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Msg  72333 of 72954  at  10/11/2022 9:24:40 AM  by


The following message was updated on 10/11/2022 9:24:40 AM.

The Launch Pad

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The Launch Pad
October 11, 2022
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With earnings season approaching, futures fell this morning on concerns that inflation and hawkish central bank policy will erode corporate earnings while U.S. Treasury yields advanced to multi-year highs. U.S. stocks fell for a fourth day yesterday as prospects for policy tightening and geopolitical risks weighed on investor sentiment with the Nasdaq closing at its lowest level in two years. The TSX ended lower on Friday, falling for the third straight day amid better-than-expected employment numbers and expectations of further rate hikes on both sides of the border. The mood remains fragile ahead of U.S. inflation data which will be released later this week, on top of bank earnings that will kick off the third-quarter season.

As the greenback hits multi-year highs, borrowers in Asia have turned to local currency bonds which have become relatively cheaper to issue than dollar bonds. This has helped Asian issuance of bonds denominated in local currencies to balloon to their largest in more than a decade. So far this year, a total of $2.65 trillion has been raised in Asia excluding Japan and Australia, reflecting a 10% increase in proceeds from a year earlier. This will likely continue as the Fed continues to raise rates opposed to central banks in Asia where rate hikes have been more subdued.

Speaking of bonds, newly appointed Prime Minister’s surprise package of tax cuts continues to reverberate through the UK. Debt markets are on shaky grounds despite the Bank of England’s attempt to assuage the market by extending its bond buying program and launching two lending facilities. The BOE is now including the purchase of inflation-linked debt into the scope of its bond purchases in an effort to avert what it called a “fire sale” that threatens financial stability. The move comes in reaction to yesterday’s record selloff in inflation-linked debt, had the immediate effect of bringing some calm to the market. It’s the second time this week the central bank has added to its arsenal of tools aimed at curbing market turbulence.

The tight labour market is not helping the federal government follow through on their plans. Earlier this year Justin Trudeau said he wants to double the homebuilding pace within a decade to tackle the housing issue, however, a shortfall of skilled construction workers is now complicating that plan. The CMHC’s latest report found that there are not enough skilled workers to meet increasing housing demand, with Ontario, BC, and Quebec having the largest needs for more workers.

One of the largest railroad unions in the U.S. rejected a five-year contract with employers yesterday that included 24% raises and $5000 in bonuses. Union representatives said little was done to address concerns about paid sick leave and demanding working conditions. The rejected deal has renewed the possibility of a strike that could weigh on the already fragile economy. The group that represents the railroads in negotiations said they were disappointed the union rejected the agreement but emphasized that no immediate threat of a strike exists after the union agreed to keep negotiating.

Rejoice Super Nintendo World fans. As of today, Japan will be accepting vaccinated visitors from 68 countries, ending almost three years of tight border controls. Travelers looking not to spend a lot will certainly enjoy their trip after the yen hit a 25 year low against the dollar in recent weeks. As one of the last remaining countries to reopen for tourism, there is anticipation of an economic lift that could eclipse the pre-pandemic travel boom.

Diversion: Everyone today after eating Thanksgiving dinner.

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Company news

General Motors announced the launch of a new business unit, called GM Energy, that will offer people a variety of products and services to help produce and store electricity at homes and offices. GM Energy will sell battery packs, solar panels and cloud software that will connect EVs to energy utility companies. With the new unit, GM is getting in on an energy production and storage business model similar to what Tesla has done and crosstown Detroit rival Ford is also pursuing. GM’s home energy systems are slated to go on sale next year, alongside the launch of the 2024 Chevrolet Silverado EV.

Asia’s top semi-conductor chip stocks are lower overseas, entrenched in an escalating US-China tech race that has erased more than $240 billion from the sector’s global market value. Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker, plunged 8.3% while Samsung Electronics Co. and Tokyo Electron Ltd. also declined. The selloff is spreading to the foreign-exchange market as investors added up the damage from the sweeping regulations the U.S. is imposing on companies that conduct technology business with China. The Biden administration has erected barriers of entry to China’s market by limiting the ability of U.S. firms to sell equipment and tech to their Chinese counterparts. There are concerns that the restrictions could spread if the U.S. widens the initiative to include other countries.

Brookfield Asset Management Inc. and DigitalBridge Group Inc. have expressed joint interest in buying a stake in Vodafone Group Plc’s wireless towers unit. The two companies paired up earlier this year when they bought a majority stake in GD Towers from Deutsche Telekom AG. Vodafone is planning to sell part of its roughly 82% interest in Vantage and has invited suitors to participate in an auction process. Other participants in the auction include U.S. telecommunication infrastructure operator American Tower Corp., private equity firms KKR & Co., Global Infrastructure Partners and EQT AB., and also Spain’s Cellnex Telecom SA.


Oil prices are lower with WTI back below $90 with global growth concerns and therefore weaker demand back at the forefront. JPMorgan Chase & Co. CEO Jamie Dimon said the U.S. and global economies are likely to sink into recession next year, while the International Monetary Fund and World Bank saw rising risks of a slowdown. Also not helping, China, the world’s largest crude importer, is signaling that there’ll be no let up in the nation’s Covid Zero policy, potentially acting as a brake on energy demand. Oil markets continue to struggle with gauging the impact of higher interest rates as central banks including the Federal Reserve fight inflation, as well as disruptions caused by the war in Ukraine and the outlook for global supply heading into the northern-hemisphere winter.

Wheat futures are down nearly 2% after headlines surfaced that Russia may abolish its grain-export quota, which typically kicks in during the later part of the season. Restrictions on shipments might not be necessary due to the nation’s large wheat harvest this year, said Russian Deputy Prime Minister Viktoria Abramchenko, and the government has sought to limit exports in recent seasons to ensure domestic supply. Prices for the grain jumped more than 6% yesterday after Russian forces launched fresh attacks across Ukraine putting the renewal of a Black Sea grain-export deal at risk and stoking worries that an escalation of the war could shrink harvests and further hamper logistics in the major grains supplier.

Fixed income and economics

It isn’t too often that we pay close attention to a government bond auction but such is certainly the case today. As the market returns from the long weekend, this afternoon’s marquee Treasury event will be a $40 billion sale of three-year Federal government notes that is set to clear at the highest yield since 2007 and likely post an 86 bps increase to the high draw from prior. At this point in the monetary policy cycle, we’re increasingly of the mind that even assuming a longer period on hold from the Fed than has been seen during prior periods, the front loading of rate hikes will necessitate a more aggressive move lower when Powell’s pivot ultimately emerges. But that doesn’t preclude us from seeing another move higher in the front end of the curve that will likely see fewer bids at the current time (despite a likely concession and the smallest overall size since April 2020). The event risk posed by Thursday’s CPI release (and any hawkish pricing resulting from a stronger-than-expected inflation read) is likely to leave some would-be buyers on the sidelines today.

Chart of the day


Quote of the day

Life is not a matter of holding good cards, but sometimes, playing a poor hand well.
Jack London

Contributors: A. Innis, A. Nguyen, D.Mak, P. Kwon

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