Wall Street Breakfast: Still Hawkish

[view original post]

Still hawkish

Hawkish comments from several Fed presidents are countering a recent narrative taking hold of financial markets, in which policymakers would ease up on a recent tightening cycle given expectations of an economic slowdown. Stocks dipped on the remarks on Tuesday, while investors sent the 10-year Treasury yield up 15 basis points to the 2.75% level. The new spate of aggressiveness also saw the safe-haven dollar renew its surge, though there was still plenty of optimism that the U.S. could achieve a soft landing and avoid a formal recession.

St. Louis’ James Bullard: “I think that inflation has come in hotter than what I would have expected during the second quarter. Now that that has happened, I think we’re going to have to go a little bit higher than what I said before.”

San Francisco’s Mary Daly: “[The Fed is] nowhere near almost done. We have made a good start and I feel really pleased with where we’ve gotten to at this point, [but] people are still struggling with the higher prices. My modal outlook, or the outlook I think is most likely, is really that we raise interest rates and then we hold them there for a while at whatever level we think is appropriate.”

Chicago’s Charles Evans: “If we don’t see improvement before too long, we might have to rethink the path a little bit higher. We want to see if the real side effects are going to start coming back in line… or if we have a lot more ahead of us.”

Cleveland’s Loretta Mester: “We have more work to do because we have not seen that turn in inflation. It’s got to be a sustained, several months of evidence that inflation has first peaked – we haven’t even seen that yet – and that it’s moving down.”

China responds

Taiwanese leader Tsai Ing-wen greeted U.S. House Speaker Nancy Pelosi at the presidential office this morning in a high-stakes visit that has enraged Beijing. Pelosi reaffirmed a pledge that the U.S. wouldn’t abandon Taiwan, saying solidarity was more important than ever in a “world [that] faces a choice between autocracy and democracy.” The two also discussed deepening economic cooperation and supply chain resilience, while indexes in Asia rebounded somewhat amid fading risks that the visit will result in a major conflict.

Quote: “The U.S. will certainly shoulder the responsibility and pay the price for undermining China’s sovereignty and security interest,” declared Hua Chunying, spokeswoman at China’s foreign ministry.

Within minutes of Pelosi’s arrival, the People’s Liberation Army announced six exclusion zones encircling Taiwan to facilitate live-fire military drills from Thursday to Sunday. While the size and scope of the areas could disrupt traffic and shipping in the Taiwan Strait – one of the world’s busiest trade routes – the exercises would come after Pelosi’s scheduled departure. Cyber warfare also hit Taiwan before the visit, with the presidential office going dark for 20 minutes due to an alleged distributed denial-of-service attack.

Sanctions: Beijing has moved to ban imports of various goods from Taiwan, from fish and fruit to baby food and cookies. According to Chinese customs data, China’s imports from Taiwan reached $122.5B in the first half of the year, up 7.3% from a year earlier. Exports of natural sand to Taiwan – that are widely used for construction and in concrete – were also banned, while China vowed to take “disciplinary actions” against Taiwanese foundations that engage in pro-independence or separatist activities. (9 comments)

Household debt

U.S. households took on more debt in the second quarter, pushing total household debt up by $312B to $16.2T. That puts balances $2T higher than they were before the pandemic at the end of 2019, according to the Federal Reserve Bank of New York.

Snapshot: Mortgage balances accounted for a large chunk of the increase, rising $207B in the quarter to $11.4T at the end of June. Credit card balances also rose by $46B. While seasonal patterns typically include an increase in Q2, the 13% cumulative jump in credit card balances since Q2 2021 is the largest in more than two decades. Elsewhere, auto loan balances rose by $33B, while student loan balances were roughly unchanged from Q1 2022 at $1.6T.

“The second quarter of 2022 showed robust increases in mortgage, auto loan, and credit card balances, driven in part by rising prices,” said Joelle Scally, administrator of the Center for Microeconomic Data at the New York Fed.

Go deeper: Household balance sheets, overall, appear to be strong, but “we are seeing rising delinquencies among subprime and low-income borrowers with rates approaching pre-pandemic levels,” continued Scally. The share of current debt moving into delinquency also rose for all debt types, though they are still historically low. Meanwhile, the delinquency transition rate for credit cards, auto loans and other debts increased by a further 0.5 percentage points, and for home equity lines of credit increased by 0.7 pp. (16 comments)

Earnings firehose

It was a busy day for earnings on Tuesday, triggering a volatile trading session, though for the most part, the season is turning out much better than feared. More than half of S&P 500 companies that have reported earnings so far have beaten analyst estimates, which is above the long-term average of 47%, but still trails the 62% average pace recorded over the past five quarters. On that note, check out some of the latest headlines on Seeking Alpha:

Uber surges 19% as sales double on mobility strength

PayPal soars after Q2 beat and annual guidance boost

Occidental Petroleum posts $3.6B in profit, slips from Q1 heights

Caterpillar sees slowing China demand and supply chain snarls

Starbucks beats on cold drinks, outlook remains suspended

AMD falls as light guidance outweighs strong Q2 results

SoFi climbs after beat, forecast raised as member numbers grow

Airbnb posts record-breaking revenue, touts resilient travel demand

Robinhood reports early, shows a decline in monthly active users

Match Group tanks on revenue miss, downbeat forecast for H2

Outlook: “We’re still in the very early innings of downturn and estimate cuts,” noted Bank of America strategist Savita Subramanian. “We think the fourth quarter is the most likely time of year when companies will decide to ‘kitchen sink’ the estimates in order to preserve hope for a better 2023,” added Morgan Stanley’s Michael Wilson. While J.P. Morgan also expects earnings to deteriorate in the second half, it’s taking a more contrarian view, with revenues expected to increase significantly and “any earnings weakness unlikely to be material.”