March 23, 2022
🍩☕️ Morning. Strange things are afoot at the Circle-K. An ill wind is blowing out of the bond market. Offices are still mostly empty. And Russia is oddly continuing to pay its bondholders.
Today's newsletter is 1,101 words, 4.5 minutes.
1 big thing: Recession oracle glowing ominously
One of the best-known recession indicators is flashing warning signs on the economy, Matt writes.
- Yields on longer-term U.S. government bonds are in danger of slipping below yields on short-term bonds, a relatively rare occurrence known as an "inversion."
Why it matters: Inverted yield curves can reflect a rising risk of economic recession. Analysts and investors closely watch for this early warning sign.
How it works: When the economy is healthy, yields — the interest rates investors are paid for buying government bonds — should be higher on longer-term bonds.
The intrigue: This year, short-term Treasury yields — which tend to be driven by expectations for the Federal Reserve's monetary policy moves — have shot higher, to 2.2% from about 0.75%.
- This reflects the Fed's move to choke off inflation by raising rates.
Meanwhile, yields on longer-term Treasuries — which tend to be more sensitive to the outlook for economic growth and inflation — have risen too, but a lot more slowly (to 2.4% from 1.5%).
- This reflects, in part, expectations that the war in Ukraine will hurt the world economy.
What's happening: The yield on the 10-year note is now only about a quarter percentage point higher than the two-year note, with many analysts expecting to see the 10-year fall below the two-year — an inversion! — sometime soon.
What they're saying: "If this continues, the risk is for an inverted yield curve," wrote Bank of America analysts in a note last week. "2s-10s inversions have preceded the last eight recessions and 10 out of the last 13 recessions."
Yes, but: Whether a recession follows could depend on whether the Fed continues to constrain the economy with rate hikes if and when an inversion occurs.
Flashback: When the yield curve began to approach inversion in 2018, it set off alarm bells about recession and helped trigger a near 20% drop in the stock market, as well as loud complaints from then-President Trump about the Fed's rate-hiking plans.
- In early January 2019, the central bank backed off the hiking plans and instead started chopping rates.
- The economy remained strong, and for a while, it seemed like the curse of the inverted yield curve had been broken.
The punchline: Then COVID arrived, and the U.S. suffered one of its most severe economic downturns on record. The predictive power of the yield curve lives on.
2. Catch up quick
3. Russia's long game
Russia appears to be making good on the interest payments it owes on tens of billions in dollar-denominated bonds — it paid some last week, and initiated another one that was due on Monday, Axios' Kate Marino writes.
- The big question is why Russia's paying. The main consequence of default — that you can’t borrow in the market anymore — is basically moot since sanctions have all but removed Russia from international financial markets already.
Why it matters: War — and its aftermath — are expensive. And Russia for the time being appears to have its eye on the long game, acting to preserve its access to global capital.
- “I think they’re trying to save a shred of credibility,” says George Catrambone, head of Americas trading at DWS Group. “And to leave some optionality down the road, that if — and that's a very big if — sanctions were to start to unwind, that they could say ‘we always paid, Russia has not defaulted, and will not default, and is a sound market participant.’”
- Last week's payments surprised the market. One of the bonds that received payment (charted above) jumped in price to around 40 cents on the dollar, from 16 cents a few days earlier.
Worth noting: A default would also make Russia's current borrowing options — already limited by sanctions — even more difficult.
- It would have to rely on domestic banks and friendly countries (China, for example) — and those lenders would surely demand higher interest payments in the wake of a default.
State of play: Russia may not need to borrow money again for a while — it was running a budget surplus going into the invasion, and its main revenue driver, oil and gas sales, have so far largely escaped sanctioning.
- But significant military operations like its attempted conquest of Ukraine are costly — and it may also need to spend large amounts on social stability to quell unrest, says Catrambone.
- Moreover, it may need cash sooner if additional countries stop buying Russian oil, or if the price of oil falls, he adds.
What’s next: Russia owes a slew of debt payments on dollar bonds throughout the rest of the year. The biggest one, a maturity of over $2 billion, is looming on April 4.
4. End of an office era
- Kastle measures occupancy by looking at foot traffic into offices, pulling data from security swipe cards and keyfobs.
Why it matters: If this lasts, it's a game-changing shift for the economics of cities around the country.
- The disruption could be comparable to the exodus of manufacturing from cities in the late 20th century, University of Toronto professor, and noted city watcher, Richard Florida told the Wall Street Journal.
Details: Occupancy rates are low even in areas of the country like Texas that have had looser pandemic restrictions in recent months: It's 52% in Austin, 48% in Houston and 47% in Dallas.
- Rates are even lower in New York (37%) and San Francisco (30%).
5. High earners' economic jitters
Even though they're still flush with cash from the booming market, wealthier people are increasingly worried about the economy, especially inflation, Emily and Neil Irwin report.
What's happening: In March, consumer confidence dropped 7.2% for those earning more than $100,000 — a much larger dip than for those earning less than $50,000, according to a measure of consumer sentiment released today as part of the Morning Consult/Axios Inequality Index.
Why it matters: High earners still feel better about the economy on average, but have more to lose from declining financial markets. So the mix of volatile asset prices, Federal Reserve rate hikes and a surge in inflation is walloping their confidence.
Between the lines: Financial assets have been particularly volatile since the start of the year.
- Wealthy people are more likely to be plugged into financial news and checking their 401k balances, said Jesse Wheeler, economic analyst at Morning Consult.