Today, in the Calculated Risk Real Estate Newsletter: Single Family Starts Up 18% Year-over-year in March; Multi-Family Starts Down Sharply YoY

A brief excerpt:

Total housing starts in April were above expectations, however, starts in February and March were revised down.

The third graph shows the month-to-month comparison for total starts between 2023 (blue) and 2024 (red).

Total starts were down 0.6% in April compared to April 2023.

The YoY decline was due to the sharp YoY decrease in multi-family starts.

Dollar Volatility Skew Hints Spot Retreat Will Be Short-Lived

By Vassilis Karamanis, Bloomberg Markets live reporter and strategist

Demand for long exposure in the dollar through options at the back-end of the curve suggests position rebalancing is the main driver of latest spot price action.

Investors were long the greenback in the spot market and at the front-end of the curve until a week ago; BBDXY is now trading at its lowest in more than a month but remains above the April lows

One-month risk reversals stand at 23 basis points, half as much as on April 30; one-year riskies, however, are in consolidation mode and, at 85 basis points, match the average for the past year.

 

Tyler Durden Thu, 05/16/2024 - 09:35

Industrial Production Disappoints, Manufacturing Contracts As Downward Revisions Continue

US industrial production was unchanged MoM in April (weaker than the modest 0.1% increase expected) and following a downward revision in March from +0.4% to +0.1% MoM. The downward revision and weak print left IP down 0.4% YoY...

Source: Bloomberg

11 of the last 13 months have seen negative downward revisions to Industrial Production...

Source: Bloomberg

Capacity Utilization fell further to 78.4%...

Source: Bloomberg

Manufacturing was even worse with a 0.3% decline MoM (worse than expected) dragging production down 0.5% YoY...

Source: Bloomberg

Not exactly the 4.0% GDP-inspiring data many had hoped for.

Tyler Durden Thu, 05/16/2024 - 09:26

Walmart Soars To Record High After Beating Estimates, Guiding Higher As Consumers "Trade Down"

WMT stock surged in premarket trading after the company not only reported Q1 earnings that blew away expectations, but guided even higher than consensus, and now expects the full year to be slightly better than planned as the big-box retailer attracts price-conscious consumers looking for essentials and discounts.  

In the quarter ended April 26, Walmart sales rose 3.8%, higher than what Wall Street was anticipating. With inflation easing, the average ticket was flat but the number of transactions rose by 3.8% from a year ago. E-commerce was a big driver, jumping 22% during the same period, as well as upper-income households that the retailer said drove the bulk of its gains.

• Revenue $161.51 billion, +6% y/y, beating the estimate $159.58 billion, driven by ha higher number of transactions even as average tickets were unchanged.
  • Walmart-only US comparable transactions +3.8%, estimate +3.17%
  • Walmart-only US comparable ticket 0%, estimate +1.32% (2 estimates)
• Adjusted EPS 60c, beating estimate 53c (and excludes a net gain of $0.05 on equity and other investments and business reorganization charges of $0.02).
• Total US comp sales ex-gas +3.9%, beating estimate +3.42%
  • Walmart-only US stores comparable sales ex-gas +3.8%, beating the estimate +3.45%
  • Sam's Club US comparable sales ex-gas +4.4%, beating the estimate +3.33%
• The company said that "globally, eCommerce penetration is higher across all markets led by store-fulfilled pickup & delivery and marketplace"

Summarized:

While the current quarter results were solid, Wall Street was more impressed with the company guidance: Walmart now expects adjusted earnings to come in at the high end or slightly above its original guidance of $2.23 to $2.37 per share and revenue growth of 3% to 4% for the full year. Analysts were expecting adjusted earnings of $2.37 per share and a revenue increase of nearly 4% for the full year.

• For Q2, Walmart now sees adjusted EPS in the range of 62c to 65c, vs estimate 64c
• For the full year, the retail giant expects EPS at high-end or slightly above $2.23 to $2.37 (saw $2.23 to $2.27) and vs the estimate $2.37
• Still sees FY capex about 3% to 3.5% of net sales

And visually:

CFO John David Rainey said that sales growth has been fueled by traffic and unit increases,

“We are seeing customers trade into Walmart,” he said of higher-income households who were the largest cohort behind share gains in nearly every category. “We’ve historically been thought of for value, but now it’s value, quality and convenience.”

While the grocery business has been fueling Walmart’s growth, general merchandise has lagged according to Bloomberg, which is to be expected after consumer sentiment crashed in early May to a six-month low due to concerns about inflation and the job market, while retail sales stagnated in April.

And with prices soaring, consumers have been prioritizing staples over larger, discretionary purchases: this has dented sales of competitors such as Home Depot and Target. But as higher-income consumers trade down or search for deals, Walmart is benefiting from a decision to roll out more discounts and new products and revamp stores. Lower-income consumers are buying in similar patterns at Walmart, Rainey said, purchasing more groceries and other necessities than general merchandise.

Meanwhile, Walmart continues to breathe down Amazon's neck as it expanded its e-commerce business and shipped about 4.4 billion units for same-day or next-day delivery over the past 12 months, Rainey said. About 44% of those orders were delivered to customers in less than four hours after ordering. By comparison, Amazon.com Inc. said last month that it shipped more than 4 billion items to Prime members via same or next-day deliveries in 2023.

CFO Rainey said the company has also been focused on keeping costs down, pointing to a 4.2% decline in inventory levels in the US for the quarter as supply normalizes after the pandemic.

Earlier this week, Walmart announced plans to shutter smaller offices and lay off hundreds of employees who are still working from home or can’t move to bigger office hubs. Most relocations will be to the retail giant’s corporate headquarters in Bentonville, Arkansas, where Walmart is building a 350-acre campus.  Some employees will be able to work from offices in the San Francisco Bay Area or in Hoboken, New Jersey.

Rainey said the recent relocation moves are about having staff work together and that most of the changes will be done by the third quarter of this year.

“We, like a lot of companies, have relaxed those policies during Covid in the last few years and we think it’s important to get back together. We see the benefit of that,” he said.

Walmart is also investing in non-retail businesses, including advertising, that have faster growth and higher margins than core operations, while exiting areas like health clinics that are proving costly. Newer business lines, including its Walmart+ membership program, fueled the company’s operating income growth for the quarter.

WMT shares surged more than 5% in premarket trading trading, hitting a new all time high The stock has gained 14% so far this year through Wednesday’s close, outpacing the 11% rise in the S&P 500 Index.

Walmart's full Q1 investor presentation can be found here.

Tyler Durden Thu, 05/16/2024 - 09:21

From the Fed: Industrial Production and Capacity Utilization

Industrial production was little changed in April. Manufacturing output decreased 0.3 percent; excluding motor vehicles and parts, manufacturing output edged down 0.1 percent. The index for mining fell 0.6 percent, and the index for utilities rose 2.8 percent. At 102.8 percent of its 2017 average, total industrial production in April was 0.4 percentage point lower than its year-earlier level. Capacity utilization moved down to 78.4 percent in April, a rate that is 1.2 percentage points below its long-run (1972–2023) average.
emphasis added

Click on graph for larger image.

This graph shows Capacity Utilization. This series is up from the record low set in April 2020, and above the level in February 2020 (pre-pandemic).

Capacity utilization at 78.4% is 1.2% below the average from 1972 to 2022.  This was at consensus expectations.

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

Industrial production was unchanged at 102.8. This is above the pre-pandemic level.

Industrial production was below consensus expectations.

 

 

The Misery Index — the combination of Inflation and unemployment — failed as a bearish criticism of the economy. Unemployment remains at 60-year lows, and Inflation has plummeted from 9% down to the 3s.

If you have a bearish mindset, and seek confirmation of that perspective, then the next economic critique after the Misery Index you try on for size is “Stagflation.” We have heard the S-word from Jamie Dimon, Stanley Druckenmiller, Bank of America, Barclays, Fox, Marketwatch, Kiplingers and many others.

The definition from the 1970s + ’80s was the combination of slow growth, high unemployment, and rising inflation. But if Stagflation is your reason for being negative, you run into a similar problem: Growth has been robust, unemployment low, and inflation is way below its June 2022 highs.

Like so much of the “If it bleeds it leads” media, there is far less to this scary threat in the data than advertised.

The United States has had bouts of Stagflation in the past. We created a STagflation bar chart using a simple formula:

Stagflation = Unemployment (U3) + CPI Inflation (Year over Year) – Real GDP

As the chart above shows, Stagflation ticked up the early 1970s, spiking to 20 in 1974, and stayed elevated for most of the decade. It hit those high levels again in 1980 and stayed high until Inflation was vanquished by then-Fed CHair Paul Volcker and the economy recovered in earnest after 1982. The economic collapse during the GFC sent this back over 15 briefly and spiked again during Covid over 10.

Today, levels of stagflation are the same as in the 1990s or the GFC 2000s. It’s another economic worry that — at least as of now — is not backed up by any data…

Or as Bank of America observed today: “Stagflation was so 2022.” After a soft Q1 GDP, and lagging (blame OER) inflation, they note the “stagflation” narrative has resurfaced. Pushing back on that, the observation is made that “real services spending has surged, despite elevated inflation. This is symptomatic of robust demand.” The key risk to watch is (in BofA’s view) not “stagflation,” but a re-acceleration in (services) demand. 

Given the large shift in demand from Services to Goods during the pandemic lockdown, I view this shift back towards Services to be part of the post-pandemic normalization.  

As Elroy Dimson observed, “Risk means more things can happen than will happen.” That implies we should not panic over every possibility, especially those that are fairly unlikely to happen — and are not showing up in the data…

 

 

See also:
Why Investors Love Being Scared, (Michael Batnick, May 14, 2024)

Still No Stag and Not Much ‘Flation (Paul Krugman May 3, 2024)

 

Previously:
What Does the Misery Index Say About the 2024 Election? (January 25, 2024)

Why the FED Should Be Already Cutting (May 2, 2024)

 

 

Google searches for “Stagflation”

 

The post What Stagflation? appeared first on The Big Picture.

There Isn't Much That Can Stop This Market For Now

By Michael Miska, Bloomberg Markets Live reporter and strategist

With US inflation and retail sales both cooling, bets that the Federal Reserve will cut interest rates are back, and there isn’t much left that could stop stocks from hitting new highs.

After most equity markets fully erased April losses — brushing off a perceived delay in rate cuts, sticky inflation and signs of slowing in the US job market — nothing seems to be able to halt stocks. Financial conditions are loose, the economy is holding up and even recovering in Europe, the technical picture is bullish, and the earnings season was overall pretty reassuring once again.

“Sentiment seems to be boosted as inflation hasn’t surprised to the upside and retail sales are on the face of it slowing,” says Charles Hepworth, Investment Director, GAM Investments. “The landscape is moderating, and that means lower volatility and easier prognostics — all of which means market direction can continue to the upside.”

Momentum is running in favor of bulls as all major markets are moving firmly into higher gear, with only a few minor overbought warnings flashing so far. It leaves stocks with upside room, while also limiting setbacks for the time being unless there is a major change in the fundamental perception of the environment.

According to a BofA European fund manager survey this week, an increasing number of investors are bullish about the macro-economic outlook in Europe. A net 61% of respondents expect stronger European growth over the coming 12 months, up from 50% last month and the highest since July 2021. Meanwhile, only 22% of investors see growth slowing in the near term in response to the lagged impact of monetary tightening, down from 83% at the start of the year.

To be sure, after a mild correction so quickly erased, the summer months could prove a bit more volatile if history is any guide. Further rate-cut repricing can’t be excluded while inflation has been slowing but is still above target.

“Real rate risk is not dead,” say Natixis strategists Emilie Tetard and Florent Pochon, adding the type of configuration seen in April, when real rates rising hit risk assets, may well come back in the medium term, with inflationary risk persisting, uncertainties over the level of the so-called ‘neutral’ rate and rising budget deficits. The best hedges against real rate shocks remain the dollar, as well as defensive sectors and low vol style, they say.

In the meantime, equity volatility risk gauges from VVIX to skew and tail risk pricing had edged higher ahead of CPI, although from a low level, but are already being compressed again after the inflation print.

Option trading desks note that dealers are back into a long gamma environment and while that’s not helping the upside as such, long gamma acts as a stabilizer in markets and a volatility dampener. Both nice things to have at a time when there are enough upside catalysts in store.

“The put/call skew remains low, and premiums only saw a modest jump, suggesting that overall hedging demand remains subdued,” according to strategists at Tier 1 Alpha. “This implies that while there are some signs of potential volatility, the market is not yet in a state of high anxiety.”

And the technical picture remains bullish, according to Bank of America technical analyst Stephen Suttmeier, flagging that the advancers-decliners line of 73 country indexes continues to hit new all-time highs and achieved another last week. Referring specifically to Europe, he says the Euro Stoxx 50 remains in a bullish trend after a breakout from a cup and handle pattern, suggesting further upside towards 5230-5360 and the 5500s, while the bullish flag breakout last week reinforces the view as long as the 5000 support level holds. “Equity market strength is global and broad,” he says. “We view this as bullish.”

Tyler Durden Thu, 05/16/2024 - 09:00

US Housing Starts/Permits Ugly In April After Huge Revisions

Despite a plunge in sentiment and soaring mortgage rates, analysts expected Starts and Permits to increase in April.

They were half right, but both missed bigly - as Starts rose 5.7% MoM (below the +7.6% exp), up from a downwardly revised 16.8% plunge in March; Permits dropped 3.0% MoM (well below the +0.9% exp), but better than the downwardly revised 5.0% drop in March.

Source: Bloomberg

The downward revision for March meant it saw the largest MoM drop since COVID lockdowns.

Single- and Multi-Family Permits both dropped in April (-0.8% and -9.1% respectively) while Rental Unit Starts surged 31.4% MoM...

Source: Bloomberg

The Multifamily start jump was off COVID lockdown lows...

• Single family permits down to 976K SAAR from 984K and the lowest since August

• Multifamily permits down to 408K SAAR from 449K and the lowest since Oct 2020

Finally, just what will homebuilders do now that expectations for 2024 rate-cuts have collapsed?

Source: Bloomberg

The number of completed single-family homes climbed to a 1.09 million annualized rate, the most since November 2022. That may explain the softer advance in new groundbreaking activity... but construction employment is at record highs?

Source: Bloomberg

One thing is for sure, a surge in mortgage rates back above 7% chilled homebuilder sentiment dramatically...

Source: Bloomberg

Is Powell trying to engineer a slow motion crash in housing to lower OER and this CPI?

Tyler Durden Thu, 05/16/2024 - 08:52

Jobless Claims Decline After Last Week's Big Surge Amid New York Chaos

After the prior week's big surprise jump in jobless claims, analysts expect a decline this week back into the lowest-in-forty-years range once again... and they were right as 222,000 Americans filed for jobless benefits for the first time last week (down from a revised 232k the prior week)...

Source: Bloomberg

This week saw claims plunge in New York...

...reversing the prior week's massive surge in New York...

How does anyone believe these numbers?

Continuing claims remained glued around the 1.8mm range (1.794mm - slightly above 1.78mm exp)...

Source: Bloomberg

The BLS data remains completely decoupled from reality still...

Source: Bloomberg

Will this all change in November (depending who wins?)

Tyler Durden Thu, 05/16/2024 - 08:38

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately‐owned housing starts in April were at a seasonally adjusted annual rate of 1,360,000. This is 5.7 percent above the revised March estimate of 1,287,000, but is 0.6 percent below the April 2023 rate of 1,368,000. Single‐family housing starts in April were at a rate of 1,031,000; this is 0.4 percent below the revised March figure of 1,035,000. The April rate for units in buildings with five units or more was 322,000.

Building Permits:
Privately‐owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,440,000. This is 3.0 percent below the revised March rate of 1,485,000 and is 2.0 percent below the April 2023 rate of 1,470,000. Single‐family authorizations in April were at a rate of 976,000; this is 0.8 percent below the revised March figure of 984,000. Authorizations of units in buildings with five units or more were at a rate of 408,000 in April.
emphasis added

Click on graph for larger image.

The first graph shows single and multi-family housing starts since 2000.

Multi-family starts (blue, 2+ units) increased in April compared to March.   Multi-family starts were down 33.1% year-over-year.

Single-family starts (red) decreased slightly in April and were up 17.7% year-over-year.

The second graph shows single and multi-family housing starts since 1968.

This shows the huge collapse following the housing bubble, and then the eventual recovery - and the recent collapse and recovery in single-family starts.

Total housing starts in April were above expectations, however, starts in February and March were revised down.

I'll have more later …

The DOL reported:

In the week ending May 11, the advance figure for seasonally adjusted initial claims was 222,000, a decrease of 10,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 231,000 to 232,000. The 4-week moving average was 217,750, an increase of 2,500 from the previous week's revised average. The previous week's average was revised up by 250 from 215,000 to 215,250.
emphasis added

The following graph shows the 4-week moving average of weekly claims since 1971.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 217,750.

The previous week was revised up.

Weekly claims were at the consensus forecast.

CME Plans To Launch Spot Bitcoin Trading

The Chicago Mercantile Exchange (CME), the world's largest futures exchange, is planning to offer spot bitcoin trading on its platform, according to a Financial Times report.

This move would provide major hedge funds and institutional traders with a regulated venue to trade Bitcoin.

As Vivek Sun reports via Bitcoin Magazine, CME is already the global leader in Bitcoin futures trading. By adding spot bitcoin, it can offer clients an integrated platform that includes both spot and derivatives markets.

This enables complex trading strategies like arbitrage and basis trading that leverage price differences between the two.

Currently, most spot bitcoin trading occurs on offshore exchanges like Binance.

CME, providing a regulated alternative, targets institutional investors who require strict due diligence and compliance standards.

The exchange has reportedly held talks with traders expressing strong interest in trading bitcoin in a regulated environment.

The move comes as Wall Street ramps up its Bitcoin offerings amid surging demand. Several firms already provide access to SEC-approved Bitcoin ETFs earlier this year. CME would differentiate itself by allowing sophisticated trading strategies beyond simple directional bets.

Yesterday saw the largest daily rise in bitcoin price in 14 months and a large net inflow to BTC ETFs...

Institutional funds are more inclined to use CME than platforms like Coinbase due to existing relationships. The transparency and trust in CME's decades-long track record outweigh its lack of Bitcoin specialization.

By tapping into extraordinary demand from institutional clients, CME can significantly boost its Bitcoin exposure, helping satisfy the appetite of hedge funds, family offices, pension funds and more for regulated and familiar avenues to access Bitcoin.

Tyler Durden Thu, 05/16/2024 - 08:25

Welcome To LaLa Land As Market Jettisons Tail Risks

By Simon White, Bloomberg Markets Live reporter and analyst

The economy is signaling a more volatile, potentially recessionary period. Markets, however, aren’t paying attention. Not only are the twin tail risks of a downturn or resurgent inflation being ignored, but a near-impossible “immaculate acceleration” of boomy growth and benign price appreciation is becoming the base case.

It’s not the first time that markets and the economy have been at odds, but this is one of the most egregious. Just as the economic mood music becomes more somber and underlying signs of persistent price pressures continue to fester, the market has virtually eliminated the tail risks of a recession or an inflationary shock.

We can estimate what the probability of those are by inferring from SOFR options the odds the Federal Reserve’s rate drops below 3% or rises above 6%. (Even though the time to expiry is falling as we move to the right in the chart below, the message is the same when using SOFR contracts with later expiries, i.e. tail-risk pricing is evaporating.)

The non-recessionary growth of immaculate disinflation has given way to expectations of an immaculate acceleration: accelerating growth and slowing inflation.

Immaculate acceleration is the quintessential two impossible things before breakfast. Yet that is exactly what the market is intending to digest: nominal rate volatility is rapidly picking up – as would be expected if a positive growth shock is foreseen – while real rate volatility is declining, indicative of inflation that is anticipated to keep falling. This is “cake and eat it”-ism writ large.

In the absence of outright panic, it doesn’t take the market long to find the diametrically opposite pole of greed and complacency. You don’t have to believe either a recession or unruly inflation are particularly likely to agree that the scant probability they are ascribed is negligently low.

That leaves the stock market in a more precarious position. It has been content to rally through this cycle with the belief the Fed would aggressively cut rates if a recession looked likely, i.e. the tail risk was underwritten. That’s ultimately still the case, but stocks are now happy to power ahead even though this tail is no longer priced by the rates market. That’s a degree of nonchalance equities have hitherto not yet displayed.

The two impossible things can be glimpsed again by looking at growth expectations. Economists’ forecast for 2024 real annual GDP was 0.6% as recently as August and is now 2.4%, while the Atlanta Fed’s GDPNow estimate for the current quarter is almost 4%. Yet the market is still projecting a steady drop in headline CPI back to 2.5% within the next year.

The market seems to be willfully ignoring many clear signals emanating from the economy. Recession risk has been in abeyance for more than six months, but that is changing. While near-term risk of a downturn is still low, we are at the point where it would not take much to flip the risks of one occurring in the next few months to being very high.

Not only have we had weak ISM services and manufacturing data, the unemployment level by US state is deteriorating. This can be a very early indication of a recession as it is a sign of a pervasive weakening of labor markets across the country — precisely one of the harbingers of a national downturn. That typically augurs much higher market volatility, as cash flows are stressed as companies hold on to workers until the last minute, despite slowing demand.

Yet volatility is muted and asleep at the wheel, seemingly paying no heed to the unemployment ripples spreading out state by state.

Indeed, hedging demand for higher equity volatility, inferred by the call-put ratio in VIX options is going down after two years at an elevated level. Have even volatility hedgers finally relented and embraced the immaculate acceleration nirvana?

Bond volatility is also ignoring the inflation backdrop. Bond vol is a price on uncertainty, and there is no more of an uncertain consideration for bond holders – even more so than the Fed – than inflation.

It may have come down, but inflation volatility is high and rising again in the US and Europe. Yet bond vol is near two-year lows. A repricing to where inflation volatility is would see a decline in global sovereign-bond liquidity (see chart below), and thus lead to much higher bond volatility.

Commodities are beginning to behave in a less emollient fashion. Copper, cocoa and natural gas are up 30-50% over the last few months and more and more commodity-future curves are going in to backwardation. Volatility has picked up in several commodities, but overall it is still muted.

One silver lining is that the widespread level of complacency in markets along with subdued implied-volatility means portfolio hedging costs are cheap.

That is the prudent way to go when we bear in mind the twin tail risks of inflation and recession have all but been erased from the market’s outlook.

Also overlooked is the possibility we enter a recession with elevated inflation. Needless to say, very few portfolios are likely prepared for this double tail-risk, or either one on its own. Moreover, little consideration is given to the boosting impact on inflation from the rate cuts that are priced in by the market.

Immaculate acceleration is like trying to thread a needle while shaking from an adrenaline rush. In other words, it’s unlikely to go according to plan.

Tyler Durden Thu, 05/16/2024 - 08:10

Futures Flat At All Time High As Markets Mull Next Move

US index futures are flat after notching new record highs on the S&P 500 and Nasdaq 100, spurred on by a miss in the US CPI print and retail sales data on Wednesday, which also boosted bets the Federal Reserve will ease policy. That inflation data, which the market was feverishly anticipating, was inadvertently published 30 minutes early the BLS reported, raising fresh questions about how some of the world’s most sensitive economic information is released. As of 7:30am, S&P and Nasdaq futs are up 0.1% with small caps underperforming, potentially on growth fears, so it will be interesting if this morning's stronger than expected WMT earnings can ease those fears. With the main data point of the week now past, investors will turn to Fed speakers and jobless claims data for new clues on the path of interest rates. Bond yields are moving +/-1 bp as the curve twists flatter. The US dollar looks to rally for the first time this week. Commodities are higher led by base metals with copper soaring for another day because of a short squeeze on the Comex exchange. The macro data focus is on Housing Starts/Building Permits, Import/Export Prices, and Industrial Production. NVDA reports next week so may see investors begin positioning for that. 

In pre-market trading, Mag7 and Semis are higher while the meme-stock craze continued to fizzle out, with GameStop Corp. and AMC Entertainment Holdings Inc. plunging more than 10% in the pre-market. Chubb shares jumped after Berkshire Hathaway unveiled a $6.7 billion stake in the insurer. Cisco Systems Inc. gained on a higher revenue forecast. Here are the other notable premarket movers:

• AST Spacemobile shares soar 36%, putting them on track for the biggest jump since March 2022, after AT&T said had it moved from a memorandum of understanding to signing a “definitive commercial agreement” with the company for a space-based broadband network.
• Chubb shares jump 9.5%, putting the stock on track for its sharpest gain since November 2008, after Warren Buffett’s Berkshire Hathaway unveiled a $6.7 billion stake in the insurer.
• Cisco Systems shares rise 4.5% after the communications equipment company raised its full-year revenue forecast, indicating that businesses are starting to spend on their computer networks again.
• Coupang shares gain 3.2% after UBS raised its recommendation on the stock to buy.
• GameStop and AMC shares fall, putting the stocks on track for a second consecutive session of losses, as the latest meme-stock rally fizzles. GameStop -16%, AMC Entertainment (AMC US) -12%
• Grab Holdings shares gain 3.3% after the ride-hailing and food delivery company reported first-quarter revenue came ahead of estimates. Additionally, the company boosted its Ebitda guidance for the year.
• ZTO Express ADRs jump 11% after the Chinese delivery company reported estimate-beating earnings. The firm said it’s shoring up profitability by keeping loss-making parcels outside of its network, as price competition heats up.

On the data front, stock-market bulls will be hoping for jobless claims to give an indication of slack in the labor market that would give the Fed room to ease monetary policy. A raft of central bank officials are due to speak today as well. Investors currently expect about two rate cuts this year, according to futures markets. 

"Slowdowns are not bearish equities, recessions are. I think on the body of evidence we are still miles from that. Although another rise in claims /confirmatory data from Philly Fed like we saw in Empire would keep inching us toward GDP downgrades" wrote Goldman trader Rich Privorotsky. "Now we'll trade slowdown and the SPX is taking out the highs. The mix of leadership will change and I think the NDX (secular growth proxy) which has actually lagged most things ytd has a good chance to run particularly into the end of the month"

In Europe, the Estoxx 50 trades lower by 0.2%, threatening to end a streak of ten straight day of gains  as insurance and real estate stocks outperform while energy and energy and autos lag behind. Local bourses were dragged down by energy names while German industrials continue to grapple with weak demand from China. Siemens AG dropped on lowered guidance for its key digital industries unit.  Italy's FTSE MIB outperforms peers while CAC 40 lags after reaching a fresh record. Traders were also watching direction from European Central Bank speakers on whether interest rates might start falling next month. So far, swap contracts have almost fully priced in the likelihood of three cuts in 2024. Here are some of the biggest movers on Thursday:

• WOSG jumps as much as 19% after the watch retailer’s sales grew faster than expected in the final quarter of its financial year and guidance for the year ahead impressed, according to analysts. The stock is on course for its biggest gain in more than six months.
• BT shares surge as much as 11% after the telecom operator unexpectedly boosted its dividend, citing an improved outlook for cash flow.
• NIBE gains as much as 7.7% with the Swedish heat-pump maker guiding for improving demand in the second half, largely offsetting a weaker-than-expected 1Q report, which was weighted down by the firm’s key Climate Solutions division.
• Roche shares rise as much as 4.8%, the most since Aug. 23, after the Swiss pharma company reported positive early-stage results for its experimental drug to treat obesity and type-2 diabetes.
• Snam shares rise as much as 3.1%, the most in six months, after the Italian natural gas distributor delivered a strong set of results and lifted its annual earnings guidance, which analysts at Citi say will push up consensus estimates.
• Sage shares slumped as much as 20%, their biggest drop since 1993, after the accounting software provider’s earnings undershot expectations.
• Ubisoft shares fall as much as 15% after the French video-game maker’s guidance suggests operating profits will likely grow slower than bookings in FY25.
• EasyJet shares fall as much as 7.8%, the biggest drop in seven months. Analyst say management views on revenue per seat in the fourth quarter seem softer than previous comments.
• Siemens shares drop as much as 4.4% after the German industrial giant reported mixed earnings, with its key digital industries division missing already-low expectations.
• Deutsche Telekom shares fall as much as 1.4% as the German company’s results fail to answer questions around union wage negotiations and the potential government stake sale in Germany.
• ConvaTec shares fall as much as 4.5% after the medical device company lowered its guidance for its Advanced Wound Care division due to uncertainty stemming from proposals outlined last month concerning coverage of skin substitute grafts and cellular and tissue-based products.

Earlier in the session, in Asia stocks also pushed toward a new peak. Shares of Chinese developers soared on optimism that Beijing will provide policy support for the purchase of unsold homes from distressed builders.

• Hang Seng and Shanghai Comp were positive with developers front-running the advances in Hong Kong on return from holiday as they reacted to the recent property support proposal, while the upside was capped in the mainland amid little fresh pertinent catalysts aside from Russian President Putin arrival in China where he seeks to deepen the strategic partnership with Chinese President Xi.
• ASX 200 was led by strength in the rate-sensitive sectors such as real estate and tech amid a drop in yields.
• Nikkei 225 gained but was off today's best levels as participants digested a firmer currency, steeper-than-expected contraction in Japanese GDP and mega bank earnings.

In FX, the Bloomberg Dollar Spot Index rebounded after slipping as much as 0.3% to a five-week low; USD/JPY fell 0.1% at 154.90, after sliding as low as 153.60. The yen rose for a second day, shrugging off GDP data that showed a contraction in Japan’s economy as investors chose to focus on long dollar liquidation. JPY and CHF are the strongest performers and only gainers in G-10 FX. AUD and NOK fall the most.

In rates, Treasuries are mixed with the curve flatter on the day, pivoting around a near-unchanged 10-year sector as post-CPI price action consolidates around Wednesday’s session highs.  US yields are cheaper by around 2bp across front-end of the curve and richer by 1bp across long-end, flattening 2s10s and 5s30s spreads by 2.2bp and 2bp on the day. 10-year yields are little changed on the day trading around 4.335% with the two-year yield rose 1bps to 4.73%, bouncing off 4.70% hit in earlier trading. Bunds and gilts both lagging by 1bp in the sector.  Swaps imply an 86% chance of a quarter-point rate cut from the Fed in September, compared with 73% earlier in the week; around 49bps of cuts are priced in total through the end of the year, up from around 43bps before the CPI print on Wednesday. US session focus includes data releases at 8:30am New York along with five scheduled Fed speakers.  

In commodities, crude futures and spot gold are steady. Most base metals trade in the green; LME copper rises 1.5%, outperforming peers.

Looking at today's calendar, US economic data slate includes initial jobless claims, April housing starts/building permits, May New York services business activity, Philadelphia Fed business outlook, April import/export price index (8:30am) and April industrial production (9:15am). Fed officials’ scheduled speeches include Barr, Barkin (10am), Harker (10:30am), Mester (12pm) and Bostic (3:50pm)

Market Snapshot

• S&P 500 futures little changed at 5,336.00
• STOXX Europe 600 down 0.1% to 523.95
• MXAP up 1.1% to 181.64
• MXAPJ up 1.3% to 568.91
• Nikkei up 1.4% to 38,920.26
• Topix up 0.2% to 2,737.54
• Hang Seng Index up 1.6% to 19,376.53
• Shanghai Composite little changed at 3,122.40
• Sensex down 0.3% to 72,748.60
• Australia S&P/ASX 200 up 1.6% to 7,881.29
• Kospi up 0.8% to 2,753.00
• German 10Y yield little changed at 2.42%
• Euro down 0.1% to $1.0872
• Brent Futures up 0.4% to $83.07/bbl
• Brent Futures up 0.4% to $83.05/bbl
• Gold spot up 0.0% to $2,386.10
• US Dollar Index little changed at 104.38

Top Overnight News

• Chinese property developers spike as expectations grow that local governments around the country will continue buying up excess housing units to bolster the property market. WSJ  
• China renews call for political end to Ukraine war as Xi Jinping rolls out red carpet for Russia’s Vladimir Putin. Any settlement must respect security and sovereignty of all parties, Chinese president says after talks Sino-Russian relationship has withstood international ‘storms and changes’ and sets a model for mutual respect and cooperation, he says. SCMP  
• Chinese goods are still getting into the US despite rising trade tensions between the two nations, although increasingly they are being funneled in via Vietnam. RTRS  
• MSFT asks hundreds of employees in China working on cloud computing and AI to transfer outside the country as tensions rise between Beijing and Washington. WSJ
• Japan’s Q1 GDP came in weaker than expected at -2% (vs. the Street’s -1.5% forecast) and revisions were negative, scrambling BOJ plans to proceed with further tightening steps. RTRS
• The ECB published its Financial Stability Review for May and provided a slightly improved outlook on the macro landscape – “Euro area financial stability conditions have improved as recession risks decline, but markets remain exposed to possible adverse macro-financial and geopolitical surprises”. ECB
• Biden’s political team feels the president’s poll numbers are sagging because the country isn’t yet focused on the election and the prospect of a second Trump term, which is why they pushed for an early debate (Biden and Trump will face off against each other on June 27). NYT
• Israeli Defense Minister Yoav Gallant criticized Netanyahu’s indecision on figuring out a post-war governance structure for Gaza (Gallant warned that the present course will result in one of two undesirable scenarios: continued Hamas rule or IDF control over Gaza’s civilian population). Jerusalem Post
• Ray Dalio has warned that the US government’s rising debt levels could hit Treasury bonds, arguing that investors should move some of their money to foreign markets. FT

A more detailed look at global markets courtesy of Newsquawk

APAC stocks took impetus from the gains on Wall St where the major indices rallied to fresh record highs after softer CPI data boosted Fed rate cut bets. ASX 200 was led by strength in the rate-sensitive sectors such as real estate and tech amid a drop in yields. Nikkei 225 gained but was off today's best levels as participants digested a firmer currency, steeper-than-expected contraction in Japanese GDP and mega bank earnings. Hang Seng and Shanghai Comp were positive with developers front-running the advances in Hong Kong on return from holiday as they reacted to the recent property support proposal, while the upside was capped in the mainland amid little fresh pertinent catalysts aside from Russian President Putin arrival in China where he seeks to deepen the strategic partnership with Chinese President Xi.

Top Asian News

• Japanese Economy Minister Shindo said regarding GDP that the economy is expected to continue moderate recovery, while he added that they need to pay close attention to risks related to forex fluctuations that would push up domestic prices.
• Baidu Inc (BIDU) Q1 2024 (CNY): EPS 19.91 (exp. 21.00), Revenue 31.5bln (exp. 31.5bln).

European bourses, Stoxx600 (-0.3%) are mostly lower, unable to continue the US CPI-induced gains from the prior session. Bourses initially opened marginally in the red, and continued to edge lower as the morning progressed. European sectors are mixed; Insurance is the clear outperformer, propped up by post-earning gains in Swiss Re and Zurich Insurance. Energy is found at the foot of the pile, hampered by broader weakness in crude prices over the past few days. US Equity Futures (ES +0.1%, NQ +0.2%, RTY -0.2%) are mixed, with some of the post-CPI optimism seemingly fizzling out. Stock specifics today include Cisco (+4.5% pre-market), which beat on its top/bottom lines.

Top European News

• ECB's de Guindos says price falls in CRE market to continue but at a slower pace than last year; rise in NPLs and rise in funding costs to weigh on bank profits this year
• Statistics Swiss says domestic GDP likely 0.2% in Q1.
• Bank of Spain says to start process to establish bank's countercyclical buffer in Q4; plans to establish countercyclical buffer at 0.5%.
• Norges Bank Expectations Survey Q2'24. The economists expect goods and services inflation 12 months ahead to be 3.6%, down 0.1pp from the previous quarter. The economists expect the average rise in real wages will be 1.2% in 2024, up 0.3pp from the previous quarter.

FX

• DXY is attempting to recoup lost ground after the fallout from yesterday's CPI and retail sales saw the index make a low at 104.07; next up, US IJC & Philly Fed data.
• EUR/USD is marginally softer vs. the USD after EUR/USD ran out of steam ahead of 1.09. IJC could see the pair retest 1.09 given the reaction to last week's jump in claims.
• GBP is a touch softer vs. the USD in quiet trade but holding onto a bulk of yesterday's notable gains. Cable went as high as 1.27 before running into resistance. If Cable manages to resume its ascent higher and breach 1.27, the April high sits just above at 1.2709.
• JPY remains one of the main beneficiaries from yesterday's post-data dollar selling as US-Japanese rate differentials turn in Japan's favour. USD/JPY down as low as 153.61 before scaling back losses to around 154.75 currently.
• Antipodeans are both softer vs. the USD following yesterday's session of chunky gains. AUD/USD saw mixed jobs data overnight and has currently scaled back from a 0.6714 peak (highest since Jan) and retreated back onto a 0.66 handle.

Fixed Income

• USTs are steady thus far with benchmarks slightly shy of this morning's peak but still in the green. A relative pullback which is being led by the short-end with the 2yr basically unchanged and lagging a touch, with an unusually sizeable for the time block trade perhaps impacting; USTs in slim 109-24 to 109-31+ bounds.
• Gilt price action is similar to that seen in USTs, with Gilts just shy of today's WTD 98.76 peak with nothing of note until 99.00 and then 99.10 from mid-April.
• Bund have also drifted back towards the unchanged mark with Bunds going as low as 131.63; overall unreactive to Spanish/French auctions.
• Spain sells EUR 5.5bln vs. Exp. EUR 4.5-5.5bln 2.50% 2027, 3.50% 2029, 1.00% 2042 Bono Auction.
• France sells EUR 11.998bln vs exp. EUR 10.5-12bln 2.50% 2027, 2.75% 2029, 2.75% 2030, 2.50% 2030 Bond

Commodities

• Crude benchmarks were in the green, though now off best levels (now flat) as the Dollar attempts to pare back some of its recent CPI-induced losses; Brent July hovers around USD 83/bbl, whilst WTI trades around USD 79/bbl.
• Precious metals are mixed; spot gold is flat whilst spot silver sees mild losses. XAU topped out at USD 2397/oz after failing to breach USD 2400/oz.
• Base metals hold little bias as the post-CPI move pauses for breath into more US data and Fed speak. In addition to pressure emanating from modest USD strength.
• Azerbaijan Oil production at 476k in April (prev. 481k M/M)
• LME says daily stock data has been delayed; investigating the situation

Geopolitics: Middle East

• Israeli PM Netanyahu rejected US calls for a post-war plan in Gaza, while Arab governments have rejected the idea of establishing an Arab-led civilian administration in Gaza, according to WSJ.
• Hamas's chief said the fate of truce talks is uncertain as Israel insists on occupying Rafah crossing, according to AFP News Agency.
• Lebanon's Hezbollah launched drones at a military base west of Israel's Tiberias in the deepest strike into Israeli territory thus far.
• Massive Israeli airstrikes were reported in Baalbek, Lebanon, according to Kann's Amichai Stein.
• Islamic Resistance in Iraq said it launched a drone attack on a “vital” target in Eilat, southern Israel, according to Iran International.

Geopolitics: Other

• Chinese President Xi said in a meeting with Russian President Putin that China will always be a good neighbour, friend, and partner of mutual trust with Russia, while he added China is ready to work together with Russia to achieve development and rejuvenation of our respective countries and uphold world equity and justice. Furthermore, Russian President Putin said Moscow and Beijing have acquired solid baggage of practical cooperation and Russia-China cooperation stands as a stabilising factor for the world.
• Ukrainian military said "intensive" enemy fire prompted the move of some troops to new positions in the Kupiansk direction, east of Kharkiv.

US Event Calendar

• 08:30: May Initial Jobless Claims, est. 220,000, prior 231,000
  • May Continuing Claims, est. 1.78m, prior 1.79m
• 08:30: April Import Price Index MoM, est. 0.3%, prior 0.4%
  • April Import Price Index YoY, est. 0.4%, prior 0.4%
  • April Export Price Index YoY, est. -1.1%, prior -1.4%
  • April Export Price Index MoM, est. 0.2%, prior 0.3%
• 08:30: May New York Fed Services Business, prior -0.6
• 08:30: April Housing Starts MoM, est. 7.6%, prior -14.7%
  • April Housing Starts, est. 1.42m, prior 1.32m
  • April Building Permits MoM, est. 0.9%, prior -4.3%, revised -3.7%
  • April Building Permits, est. 1.48m, prior 1.46m, revised 1.47m
• 08:30: May Philadelphia Fed Business Outl, est. 8.0, prior 15.5
• 09:15: April Industrial Production MoM, est. 0.1%, prior 0.4%
  • April Manufacturing (SIC) Production, est. 0.1%, prior 0.5%
  • April Capacity Utilization, est. 78.4%, prior 78.4%

Central Bank Speakers

• 10:00: Fed’s Barr Testifies to Senate Banking
• 10:00: Fed’s Barkin on CNBC
• 10:30: Fed’s Harker Speaks on Higher Education, Healthcare
• 12:00: Fed’s Mester Gives Remarks on Economic Outlook
• 15:50: Fed’s Bostic Speaks in Moderated Chat on Economy

DB's Jim Reid concludes the overnight wrap

There was the slightest hint of stagflation in what was a big day in global macro yesterday but markets were in no mood to countenance such a view as a small miss in headline CPI helped ignite a rates rally, helping the S&P 500 (+1.17%) and STOXX 600 (+0.59%) to both hit fresh all time highs. Today the highlight might be to see if last week's surprising spike in US initial jobless claims, after months of calm, was a one-off or not. Our economists think it may have been due to changes in the NY school holiday dates. We will see.

In terms of the details of the April CPI report, the headline came in at a monthly +0.3% (vs +0.4% expected). The year-on-year rate fell from +3.5% to +3.4% as expected, so it was a pretty marginal miss. Core CPI came in at +0.29% (vs. +0.3% expected), with the year-on-year rate falling to +3.6% from +3.8% (as expected). This marks the lowest annual core inflation print in two years but still at uncomfortable levels for the Fed. Digging deeper, monthly core services inflation slowed from +0.5% to +0.4%, and core goods inflation remained negative at -0.1%. A welcome development was the deceleration in shelter rents, which fell from +0.5% to +0.4%. But as markets celebrated the miss on headline CPI, core services excluding shelter, otherwise known as supercore, increased from +4.8% year-on-year in March, to +4.9% year-on-year. This measure has been rising consistently since last October in year-on-year terms, so one to watch for in the months ahead, even as the month-on-month rate slowed from +0.6% to +0.4%. Overall, our US economists see the CPI print as a step in the right direction after the hot Q1 prints, but with further progress needed over the coming months to give the Fed enough confidence to cut rates on declining inflation alone. See their full reaction here

At the same time, we also had the US retail sales data for April, which saw the headline print stagnate (0.0% vs +0.4% expected). This came alongside a slight downward revision to the March reading (from +0.7% to +0.6%). The retail control group, which feeds into GDP, fell by -0.3% (vs +0.1% expected), with the March number also revised lower. So, retail sales pointing to a slow start to Q2, with signs that US consumer spending has lost some of its momentum. Adding to this picture, the NAHB housing market index also fell below expectations, dropping from 51 to 45 (vs 50 expected). This could be a lagged response to higher mortgage rates or poor weather in the Spring. Or a combination of the two.

The ever so slightly weaker CPI print for April, coupled with the downside surprise to retail sales, saw markets raise their expectations of Fed rate cuts for 2024, with the odds of a rate cut by the September meeting rising from 50% to 61%. And markets moved back to pricing two full cuts in 2024 (+9.0bps to 52bps) for the first time since the last CPI print five weeks ago.

Given these developments, US Treasuries recorded a solid rally across the curve. 10yr yields fell -9.9bps to 4.34%, their lowest levels since early April, while at the front end 2yr yields were down -9.1bps to 4.725%. This move was led by real yields, as the 10yr real yield slipped -7.5bps, its largest decline since January. Amid the rates repricing, the broad dollar index saw its weakest session of the year so far (-0.64%). This morning in Asia, 10yr US yields are another 2bps lower.

The rates rally echoed across the globe, as investors moved to bring forward the probability of rate cuts from other central banks. Pricing of a June ECB cut rose from 92% to 98%, with 75bps of cuts now priced by year-end (+7.0bps on the day). Prospects of a June cut were also reaffirmed by the latest ECB commentary, with France’s Villeroy stating it was “very likely [the ECB will] start cutting rates in June”, and Estonia’s Muller commenting that a “rate cut in June is very probable”. Similarly, for the Bank of England, the chance of a 25bps cut in June rose from 55% to 60%, and for the Bank of Canada it rose from 39% to 48%. European sovereign bond yields had already been trading several basis points lower on the day prior to the US data and extended their decline thereafter. Yields on 10yr bunds (-12.5bps) posted their largest decline since August, with OATs (-13.2bps), BTPs (-15.3bps) and gilts (-10.8bps) all also outperforming US fixed income.

With the respite in the streak of upside surprises to headline inflation at least, US equities advanced as the S&P 500 gained +1.17% to a new all-time high of 5,308. All but one of the S&P 500 sectors were in the green, with information technology leading the charge after rising +2.29%. The NASDAQ (+1.40%) and the Magnificent 7 (+1.16%) both also posted new record highs. But the gains were also enjoyed more broadly, as the Russell 2000 index of small-cap stocks rose +1.14% to its highest level since late March. The positive sentiment saw the VIX volatility index decline -1.0 points to 12.45, its lowest level since early January. Meanwhile in Europe, the STOXX 600 increased +0.59%, which marks its 9th consecutive advance, and another all-time high.

In our new regular meme-stock corner, GameStop (-18.87%) slumped after an astonishing start to the week. There were also declines for other meme-stock names that had seen sizeable gains over the previous two days, including AMC Entertainment (-20.00%) and Hertz (-8.67%).

Overnight in Asia the risk rally continues with the Hang Seng (+1.59%) leading gains after returning from a holiday with the Nikkei (+0.80%) also trading notably higher. Elsewhere, the KOSPI (+0.70%) is also catching up after a holiday with the CSI (+0.53%) and the Shanghai Composite (+0.43%) also advancing but have lagged their global peers this week. S&P 500 (+0.16%) and NASDAQ 100 (+0.20%) futures continue to edge higher.

Early morning data showed that Japan's economy contracted in the first quarter, shrinking at an annual rate of -2.0% (v/s -1.2% expected) as consumption and exports declined. This will complicate the debate for the BoJ although with the Dollar fall, the Yen is rallying. This time yesterday we were at 156.5 and we're now at around 153.8.

Elsewhere, Australia’s unemployment rate unexpectedly advanced to +4.1% in April (v/s +3.9% expected) as against an upwardly revised +3.9% for March, thus reducing the possibility of another rate hike by the Reserve Bank of Australia (RBA). The economy added a net 38,500 positions in April with full-time roles down 6,100 while part-time positions rose 44,600. The participation rate ticked higher to 66.7% in April from 66.6% in March. Following the data release, yields on the 10yr government bonds fell sharply (-12.8bps on the day) to trade at 4.19% while the policy-sensitive 2yr bond yields has moved -11.1bps lower to 3.91% as I type.

Now to the day ahead, and data releases include the US April industrial production, import and export indices, housing starts, capacity utilization, building permits, the May Philadelphia Fed business outlook, the New York Fed Services business activity, and initial jobless claims. Outside the US, we have the Italy March trade balance. From central banks, we will hear from the Fed’s Harker, Bostic and Mester, the ECB’s Panetta, De Cos, Nagel and Villeroy, as well as the ECB’s financial stability review. We will also hear from the BoE’s Greene. Earnings results include Walmart, Applied Materials, Deere, and Take-Two

Tyler Durden Thu, 05/16/2024 - 07:47

What About The Non-Superstar Companies That Account For 85% Of US Jobs

By Dhaval Joshi of BCA Research

The Superstar Economy

• The stellar performance of the S&P 500 superstars is not representative of the profits of wider corporate America.
• For the direction of the US jobs market, we should closely monitor the profits of the 6.4 million non-superstar US companies that account for 85 percent of US jobs. These profits have been softening.
• The US stock market’s record 50 percent valuation premium versus the non-US stock market is pricing generative AI to do through the next decade what the Web 2.0 network effect did through the last decade.
• But it will be very difficult for the Web 2.0 superstar companies to become generative AI superstar companies, all assuming there are indeed any lasting generative AI superstar companies.
• Hence, the long-term message is to underweight the US stock market versus the non-US stock market, and the preferred non-US stock market is Europe.

Through the past decade, almost all the growth in world stock market profits has come from the US stock market, where profits have doubled. Profits in  the non-US stock market have barely grown at all

Given the stellar performance of US stock market profits, you might think that the profits of the average American corporation have performed well. But you would be wrong.

There are 6.4 million corporations in the US, so the 500 corporations in the S&P 500 constitute the top 0.01 percent. The superstars. While the  superstars’ profits have doubled, the apples-for-apples growth in economy-wide corporate profits is 50 percent. Not bad, you might think. But excluding the contribution from the S&P 500 superstars, non-S&P 500 corporate profits have increased by just 20 percent on an apples-for-apples basis.

The profits of the top 0.01 percent of US companies have spectacularly outshone the other 6.4 million. Of course, we would expect the superstars to shine, but for many decades S&P 500 profits only mildly outshone those from wider corporate America. For the superstars, the past decade has been a truly stellar period

As The Superstars Shone, The Rest Dwindled

Below the 6.4 million American companies lies an even bigger layer of 28 million sole proprietors. These are the plumbers, builders, piano teachers, and other self-employed individuals whose income is defined as proprietors’ income.

Through the 2010s, the number of sole proprietors4 increased by almost a quarter, yet proprietors’ income as a share of national income has been falling. Meaning that the incomes of the independent contractors, freelancers, gig economy workers and other self-employed have underperformed.

Meanwhile, the wage share of national income has trended modestly higher, albeit from a multi-decade low at the start of the 2010s.

For completeness, Federal government tax receipts as a share of national income has trended broadly sideways. Hence, through the past decade, the incomes of the self-employed, and the profits of non-superstar corporate America have underperformed, while wage earners’ share of national income has recovered from a secular low. But the real winners are the top 0.01 percent of US companies – the superstars – whose profits have soared.

Web 2.0 Birthed The Superstars

In the first two essays of this series, BCA Research - The Superstar Economy and BCA Research - The Superstar Economy: Part 2, I explained that  what birthed the superstars in the 2010s was the Web 2.0 revolution. As the proliferation and power of the internet increased dramatically with smartphones and user-generated data and content, so too did the earnings growth rate and the longevity of the superstars versus the rest. This  exaggerated the skew in the Pareto distribution of incomes.

But more important for the US stock market, Web 2.0 was all about networks. Once you get networks, you get the network effect – the value of a network increases as the number of users of the network increases. Meaning that in a competition of networks, ‘the winner takes all.’ Thereby, the winning networks became natural monopolies with global reach: Amazon for shopping, Google for searching, Facebook for socialising. Plus, the associated ecosystem monopolies: Apple for the hardware, Microsoft for the software.

The Web 2.0 monopolies started generating stellar profits growth in the 2010s by harvesting and monetising the vast quantities of data and content that Web 2.0 users produced. But this growth model has run its course, given the consumer backlash against privacy infringements and the resulting much tighter regulation of data and content harvesting.

Now, expectations for Web 2.0 monopolies' profit growth are premised on a new hope – generative AI. Yet there is no obvious way for the Web 2.0 monopolies to monetize generative AI and to put a ‘moat’ around any such profits – as the network effect did through the 2010s. Making the market pricing for profit growth to continue outperforming by 10 percent a year through the next decade a huge ask.

Fading Superstars

There are two important messages from the stellar performance of the S&P 500 superstars, one for the short term, one for the longer term.

First, the stellar performance of S&P 500 profits is not representative of the profits of wider corporate America. This is crucial because while the evolution of S&P 500 companies’ profits drive their hiring and firing plans, S&P 500 companies account for no more than 15 percent of the 158 million jobs in the US.

For the US jobs market, much more important than S&P 500 companies is wider corporate America that accounts for at least 85 percent of all jobs.

The short-term message is that to pre-empt the direction of the US jobs market, we should closely monitor the evolution of profits at the 6.4 million non-superstar US companies.  These profits have been softening.

Second, even though almost all the last decade’s growth in world stock market profits has come from the US stock market, relative valuations are pricing last decade’s superstar profit outperformance to persist through the next decade. The US stock market is trading at a more than 50 percent premium to the non-US stock market – well above the early 2000s high, and now in uncharted territory.

For the superstars, the market is pricing generative AI to do through the next decade what the Web 2.0 network effect did through the last decade. But it will be very difficult for the Web 2.0 superstar companies to become generative AI superstar companies, all assuming there are indeed any lasting generative AI superstar companies.

Hence, the long-term message is to underweight the US stock market versus the non-US stock market, and my preferred non-US stock market is Europe.

Superstars At A Structural Turning-Point

Our proprietary analysis of the complexity of price trends, and their collapse, usually focuses on relatively short trends: 65 days (a quarter), 130 days (6 months), and 260 days (a year). But the approach, and its power to presage the end of trends, applies equally to long-term trends: for example, 120 months (10 years).

Therefore, it is significant that the complexity of US tech’s 10-year outperformance has collapsed to the point that presaged the structural reversal through 2000-08, as well as the reversal through 2020-22 .

This analysis of longer-term complexity, combined with the record-high valuation premium that makes a huge ask of the superstars’ profits growth, supports the long-term message: that investors should underweight US tech and the US stock market.

Tyler Durden Thu, 05/16/2024 - 07:20

Commodity Index Hits Highest In Year As Sticky Inflation Becomes Nightmare For Fed 

About a month ago, HSBC Global Research noted a forecast for a "weak" bull market in commodities. New data shows that the US Consumer Price Index (CPI) for April rose by .3% from the previous month and by 3.4% year-over-year. Although inflation is still increasing, it is doing so at a slower pace. Meanwhile, in Asia, Beijing is working to stabilize its economy. Amid these developments, commodity prices, tracked by Bloomberg, have reached their highest level in a year. This poses a serious threat for Fed Chair Powell's efforts to combat the inflation monster. The persistent elevated inflation is due to the US Treasury spending like it's in a 'Great Depression', which amounts to approximately $1 trillion every 100 days. 

Given all of this, the Bloomberg Commodity Spot Index — which tracks 24 energy, metal and agricultural contracts — moved higher by nearly one percent on Wednesday, tagging the highest level since April 2023. 

On a much larger timeframe, the BCOM index has retraced 50% of its total move from early 2020 lows during the onset of government enforced lockdowns spurred by Covid, and the blowoff top in the first half of 2022. 

Now BCOM is pushing higher, and this comes as Brent crude, one of the largest components of the index, has moved higher in recent months on a combination of stronger demand, tighter supplies, and disruptions in the Middle East due to multiple ongoing conflicts. There's also copper prices squeezing to new highs, as well as cocoa and coffee that have recently surged. 

“Overall, the commodities rally reflects a late-cycle economic environment where demand remains robust but supply constraints are evident,” Sam Vogel, chief operations officer of Cayler Capital, recently noted. He said in oil markets, commodity trading advisers expect a “very strong supply-demand balance in the second half of the year.” 

HSBC's Paul Bloxham and Jamie Culling asked clients last month: "Have commodity prices past the trough?" 

Their very simple answer: "It seems likely."

BCOM remains 24% below the all-time-high set in May of 2022. However, with stealth stimulus in the US, otherwise the $1 trillion the federal government is spending every 100 days, this will likely keep inflation and commodity prices elevated. 

Tyler Durden Thu, 05/16/2024 - 06:55

'So Much For Democracy'? Blinken Justifies Ukraine Canceling Elections

Authored by Dave DeCamp via AntiWar.com,

Secretary of State Antony Blinken made an unannounced visit to Ukraine on Tuesday and delivered a speech where he justified President Volodymyr Zelensky’s decision to postpone elections.

Presidential elections were due to be held in March, but they weren’t, and Zelensky will remain in office after his term ends on May 20. Ukrainian parliamentary elections were scheduled to be held last year in October, but they were also canceled.

On Tuesday night Blinken put on a concert at a bar in Kyiv.

Zelensky and other Ukrainian officials have justified the decision by pointing to Ukraine’s constitution, which prohibits elections during martial law. Martial law was first declared when Russia invaded and has been extended since. However, at one point, Zelensky made it clear that he could hold a vote if he wanted to.

Last year, Zelensky said that he could hold elections if the US and other Western countries paid for them and if Ukrainian legislators agreed to amend the constitution.

He later ruled out the idea and there’s been no pressure from Ukraine’s Western backers to hold a vote despite the claims that the proxy war is a fight for democracy.

In a speech at the Kyiv Polytechnic Institute, Blinken said the US and Europe had been helping Ukraine build "democratic pillars," including "free and fair elections," but said a vote can only happen when the "conditions" are right.

Only by ending democracy can we save it https://t.co/W3UIJqb6jh

— Tom Elliott (@tomselliott) May 14, 2024

"That’s why we’re working with the government and civil society groups to shore up Ukraine’s election infrastructure. That way, as soon as Ukrainians agree that conditions allow, all Ukrainians – all Ukrainians, including those displaced by Russia’s aggression – can exercise their right to vote. People in Ukraine and around the world can have confidence that the voting process is free, fair, secure," Blinken said.

Secretary of State Antony Blinken goes to Ukraine, proclaims the importance of "free and fair elections," and then effectively endorses the indefinite suspension of elections in Ukraine until "conditions allow" pic.twitter.com/DNizhGaRJK

— Michael Tracey (@mtracey) May 14, 2024

Gen. Valery Zaluzhny, Ukraine’s former commander-in-chief who was recently appointed ambassador to the UK, has long been rumored to be a potential presidential candidate in a future election, although he hasn’t announced his intention to run.

Earlier this year, a poll in Ukraine found Zelensky would lose to Zaluzhny in a presidential election. The poll found that 41% favored Zaluzhny in a first-round election, while only 23.7% would vote for Zelensky.

Tyler Durden Thu, 05/16/2024 - 06:30

These Are Africa's Most Powerful Passports

The Seychelles has the most powerful passport in Africa, followed by Mauritius and South Africa, according to the Henley Passport Index 2024. This index ranks passports based on the number of destinations their holders can access without a prior visa.

As Statista's Anna Fleck shows in the following chart, citizens from Seychelles can travel to 156 destinations without a visa organized beforehand. In a global comparison, the country ranks 26th, joint with St. Kitts and Nevis in the Caribbean as well as Uruguay in South America. Mauritius ranks 29th globally alongside Trinidad and Tobago and has access to 151 countries without a prior visa, while South Africa ranks 53rd alongside Qatar with access to 108 countries.

You will find more infographics at Statista

The writers of the report highlight how the strength of a country’s passport directly impacts the economic mobility of citizens and their ability to travel internationally without being hampered by lengthy visa applications, possible rejections, and long passport control queues. They write:

“Only two African passports ­- Mauritius and Seychelles - enable their holders to access more than 50 percent of global GDP without having to obtain a visa in advance, despite the fact that the continent boasts some of the most open nations in the world on the Henley Openness Index when it comes to providing visa-free access to other countries.”

This is important, Chidinma Okebalama, Senior Consultant at Henley & Partners Nigeria, explains, because a passport serves as a “determinant of financial freedom, impacting individuals’ abilities to explore international business ventures, network efficiently, or engage in multi-national trade opportunities. Consequently, African entrepreneurs and investors are often left out of lucrative global markets, impeding their potential for economic growth and financial prosperity.”

The countries currently tying in top place worldwide for having the strongest passport are France, Germany, Italy, Japan, Singapore and Spain, each giving their citizens access to 194 countries visa-free. Of the countries analyzed, Afghanistan ranks in last place with its citizens permitted to enter just 28 destinations without a prior visa.

Tyler Durden Thu, 05/16/2024 - 05:45

"West's Governments Need War" Warns Martin Armstrong "Because Their Debts Are No Longer Sustainable"

Interview with Martin Armstrong by Piero Messina for SouthFront

Martin Armstrong is one of the most influential economists of our times. Someone called him the “Forecaster”, because that was the title of the biopic film that helped make his activities known throughout the world.

Those of Martin Armstrong are not just “predictions”, as his reflections are based on the compendium of precise mathematical formulas and analytical skills. We interviewed him to try to understand the current geopolitical context. From the crisis of Western democracies to the birth of the BRICS front, to arrive at profound reflections on the risk of a military conflict on a global scale, Armstrong interprets real-time data thanks to his diachronic “vision” and a decades-long effort of research and analysis . Armstrong’s work allows us to connect knowledge of the past to critical factors of the present time. For all these reasons, Armstrong’s analyzes are precious for understanding the present and orienting ourselves towards a future that appears full of unknowns and pitfalls.

Fukuyama advocated the end of history. Huntington spoke of a clash of civilizations. Is it possible to imagine a third way?

Our greatest threat is centralized control; that is what doomed communism. I agree with Huntington that the clash of civilizations will be based upon cultures and religion mainly because of centralized attempt to impose a unified culture.

At the end of the 1980s, the reference geopolitical model was the unipolar world, based on Western primacy. What cultural, military, and economic pillars is the Washington Consensus based on? Is it true freedom?

The military in economic pillars that dominate Washington today have nothing to do with freedom. They have to do with people who were unwilling to accept the collapse of communism. Whereby the enemy was transformed by communism to ethnic racism.

With the birth of the BRICS, is it possible to talk about a multipolar option? What are the limits that you see in this geopolitical dimension?

The birth of the BRICS was caused by these people we call the neocons who engaged in ethnic racism and targeted Russia by removing them from the world economy under SWIFT. This woke up many in the world, realizing that the dollar was now being weaponized and was no longer a monetary instrument exclusively. Nations began to realize if they did not conform to the commands of Washington, then they to could be removed from SWIFT. Thus they have divided the world economy bringing to an end globalization.

Your analysis and studies seems to reveal several critical issues regarding the stability of the so-called Western system. There is a profound crisis of democratic systems, there is a lot of mistrust towards mainstream information and above all there are “agents” external to the institutions (an example above all is the activity of George Soros) who seem to influence the choices of governments in the United States and Western Europe. What could happen in the immediate future and in the coming years?

It has been propaganda that we live under a democracy. We live under republics in which case the people are represented and have no right to vote on critical issues. Republics historically are the most corrupt forms of government compared to a monarchy or dictatorship which cannot be bribed. In a republic, all representatives lacking term limits are up for sale to the highest bidder. This has resulted in the collapse of confidence in government both in Europe and the US which have fallen below 30% – the lowest since WWII. External agents such as George Soros, Bill Gates, World Economic Forum, push personal agendas which has further undermined the confidence in our systems. It is the government that decides if we go to war or not. The people are never asked.

Now, We invite you to make some reflections on the geoeconomic dimension. The global capitalist system is based on the indebtedness of sovereign states. Is this a sustainable situation? Who will pay the bill in the end?

The sovereign debt crisis that we face has appeared often throughout history. It is unsustainable because governments act in their own self-interest and will always expand debt to retain power. Historically, these systems collapse when they issue new debt to pay off the old, and no one is there to buy the new debt. Once they can no longer continue to borrow new money, then inevitably, they collapse.

Your predictive model is based on precise calculations. The cycles of history and the economy thus seem to chase each other along the time span of history. If I’m not mistaken, you compared the current context to the crisis and dissolution of the Roman Empire. Is it correct?

History repeats because human nature never changes. The Roman Empire is but one example from history of its success and failures. It lasted longer than anyone because it did not impose cultural regulations. The Christians called them pagans because they had so many Gods. That was the product of their policy of freedom of religion. Athens had Athena, Northern Europe had Thor, so they did not try to change the culture of the lands they conquered. They created a common market where someone in Britain could sell products to someone in Rome. So the freedom of religion, low taxation, freedom of movement, and a common market combined to create the Pax Romana.

Is it still possible to avoid a large-scale world conflict?

It is unlikely that we can avoid world war. Governments need war because their debts are no longer sustainable. They will use the war as the excuse for defaults – as was the case for WWII. They will create Bretton Woods II with the IMF digital currency as the reserve.

Pope Francis has been talking about a piecemeal Third World War for years. From your point of view, is what the Holy Father claims can be shared? What are the main weapons of this possible Third World War?

I believe we have a third world war that will begin piecemeal with the Middle East, Iran vs Israel, Europe vs Russia, north Korea vs Japan and South Korea, China vs Taiwan. But they will eventually merge together.

Have you argued that the true wealth of a state is its people? Why did we forget about all this? Above all, who is it convenient for?

The wealth of every nation is its people. That has been proven with the rise of Germany and Japan after WWII. This is the essence of Adam Smith’s “Invisible Hand.” But those in government prefer Marx, for he advocates that the state has the power to manipulate the people. So, Governments have forgotten it and reject Smith because Marx provides them with more power.

Is it correct to claim that your analysis succeed in covering the intersection of geopolitics, Global Markets and Economic Confidence? Can you explain to us in a simple way how your Socrates predictive model works? By the way, why did you name it just like the Greek philosopher?

I named my computer model after Socrates because the oracle of Delphi had said that he was the smartest man in Greece. He tried to prove the oracle wrong and the process proved it to be correct. He was put on trial and sentenced to death because he knew too much. My computer has taught me a lot in geopolitics, we had a major bank in Lebanon in the 1980’s and they asked if I could create a model on the Lebanese pound. I put the data in the computer and it came out and said their country would fall apart in 8 days. I thought something was wrong with the data. When I told the client, they asked me what currency would be best, and I said the Swiss Franc. Eight days later the civil war begn. Obviously they saw the movement of money themselves and came to me for the timing. The same thing happened with a client in Saudi Arabia who was a big shipper. He called me asking me what gold would do tomorrow because Iran was going to begin attacking shipping in the gulf. So once again, there was advanced information about war. By 1998, I understood how the computer was forcasting such events. I warned in June at our London conference that Russia was about to collapse. The London financial Times had snuck into the back of the room and reported that forecast on the front of their newspaper on June 27th 1998. Russia collapsed about 6 weeks later.

Are unpredictable events, such as the terrorist attack in Moscow, also considered among the parameters of your predictive model? A “black swan” type event can change the course of history and geopolitical relations?”

Yes, we saw the capital flows shift a day in advance, up to a week in advance in the case of the attack in israel. The defense stocks began to rise even with 9/11 the government used our model to look at who bought puts on airlines in the days before. Someone always knows when they’re going to do these types of events. And they move their money either to profit or to avoid a loss. The computer is tracking everything. It cannot tell me which person has done it. Just that the move is about to take place.

Tyler Durden Thu, 05/16/2024 - 05:00

Google's Smartphone Loyalty Problem

Google's latest smartphone, the Pixel 8a went on sale this week - a more affordable version of October's Pixel 8 and Pixel 8 Pro, with which the tech giant aims to wrestle more of the market out of Apple's and Samsung's hands.

While the devices and their AI-driven software may well win over new customers, Statista's Martin Armstrong reports that data from the Statista Consumer Insights survey suggests Google's biggest battle could be to hold onto the ones they've already got.

When asked how likely they were to change to a different smartphone brand at the next opportunity, over half of the Google users surveyed in the United States said this was likely or very likely. As this infographic shows though, this isn't representative of a fickle customer base in the smartphone segment generally but a real problem for the company to address.

You will find more infographics at Statista

Apple, the kings of tech brand loyalty had the opposite result: 50 percent of their users said it was unlikely or very unlikely that they will switch brands.

Samsung can't quite boast that figure, but a solid 44 percent said they plan to stick to the company in the future.

Tyler Durden Thu, 05/16/2024 - 04:15