Spooky Sell Signal
Here are some of the biggest stories from last week:
Dig deeper into these stories in this week’s review.
The OECD had quite a few warnings for the developed world in its latest economic outlook released this week. First, it cautioned that economic growth is losing momentum in many countries and won’t edge up until 2025, when consumers’ real incomes recover from the inflation shock and central banks will have begun cutting borrowing costs. It forecasts global growth will decelerate from an already weak 2.9% in 2023 to only 2.7% next year, marking the slowest rate since the financial crisis, not counting the first year of the coronavirus pandemic. The sluggish outlook reflects tighter financial conditions, slowing world trade, and fading business and consumer confidence, the OECD said.
Second, the organization warned that average inflation in the G20 economies will ease only gradually, falling to 5.8% in 2024 and 3.8% the year after, compared with 6.2% in 2023. Interestingly, it noted that more than half of the items in the consumer price indexes in the US, eurozone, and UK are still showing annual gains above 4%. What’s more, core inflation, which excludes volatile food and energy components to give a better idea of underlying price pressures, is proving to be quite sticky and remains relatively high, according to the OECD.
Third, because of these lingering inflation pressures, the organization expects the Federal Reserve and the European Central Bank will need to keep interest rates high for longer than investors expect. It sees rate cuts in the US beginning only in the second half of 2024, and not until the spring of 2025 in the eurozone. That contrasts starkly with market expectations: investors are currently betting that the European and US central banks will cut interest rates as soon as April and May next year, respectively.
Fourth, the OECD warned that a “challenging fiscal outlook” is confronting many governments as debt-servicing costs rise alongside interest rates. The organization said that many developed countries face big risks to their long-run fiscal sustainability without bigger efforts to rein in public borrowing – something easier said than done considering that governments are being forced to spend more to meet demands from aging populations and fund the climate transition.
In a welcome boost for retailers grappling with tepid sales projections for the holiday season, Black Friday saw US online sales reach a record $9.8 billion, marking a 7.5% increase from the previous year, according to Adobe Analytics. The rebound from last year's holiday season, which was impacted by high inflation affecting consumer spending and retailers offering significant discounts to clear excessive inventory, demonstrates consumers’ resilience despite dwindling pandemic-era savings and the highest interest rates in over two decades. But shoppers are still cost-conscious and navigating tighter budgets: the Adobe survey, for example, revealed that $79 million in sales were generated by customers choosing the “Buy Now, Pay Later” (BNPL) option, marking a 47% increase from the previous year. The option allows shoppers to make payments over time, typically without interest.
In further welcome news for retailers, Adobe Analytics said online sales on so-called Cyber Monday hit $12.4 billion, growing 9.6% from last year and also setting a new record. The rise was down to new demand and not simply higher prices. In fact, the estimate would have been even higher if the figure was adjusted for inflation, according to Adobe. But in a similar trend to Black Friday, cost-conscious shoppers navigating tighter budgets relied more heavily on BNPL services, using the option for an estimated $940 million of sales – up 42.5% from last year. Taken together, “Cyber Week” – the five days from Thanksgiving on Thursday through Cyber Monday – generated $38 billion in total sales, up 7.8% from last year.
In its biannual stability review, the European Central Bank warned that eurozone banks are showing early signs of stress, marked by an uptick in souring loans. In fact, both companies and individuals are experiencing rising default rates and an increasing proportion of overdue loans, with the latter now exceeding the historically low levels observed in 2022.
Loans to commercial real estate companies and on residential mortgages have been performing particularly poorly due to the recent downturn in European property markets, resulting in a big increase in non-performing loans (NPLs) within the sector. (An NPL is a loan in which the borrower has not made the scheduled payments of principal or interest for a specified period, typically 90 days or more). After a long period of decline, there was a net increase in NPLs of about €2.5 billion among commercial real estate loans and €1 billion for consumer loans in the second quarter.
Now, the good news is that the ECB is confident the banking system can handle this deterioration in asset quality due to its strong capital and liquidity position. The eurozone banking system, after all, remained resilient during the sector’s turbulence earlier this year, which saw the collapse or required rescue of several US and Swiss banks, including Silicon Valley Bank and Credit Suisse. The bad news, however, is that an increase in loan defaults, coupled with a big drop in lending volumes and increased funding costs as banks pass on higher interest rates to depositors, will be major headwinds for banks’ profitability.
That’s part of the rationale behind JPMorgan strategists' recent call to short European banks. The Stoxx 600 Banks Index has climbed 15% this year, outpacing the 8% gain in the regional benchmark. But the team at JPMorgan expects this outperformance to reverse as banks’ profitability dips and credit risks rise, particularly for lenders exposed to high-yield corporates, small-and-medium enterprises, and commercial real estate.
Speaking of a drop in lending volumes, new data this week showed bank lending to businesses across the eurozone fell for the first time in eight years last month. Credit to non-financial corporations shrank by 0.3% in October from the same time last year, marking the first contraction since 2015. Lending growth to households, meanwhile, slowed to 0.6% in October from 0.8% the month before – the smallest pace since early 2015, when the bloc was just beginning to recover from its debt crisis.
The drop in lending contributed to the "M3" measure of money supply decreasing for the fourth consecutive month, contracting by 1% in October from a year ago. M3 is a broad measure of all the money that's available in an economy, including not just cash but also various types of deposits (with maturities of up to two years) and funds that can be quickly turned into cash (e.g. money market funds). When banks slow their lending, less money is circulated in the form of loans. People and businesses then have less money to deposit back into banks. And because M3 counts not just physical cash but also various types of deposits, a decrease in lending leads to a smaller amount of these deposits, causing M3 to shrink.
This all matters because the ECB closely monitors M3 to assess whether its monetary policy tightening is working as intended. After all, when bank lending and the money supply shrink, it should slow economic activity and inflation, which has been running above the central bank's target for more than two years. The latest data, then suggests those tightening moves are indeed getting the job done.
But some fear that the ECB has raised rates too far in the past year and a half, and that lending is becoming so restrictive that it could lead to an economic downturn. See, Europe relies more heavily on bank lending than the US and many other countries, making growth and inflation in the bloc particularly sensitive to changes in credit supply. In fact, the bloc's economy is probably already in a recession, having contracted by 0.1% last quarter from the one before, with analysts anticipating a further decline this quarter.
But at least the ECB’s rate hikes are working as intended to tame inflation. Case in point: consumer prices in the eurozone rose by a less-than-expected 2.4% in November from a year ago – a sharp drop from the previous month’s 2.9% pace and the smallest increase since July 2021. Falling energy prices and lower growth in food and services prices were the main factors behind the slowdown. But even core inflation, which excludes volatile food and energy items, slowed for a fourth consecutive month, to a less-than-expected 3.6%.
General Disclaimer
The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.
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Spooky Sell Signal
Gold Shines at New Highs
The ECB Cuts Again
Slowing Disinflation
Golden-Week Rush
China’s Massive Package
The Fed’s Big Rate Cut
The ECB Cuts Again
Banks Turn Bearish On China
Million-Dollar Gold Bar
Bonds Are Back
Black Monday
Diverging Rate Decisions
Still Strong
Smaller Is Better
The Name Is Bond, Green Bond
Landslide Victory
AI-Frenzy Takes a Break
Bye Apple, Hello Nvidia
The Fed Stays Put
An Indian Rollercoaster
The Name’s Bond, Convertible Bond
Nvidia Does It Again
A Small Relief
From Boom To Bust
Higher For Longer
Still Magnificent
Halve And Havoc
Stubborn Inflation
Choc Shock
An End Of An Era
Britain Bounces Back
China's Goal
Bye iCar, Hello iAI
Nvidia Beats Expectations
Germany Overtakes Japan
Riding The Dragon
China’s Falling Behind
India Outshines Hong Kong
Aging Dragon
US Inflation’s Accelerating
Tesla Lost Its Crown
2023 Market Wrap-Up
The Last Samurai
Fed Teases 2024 Rate Cuts
Bond Market's License to Thrill
OpenAI's Leadership Shuffle Drama
Inflation’s Cooling In The US And UK
Back Into Deflation
Triple Hold On Rate Hikes
The US Economy Is Still Flexing Its Muscles
Inflation’s Refusing To Come Down
Investors Are Bracing For A Dip
An End In Sight
Rate Hike Recess
End Of An Era
China's #1 Ambitions Are Fading
Americans’ Piggy Banks Are Running Low
Trying To Break The (Wage-Price) Spiral
China: A Nation In Deflation
Uncle Sam Gets Downgraded
Twin Hikes
Stagnating Dragon
A Tale Of Three Inflation Stories
Silver Is Shining Bright
UK Inflation: Defying Gravity
The Fed Calls A Timeout
A One-Two Punch
Shrinking Dragon
Keep Calm And Carry On
The AI-ffect Of The AI Mania
SLOOS: Crunch Time Looms
Last Republic
LVMH Pops The Bubbly
India Takes The Population Throne
The End Is Nigh
OPEC Drops the Pump
Why Gold Is Glittering
Can't Stop Won't Stop
To Hike Or Not To Hike
China’s An Underachiever
Cash Is King
What Energy Crisis?
The Name’s Bond, Japanese Bond
The AI War Has Begun
Hikes Everywhere
What Recession?
Shrinking Population
Grab Your Box And Leave
A Gloomy Prediction
It's Darkest Before The Dawn
Elon Fires Himself…
Triple Whammy
No More Zero-Covid?
Eight Billion And Counting
Another One Bites The Dust
No Santa Pause
Big Tech, Big Disappointment
The Lettuce Won
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