Market 02/06: Credit outstanding reaches record, bond auction no surprise

Auction of 54 billion USD 3Y US Treasury bonds positive

Today's auction of 54 billion USD 3Y US Treasury bonds quite positive with 0.8bps stop through (High Yield of the auction lower than market yield):

• High Yield: 4.169% (lower than previous session: 4.182% and market yield: 4.177%).

• Only about 15.70% of traders requested this High Yield level.

FOMC member Mester's statements:

• Rate cuts may occur at a gradual pace.

  • If inflation does not decrease, Fed may keep rates high.

• Wage levels remain too high, possibility of inflation persisting longer than expected.

• Red Sea troubles have not disrupted supply chains yet.

• Growth and employment will slow down this year.

• Household spending in 2024 at moderate levels.

Total household outstanding debt and credit delinquency rate both hit records

Total household debt increases +212 billion USD in Q4/2023, reaching a new record of 17.5 trillion USD ~ up 23% in 3 years, of which:

1. Mortgage debt: +112 billion USD, reaching 12.25 trillion USD.

2. Auto loans: +12 billion USD, reaching 1.61 trillion USD.

3. Student loans: +2 billion USD, reaching 1.60 trillion USD.

4. Credit card debt: +50 billion USD, reaching 1.13 trillion USD.

• While total household debt was only 8 trillion USD 20 years ago, and ~13 trillion USD pre-Covid.

Credit delinquency rate also under warning as it surged more than +50% just in 2023, signaling escalating financial stress.

• Debt demand forecast to continue trending upward in 2024, “even as banks tighten credit conditions for some loans”.

SLOOS report from survey with credit lenders: Credit lending conditions remain relatively tight, credit demand still low

Fed's survey with senior credit officers Q4 (Senior Loan Officer Opinion):

• Net % of banks tightening lending standards for large/medium enterprises decreases 14.5%.

  → Financial conditions have eased more over the past two quarters but remain high compared to normal periods.

• % of survey participants perceiving loan demand remains negative in January, but has improved compared to previous period.

• Ratio of credit providers willing to make consumer loans remains quite low: -17.9%.

Earnings reports: Spotify, Palantir, Eli Lilly, UBS

1. Spotify ER: Revenue beats expectations thanks to impressive user growth

• MAU (Monthly Active Users - number of monthly active users): +23% QoQ, reaches 602 million (> estimate by 1 million)

  → Highest growth rate to date in the quarter.

• Premium Subs: +15%, reaches 236 million (> estimate by 1 million).

• Revenue: +16% YoY, reaches €3.7 billion.

• Operating margin: +5% YoY.

• In December, Spotify laid off about 1,500 employees to cut costs.

Q1/FY24 guidance:

• MAU: +20% YoY, reaches 618 million.

• Premium Subs: +14% YoY, reaches 239 million.

• Revenue: +18% YoY, reaches €3.6 billion.

2. Palantir ER: AI demand drives revenue

• Customers: +35% YoY, reaching 497.

• Billings: +56% YoY, reaching 605 million USD.

• Net dollar retention (ratio of revenue from a group of customers compared to the initial time): 108% (-7% YoY).

• Revenue: +20% YoY, reaching 608 million USD (> estimate 6 million USD).

• Non-GAAP EPS: 0.08 USD.

This tech start-up said it has expanded the AI Platform and deployed nearly 600 pilot projects last year.

FY2024 Guidance:

• Revenue: 2.66 billion USD (+20% YoY).

• Adjusted profit margin: 32%.

3. Eli Lilly ER: Strong growth thanks to weight loss drug Zepbound and diabetes drug Mounjaro

• EPS: 2.49 USD (> expected 2.22 USD).

• Revenue: +28% YoY, reaching 9.35 billion USD (> expected 8.93 billion USD).

• Weight loss drug Zepbound revenue: 175.8 million USD.

• Diabetes drug Mounjaro revenue: 2.21 billion USD (> 279.2 million USD same period last year).

2024 revenue guidance: 40.4 - 41.6 billion USD.

→ Eli Lilly stock has risen over 100% in 1 year as weight loss drugs become popular and supply shortages, despite high prices + some side effects.

• Eli Lilly market cap around 673 billion USD ~ largest pharmaceutical company in the US.

4. UBS ER: continues net loss, buys back 1 billion USD shares

• Net loss: -279 million USD.

  • In Q3, UBS also reported net loss of 785 million USD - including 2 billion USD costs related to the merger with rival Credit Suisse.

• EPS: 0.70 USD, up 27% YoY.

• Revenue: 10.86 billion USD ( < 11.7 billion USD in Q3).

→ Expected to record 13 billion USD by the end of 2026 thanks to workforce reductions and other savings.

UBS stock fell more than 4% in the session after the earnings report.

• UBS may suffer the same fate as NYBC when it has to bear bad debts from the bank it acquired last year.

  • The banking crisis remains an uncertainty and could explode when BTFP ends in March along with banks having to repay BTFP debt to the Fed.

  • FYI: NYCB is under tight supervision, forced to cut dividends and increase cash reserves.

    

Some other news:

1. DocuSign cuts 6% of workforce to improve financial efficiency.

   • In 2023, DocuSign laid off 10% of workforce to cut costs.

   • In 2022, DocuSign also laid off 9% of workforce.

     

2. Hong Kong raises deposit insurance limit from 64,000 USD to 102,000 USD ~ 92% of deposits will be insured.

   • President Xi Jinping also discussed stabilizing the market with regulators => good move for Chinese stocks today.

     

3. 30-year mortgage rates rise back above 7% after expectations of a March rate cut sharply decline.

   • Median home price is hovering around 418,000 USD, up ~35% since 2020 → Housing affordability remains very low.

     

4. King Charles of England diagnosed with cancer.