Midday Macro – 10/14/2022
Overnight and Morning Recap / Market Wrap:
Price Action and Headlines:
Equities are lower, giving up all of yesterday’s gains, with all sectors lower as a rise in inflation expectations increased Fed tightening fears despite flat retail sales and weaker trade inflation
Treasuries are lower, with the curve little changed and the belly to ten-year underperforming, driving 10-year yields above 4%.
WTI is lower, with the recession fears growing and hence less demand expected after stronger inventory builds domestically yesterday continued to cool the recent rally, driving the price back to an $85 handle
Narrative Analysis:
Equities are basically back to where they started yesterday, re-entering their post-NFP consolidation range, as an uptick in inflation expectations was all it took to derail yesterday’s short-covering rally. Given where the Vix is, a 2% move in markets is what is to be expected, and with higher inflationary worries hitting Fed officials from yesterday’s and today's data, both stocks and bonds are moving as expected. Improving core retail sales and continued deflationary pressures through the import channel failed to help stave off the 130-point drop in the S&P, with tech and small caps performing worse as Large-Cap value is outperforming but still notably down. Two-year treasury yields are now at 4.5%, while the ten-year has risen above 4%. Some more neutral comments from Fed officials, but still no sign of worries about the pace and ultimate level of rate rises. Oil is under increasing pressure, retracing around a third of its recent rally mainly due to better inventory data and renewed recessionary worries reducing the demand outlook. Copper is lower by -1% as eyes increasingly turn to China to see if any significant changes will come out of their 20th National Congress gathering (hint, there won’t be). It is also a sea of red in the agg space, as the general risk-off tone is far-reaching today while fundamentals there are little changed. Finally, the dollar is stronger, with the $DXY at 113.3, thanks to multiple crosses down over -1% on the session.
The S&P is outperforming the Russell and Nasdaq with High Dividend Yield, Low Volatility, and Value factors, and Healthcare, Communications, and Utilities sectors all outperforming on the day. Sectors and factors are more aligned (Consumer Staples and Healthcare vs. High Dvd Yield and Small-Cap) over the last week, with a more defensive domestic bias tilt outperforming.
@KoyfinCharts
S&P optionality strike levels have the Zero-Gamma Level at 3856 while the Call Wall is 4100. The 3700 Vol Trigger level remains a strong resistance line overhead while support is still at the 3500 Put Wall. Yesterday’s rally saw call interests growing at the 3650 to 3750 area while put interests were added to strikes at 3500. However, there was not enough put flow to shift the Put Wall. Barring some negative headlines that re-energize October puts, @SpotGamma continues to see IV coming down (vanna) and time passing (charm) add a tailwind for equities into next week.
@spotgamma
S&P technical levels have support at 3580, then 3555, with resistance at 3625, then 3660. The S&P is basing in the same zone it spent most of the last two weeks in. Yesterday's squeeze was triggered by reclaiming the 3585 level, and essential bulls need to hold it into the close, or this rally fails.
@AdamMancini4
Treasuries are lower, with the 10yr yield at 4.01%, higher by 7 bps on the session, while the 5s30s curve is flatter by -1 bps, moving to -29 bps.
Deeper Dive:
Things continue to move quickly, with yesterday’s gains already gone mainly due to hotter-than-expected inflation expectations in the University of Michigan consumer survey. It is always nice how 400+ preliminary readings/respondents can move trillion-dollar markets, but we digress. It seems like the algo trading programs have been driving price action recently, cueing of technicals, and helped by high levels of (negative) optionality and positioning. As a result, and absent any inflows of more real (sticky) money, the level of implied and realized volatility for both rate and equity markets really has no reason to fall meaningfully. As we saw following the hotter-than-expected CPI data yesterday, the market is still moving up its expected Fed funds terminal rate and increasing the duration it will stay there. You simply can’t get overly bullish with this occurring as real rates continue to rise and financial conditions tighten further. However, following yesterday’s price action, recent economic data, and the view that markets are still too bearish/defensive, we still believe a tactical bear market rally can commence into the midterm elections (and World Cup) and potentially year-end. We continue to take comfort that leading inflation indicators are falling, hard data is holding in while soft data looks to be stabilizing, and expectations for Q3 earnings and guidance may be too pessimistic. As a result, we moved down our S&P long stop and remain patient with our dollar short and long-end Treasury long. Finally, we are closing our natural gas short, expressed through the $UNG ETF, for a 25% gain in two months.
Right at that 200-week moving average, you say? That was also the 50% Fibonacci retracement level since the post-pandemic highs? All this led to a delta squeeze due to large levels of negative gamma from extreme hedging and short positions? Yesterday's large down-then-up round-robin price action in equities was one for the history book. Historically, the combination of factors discussed above can indicate that equities have at least hit a temporary bottom. It is also a reminder that technicals need to be respected, and just like the 200 DMA ended up being the resistance that topped the June to August rally, it is possible the 200 WMA holds for the S&P while other headwinds take a breather.
*Yesterday's rally began in earnest once the S&P 500 hit the 50% retracement level from its pandemic low & all-time high, roughly 3500, which also happened to be where the 200-week moving average was.
*Sentiment and positioning are overly one-sidedly negative, leading to a poor risk-reward to further short the market here and limiting the upside to any rallies
In reality, yesterday’s CPI data, coupled with today’s University of Michigan inflation expectations, only increased the headwinds risk assets face from policymakers. This is why markets are back around their post-September Jobs Report level today. Although cracks look to be slowly forming in the Fed's resolve, it is still clear that their over-reliance on backward-looking inflation data will keep the market's terminal rate expectations rising until we see subsequent reductions in core CPI/PCE prints. This leads to a much higher probability of a policy error of overtightening, as the reverse of what happened last year is very much in effect due to the new wave of inflationary pressures in the last two months' core service prints. Last falls/winter's lagged ability for CPI/PCE data to pick up the increase in inflation is now leading to a delay in identifying its fall; something leading inflation indicators are clearly showing elsewhere.
*When stripping out food and core services, CPI was effectively flat on the month. However, these aren’t trivial things, and expectations are for core-service inflation to remain sticky for a few months more
*Markets are increasingly pricing in a 75 bp hike in December now
*Historically, the real rates curve inverts toward the end of a Fed hiking cycle, but with another 200 bps to go, moving policy further into restrictive territory, it is likely to curve inverts significantly more
In theory, a higher level of quick front-loaded hikes due to stickier inflation should further invert the curve as future growth expectations are reduced and the probability of a deflationary period increases and moves forward in time. This means growth and momentum-orientated factors should outperform. However, this is not what is happening. Until markets settle reverse/stabilize the increasingly negative trend in future earnings expectations, real rates settle into a range, and financial condition ease, it's hard to make a case for any outright longs beyond tactical bear market bounce-orientated trades. All risk assets, let alone tech or consumer discretionaries, face too much of a negative skew. We have been more remiss than most due to our belief inflation would be meaningfully falling by now. However, the official data is what it is, and as long as it is in the driver's seat, the knife is still falling.
*Treasury volatility continues to be highly elevated, a sign that markets aren’t functioning as smoothly as they should. This comes right as the Fed is only beginning to reduce its balance sheet.
*Volatility in rate markets has been higher than equities in many ways and, when coupled with curve inversion signals that the VIX should remain elevated for some time
*A mild recession to more severe is now the base case scenario for 2023, with each hot CPI print increasingly weighing on the growth outlook
Finally, as stated above, we are taking profit on our natural gas short through the $UNG ETF with a 25% profit. It’s a nice return for a two-month period, and with winter coming as well as signs parts of the global energy complex are getting tight again, we don’t want to be greedy. We are now down on our long S&P and long-end Treasury positions but will remain patient there as well as our long copper and short dollar ones. It is beginning to look like our copper long will determine if we end the year in positive territory, given a reluctance to add too much more risk in the current environment. Again, the fundamentals there continue to improve. Still, recession fears are weighing on investor sentiment, something we believe should flip into next year as nations/companies increasingly scramble to secure future supply to meet energy infrastructure initiatives and Chinese demand rebounds as their property sector gets further official support.
*The mock portfolio is down -2.7% for the year and is 50% invested.
Econ Data:
The headline CPI rate increased by 0.4% MoM, moving the annual rate to 8.2% in September, compared to 8.3% in August but above market forecasts of 8.1%. The core rate increased 0.6% MoM, moving the annual rate to 6.6%, the highest since August of 1982, and above market expectations of 6.5% YoY. Food prices continued to rise in September, rising 0.8% MoM and by 11.2% annually. Energy prices declined by -2.1% in the month due to a -4.9% drop in gasoline, but utility prices offset some of this decline, with electricity up 2.7% and domestic gas up 1.0%. The core goods prices were flat on the month, with used car prices dropping by -1.1% while new car prices rose by 0.8%. Core services rose 0.8%, with rents up 0.8% and medical services (1%) and transportation services (1.9%) helping, but the advance of services prices was fairly broad-based.
Why it Matters: At the headline level, the report indicates that inflationary pressures are becoming more sticky, especially regarding the service side, something we expected. As a result of the hotter-than-expected monthly increase, the report not only locks in a 75-basis-point hike in November but also opens the door to a further 75-basis-point hike in December, although there are two CPI reports between now and the December meeting with the November CPI released on December 13th. The market now sees the peak fed funds rate in 2023 above 5% and that this rate will have to be maintained for some time to pressure inflation lower. However, we continue to see leading inflation indicators rolling over and question the methodology of the CPI report in timely capturing the delta there. Does it matter? It may as the Fed looks at a mosaic of inflation indicators and is beginning to indicate a more cautious approach to further tightening. However, given the jump in the Fed funds curve following the report, this view is not winning the market debate. As a further contrarian point, all items, ex-food and shelter, were flat in September. With food inflation expected to fall, rents on new listings declining, holiday discounting of durables and autos due to excess inventories, and no spike in energy (big if), we continue to see a weakening inflation picture moving forward, especially given how harder beating annual/monthly comparables becomes. Again, if the official data is slow to capture this, the risk of a policy error in over-tightening only increases.
*It is all about services and food driving the inflation higher in September, while energy was negative while goods were generally flat
*Core services and food have been methodically rising each month, taking a larger part of the overall inflationary picture as goods and energy has retreated
*A more detailed look at individual components using a heat map shows a clear picture of where the pockets of pressure are
*The CPI report was not as bad as initial reactions suggest. All items ex-food and shelter, were up only 0.1% in September. As the charts below show, food inflation will fall, and rents on new listings have already rolled over. Wage growth also looks set to cool. - @BerezinPeter, Chief Global Strategist and Director of Research at BCA Research
Retail Sales were unchanged in September, below market expectations of a 0.2 percent advance. On an annual basis, retail sales growth slowed to a five-month low of 8.2%. Core retail sales, which exclude automobiles, gasoline, building materials, and food services, and are more closely aligned with the consumer spending component of GDP, advanced 0.4% last month.
Why it Matters: Core retail sales were slightly stronger than expected in September, and August was also revised higher. As always, retail sales aren’t adjusted for inflation, which is likely why gasoline station sales declined by -1.4%. However, declines in larger and smaller ticket discretionary goods (furniture, electronics, appliances, sporting goods, and hobby) echo what we have seen in consumer surveys and expect with a slowing housing market, not due to merchandise discounting to clear inventory. The increase in general merchandise, specifically department stores and clothing, indicates that there was likely an inline back-to-school shopping season, something individual earnings reports will shed more light on. In summary, still an indication the consumer is going out, but this report confirms what we have seen elsewhere, staple goods purchases are beating discretionary ones.
*Overall sales were flat due to discretionary “leaning” retailers, motor vehicles, and gasoline stations, but core retail sales were higher, and given a flat core goods inflation on the month indicates some resilience there
*There was a large move higher in the estimated measure of sampling variability for Misc Stores Retailers, so something is up there
Import prices decreased by -1.2% in September, following a -1.1% decline in the previous month and compared with market expectations of a -1.1 percent drop. Fuel prices were down by -7.5%, while nonfuel dropped by -0.4%. Lower prices for nonfuel industrial supplies and materials offset higher prices for foods, feeds, and beverages. Import prices are higher by 6% YoY, the smallest rise since February 2021, after advancing 7.8 percent in August. Export prices declined by -0.8% MoM, slightly below market expectations of a -1% drop and easing from an upwardly revised -1.7 percent decrease in the previous month. Declines came from both agricultural (-1%) due to lower prices for soybeans, fruit, meats, and nuts, while non-agricultural (-0.9%) outbound sales were helped by drops in industrial supplies and materials and consumer goods, which more than offset higher prices for capital goods, non-agricultural foods, and automotive vehicles. On a yearly basis, prices are higher by 9.5%, easing from the downwardly revised 10.7% jump in the prior month.
Why it Matters: It was the third consecutive monthly decline in both import and export prices as the strong dollar helped to reduce prices of imported goods while prices for agricultural exports and industrial/material supplies and consumer goods continued to fall. Prices for imports from China ticked up 0.1% MoM, marking the first increase since April 2022. Overall there is a clear trend being set by the stronger dollar, with export demand likely continuing to be pressured through the forex channel and weaker growth overseas while imports continue to become cheaper.
*Drops in prices across the board contradict what is being seen elsewhere, although food prices were more mixed
The University of Michigan consumer sentiment rose to 59.8 in September, the highest in six months, up from 58.6 in the previous month and above market expectations of 59, a preliminary estimate showed. The Current Economic Conditions index rose to 65.3 from 59.7, while the Expectations index fell to 56.2 from 58. The median expected year-ahead inflation rate rose to 5.1% from 4.7%, with increases reported across age, income, and education. Also, long-run inflation expectations increased to 2.9% from 2.7%.
Why it Matters: The report is a mixed bag, with the overall index rising due to current conditions but expectations and inflation expectations moving in the wrong direction. Expectations declines were split between Democrats and Republicans while independent's outlook improved. As a matter of fact, the overall outlook (current and future) improved across the board for independent politically leaning respondents. “Continued uncertainty over the future trajectory of prices, economies, and financial markets around the world indicate a bumpy road ahead for consumers,” according to Director Joanne Hsu. Finally, after three months of expecting minimal increases in gas prices in the year ahead, both short and longer-run expectations rebounded in October.
*The decline in Expectations does not bode well for the Current Economic Condition outlook to continue to improve
*Notable increase in one-year ahead inflation expectations likely due to the price at the pump and food cost rising in the last month
Policy Talk:
The September FOMC minutes aligned with expectations and elicited little price response. The main takeaway from the minutes is that the debate on where the appropriate “restrictive” level for the Fed funds range should be will occur at the next meeting, with the race to get into restrictive territory ending. Nearly all the Fed officials saw a larger interest-rate rise at each of their coming two meetings this year. The projections also suggested they would dial down the size of their rate increases by December and potentially end them by February or March. Further, “many” officials saw the need to maintain restrictive rates for “some time,” with several saying such a stance could be held “as long as necessary.” Additionally, a “couple” of officials said it could be appropriate to consider mortgage-backed securities sales after reduction was “well underway.” Stepping back, it looks like Fed officials are happier about where markets are (real rates, financial conditions, and Fed Funds expectations), with several officials indicating a need to begin to assess the impact of policy to this point, given the lag effect it has in hitting the real economy.
“The staff viewed the risks to the inflation projection as skewed to the upside on the grounds that supply conditions might not improve as much as expected and energy prices might rise sharply again. The staff also pointed to the possibility that wage increases could put a greater-than-expected amount of upward pressure on price inflation and the possibility that inflation expectations could become unanchored given the large rise in inflation seen over the past year as additional upside risks to the inflation forecast.”
“Several participants noted that, particularly in the current highly uncertain global economic and financial environment, it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook. Participants observed that, as the stance of monetary policy tightened further, it would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation.”
Governor Michelle W. Bowman gave a speech titled “Forward Guidance as a Monetary Policy Tool: Considerations for the Current Economic Environment” at the Money Marketeers of New York University (an organization we are a member of) in which she reiterated her outlook on the economy and policy. The speech mainly focused on the benefits and costs of using forward guidance as a policy tool. She highlighted that explicit forward guidance was seen as enhancing monetary policy accommodation when traditional policy, the federal funds rate, could not. The Fed could reduce uncertainty regarding its future policy decisions and keep longer-term interest rates low as the economic recovery progresses, something that was seen as invaluable with rates at the ZLB following the GFC. She views the benefits of providing explicit forward guidance as lower in the current environment than they were in the years immediately after the 2008 crisis. She sees the highly uncertain environment we are currently in as weakening the value that forward guidance has to stabilize market expectations and instead sees it as potentially detrimental to policy's ability to adjust to new developments that may occur quickly.
“…if inflation starts to decline, I believe a slower pace of rate increases would be appropriate. To bring inflation down in a consistent and lasting way, the federal funds rate will need to move up to a restrictive level and remain there for some time… it is not yet clear how high we will need to raise the federal funds rate and how much time will pass before we begin to see inflation moving back down in a consistent and lasting way.”
“And I would argue that the costs and risks of providing explicit forward guidance are now higher than they were in the decade that followed the last financial crisis... With uncertainty about the economic outlook unusually high today, the pre-2000s concerns about providing explicit forward guidance have regained their relevance. High uncertainty about the outlook puts a premium on flexibility, and—to the extent that the Committee sees a cost to frequent changes to its forward guidance—the provision of explicit forward guidance could reduce the Committee's flexibility to respond to unexpected changes in economic conditions.”
“However, being more explicit in our communications regarding the likely size of the increases in the target range at each future meeting was not helpful during this time because our decisions depended on the incoming data and its implications for the outlook.”
Kansas City Fed President Esther George gave a virtual speech to S&P Global Ratings today, reiterating the need for the Fed to raise interest rates to a restrictive level to curb inflation but warned that the pace needs to be appropriate so as not “disrupt financial markets and the economy in a way that ultimately could be self-defeating.” Unfortunately, we were unable to access the speech, so our highlights are brief. However, given Brainard's recent speech, we wanted to highlight it.
“You may see the terminal fed funds rate higher and have to stay there longer, but I’m more cautious maybe than most about how quickly we do that.”
Technicals and Charts:
Four Key Macro House Charts:
Growth/Value Ratio: Value is higher on the day and the week, and Large-Cap Value is the best-performing size/factor on the day.
Chinese Iron Ore Future Price: Iron Ore futures are lower on the day and on the week.
5yr-30yr Treasury Spread: The curve is flatter on the day and little changed on the week, with consumer inflation expectations driving yields higher due to increased Fed hiking expectations
EUR/JPY FX Cross: The Euro is stronger on the day and the week as further ECB officials continue to indicate a desire to raise rates and end QE.
Other Charts:
Yesterday's 5.55% intraday move was the largest since March 2020; back then, however, the VIX was at 80 - @zerohedge
Pretty amazing drop in 3Q EPS expectations. Analysts went from forecasting nearly 10% YOY growth in S&P 500 to less than 2%. Growth stocks are expected to post an -8.4% decline. - @GinaMartinAdams
In terms of expected forward aggregate EPS for the S&P in 2023, things are clearly trending lower with no signs of a trough or bounce yet and expectations by a few that $220 is in store.
This downgrade in earnings is being driven by profit margin compression, although top-line growth is also expected to fall significantly
"...mortgage equity withdrawals are at their highest since 2007, with $95bn net in 2Q. Consumers are also utilizing accumulated savings, drawing down ~$480bn through August with more than $1.9tn remaining." – Goldman Sachs Research
As a result of diminishing savings and increased debt, as well as a more uncertain outlook on the economy and jobs market, consumers spending expectations is falling fast
“Is wage growth, as tracked by the Atlanta Fed, rolling over? The latest update shows +6.3% growth in September, which is the first sign of easing since October 2021.” – LizAnnSonders
Likely more pressure to come on wages, given leading indicators such as JOLTs and business survey wage indexes are indicating further weakness.
“After increasing all year, rent prices fell 2.5% from August to September. We expect rent growth to slow further into 2023 as Americans continue to hunker down and more new rentals hit the market.” - @Redfin
“The rental market is coming back down to earth, …growing half as fast as they were six months ago.” - @Redfin
Demand for trucks continues to decline, reducing pricing pressure both in new and used autos as well as correlating with the decline in residential investment already occurring
The European diesel market has been tightening in the last month…
…as has America’s, indicating refinery capacity is again hitting limits, and the loss of Russian supply will continue to pressure prices here
Options bets on further weakness in the pound haven’t been this extreme since the Brexit vote, and political headlines continue to keep price action choppy
Article by Macro Themes:
Medium-term Themes:
Real Supply-Side Situation:
Winter is Coming?: America’s Red-Hot Warehouse Market Shows Signs of Cooling – WSJ
A pandemic-driven boom in warehousing demand is showing signs of slowing as companies grow more cautious about leasing in an uncertain economy and look to pare back the big inventory stockpiles that have swamped storage space this year. The average warehouse vacancy rate across the U.S. inched up to 3.2% in the third quarter from 3% in the previous quarter, according to commercial real estate services firm Cushman & Wakefield. It was the first increase in two years and is still far below the 5% average national vacancy rate during 2020.
Why it Matters:
Warehouse space remains tight, with some companies still storing goods on trailers outside distribution centers, but the broader figures suggest the pressure on one supply chain choke point is easing. “Maybe the froth comes off the top, but you still have a very stable and strong leasing market for industrial. It goes from great to good,” Mr. Mele said. Real-estate experts say part of the decline could be because companies aren’t finding enough empty warehouse space after nearly two years of frenetic construction and leasing. Companies are also more cautious about signing leases as they look to restrain high supply-chain costs and grow more wary of big investments in a wavering economy.
More Rivers Gone: Drought Worsens Across Midwest as Mississippi River Dwindles – Bloomberg
A drought is spreading across the U.S. Midwest, drying up the Mississippi River and its tributaries that serve as a critical freight artery for the country. From Iowa to Ohio, nearly a third of the region is in drought, up from a quarter a week earlier, according to Thursday’s update from the U.S. Drought Monitor. It all points to little relief for the transportation snafus seen in recent weeks. The dwindling water levels have led to barge groundings, forcing blockages and days-long delays on the Mississippi and Ohio rivers, which are among the most important routes for U.S. heavy industry and agricultural shipments.
Why it Matters:
Drought during the autumn harvest, when the demand for shipping supplies of soybeans and corn is at a peak, has pushed costs for chartering barges in the benchmark St. Louis market to three times more expensive than at any point in the past 20 years, according to Kevin McNew, the chief economist at Farmers Business Network. In addition to the low river flows, pasture land and ponds are drying out throughout the Midwest, according to the monitor. Soil moisture has dropped in many places, with little rain falling since August, a bad sign for crops. Weather forecasts aren’t encouraging. No rain is expected for most of the Midwest in the next seven days, the US Weather Prediction Center said.
China Macroprudential and Political Situation:
No End in Sight: China Has No Timetable for Easing ‘Zero-Covid’ Policy Yet, Top Epidemiologist Says – Caixin
Senior Chinese health expert Liang Wannian said the country has no timetable for easing its “zero-Covid” policy after next year’s “Two Sessions,” the annual meetings of the country’s top lawmakers and political advisers held typically in March. Liang, head of a National Health Commission expert panel, made the remarks in an interview with state broadcaster CCTV on Wednesday, after several official media outlets, including the People’s Daily and the Xinhua News Agency, recently reiterated that China must stick to the policy, dashing hopes of a gradual easing after the Communist Party’s 20th National Congress, scheduled to begin on Sunday.
Why it Matters:
An uncompromising Zero-Covid strategy has had deep and likely long-lasting societal, political, and economic impacts. Popular exasperation at rigid and inhumane treatment has filled social media, while at the same time, China’s economy has been even worse than in early 2020. The economic dislocations are now spilling into the larger world, fueling inflation, disrupting supply chains, triggering a retreat or pause by some foreign businesses in China, and increasing external concern over China’s deepening isolation. It’s also reducing commodity demand, specifically oil. Even with rumors that an mRNA vaccine is coming soon, Xi continues to push zero-Covid for what now looks like other purposes.
Longer-term Themes:
National Security Assets in a Multipolar World:
Biting: U.S. Suppliers Halt Operations at Top Chinese Memory Chip Maker – WSJ
U.S. chip-equipment suppliers are pulling out staff based at China’s leading memory-chip maker and pausing business activities there, according to people familiar with the matter, as they grapple with the impact of Commerce Department semiconductor export restrictions. State-owned Yangtze Memory Technologies Co. is facing a freeze in support from key suppliers, including KLA Corp and Lam Research Corp. The suspensions follow last week’s sweeping curbs imposed by the U.S. on China’s chip sector, ostensibly to prevent American technology from advancing China’s military power, though the impact might reach further into the industry.
Why it Matters:
While the moves might be temporary, they are immediate signs of business disruptions facing Chinese chip makers and U.S. technology suppliers as Washington escalates its efforts to stifle China’s emerging semiconductor industry. The U.S. export control measures, which restrict companies from sending chips and chip-making equipment to China, are some of the broadest the U.S. has enacted against China’s semiconductor industry. They veer from previous actions that often targeted individual companies and a narrower subset of technology. “I believe the U.S. government intends to force the more advanced production facilities of Chinese companies like SMIC and YMTC to shut down entirely,” Gregory Allen, a senior fellow at the Center for Strategic and International Studies, said.
Fly By Propaganda: Hollywood says farewell to Chinese investment bonanza - FT
In 2019, Tencent Holdings of China made a savvy call on a future box office smash by agreeing to co-finance Top Gun: Maverick with Skydance, a Hollywood studio. Tencent, the world’s largest video games group, pulled out of the investment after executives grew concerned that the Chinese Communist party would be unhappy with its support of a film glorifying the US military. That decision, while a smart domestic political move, cost Tencent a stake in the fifth-best-performing film ever in the U.S. Globally, Top Gun: Maverick has taken more than $1.4bn at the box office since its release in May, and it is still playing in cinemas.
Why it Matters:
For a while, China’s bold push into Hollywood seemed like good business for both sides. It offered studios an opportunity to tap into a vast, freshly minted middle class in China. And Chinese companies, flush with cheap capital, were keen to learn the art of moviemaking and help their country develop its own version of soft power. The peak came in 2016, when Chinese companies invested roughly $4.8bn in U.S. media and entertainment companies, according to Rhodium. Many of the Chinese companies became stretched too far, however, and also attracted unwanted attention from Beijing. The Chinese buying spree in Hollywood “got out of hand and came to a crashing halt,” says Bennett Pozil, head of corporate banking at East-West Bank. It never really recovered, he adds. “There was still some quiet investment in the Trump years, but today it is pretty much non-existent.” On the other side, officials signaled they had learned everything they needed to know from Hollywood in 2017 following the release of Wolf Warrior 2, a Rambo-style film featuring a Chinese supersoldier, which grossed more than $850mn. “That was the moment where China said, ‘We really don’t need you guys,’” he added, “and that was also the theme of the movie too: ‘We really don’t need you. We can do our own stuff.’ That changed things.”
ESG Monetary and Fiscal Policy Expansion:
Divergents: Netherlands Warns Against Unilateral Solutions for Minimum Tax - Bloomberg
The Netherlands would only support, as a last resort, members of the European Union unilaterally implementing a minimum tax on multinationals, as this risks creating divergences in the bloc. “We have the EU to avoid unilateral measures like this because you are running the risk of countries making changes,” Marnix van Rij, state secretary for tax affairs, told Bloomberg. Meanwhile, technical work to conclude the Pillar 1 of the OECD deal to allow for taxing profits of some multinationals, including tech giants, has been progressing at a slow pace at the international level, and the proposal could be further derailed following the results of U.S. mid-term elections.
Why it Matters:
The OECD-led deal to impose a 15% minimum tax on large multinationals, the so-called Pillar 2 of the accord, remains stuck in the EU because of opposition from Hungary. Taxation proposals usually require unanimous backing. Taxation proposals usually require unanimous backing. Finance ministers from five of the largest EU economies said at a meeting in Prague on Friday they will strengthen their commitment to the plan by working on alternatives that would exclude Budapest.
Appendix:
Current Macro Theme Summaries:
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