Jerome Powell gave his Humphrey-Hawkins testimony. The key punchline: “Rate cuts are coming, but not imminent: We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year. But the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured. Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2 percent. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks. The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
US February employment data showed +275,000 jobs created (vs some 200,000 forecasted). However, the employment gains for January and December 2023 were nothing like as “hot” as had been first reported. January was revised down to 229,000 (from 353,000) and December was revised down to 290,000 (from 333,000). The jobless rate rose to 3.9% while wages ticked up slightly by +0.1% m/m to 4.3% y/y (Jan: 4.5% y/y). By sector, healthcare saw +67,000 new jobs, government +52,000, restaurants & bars +42,000, social assistance +24,000, construction +23,000, transportation & warehousing +20,000 and retail +19,000. Bonds rose as expectations of a rate cut heightened. Overall, a combination of “controlled” job increases together with tame wage rises might give the Fed the “greater confidence” it needs to cut rates in June.
The latest view of the US Junk Bond market debt wall maturity (i.e. loans coming up for maturity) is looking better than first anticipated. Some $1.5tn of high-yield debt matures between now and end-2026. Of this, $882bn is US. Of this, $338bn is in bonds. Of this some $54bn matures this year, $125.5bn next year and $158.6bn in 2026. Though large, given the current growth path of the economy, companies are managing to refinance and are doing so at nearly twice the original rate. The S&P Global study shows non-financial firms globally reduced 2024 maturities by -44%, 2025 maturities by -27% and have already trimmed 2026 maturities by -6%. In two other signs, Default Rates (DRs) of junk-rated corporate bonds have levelled at around 4% (vs 8% during periods of financial stress). They could always rise but, shocks aside, the strength of the economy should help it through. The other factor remains the inflation view and rate action. For now, the former continues to tick down while the latter remains unchanged at worst or cut at best.
NYCB (NY Community Bancorp, a US Regional bank) has managed to raise $1bn, in exchange for equity, in a deal comprising several investment firms that include Steve Mnuchin’s Liberty Strategic Capital. Others include Hudson Bay Capital and Reverence Capital Partners. The stock price jumped nearly +30% on the day before giving some back. Trading was halted several times due to volatility. Prior to this news release, the share price had fallen -42%. Moody’s had downgraded the company to junk status and last week (see last week’s commentary) material weaknesses had been identified in internal controls related to internal loan reviews. Additionally, the former CEO has resigned and a new one (Jo Otting) brought in. NYCB lost 7% of deposits ($77bn from $83bn) in the past month and slashed its dividend to just $0.01 (1 cent). In his Humphrey-Hawkins testimony, Powell made it clear officials have begun reconsidering the “Basel III endgame” and its impact on cost as well as potential economic impact and are looking into major changes that would significantly reduce the impact on banks. The current international accord (with bank Regulators) forces banks to gauge risk and how much cash (capital adequacy) they hold against potential losses. Banks detest the endgame proposal as it hinders lending by having to set aside billions in capital (cash). The rescue of NYBC as well as the possible revamp of the “Basel III endgame” could be quite a catalyst for Regional banks. There is plenty of capital out there and huge scope for high returns in what has been a subdued sector for some time.
China’s 14th national People’s Assembly opened. Key takeaways: (1) Beijing aims for 5% stable growth this year; (2) Defence spending to increase 7.2%; (3) No change on its Taiwan stance (Premier Li reiterated its stance on reunification and that “it will happen”); (4) it acknowledged it wants to make it easier for migrant workers with rural “hukou” a registration and identification system through which social benefits (such as health insurance and schools) are allocated and (5) a yearlong programme will be launched to boost domestic demand to shift the economy away from real estate and, in this regard, observers are waiting to see what measures will be announced!
The last point – measures to boost domestic demand – is key to watch. The challenge China faces is whether it can maintain this steady state growth while still transforming its economy simultaneously. Reverting to a credit-fuelled approach is very much a measure of last resort. Economic activity is starting to pick up as evidenced by latest trade data but has a long way to go.
