Initial Jobless Claims Increase More Than Expected
Initial jobless claims increased 22k to 231k in the week ended May 4, the highest level since the week ended August 26, 2023. The four-week moving average of claims increased by 5k to 215k. Claims increased by 12k in New York, by 3k in California and Indiana, and by 2k in Illinois, and decreased by 2k in Iowa.
New York jobless claims had been unusually low over the last two weeks, and we suspect that seasonal adjustment difficulties around the end of the academic year could explain some of the increase in jobless claims in the state. Nationwide continuing claims—the number of persons receiving benefits through standard programs—increased 17k to 1,785k in the week ended April 27. (GS)
Bank of Canada warns of steep jump in mortgage payments
Homeowners who are due to renew their mortgages over the coming years will face steep jumps in payments, according to the Bank of Canada, with the median monthly payment increasing by more than 60 per cent for those with a variable rate mortgage.
So far, many homeowners have been able to weather the sharp rise in interest rates, with residential mortgage defaults remaining below 0.5 per cent across Canada, the central bank said in its annual Financial Stability Report, published Thursday.
But the report warns that the ability of households and businesses to service their debt has become one of the main risks to the stability of the country’s financial system.
“If more Canadians lose their jobs, the unemployment rate goes up, all of a sudden that stress, that vulnerability is really at risk of crystallizing,” Governor Tiff Macklem said in a press conference about the report.
“More households won’t be in a position to pay that mortgage, particularly given the larger reset. So it is a vulnerability. And the point here is households and banks need to get ahead of that. We know what’s coming.”
Since the central bank started aggressively hiking interest rates in March, 2022, about half of the country’s outstanding mortgages have renewed at higher rates. This process has gone relatively smoothly, according to the bank, as income growth, accumulated savings and a pullback in spending has helped homeowners handle the higher rates.
Indeed, the report showed that renters are facing greater financial stress than homeowners, and have been increasingly missing payments on car loans and credit cards.
The next phase of mortgage resets, however, could be more painful. Many people whose mortgages are scheduled to renew over the next two years purchased their home early in the pandemic, when the bank’s policy interest rate was at an emergency low of 0.25 per cent. It has since risen to 5 per cent. (…)
Those that will shoulder the largest payment increase are homeowners who have a variable rate mortgage with a fixed monthly payment, where the monthly payment has remained the same throughout the term of the mortgage. For those mortgage holders, the steepest rise will occur in 2026, with the median monthly payment rising by more than 60 per cent, according to bank estimates. In 2025, the median increase is more than 50 per cent; this year, about 30 per cent.
For those with a fixed-rate mortgage, where the interest rate does not change over the loan term, the shock at renewal time will not be as great. Fixed-rate mortgages are based on longer-term bond yields, which have fallen since the autumn. The bank estimates that the sharpest rise will occur in 2026, with the median increase being more than 20 per cent. (…)
The report says the office real estate market is under pressure with office vacancies rising in major cities. That includes Toronto, the country’s financial capital, where the vacancy rate is nearing 20 per cent.
Small to medium-sized banks had the highest exposure to the commercial real estate sector with their loans accounting for 20 per cent of their portfolio, according to the report. For large banks, commercial real estate loans made up 10 per cent of their portfolio.
As a whole, the banking sector is in fairly good shape to handle potential losses, the report says. Canada’s large banks have sizeable liquidity and capital buffers, and they’ve built loan-loss provisions, which provide a buffer if borrowers default. (…)
A similar divide appears to exist between smaller and larger non-financial businesses. The report says large companies are handling their debt fairly well. In contrast, small business insolvencies have risen sharply over the past year. This is likely the result of both higher borrowing costs and an end of pandemic-era government support programs, the report says. (…)
Biden Set to Impose Tariffs on China EVs, Strategic Sectors China’s strategy of ramping up manufacturing to arrest an economic slowdown at home has triggered alarm abroad.
President Joe Biden’s administration is poised to unveil a sweeping decision on China tariffs as soon as next week, one that’s expected to target key strategic sectors while rejecting the across-the-board hikes sought by Donald Trump, people familiar with the matter said.
The decision is the culmination of a review of Section 301 tariffs first put into place under Trump starting in 2018. The new tariffs will focus on industries including electric vehicles, batteries and solar cells, with existing levies largely being maintained. An announcement is scheduled for Tuesday, two of the people said.
While a decision could be delayed, it nonetheless represents one of Biden’s biggest moves in the economic race with China. It builds on his call last month to hike tariffs on Chinese steel and aluminum, and the formal launch of a fresh probe into China’s shipbuilding industry. (…)
President Xi Jinping’s strategy of ramping up manufacturing to arrest an economic slowdown at home has triggered alarm abroad. US and European Union leaders have scolded Beijing over state support that they say has fueled a deluge of cheap exports that threaten jobs in their markets. The EU launched an EV subsidy investigation in October that may lead to additional tariffs by July.
The US is standing up to China’s “unfair economic practices and industrial overcapacity,” Biden said last month. “I’m not looking for a fight with China. I’m looking for competition, but fair competition.”
The tariffs would likely have little immediate impact on Chinese firms, since its world-beating EV manufacturers have steered clear of the US market due to tariffs. Its solar companies mostly export to the US from third countries to avoid curbs, with US firms seeking higher tariffs on that trade, too. (…)
Trump has promised to hike tariffs on China across the board if reelected, vowing a 60% tax on all Chinese imports. Many Democrats have dismissed that approach, in part because it would raise prices for US consumers grappling with inflation. (…)
The move comes after Biden last month proposed new 25% tariffs on Chinese steel and aluminum as part of a series of steps to shore up the American steel sector and woo its workers in an election year. That vow was viewed as largely symbolic, because China currently exports little of either metal to the US.
Beijing responded with restraint to the threat of metal curbs, imposing tariffs on US propionic acid, an export market worth $7 million to America last year, according to customs data. Still, ramping up tariffs on a broader spectrum of industries could prompt a stronger response from Chinese officials.
The full range of existing duties spans imports from industrial inputs, such as microchips and chemicals, to consumer merchandise including apparel and furniture. Trump imposed the first of the tariffs in 2018, citing section 301 of the Trade Act of 1974. (…)
RESTRICTIVE?
Fed’s Daly Says ‘More Time’ Needed for Restrictive Rates to Work
(…) “We are restrictive, but it might take more time to just bring inflation down,” Daly said Thursday during a moderated discussion at George Mason University’s Mercatus Center, echoing remarks Fed Chair Jerome Powell made on April 16. (…)
“There’s considerable now uncertainty about what the next few months of inflation will be and what we should do in response,” she said. (…)
No restraint there:
There’s a party in global credit, and (almost) everyone is invited. Investment-grade firms priced some $53 billion of bonds from Monday through Wednesday per Bloomberg compiled data, the busiest three-day period since 2021. Junk supply likewise registered at a healthy $11 billion over that stretch, marking the most active week since February with two sessions to spare, while European high- and speculative-grade borrowers priced roughly $23 billion despite an array of holidays on the Old Continent.
Lenders and borrowers alike are living their best lives these days, as credit spreads for both junk-rated and high-grade firms sit near their tightest of the post-crisis era, while meaty all-in rates relative to the ZIRP-era norm helps drive investor interest.
Underscoring the serendipitous state of play: single-B-rated Citrix Systems parent Cloud Software Group sold $1.8 billion in eight-year bonds yesterday at an 8.25% yield, Bloomberg relays, with ravenous demand serving to balloon the offering from an initial $1 billion. Wednesday’s result marks a diametric shift from the aftermath of Citrix’s January 2022 Elliott Investment Management and Vista Equity Partners-led leveraged buyout, in which syndicate banks eventually ate a $1.5 billion loss after struggling to offload the cloud computing firm’s debt for months during the post-Covid bond market swoon.
Today’s free and easy conditions likewise extend to leveraged loans, long a key cog in the private equity machine. Dollar denominated issuance over the first four months of the year reached $395 billion according to Fitch Ratings, already topping the $377.6 billion in volume seen throughout last year and far above the $250 billion logged in calendar 2022. Refinancing and repricing transactions accounted for more than 80% of activity from the start of January through April. (Almost Daily Grant)
SMALL VS LARGE
Addendum to my April 29 post Small vs Large. This is from Torsten Slok, Apollo’s chief economist:
Middle-Market Firms Hit Harder by Fed Hikes
Forty-one percent of companies in the Russell 2000 have negative earnings, see the first chart.
With this backdrop, it is unsurprising that Fed hikes have a more negative impact on small-cap and middle-market companies than on large-cap companies, see the second chart.
The negative impact can be felt in particular in tech, enterprise software, venture capital, and similar firms with no earnings and no revenue.
THE SWIFT ECONOMY
Americans flock to Taylor’s Swift’s Eras Tour in Europe
Swift’s tour was credited with boosting local economies across the U.S. last year. Many European cities are anticipating the same boom.
- Many fans are taking advantage of significantly cheaper ticket prices, thanks to tighter regulations on fees and resales in Europe.
- Americans have already bought up 20% of the tickets for Swift’s four sold-out Paris shows, per AP.
The Eras Tour shows in Paris are also attracting five times more luxury travelers from the U.S. than anticipated travelers for this summer’s Olympic Games in the French capital, Bloomberg reported.
- About 10,000 Americans are expected to attend the Eras Tour shows in Stockholm alone, per AP.
Tickets for Swift’s remaining U.S. shows — in Miami, New Orleans and Indianapolis — have skyrocketed since she dropped her latest album The Tortured Poets Department last month.
- The average lowest ticket price is a whopping $2,600 per ticket, Billboard reported, citing data from TicketIQ.
- By comparison, the average lowest ticket price for her Paris kickoff show is $340 per ticket — about 87% cheaper. Tickets are even lower on some of her other stops, like Stockholm and Lisbon, per Billboard.
In many of Swift’s planned European stops, hotel and short-term rental prices have spiked and seen increased booking rates well in advance of her arrival, the Guardian reported.
- Stockholm’s Chamber of Commerce said in March that it anticipates the Eras Tour shows to pump more than $46 million into the local economy.
- It’ll be a “real hit,” according to chief economist Carl Bergkvist.