The Daily Spark

The share of Chinese exports to the US, Europe, and Japan has declined steadily over the past 20 years, see the first chart below.

Similarly, China is today the top export destination for eight of the G20 countries, up from zero in 2000, see maps below.

We have updated our estimates of how much excess savings households have left using the Fed’s methodology, and the conclusion is that consumers are almost out of pandemic savings, see chart below.

IG and HY issuance are higher in September, and this is a technical headwind to credit markets over the coming weeks, see charts below.

Markets think the inflation problem has been solved. But that is the wrong conclusion. 

The chart below shows that supercore inflation, which is the Fed’s preferred measure of inflation because it excludes housing, is sticky at 4.5% and not showing any signs of moving down to the Fed’s 2% inflation target. In fact, supercore inflation increased in July because of strong inflation in financial services, transportation, food services, amusement parks, and sports.

The bottom line is that inflation is still a problem, and equity markets, credit markets, and rates markets are underestimating how much additional slowing is still needed in the service sector to get inflation under control.

Since the Fed started raising rates in March 2022, deposits in the banking sector have declined by $862 billion, see the first chart.

Over the same period, almost the same amount, $896 billion, has gone into money market accounts, see the second chart.

Our banking sector chart book is available here. It shows that credit growth continues to slow, and bank lending conditions continue to tighten, see the third, fourth, and fifth charts.

Since the ECB started raising rates in July 2022, corporate bankruptcies have trended higher, driven by transportation and storage; accommodation and food services; and education, health, and social activities—see chart below.

With the ECB keeping rates high well into 2024, we should expect these trends to continue.

When interest rates increase, the household sector has to pay more for debt.

But when interest rates go up, households also receive higher cash flow on fixed-income assets.

Dividing households’ interest payments with households’ interest income shows that debt servicing costs as a share of interest income are at the highest level since 1959, see chart below.

In other words, both debt servicing costs and interest payments have increased as the Fed has raised interest rates. But debt servicing costs have just increased more.

One way to better understand the impact of BoJ YCC exit on Japanese demand for US Treasuries is to look at how much of the recent increase in US long-term interest rates has happened during Tokyo trading hours.

The chart below shows that since the BoJ YCC exit surprise in late July, the move higher in 10s has occurred almost entirely during New York trading hours.

This suggests that US rates are not driven higher by Japanese investors during Tokyo trading hours. And hence, BoJ YCC exit doesn’t seem to be the reason long rates have increased over the past month.

Instead, likely drivers of US rates over the past month are the US sovereign downgrade, fewer dollars for China to recycle in a falling exports environment, Fed QT, the significant budget deficit, the large stock of T-bills, and the Treasury’s intention to increase coupon auction sizes.

Despite the unemployment rate being at the lowest level in 50 years, credit card delinquency rates at small banks are at the highest level on record, see chart below. Imagine where these lines will be once the labor market finally begins to soften.

The map below shows the number of new business applications per 1,000 residents, and there are a lot of entrepreneurs in the Southeast, in particular in Florida.