Market 02/07: 42 billion USD 10Y bond auction successful

Largest 10Y bond auction in history ends favorably

Today, the 10Y bond auction with record high value of 42 billion USD of the Treasury was quite successful:

High Yield: 4.093% (lower than market level: 4.105%) => 1.2bps stop through
19.64% of bids at High Yield.
Bid-to-cover ratio: 2.56
Foreign demand leading strongly with success rate: 70.96%

Summary of Fed members' statements

Kashkari (Fed Minneapolis)

Believes interest rates should only cut interest rates 2 - 3 times in 2024 is appropriate.
Monetary policy seems not reducing demand strongly enough + need to monitor consumer behavior.
Commercial real estate sector, except offices, performing well.

Kashkari has no voting rights in FOMC 2024. He has a "hawkish" tendency on monetary policy.

Kugler (Fed member)

Optimistic about inflation decline pace.
Fed has no major pressure to cut base rates soon, "rate cut in March unlikely".
Labor demand + wage growth rate slowing will reduce inflation pressure.

Collin (Fed Boston)

Rate cuts will occur at the end of this year.
Risk of persistently high inflation relatively low.
Economic recession signs (quits rate declining + manufactured goods spending) slowing → Inflation-related risks more balanced.

NYCB continues to be downgraded on credit rating: regional banking crisis escalating

NYCB downgraded by Moody's from Baa3 to Ba2 ('junk' level), warning of possible further downgrade.

Shares of the over 160-year-old bank fell another -17% after this announcement.

Year-to-date, NYCB stock down nearly -70% (lowest since 1997).
About 40% of NYCB's assets not FDIC insured.
Investors worried about: 70% dividend cut + -260 million USD loss Q4 + CRE risk.
- NYCB must sharply increase provisions for CRE loans to $552 million in Q4, more than 10 times the estimate.

Last week, Fitch Ratings also downgraded NYCB's credit rating to BBB-, the lowest among the ratings.

NYCB is considering risk transfer with collateral being mortgage loans worth ~$5 billion originated when mortgage rates were low.

FYI: These loans will be safer because borrowers will not abandon their low-interest contracts at the current time.

European banks are also starting to sell high-risk debts and issue AT1 bonds to raise additional capital:

UBS proposes $1 billion AT1 (Additional Tier 1) bonds and up to an additional $2 billion AT1 in 2024.
BNP Paribas SA plans to issue ~$2.7 billion and Deutsche Bank plans 1-2 billion EUR AT1 and Tier 2 bonds.
FYI: AT1 - contingent convertible bonds - are bonds where bondholders bear losses first when the bank is in trouble.

Commercial real estate crisis is intensifying - the main cause of regional banking crises this year in both the US and Europe:

KKR Mortgage REIT (fund investing in commercial mortgages), sharp drop in market cap after cutting dividend to 25 cents and recording loss of ~ -$59 million from office real estate loan in Philadelphia.

Update on regional bank stocks in the first month of 2024:

NY Community Bank, $NYCB: -60%
Valley National Bank, $VLY: -25%
Metropolitan Bank, $MCB: -15%
HarborOne, $HONE: -14%
Comerica Bank, $CMA: -13%
Zions Bank, $ZION: -12%
Western Alliance, $WAL: -11%
Citizens Financial, $CFG: -6%
KeyCorp, $KEY: -5%

Trade deficit narrows to the smallest since 2009

Trade deficit (trade deficit): down 19% to -773.4 billion USD compared to the record level in 2022 due to: inventory restrictions + reduced import demand.

December goods and services trade deficit slightly up to 62.2 billion USD.
Exports: 258.2 billion USD (+1.5% MoM).
Imports: 320.4 billion USD (+1.3% MoM)

Oil prices rise due to declining inventories, slowing production growth

According to API report:

Crude Oil: +674,000 (+1.3 million expected)
Gas: +3.65 million (+300,000 expected)
Distillates: -3.7 million (-2.0 million expected)

According to DOE report:

Crude oil: strong increase +5.52 million (+1.3 million expected)
Gas: -3.15 million (+300k expected)
Distillates: -3.22 million (-2.0 million expected)

Government adds 615,000 barrels of oil to Strategic Petroleum Reserve for 8 consecutive weeks.

Crude oil production recovers to record high after storm impact.

WTI recovers back to around 74 USD.

Earnings reports: Alibaba, Uber, Snap, Ford

Uber ER: Profits surge due to demand and bookings volume

Total bookings value: +22% YoY, reaching 37.6 billion USD.
Number of trips: +24% YoY, reaching 2.6 million.
Revenue: +15% YoY, reaching 9.9 billion USD (>140 million USD expected).
Operating margin: 7% (+8% YoY).
EPS: 0.66 USD (> 0.49 USD expected).

Q1/FY24 guidance:

Total bookings value: around 37-38.5 billion USD (estimate 37.3 billion USD).
Adjusted EBITDA: 1.25-1.34 billion USD.

Alibaba ER: Revenue declines, buyback plan increases by 25 billion USD

EPS: 2.67 USD (> 2.62 USD expected).
Revenue: 36.6 billion USD (< 36.7 billion USD expected).
- Revenue misses expectations and declines from prior years due to slower growth in China e-commerce + cloud computing.

Net income: down 69% YoY, reaching 14.4 billion CNY.

In 2023 Alibaba conducted largest workforce restructuring ever, including senior management: cutting >20,000 employees.

Alibaba plans $25 billion stock buyback - still not satisfying investors.

Snap ER: Stock plunges 30% after poor report

EPS: 8 cents (> 6 cents expected).
Revenue: 1.36 billion USD (< 1.38 billion USD expected).
- Snap says the company was affected by the Hamas-Israel war.
Global daily active users : 414 million (> 412 million expected).
Average revenue per user: 3.29 USD (< 3.33 USD expected).

→ Snap stock plunges over -30% right after earnings report.

Snap plans to cut 10% of global workforce ~500 employees for restructuring.
- Mid-2022, Snap laid off about 1,000 employees ~20% of workforce.

Ford ER: Increases dividend, cuts EV spending

EPS: 29 cents (> 14 cents expected).
- Ford pays additional special dividend of 18 cents/share besides regular dividend.
Automotive revenue: 43.2 billion USD (> 40.12 billion USD expected).
Ford will reduce investment in EVs due to lower demand.

2024 Outlook: