Morning Roundup

By Mark Masterson on January 17, 2023

Good morning,

Below are the news items moving markets today

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Executive Summary:

Earnings season continues this week, and we have a few important market trigger events on the calendar.

First – the debt ceiling theater continues this week with the US set to hit the debt limit by Thursday.  I call it theater because we all know that they will eventually raise the debt ceiling, issue a bunch of new debt, and the Fed will ultimately monetize that debt.  How can they not?  What is the alternative – default?  Despite the drama, here is the latest…..

• US debt ceiling back in focus, with Treasury Secretary Yellen on Friday warning Speaker McCarthy debt limit will be reached by 19-Jan, after which her department will begin using “extraordinary measures” to prevent the US from defaulting (adding these are unlikely to be exhausted before June).
• A monthslong political fight is likely coming, with Democrats asking for a clean debt-ceiling raise without conditions and Republicans indicating they will use their House majority as leverage to gain fiscal concessions, arguing default is a “real threat” (The Hill).
• Washington Post reports House GOP drafting a proposal to call for Treasury to prioritize payments for such items as interest on debt, Social Security, Medicare, and military spending.
• Adds Obama administration argued in 2011 and 2013 such an approach would be unworkable.
• White House saying it may wait to engage until after April’s tax deadline to get a clearer view of federal revenue (CNBC).

Meanwhile, central banks continue to operate and work to control both inflation and interest rates.

The Bank of Japan has now done 4 days of bond purchases in a row to try and defend the .5% level for its 10 year Japanese Government bonds.  Rates want to rise, but they will not allow it.

• BOJ TO BUY MORE GOVERNMENT BONDS MONDAY AFTER RECORD PURCHASING SPREE – NIKKEI
• THE BANK OF JAPAN IS PREPARING TO PURCHASE MORE JAPANESE GOVERNMENT BONDS ON MONDAY
• They just purchased $78 billion in a week.

We also have a full slate of Fed speakers this week…..

• *FOMC MEMBER WILLIAMS (TUES. 3:00PM)
• *FOMC MEMBER HARKER (WED. 2:00PM)
• *FOMC MEMBER LOGAN (WED. 5:00PM)
• *FED VICE CHAIR BRAINARD (THURS. 1:15PM)
• *FOMC MEMBER HARKER (FRI. 9:00AM)
• *FOMC MEMBER WALLER (FRI. 1:00PM)

While the Fed will tell us all is well in the economy – a few charts below suggest that stress is lurking just under the surface.

The first chart shows credit card debt for consumers surging higher, while the savings rate is now at the lowest level in 20 years….

@Mayhem4Markets 1/15/23

I suspect in time housing will also feel the weight of the below chart.

It shows that the annual mortgage cost is now at a 45% of household income level.  That cannot be sustained…..

JPMAM 1/17/23

More below…..

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Articles of Interest:

• Economy:
  • China growth slows but impact of Covid lockdowns, volatile reopening less severe than feared (Bloomberg, Reuters)
  • Company CEOs growth prospects dropped the most since 2007-08 global financial crisis (Reuters)
  • UBS chief economist Pingle says Fed cannot achieve soft landing due to rising credit card debt, falling house prices and higher borrowing costs (AFR)
  • Bank of America says company’s longer-duration exposure to fixed-rate debt means they have time to navigate rate hikes (Bloomberg)
• Markets:
  • Allocation to US equities collapses in January (Reuters)
  • BOJ tightening speculation contributing to rise in corporate borrowing costs (Bloomberg)
  • Yen traders braced for volatility as BoJ meets (FT)
• Washington:
  • House Speaker says Democrats should cap spending to avoid US debt default (Reuters)

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Charts of the day:

I posted a chart showing how overbought the DJIA was last week….

Below is the same for the Nasdaq….. The NASDAQ is still the most overbought since the post-COVID crash rally at 86.34 on NAMO

@Mayhem4Markets 1/13/23

Earnings are down about 7% from the peak.

You can see how earnings typically decline during a recession below…..(gray bars are recessions)

If we get the recession this year as looks likely, earnings have more room to the downside.

Daniel Lacalle 1/14/23

Speculation is rampant in stocks.

Never have we seen so many 24 hour options being traded……….

Goldman Sachs 1/17/23

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Quote of the day:

“There is time to go long, time to go short, and time to go fishing.”

Jesse Livermore