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Market Update
May 15, 2023

Uncertainty & Confusion

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Week Ending 12 May, 2023

The week has continued in much the same manner as last week – uncertainty, confusion and volatility. The drivers of this include the following:

  1. US Debt Ceiling: However – if ever – this is resolved, the fear of the resulting default on payment obligations is spooking markets. It’s going down to the wire and the risk will kick in between now and June-end. The Congressional Budget Office (CBO) estimates $50bn needed middle of this month for interest payments (on 10y notes and longer-dated bonds), followed by $10bn to $16bn of outlays by May-end. On 1st June about $25bn will likely be paid in Social Security payments and benefits to military personnel. Then, 30th June, by suspending access to two government employee retirement and health funds, Treasury can access $145bn. Altogether, there is some $500bn in cash available. Contrast that with $1.9tn and $2.2tn needed to fund operations through to year-end! On paper and past precedent, it should get resolved…..but this time, both sides of the House really despise each other and there’s an election next year.
  2. US SLOOS: The April Senior Loan Officer Opinion Survey showed a further, but small, tightening in lending standards for Commercial and Industrial (C&I) loans. 46% of Banks overall tightened standards for large and medium-market firms (March: 45%). 62% of Banks overall widened spreads of loan rates over the cost of funds for large firms (from 45% in Q1); 58% widened loan spreads for small firms (from 33% in Q1). For those that tightened credit standards or terms for C&I loans, 94% cited a more uncertain (less favourable) economic outlook as the main reason (vs 100% from Q1). 57% cited a worsening in industry-specific conditions (from 54%). 53% cited a deterioration in their current or expected liquidity position (from 31%). 25% cited less aggressive competition from other lenders (from 36%). Commercial Real estate (CRE) loan standards saw a tightening in Q1 with 74% (+5%) of Banks reporting a tightening in Construction and Land Development; 65% (+8%) for multifamily properties and 67% (+9%) for non-residential.
  3. Central Banks are divided on future rate action. The US has hinted at a pause, the Bank of England (BoE) seems to be qualifying its previous remarks from the last couple of months and is now saying inflation risk is skewed “significantly to the upside”, the European Central Bank (ECB) is still in an aggressive tightening mood – they are of the view rising inflation is not firmly under control.
  4. Inflation: Last week’s US inflation release shows slow progress. The headline rate rose +0.4% m/m to 4.9% y/y (slightly less than expected) as energy prices keep trending lower helping to push gasoline prices down…..but Core inflation also rose +0.4% m/m to 5.5% y/y, in line with expectations. Real hourly average earnings rose +0.1% m/m and are down -0.50% y/y (only!). Shelter maintained its slowdown which is encouraging (+0.4% m/m to 8.1% y/y). Overall, it’s not a print to get too excited about - pace of decline is very slow. There is still a contingent of Fed members who believe the US is not over the worst and that more tightening is needed……don’t bank on a Fed pivot just yet! China’s April inflation fell -1.0% m/m to 0.1% y/y (NBS) confirming the weak state of consumer spending with retail spending and travel demand still below pre-pandemic levels. Factory (input) inflation shrank more than expected to 3.6% y/y as manufacturing declines. Base effects have played their part too but there is clear lag between the pickup in consumer mobility indicators vs manufacturing. It doesn’t help that there has been another covid wave. It’s proving to be the perfect storm – home and overseas.

On Sunday (14th) marked what looked like being a very closely-contested Turkish general election. Voter turnout was expected to be high with some 5mn first-time voters taking part. It hadn’t received big press but, for a nation with a population of 87mn, strategically positioned (Europe’s doorstep), it was no Venezuela or Argentina! It was truly the bridge between East and West. Latest polling (PolitPro) shows Erdogan’s ruling AKP party now ahead on 34.4% with the nearest rival, the CHP headed by Kilicdaroglu, on 29.5%. The Turkish parliament comprises 600 seats, so a majority is 301. Based on current polling, it doesn’t look like either of the two main parties (AKP & CHP) will win outright this Sunday with at least 50% of the vote – in which case there will be a runoff in two weeks (28th May). The two main parties couldn’t be more diametrically apart – key issues and differences:

  1. Central Bank: AKP runs it (look how many Central Bank governors have been deposed); CHP wants to restore CB independence.
  2. Power base: AKP has centralised it around an executive presidency; CHP wants to decentralise it.
  3. Economic policy: AKP has been cutting interest rates which drove the Lira down over -95%. Despite this, inflation peaked at 85% last year and is currently down to 43.68%. Interest rates are down to 8.5% (Erdogan’s doing) when markets and previous central bankers were calling for hikes.
  4. Justice: The AKP has been criticised for silencing dissent and eroding rights by bringing the judicial system under its control. The CHP wants to undo this.
  5. Geopolitics: Despite being a NATO member, the AKP has flexed its muscles by getting involved in Syria, waging an offensive against Kurdish militants inside Iraq and providing military support to Libya & Azerbaijan. It has also had clashes with other countries (Saudi, Egypt, UAE, Israel). Under the AKP, the country has bought Russian air defences but has used its influence to broker the Ukrainian wheat deal. The opposition CHP and others want to improve relations with the West and its allies (including the US) and return the country to the F-35 fighter jet programme (which was blocked following the purchase of Russian air defences).
  6. Refugees: The AKP hosted 3.6mn Syrian refugees and this has caused real problems in a country facing economic hardship – especially following the tragic earthquakes. The opposition wants to return some of them.

So assuming no party wins outright this Sunday (most likely outcome), it’s all about coalition scenarios. The AKP has more choice with potentially fewer parties – which makes it easier to manage the process that share similar ideologies (right-wing parties, centralise political decisions, stricter immigration policy and a strong nation. This coalition could involve the likes of the MHP, the Islamist and Ultranationalist Great Unity Party and the Islamist New Welfare Party). By contrast, the CHP would struggle on this front as it would have to engage with a disparate bunch of parties that have different ideologies. So assuming it goes to a second round on the 28th, the AKP under Erdogan seems to have more options than its opponents!

  1. Global Equity Funds saw $4.9bn of outflows with US Funds registering $5.7bn of outflows. Asia and European Funds saw inflows of $1.1bn and $0.59bn respectively. Financials led the outflows followed by Real Estate and Energy.
  2. Global Bond Funds attracted $3.4bn with Government Bond Funds receiving $3.01bn. High Yield and Inflation-Linked Funds saw outflows of $1.5bn and $264mn respectively.
Source: Refinitiv Datastream/Fathom Consulting
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