There is full-blown panic setting in as the economic collapse is accelerating.
Panic In Global Currency Markets
July 12 (King World News) – Peter Boockvar: There is of course going to be a lot of focus on these sharp FX moves and its impact on corporate profits but I want to highlight that what should also be paid attention to is to what extent company floating rate debt has cost them. Now just as some companies hedge out their FX exposure, many hedge their floating rate position via swaps or even replace it with fixed but others don’t and that is going to cost them. In Pepsi’s earnings release today, they said the stronger dollar cost them 200 bps on after tax earnings per share.
They also said this, “we are unable to reconcile our full year projected 2022 organic revenue growth to our full year projected 2022 reported net revenue growth because we are unable to predict the 2022 impact of foreign exchange due to the unpredictability of future changes in foreign exchange rates” and other things. Looking at their income statement there was little change in interest expense so Pepsi at least protected themselves from the sharp rise in rates y/o/y.
For perspective on the euro by the way, the average exchange rate vs the dollar since it was introduced in 1990 is $1.20.
Yesterday the NY Fed said its median one year inflation expectations survey saw an increase to 6.8% in June vs 6.6% in May and that is a new cycle and series high. With the response being an aggressive Fed, expectations for 3 yr inflation expectations fell to 3.6% from 3.9%. With the sharp rise in mortgage rates, expectations for home price gains are slipping to 4.4% one year out vs 5.8% last month. That’s the slowest since February 2021 and it is a cooling that the housing market needs.
Worries grew for the labor market as the “mean probability that the US unemployment rate will be higher one year from now increased by 1.8 percentage points to 40.4%, its highest level since April 2020.” Income growth expectations ticked up and spending expectations fell…
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Serious Problems In The Housing Market
Expanding more on housing, there was a really interesting Twitter thread by Rick Palacios who is the Director of Research at John Burns Real Estate Consulting. I’m going to include the important quotes that he gathered from participants in a variety of markets:
1) Atlanta builder: “Someone turned out the lights on our sales in June!”
2) Austin builder: “Sales have fallen off a cliff. We’re selling 1/3 of what we sold in March and April. Trades are more willing to negotiate pricing since market has adjusted significantly past 60 days.”
3) Birmingham builder: “Sales have fallen 75% the last two months in a further out community.”
4) Boise builder: “Sales have slowed tremendously. Builders are dropping prices and halting new starts. Seeing prices drop on labor due to slowing of home starts. Expecting 15% to 20% reduction in most costs.”
5) Charlotte builder: “This recession is looking like and feeling like a big long five year depression.”
6) Colorado Springs builder: “Amazing how fast a market can change with such a rapid increase in rates. So many people were taken out of the market. Most builders will go to suppliers/trades and ask for rollbacks [on costs].”
7) Dallas builder: “Framing labor has become readily available, suggesting housing starts slowdown is finally showing its typical signs. Haven’t raised prices in 3 months.”
8) Des Moines builder: “Starting to see [construction] trades hold labor prices for us as they are fearful of a downturn.”
9) Fort Myers builder: “Investor sales have stalled.”
10) Grand Rapids builder: “Believe we’re on the edge of cost reductions. Making every effort to refuse further [cost] increases and pushing for decreases in all areas that have seen significant two year run up.”
11) Greenville builder: “Traffic has slowed from red hot. Feels different for sure, but it’s more like a normal market.”
12) Harrisburg builder: “Sales decreased to 50% of what they were 3 months ago. Traffic is down and we’re only moving spec homes after dropping prices. No one is buying to-be-built homes at this time.”
13) Phoenix builder: “Some builders are already cutting staff. Cancellations are extremely high. Dismal traffic and sales climate.”
There is more but you get the point.
Economic Collapse Unfolding
The June NFIB small business optimism index fell to 89.5 from 93.1 and that is the weakest since January 2013.
Optimism Amongst Small Business Owners
Plunges To Lowest Level Since 2013!
After jumping by 6 pts last month, Plans to Hire fell by 7 pts to 19% but there still remains a lot of job openings. Compensation fell 1 pt but after rising by 3 in May and compensation plans rose 3 pts to match the highest since December 2021. Expectations on a Better Economy continued to fall to a fresh all time low at -61% from -54% in May.
Those Who Expect A Better Economy
Crashes To All-Time Low Of -61%!
Those that Expect Higher Sales plunged to -28% from -15% and those that said it’s a Good Time to Expand fell to 3% from 6%. As we are about to get flooded with earnings releases, Earnings Trends fell 1 pt to the lowest in two years. As profits weaken, those that plan to Increase Capital Spending fell 2 pts to the softest since March 2021. And, those that Plan to Increase Inventories declined by 3 pts to below zero at -2%. Relief was seen on pricing as Higher Selling Prices fell 3 pts to 69% after rising by 2 pts in May and that puts it back in line with the 6 month average.
Specifically on inflation, it again was the “top problem for small businesses with 34% of owners reporting it was their single most important problem in operating their business, an increase of 6 pts from May and the highest level since quarter four in 1980.”
Bottom Line
Here was the NFIB’s bottom line:
“As inflation continues to dominate business decisions, small business owners’ expectations for better business conditions have reached a new low. On top of the immediate challenges facing small business owners including inflation and worker shortages, the outlook for economic policy is not encouraging either as policy talks have shifted to tax increases and more regulations.”
The bottom line from all of the above from a market perspective is the biggest 2s/10s yield inversion since early 2007.
Tightening Into A Collapse
The Fed is not just tightening at the most aggressive pace in 40 years but they are now doing it in the face of a CLEAR economic slowdown of note which of course was the purpose of what they are doing in order to tame inflation but be sure that just as they were WAY too easy for WAY too long, they are going to WAY over do it on the tightening side. Soon to be retiring KC president Esther George seems to be the only Fed member that understands this. She said yesterday “Moving interest rates too fast raises the prospect of oversteering…Along these lines, I find it remarkable that just four months after beginning to raise rates, there is growing discussion of recession risk, and some forecasts are predicting interest rate cuts as soon as next year.” I remain bullish on the 2 yr note.
German Troubles Big Worry For Europe
With the inflation and energy squeeze, the July German ZEW investor confidence in their economy fell to -53.8 from -28. The estimate was for a drop to -40.5. That matches the lowest since October 2008 right after Lehman blew up.
German ZEW Investor Confidence Index
Tumbles To Lowest Level Since 2008!
Current Conditions dropped to -45.8 from -27.6. Not surprisingly, the ZEW said “Expectations for energy intensive and export oriented sectors of the economy have fallen particularly sharply, and private consumption is also assessed as significantly weaker.” The German 10 yr yield is dropping by 12 bps and by 22 bps over the past two days in response to 1.13%, the lowest since late May.
Lastly overseas, Japan said its June PPI rose 9.2% y/o/y, above the estimate of up 8.9% and vs an upwardly revised 9.3% in May.
Desperation In Japan
The 40 yr JGB yield was up another 3 bps to 1.495% and this remains a must watch yield. The 10 yr inflation breakeven was down 1 pb to .90%. The yen is higher today as Yellen met today with the Japanese Finance Minister Suzuki. They talked FX but no actions were said or even implied but that is now a global discussion is worth taking note from.
***To listen to Alasdair Macleod discuss why the coming crisis will be far worse than anything seen in 2008 global collapse CLICK HERE OR ON THE IMAGE BELOW.
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