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US Dollar Slumps As Investors Brace for 10-Year Treasury Auction

The US dollar weakened in the middle of the trading week as all eyes will be on the Treasury auctions. The greenback has been strengthening this month following a lackluster February, buoyed by turmoil in the financial markets and soaring…

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The US dollar weakened in the middle of the trading week as all eyes will be on the Treasury auctions. The greenback has been strengthening this month following a lackluster February, buoyed by turmoil in the financial markets and soaring bonds. Can the buck continue its journey upward, or will it fall back to earth? Inflation and the Treasury market could be the deciding factors.

According to the Bureau of Labor Statistics (BLS), the annual inflation rate jumped to 1.7% in February, up from 1.4% in January. This matched market expectations. The annualized consumer price index (CPI) faced upward pressure from higher energy, medical care, housing, and food costs. But apparel prices tumbled 3.6%.

On a monthly basis, price inflation rose 0.4%, while the annual core inflation, which removes volatile food and energy, advanced 1.3%.

Federal Reserve Chair Jerome Powell recently reversed his position on inflation, warning that it could temporarily top 2% as the US economy continues to reopen. The head of the central bank noted that this would not force the Fed to taper its quantitative easing campaign or raise interest rates. Others at the Eccles Building have been sounding the inflation alarm for months.

In other economic data, mortgage applications slipped 1.3% in the week ending March 5, down from the 0.5% jump in the previous week, according to the Mortgage Bankers Association (MBA). The 30-year mortgage rate continued its upward movement, climbing 0.3% to 3.26%.the

Investors will be monitoring the bond market as the 10-year Treasury auction takes place on Wednesday. Treasurys have been rallying in recent weeks, with the benchmark 10-year yield surging from 1.1% to 1.5%, and some industry observers forecast it could surpass 2%. Analysts believe foreign demand will be significant, but they also assert that the pace of the increases matters a great deal more than the actual yields.

Guy Lebas, the chief fixed income strategist at Janney Capital Markets, told CNBC:

What matters is the pace of increases rather than the actual yields. We had a pretty rapid increase in yields at the end of February and early March, and that caused a lot of indigestion. When prices decline like they have, more demand steps in and slows the process.

A large part of U.S. Treasuries are owned by overseas entities, it’s roughly 40% of all Treasuries outstanding. Many of those buyers hedge currency risk, so what they care about is the after-hedge yield. Right now you are getting 1.5% on the 10-year, and you are getting 20 basis points on the currency hedge, so that’s 1.7%. That is a very attractive yield for foreign buyers. There is no place in the world where you can get 1.7% on a currency hedged basis.

Bonds are mostly in the red midweek: the 10-year Treasury fell 0.003% to 1.54%, the one-year bill was flat at 0.089%, and the 30-year bond shed 0.007% to 2.252%.

The US Dollar Index, which measures the greenback against a basket of currencies, hit the pause button on its rally in the middle of the trading week. The DXY slid 0.14% to 91.83, from an opening of 92.05. Year-to-date, the index is up 2.1%, beating most economists’ projections for a bearish performance.

The USD/CAD currency fell 0.11% to 1.2628, from an opening of 1.2638, at 13:33 GMT on Wednesday. The EUR/USD jumped 0.18% to 1.1923, from an opening of 1.1900.


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Lira Tumbles To New Record Low As Critics Blast Erdogan’s Ambassador Expulsion Scandal

Lira Tumbles To New Record Low As Critics Blast Erdogan’s Ambassador Expulsion Scandal

Following Erdogan’s Friday tirade, lashing out at…

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Lira Tumbles To New Record Low As Critics Blast Erdogan’s Ambassador Expulsion Scandal

Following Erdogan’s Friday tirade, lashing out at Western countries for issuing a joint letter demanding the immediate release of jailed Turkish billionaire philanthropist businessman and opposition politician Osman Kavala, which was followed by the president’s threat that he had ordered ten ambassadors – including the US – to be deemed ‘persona non grata’ by Turkey’s government, the Turkish lira weakened to another record low against the dollar after electronic trading reopened early in the Asian session.

Around 4pm ET Sunday afternoon, the lira tumbled 1.6% to a new record low against the dollar of 9.73 at the opening of Asian trading; this following the bigger-than-expected rate cut on Thursday despite rising inflation which sparked a furious selloff in the country’s currency as the move was widely derided as a dramatic and reckless and followed’s Erdogan’s erratic firing of three central bankers  the week prior.

The non grata designation targeted the ambassadors of US, Germany, France, Canada, Denmark, Finland, the Netherlands, Sweden, Norway, and New Zealand. Meanwhile, Turkish opposition leaders slammed Erdogan’s lashing out against the United States embassy and other allied Western countries as nothing but a major effort at distraction from Turkey’s economic tailspin and disaster in the making

Kemal Kilicdaroglu, leader of the main opposition CHP, said Erdogan was “rapidly dragging the country to a precipice.”

“I worry … for Turkish financial markets on Monday. The lira will inevitably come under extreme selling pressure,” said veteran emerging market watcher Tim Ash at BlueBay.

“And we all know that (Central Bank Governor Sahap) Kavcioglu has no mandate to hike rates, so the only defense will be spending foreign exchange reserves the CBRT does not have.”

Typically such a designation of foreign ambassadors results in their prompt expulsion from the country, but as of Sunday night that doesn’t appear to have happened yet, suggesting this may be yet more jawboning from Erdogan. It wouldn’t be the first time the president has failed to follow up on his threats: in 2018, he said Turkey would boycott U.S. electronic goods in a dispute with Washington. Sales were unaffected. Last year, he called on Turks to boycott French goods over what he said was President Emmanuel Macron’s “anti-Islam” agenda, but did not follow through.

As Reuters adds, citing a diplomatic source, a decision could be taken at Monday’s cabinet meeting and that de-escalation was still possible. Erdogan has said he will meet U.S. President Joe Biden at next weekend’s G20 summit in Rome. Erdogan has dominated Turkish politics for two decades but support for his ruling alliance has eroded ahead of elections scheduled for 2023, partly because of high inflation.

Emre Peker, from the London-based consultancy Eurasia Group, said the threat of expulsions at a time of economic difficulties was “at best ill-considered, and at worst a foolish gambit to bolster Erdogan’s plummeting popularity”.

“Erdogan has to project power for domestic political reasons,” he said.

Erdogan’s anger erupted after the ambassadors of Canada, Denmark, France, Germany, the Netherlands, Norway, Sweden, Finland, New Zealand and the United States issued a joint statement on Oct. 18, calling for a just and speedy resolution to Kavala’s case, and for his “urgent release”.

Soner Cagaptay from the Washington Institute for Near East Policy tweeted: “Erdogan believes he can win the next Turkish elections by blaming the West for attacking Turkey — notwithstanding the sorry state of the country’s economy.”

Tyler Durden
Sun, 10/24/2021 – 16:20




Author: Tyler Durden

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What’s Behind The Eerie Calm In Corporate Credit

What’s Behind The Eerie Calm In Corporate Credit

By Vishwanath Tirupattur, global head of Quantitative Research at Morgan Stanley

Over the…

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What’s Behind The Eerie Calm In Corporate Credit

By Vishwanath Tirupattur, global head of Quantitative Research at Morgan Stanley

Over the past few weeks, risk markets have been buffeted by volatility from a wide array of sources. It was around a month ago that the regulatory reset in China and near-term funding pressures on select property developers roiled global markets, as investors fretted over the systemic implications for global growth. A mixed US jobs report along with sharply higher commodity prices intensified the debate around stagflation. Rhetoric from multiple central banks has been increasingly hawkish. The combination of these concerns has resulted in substantial market gyrations. Relative to a month ago, the S&P 500 Index declined by about 4% before recovering to up 6%. The shape of the Treasury yield curve has twisted and turned. The benchmark 10-year Treasury interest rate went from around 1.30% to around 1.70%, and market pricing of the timing of a Fed rate hike has come in sharply.

Amid these substantial moves, corporate credit markets on both sides of the Atlantic have largely stayed calm. Credit spreads in investment grade, high yield and leveraged loans across the US and Europe have hovered near 52-week tights, with surprisingly limited volatility.

Credit market beta relative to equity markets remains very low. Market access for companies across the credit spectrum has remained robust, as indicated by strong issuance trends, running at or ahead of the pace a year ago. What explains this stark difference between credit and other markets? The answer boils down to meaningfully improved credit fundamentals and elevated balance sheet liquidity, leading to a decidedly benign outlook for defaults over the next 12 months, if not longer.

Our credit strategists, Srikanth Sankaran and Vishwas Patkar, have highlighted that the balance sheet damage from COVID has been reversed. At the end of 2Q, gross leverage in US investment grade credit had declined sharply to 2.4x, back to pre-COVID levels. Net leverage is now below pre-COVID levels, while interest coverage has risen sharply to a seven-year high.

The trends in the high yield sector are even more impressive and the improvement broad-based, driven not just by the rebound in earnings but also negative debt growth. At 3.87x, the median leverage of high yield companies in our coverage universe for 2Q21 is down 0.5x Q/Q and 0.89x Y/Y. After four consecutive quarters of declines from the 2Q20 peak, median leverage now sits below the pre-COVID trough. That 71% of the issuers are reporting lower gross leverage Q/Q reflects the broad-based improvement.

Encouragingly, the size of tail cohorts has also begun to normalize – the share of issuers reporting 6x+ leverage is down 7 percentage points on the quarter. On the median measure, debt balances were 3.9% lower Y/Y while LTM EBITDA was 17.5% higher. Median interest coverage increased in the quarter to 4.68x (+0.52x Q/Q), with a solid 82% of issuers posting improved coverage. Cash-to-debt ratios remained close to record highs at 15.6%. Even in LBO land, while 2021 has been a bumper year for acquisition activity, with transaction multiples and debt multiples at record highs – usually a source of concern for leveraged loan and high yield bond investors – unprecedented equity cushions have resulted in a better alignment of sponsor and lender interests, helping to alleviate concerns.

These improvements in credit fundamentals explain the low-beta behavior of credit versus equity markets. Earnings and margin concerns matter for credit investors, too, but the intensity and breadth of balance sheet repair matter more. Furthermore, given the sharp rally in stocks, equity cushions in capital structures have increased and leverage as measured by debt-to-EV has declined.

What are the implications for investors? A lot, of course, is in the price. With credit spreads near the tight end of the spectrum, we are more likely to see them widen than tighten.

Indeed, the base case expectation of our credit strategists is for modestly wider spreads. However, the strength in credit fundamentals suggests that the outlook for defaults is benign and likely below long-term average realized default levels. Thus, we prefer taking default risk to spread risk here, leading us to favor high yield over investment grade and, within high yield, loans over bonds. For the more sophisticated investor seeking double-digit returns, the best expression of this view would be through equity tranches of collateralized loan obligations (CLO). Structural leverage as opposed to repo leverage, cash flows that are front end-loaded, multiple embedded refinancing options, all combined with the expectations of benign defaults, make CLO equity tranches a particularly interesting opportunity.

Tyler Durden
Sun, 10/24/2021 – 16:40



Author: Tyler Durden

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Shadow Inflation: Shipping Costs Are Up Way More Than You Think

Shadow Inflation: Shipping Costs Are Up Way More Than You Think

By Greg Miller of FreightWaves,

Name something that costs far more than it…

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Shadow Inflation: Shipping Costs Are Up Way More Than You Think

By Greg Miller of FreightWaves,

Name something that costs far more than it did before the pandemic that simultaneously gives you far less value for your money than it used to.

Of all the goods and services in the world, it’s hard to find a better pick than ocean container shipping. As rates have skyrocketed, delivery reliability has collapsed amid historic port congestion. Ocean cargo shippers are paying more than they ever have before for the worst service they’ve ever experienced.

The true COVID-era inflation rate for ocean shipping, when adjusted upward to account for lower quality, is much higher than the rise in freight rates.

Rates spike, quality plummets

For businesses that rely on imports and exports, ocean shipping is a necessity, not a luxury, so pricing rises if demand exceeds supply regardless of how bad the service is. U.K.-based consultancy Drewry recently upped its forecast and now predicts that global container rates will increase by an average 126% this year versus 2020, including both spot and contract rates across all trade lanes.

Norway-based data provider Xeneta sees most long-term contract rates in the Asia-West Coast route averaging $4,000-$5,000 per forty-foot equivalent unit, double rates of $2,000-$2,500 per FEU at this time last year. Spot rates have risen much more than that, both in dollar and percentage terms. The Freightos Baltic Daily Index currently assesses the Asia-West Coast spot rate (including premium charges) at $17,377 per FEU, 4.5 times the spot rate a year ago.

Daily assessment in $ per FEU. Data: Freightos Baltic Daily Index. Chart: FreightWaves SONAR (To learn more about FreightWaves SONAR, click here.)

Service metrics have sunk as rates have risen. Denmark-based consultancy Sea-Intelligence reported that global carrier schedule reliability fell to 33.6% in August, an all-time low. In August 2019, pre-COVID, reliability was more than double that. Sea-Intelligence calculated that the global delays for late vessels was 7.57 days, almost double the number of days late in August 2019.

Charts: Sea-Intelligence. Data sources: Sea-Intelligence, GLP report issue 121

U.S.-based supply chain visibility platform Project44 highlighted the diverging paths of pricing and quality by contrasting its data on average days delayed with Xeneta’s short-term rate data. Between August 2020 and this August, project44 found that the monthly median of days delayed on voyages from Yantian, China, to Los Angeles increased 425%, from 2.46 days to 12.93. Over the same period, average short-term rates jumped 102%.

Chart: p44. Data sources: p44 and Xeneta

Shadow inflation

Neil Irwin of The New York Times recently wrote about “shadow inflation”when you pay the same as before for something that’s not as good as it used to be, so you’re effectively paying more. A pre-COVID example of shadow inflation: the infamous Lay’s potato chip incident of 2014. Lay’s intentionally included about five chips less per bag, lowering content from 10 ounces to 9.5, yet still charged $4.29 per bag, meaning customers were paying (and Frito-Lay was making) 5.3% more per ounce of chips.

The opposite — and until COVID, far more common — scenario is when product quality rises faster than pricing, decreasing effective inflation, as in the case of computers and other tech products. This downward effect on inflation is incorporated into the Consumer Price Index (CPI) via so-called hedonic adjustments.

As recounted by Irwin and Full Stack Economics author Alan Cole, COVID flipped hedonic adjustments in the other direction, toward lower quality per dollar paid, the equivalent of inflation. Pointing to restaurants and hotels, Irwin wrote, “Many types of businesses facing supply disruptions and labor shortages have dealt with those problems not by raising prices (or not only by raising prices), but by taking steps that could give their customers a lesser experience.”

According to Cole, “Over the last 18 months … goods and services are getting worse faster than the official statistics acknowledge,” implying that “our inflation problem has actually been bigger than the official statistics suggest.”

Shadow inflation and container shipping

Ocean container shipping is an extreme example of the “services are getting worse” trend, despite enormous freight-rate inflation.

Measuring quality adjustments to inflation is inherently difficult, which is why very few CPI categories have hedonic adjustments. One way to do a back-of-the-envelope estimate of ocean shipping shadow inflation is to focus on time: the longer the delays, the less quality, the higher the cost fallout, the higher the effective inflation above and beyond the rise in freight rates.

Jason Miller, associate professor of supply chain management at Michigan State University’s Eli Broad College of Business, suggested using accounting of inventory carrying costs to measure the time effect.

“If I already own a product and I took possession of it overseas at the port of departure, and it’s on my balance sheet and it’s just sitting on the water, then in inventory management, there is a charge incurred every day it’s not sold,” he explained.

Miller explained, “There is the cost of capital. Every $100 in inventory is $100 that can’t be allocated elsewhere for a more value-producing purpose. There is also the cost due to obsolescence. It’s essentially opportunity costs. The longer the delay, the more additional costs from stockouts [as shelves empty] or the need to buy more safety stock.”

Rate rises affect different shippers differently

Whether it’s price inflation from rate hikes or indirect shadow inflation from slow service, different shippers are affected very differently.

On the rate side of the equation, Xeneta data shows a massive $20,000-per-FEU spread between the lowest price paid by large contract shippers in the trans-Pacific trade and highest price paid by small spot shippers.

Erik Devetak, chief data officer of Xeneta, told American Shipper, “We see the very bottom of the bottom of the long-term market at approximately $3,300 per FEU, although there are very few contracts at this price. On the other hand, we see the short-term market high up to $23,000 per FEU, again, in rare situations.”

In the latest edition of its Sunday Spotlight report, Sea-Intelligence analyzed how rate hikes affect different shippers and found a huge competitive advantage for larger shippers given this gaping freight spread.

Sea-Intelligence, using Xeneta data, estimated that a large importer on contract (in this case, in the Asia-Europe trade) shipping a 40-foot box with $250,000 of high-value cargo would see freight costs rise from 0.5% of the cargo value a year ago to 1.8% currently — an easily digestible increase. A small shipper in the spot market moving the same load would see freight costs jump from 0.7% of cargo value to 6.2%.

Sea-Intelligence then ran the same exercise with a low-value cargo worth $25,000. It said that in this case, the large contract shipper’s freight-to-cargo-value ratio rose from 5% last year to 18% currently, while the small spot shipper’s freight-to-cargo-value “exploded” from 7% to 62%.

Service delays affect different shippers differently

Rising rates affect high-value cargo the least because the freight rise equates to a small proportion of the cargo value. But with shadow inflation from voyage delays, it’s the opposite, according to Miller. Shipments of high-value goods get hit much harder than low-value goods.

Accounting carrying costs are derived from cargo value. The higher the cargo value, the higher the carrying costs. “Where these delays especially matter is for high-value imports,” said Miller. “It’s ironic. The importers that are least affected by high spot prices are the ones who are getting really hurt most by the delays.”

One example: A large importer pays $4,000 in freight under a contract to ship a high-value cargo of $250,000 worth of electronics in a 40-foot box. There is a 30% annual carrying cost, in part due to high obsolescence risk, thus a carrying cost of $205 per day, so a 10-day delay would equate to an accounting cost of $2,050, adding 51% on top of the freight cost.

A contrasting example: A small importer pays $15,000 in the spot market to ship a low-value cargo of $25,000 worth of retail products in a 40-footer, with a 20% annual carrying cost. A 10-day delay would equate to an accounting carrying cost of $137, just 1% more on top of the freight rate.

It’s not just high-value cargoes that suffer from delays, Miller continued. Obsolescence risk is key. On the high end of the value spectrum, that relates to goods like electronics; on the low end, to things like holiday items and seasonal fashion.

Another major factor: whether the delayed import item is a component in a manufacturing process. In that case, the cost of ocean shipping delays can be enormous, dwarfing the increase in freight rates.

American Shipper was recently contacted by a manufacturer that has a vital component of its production process trapped in containers aboard a Chinese container ship that has been at anchor waiting for a berth in Los Angeles/Long Beach since Sept. 13.

“When imports are actually inputs into a production process, and if a stockout is going to shut down a plant, you are now facing a huge opportunity cost,” warned Miller.

Tyler Durden
Sun, 10/24/2021 – 15:30

Author: Tyler Durden

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