US producer prices increased more than expected in Sep due to higher energy costs. The IMF just came out and noted that if the war in Gaza/Israel widens, inflation will increase. A 10% increase in oil prices represents roughly a +0.4% increase in inflation a year later.
Credit risk gauges are declining as UST yields declined, with the cost to insure IG debt down for a 3rd day. JPM is touting credit as a way to add beta versus equities. Banks were doing the same thing about a month ago before rates spiked, so be careful, folks. Once you start moving down in credit quality, you’re actually taking risks, so make sure to know the credit and understand where you are in the cycle. One reason yields are down is the flight to safety because of the Hamas attack. On Friday, ASR is giving a webinar about their view that the credit default cycle has already begun. So, may be worth learning about both sides of the argument if you are tempted. Also, note that the Fed’s Bowman warned that higher rates might be needed to curb inflation, per Bloomberg.
Big banks in the US are expected to write off more bad loans than early pandemic days, and >2x levels a year ago. Consumers are struggling folks, and with high rates and lower savings, today’s inflation is hard to manage. Higher provisions eat into earnings. Plus, if you’re watching for bank earnings season, net interest income will be a focus. Banks have had to share more with depositors, and loan growth is not as strong.
Exxon is buying Pioneer for $59.5 bn, the world’s largest buyout this year. Exxon will become the most significant player in the Permian Basin, and its total production will reach ~4.5 mm barrels/day of oil, which represents ~50% more than the next biggest supermajor. Exxon says it will be “accretive immediately.”
Investors are watching to see if China’s gov steps up to support the economy, versus trying to get local govs to do so. Markets were up on the news, per Bloomberg. They are watching for a rare mid-year revision to China’s budget. Given the leverage at the local level (and continued real estate/financial challenges), it would seem to make more sense for the central gov to take responsibility here and increase its budget deficit.
Yellen is in support for an EU windfall tax on profits generated by frozen Russian sovereign assets.
BBG is out with a story on how active strategies are moving to ETFs. Firms are moving SMAs to the more tax-friendly structure now around $7.2trn in size. Funds don’t incur cap gains tax—the burden is on investors when they exit. So, with more capital to invest, the funds typically earn more.
