| Good morning. Traders pile into Treasuries ahead of an inflation reading. Goldman Sachs signals the end of an era in private equity. The IMF blasts the US over risky debt. Here's what's moving markets. — Isabelle Lee The world's largest bond market rose after the latest batch of economic reports reinforced speculation the Federal Reserve will be able to cut interest rates this year to prevent a bigger US slowdown. Traders gearing up for the Fed's favored inflation gauge piled into Treasuries as several data points illustrated a downshift in growth tied to the central bank's higher-for-longer stance. Treasury 10-year yields fell four basis points to 4.29%. A $44 billion sale of seven-year notes saw solid demand. Swap markets are pricing in about 45 basis points of easing in 2024, which would equate to less than two quarter-point cuts. The S&P 500 fluctuated around 5,480. In late trading, Nike dropped after sales missed estimates. Goldman Sachs is signaling the end of an era in private equity. Marc Nachmann, the head of the firm's money-management arm, added his voice to the chorus of industry leaders declaring the buyout business has passed a critical juncture. A period of profits driven by financial engineering and "multiples expansion" is over, Nachmann said. "Where your returns come from will be much more focused on creating better earnings growth." To that end, Goldman is bringing in Darius Adamczyk — the former head of Honeywell International — to parachute into portfolio companies that the bank works with and help fix their operations. Even at a bank known for scooping up high-profile advisers, adding a former CEO of a sprawling industrial conglomerate is hardly ordinary. The International Monetary Fund said the US is running deficits that are too big and is weighed down by too much debt, and warned of dangers from its increasingly aggressive trade policies. While calling the world's largest economy "robust, dynamic and adaptable," the fund leveled unusually harsh criticism toward its biggest shareholder. "The fiscal deficit is too large, creating a sustained upward trajectory for the public debt-GDP ratio," the fund said. The IMF, the global economic watchdog and lender of last resort, has become increasingly critical of US economic policies, warning that unsustainable borrowing and its competition with China are creating risks for the global economy. Hedge funds are increasing their exposure to leveraged bond-market strategies such as the basis trade, according to the Bank of England, creating risks to financial stability should they be forced to rapidly unwind their positions. Borrowing in repo markets by hedge funds relative to their equity capital climbed to the highest since 2020 in the first quarter, the central bank said in a report, citing data from the UK's Financial Conduct Authority. While the BOE acknowledged the trades provide liquidity to the market, these relative-value strategies risk blowing up when unexpected events spur volatility, amplifying future financial shocks. In a few hours, President Joe Biden and former President Donald Trump face off for their first 2024 debate, and options pros are bracing for wider equity price swings. Traders are pricing in roughly "one volatility point" of added premium on Friday, according to an analysis from Citigroup that compared current and expected volatility. In the region, Japan's industrial production likely rebounded in May from a drop in April. Meanwhile, Sri Lanka and Colombo will report CPI. Here's what caught our eye over the past 24 hours: - L'Oreal sees slower beauty market growth as China struggles
- Billionaire Birla buys India Cements stake to fend off Adani
- Tesla design changes confuse drivers, undercut EV quality
- Target lowers bar for workers to stop thefts to as low as $50
- List of money managers dumping oil stocks just got longer
- Nvidia CEO has billions at foundation where he logs 1-hour weeks
Investors seeing strong consumption as evidence that the US economy isn't weakening are overlooking the fact that consumer spending hasn't historically been a good indicator of major turns in the economy, because it's lagging. The lack of reliable leading indicators is precisely why stock corrections are so steep when downturns ensue. Consumer spending accounts for the lion's share of the economy, so it makes sense to obsess over it to gauge the future. In a great column, Bloomberg Opinion's Robert Burgess writes that consumers "are making economic doomers look silly" as they're still spending enthusiastically -- just focused on experiences rather than goods. But consumption is a lagging indicator: Since 1960, the three-quarter average in personal consumption prior to the official start of recessions has been 2.6%, with no negative readings. In some cases, like in the 2001 downturn, it never contracted on a quarterly basis, even as the pace of growth weakened. The latter -- measured as the net change quarter-over-quarter-- does appear to capture a slowdown in all but one recession outside of the pandemic. Granted, higher-frequency data like retail sales might offer better clues. But here, too, the three-month average heading into downturns has been 0.5%, yet official data only goes back to 1992 and captures very few recessions. Don't take my word for it. Bloomberg Economics did a more thorough analysis of data going back to 1969. Economists Eliza Winger and Anna Wong found that aggregate spending showed few signs of slowdown before prior recessions. "Rather, spending slows moderately only when a recession is already underway," they wrote. And it's precisely a slowdown in goods — durable goods — which appeared to have some signaling value ahead of downturns. Services was found to be often "insensitive to recessions." Tatiana Darie writes for Bloomberg's Markets Live blog in New York. Follow her on X at @tatianadariee. | 
No comments:
Post a Comment