US Treasury 20Y auction unfavorable
Today's US Treasury auction results:
Highest accepted yield (High Yield): 4.423% with a tail +0.8bps (higher than market yield: 4.415%).
Today's market yields were already elevated due to macro data, yet the auction yield was even higher.
=> This is definitely not a successful auction!
The percentage of bidders demanding the High Yield was 5.31%.
Total auction value: USD 13 billion.
Of which, the value of 20Y T-bond auctions is steadily declining, partly because the government does not want to lock in long-term debt at high interest rates:
However, borrowing more short-term debt will make the US difficult in investing in long-term economic projects!
Foreign demand still leads: accounting for 62.18% of the auction value.
Read more about how to interpret bond auction results here.
China: Poor macro data causes mainland stocks to collapse
A series of China's macro data today was quite disappointing
China's 2023 GDP +5.2% Y/Y, meeting the target but disappointing because too low compared to previous years
In fact, China's GDP deflator (to calculate real GDP) fell -1.5% in Q4/2023 - the 3rd consecutive quarter of decline and the longest decline since 1999
Even during the 2008 financial crisis, China only saw 2 quarters of price decline.
Weak consumer confidence and housing market downturn are the main reasons.
NBS data shows China's housing prices last month fell the most since 2015.
New home prices in 70 cities in December fell -0.45% from November (-0.37%)
Resale home prices fell -0.79% M/M
Contrary to market expectations amid deflationary backdrop, PBOC maintained MLT rate at 2.5% with no rate cut action.
Viet Hustler's view on PBOC interest rate policy:
PBOC may be trying to stabilize CNY exchange rate without selling foreign exchange reserves.
CNY value is significantly lower against USD, while China is still trying to make CNY an “international currency” used in commodity trade.
Meanwhile, the gap between foreign exchange reserves and FX settlement remained large in December.
=> That means China wants to stabilize CNY price but refuses to sell FX reserves. Therefore, China chooses to keep interest rates high.
Chinese stock market immediately reacts strongly to macroeconomic data:
Hang Seng index drops to -4% after poor macroeconomic data.
CSI stock index falls to a new 5-year low of 3260.44 and has now dropped more than 44% from the high on 02/15/2021
2023 retail sales surge thanks to automobiles and food services
December retail sales +0.6% M/M - strongest jump since September,
… lifting Y/Y change to +5.6% - hottest increase since 01/2023.
Compared to November, sales at gas stations and personal care stores declined, while non-store retail sales increased.
Both headline and core retail sales rebounded - ending 2023 at 5.6% Y/Y
Gas stations and Building materials are the 2 segments with declining retail sales in 2023, while motor vehicles and Food services increased the most
Real 2023 retail sales - inflation-adjusted, +2.2% Y/Y - much better than negative in 2022 though weakest increase since 2018
US bond yields surge, gold plunges after retail sales report
Strong retail sales → economy still healthy but implies inflation may persist (due to high demand.
Market fears Fed will keep rates high for longer. Thus the market reacts strongly to this news:
T-bond yields rise
US 10-year Treasury yield rises to 4.1% - highest in over 1 month
2Y T-bond yield also surges after retail sales data.
Charles Schwab sticks to forecast for first cut in May and about 3-4 25 bp cuts this year.
Yield spread between 2-year and 30-year Treasuries just turned >0
The last time this happened was end of 2000, right after S&P 500 double-topped leading to Dotcom bubble.
Market now prices Fed rate cut -25 bps at March meeting, and total 6 cuts in 2024
Stock market in red after retail data and rising bond yields:
Gold price also plummets to $2007.5
US industrial production rises in December but Q4/2023 output still low.
US Industrial Production in December surprises with slight +0.1% MoM increase, thanks to downward revision to -0.03% in November (initial: +0.2% M/M)
This helped push industrial production to +1% Y/Y.
Manufacturing output rises +0.1% MoM and +1.2% Y/Y in December.
However, manufacturing output declines -2.2% Y/Y in Q4
In durable goods:
Declines over -1% in wood products, fabricated metal products, machinery, electrical equipment and appliances, and components
Motor vehicles and parts, furniture and related products all up > +1%.
Auto production nearly recovered to pre-strike levels.
Capacity utilization falls to lowest since September 2021 at 78.6%
Q4 ends with industrial production lowest since Q1/2022 and largest quarterly decline since COVID lockdowns.
News update at World Economic Forum
Key news at World Economic Forum in Davos, Switzerland (01/15 - 01/19) today:
Interest rate debate (12.45pm):
Differing views on Fed rate path:
Ron O'Hanley, CEO State Street Corp: Fed may lean towards keeping interest rates high due to the risk of inflation rising again.
Anne Walsh, chief investment officer at Guggenheim Partners: expects Fed to ease earlier due to “the economy weakening a lot”.
Christine Lagarde states outright: ECB may cut interest rates in the summer.
Public debt issue (11.30am):
IMF: Fiscal deficit expected to be higher than pre-pandemic.
IMF warns potential liquidity risks as countries begin to refinance maturing debt...
Labor issue (8.30am): While banks are cutting staff, JP Morgan announced at the Davos conference that it will hire more staff.
FYI: JPM is the most profitable bank last year due to:
using capital from BTFP loans sponsored by the Fed
increase in depositors transferred from small banks after the SVB event.
Other news
China's population in 2023 down 0.15% Y/Y - second consecutive year of decline
Record low birth rate, highest death rate since 1974
Total new births down 5.7% Y/Y to 9.02 million
Total deaths up 6.6% Y/Y to 11.1 million
UK inflation unexpectedly rises back to +4% for the first time in 10 months, dashing market expectations of a slowdown in price increases.
Spirit Airlines stock, $SAVE, down 60% after merger with Jetblue blocked due to antitrust concerns
Sprint Airlines market cap just hit all-time low of only 600 million USD.
~70% of 400 US metro areas now have rising unemployment rates. Such high unemployment rates were only seen right before recessions
With nearly 26%, Detroit has surpassed Houston to become the US city with the highest office vacancy rate. Boston maintains the lowest at nearly 11%
Export and import prices continue to decline YoY
Export prices fall more than import prices => not good for GDP
Falling import prices => good for goods inflation (but goods inflation has already fallen, look at services measure).
NAHB housing market index January up to 44, higher than expected 39 and higher than previous month's 37
All components up, future sales up the most (from 45 to 57)
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