thousands of “experts” that may have told them that this is a clever idea. It is rubbish.

If the G7 really wanted to hurt Russia’s finances and exports the way to do it is to encourage higher investment in alternative and more competitive sources. However, what is happening is the opposite. G7 governments continue to impose barriers to investment in energy as well as place regulatory and wrongly called environmental burdens that make it even more difficult to guarantee diversification and security of supply.

What killed the oil crisis of the seventies was the phenomenal rise of investment in other productive areas. What has allowed oil prices to do an almost 180-degree year-to-date move is higher supply, non-OPEC competition and demand response.

The energy sector already suffers from concerning levels of underinvestment. According to Morgan Stanley, oil and gas underinvestment has reached $600 billion per annum. With this so-called price cap, the incentive for producers to sell what they can and invest as little as possible is even higher, and this may imply much higher oil prices in the future. China and Russia also know that renewables and other alternatives are nowhere close to being a widely available alternative and that, anyhow, this would require trillions of dollars of investment in mining of coper, cobalt, and rare earths.

By adding a so-called cap on Russian oil prices to the increasing barriers to develop domestic resources the G7 may be planting the seeds of a commodity super-cycle where dependence on OPEC and Russia increases, instead of decreasing.

I repeat what I have been saying for months. The developed economies’ governments are taking their countries from a modest dependence on Russia to a massive dependence on China and Russia.

By Eric Peters, CIO of One River Asset Management

“Everyone has been traumatized by something unexpected,” he said, the two of us catching up, wandering, our regular free-form talks. “So they try to organize their lives and create structures that they feel give them control,” continued the CIO, a brilliant investor. “But there is no such thing as certainty, only the illusion of having an ability to control our destiny.” Last year at this time, markets priced the Fed Funds rate would be 1% now, rising gradually to 2.25%. And last month, SBF was seen by many as a savior savant. We fill our lives with fantasy.

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“In market parlance, this phenomenon is the equivalent to selling volatility,” he said. “People view the income received from buying bonds or selling volatility to be a known quantity, a guarantee of sorts. But the reality is the certainty of such coupons is an illusion,” he said. “The truth is that buying convexity is a better way to live, because it is inherently less fragile.” But you must buy enough of it, making numerous bets, whether in entrepreneurial business-building or investing. “You must expose yourself to upside and accept the downside.”

“People hate holding cash, because they forego locking into a coupon,” he said. “They think it is a drag on their portfolios, but cash is an option.” It gives you an ability to buy something in the future, even if you do not yet know what you’ll buy. “Most people dream of someday having enough money so that they can purchase enough coupons to allow them to live risk-free forever.” A bulletproof life. “But getting to a place where you no longer need to think is emotionally quite dumb. The thrill of thinking and being is what makes us human.”

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“One of the great ironies in both life and investing is that the harder you try to protect yourself from something, the more likely it is to find you,” he said. “We are best when we accept that the thing we fear most is what we must embrace,” said my friend. “And it’s often the thing that we tell ourselves most regularly that is our greatest self-deception. Mine is that I tell myself I’m bad with people. I don’t like being social and use that as justification for creating the detached life I live. The truth is probably that I fear letting people down. And everyone has such lies they tell themselves. They’re usually staring us right in the face.”