Aurelia Butler

“Credit Suisse will commence the process of terminating coverage on September 18, 2023,” Credit Suisse’s Research clients were told.Institutional customers are to be switched to UBS Global Research. Credit Suisse’s Wealth Management clientele will not be affected by the transition as they have access to UBS IB Research, a UBS spokesperson said.Integrating the banks’ Global Markets services is a further step along UBS’s tricky path to absorbing its fallen rival in the first-ever merger of two global systematically important banks.Last week Credit Suisse said it will reduce the volume of new markets business from Sept. 22 as UBS moves to wind down trading in global securities at its former rival. More

The global bank expects rising interest rates to shave off more than 1% of euro zone’s GDP by 2025. HSBC, however, forecast a “smaller impact” to the British economy as a large chunk of corporate debt is now accounted for by ‘bounce back’ loans – government-guaranteed programs to help struggling small businesses hit by COVID-19 era lockdowns – fixed at the rate of 2.5%.A recession in Europe is “certainly possible,” HSBC said. However, the corporate sector will not tip the euro zone economy into one, as “fairly healthy” balance sheets limit the risk of businesses going bust, it added.”The impact has been delayed because, while debt costs are rising, firms are also earning more interest on their deposits which ballooned as a result of subsidies during the COVID-19 pandemic,” said Chris Hare, the lead senior economist at HSBC.HSBC points out that fast-growing lending rates matter more to European businesses than their U.S. counterparts, as bank loans make up the vast majority of European corporate debt compared to U.S. companies.”But ‘excess’ deposits are waning and we see the bulk of the interest rate headwinds emerging over the rest of this year and next,” Hare added.The euro zone returned to growth in the second quarter of this year, with a greater than expected expansion after narrowly avoiding a technical recession around the turn of the year. More

HONG KONG/BEIJING (Reuters) – China is set to launch a new state-backed investment fund that aims to raise about $40 billion for its semiconductor sector, two people familiar with the matter said, as the country ramps up efforts to catch up with the U.S. and other rivals.It is likely to be the biggest of three funds launched by the China Integrated Circuit Industry Investment Fund, also known as the Big Fund.Its target of 300 billion yuan ($41 billion) outdoes similar funds in 2014 and 2019, which according to government reports, raised 138.7 billion yuan and 200 billion yuan respectively.One main area of investment will be equipment for chip manufacturing, said one of the two people and a third person familiar with the matter.President Xi Jinping has long stressed the need for China to achieve self-sufficiency in semiconductors. That need has become all the more pressing after Washington imposed a series of export control measures over the last couple of years, citing fears that Beijing could use advanced chips to boost its military capabilities.In October, the U.S. rolled out a sweeping sanctions package that cut China’s access to advanced chipmaking equipment and U.S. allies Japan and the Netherlands have taken similar steps.The new fund was approved by Chinese authorities in recent months, two of the people said.China’s finance ministry is planning to contribute 60 billion yuan, said one person. Other contributors could not be immediately learned.All the sources declined to be identified as the discussions were confidential.The State Council Information Office, which handles media queries on behalf of the government, the finance ministry and the Ministry of Industry and Information Technology did not immediately respond to Reuters requests for comment. The Big Fund also did not immediately respond to requests for comment.INVESTMENTS TO DATEThe fundraising process will likely take months and it was not immediately clear when the third fund will be launched or if further changes will be made to the plan, said the first two sources.Backers of the Big Fund’s previous two funds include the finance ministry and deep-pocketed state-owned entities such as China Development Bank Capital, China National Tobacco Corporation and China Telecom (NYSE:CHA).Over the years, the Big Fund has provided financing to China’s two biggest chip foundries, Semiconductor Manufacturing International Corporation and Hua Hong Semiconductor, as well as to Yangtze Memory Technologies, a maker of flash memory and a number of smaller companies and funds. Despite those investments, China’s chip industry has struggled to play a leading role in the global supply chain, especially for advanced chips.INVESTMENT MANAGERSThe Big Fund is considering hiring at least two institutions to invest the new fund’s capital, said the three people.Several senior officials and former officials at SINO-IC Capital, the sole manager for the Big Fund’s first two funds, have been under investigation by China’s anti-graft authority since 2021.Even so, SINO-IC Capital is expected to remain one of the managers for the third fund, said two of the people.SINO-IC Capital did not immediately respond to a request for comment. Chinese officials have also reached out to China Aerospace Investment, the investment arm of state-owned China Aerospace Science and Technology Corporation, to discuss being one of the managers, said two of the people.China Aerospace Investment did not immediately respond to a request for comment. ($1 = 7.2901 Chinese yuan) More

The biggest driver of the surprisingly resilient US economy has been the ability and willingness of Americans to shrug off the bad vibes and buy “everything that isn’t nailed down”, as Chris Rupkey puts it.Consumer spending doesn’t seem to be slackening much either. Quarter-on-quarter growth did slow from a blockbuster 4.2 per cent in the first three months of 2023 to 1.7 per cent in the second quarter, but it’s currently tracking at 3.2 per cent in the current one. This is the main factor that has confounded the hard-landers, as Ed Yardeni wrote this week:Forecasters who’ve long been expecting a hard landing of the economy made a big mistake in betting against American consumers. But the hard-landers are not accepting that consumer spending isn’t going to retrench; instead, they’re doubling down by predicting that it will happen soon, because consumers are running out of pandemic-related excess savings now and have too much consumer debt. In addition, payments on student loans are about to resume.It’s easy to see what’s juicing the spending splurge. Yes, sure, inflation is still high, but real incomes are growing at about 4 per cent a year, according to Goldman Sachs (zoomable version):The Spending Outperformance in 2023 Reflects Robust Real Income Growth, Particularly at the Start of the Year © Goldman SachsAnd after being briefly short-circuited by pandemic lockdowns, the intimate relationship between real income growth and spending has reasserted itself (zoomable version):Real Income Growth Has Historically Driven Real Spending Growth, and the Relationship Between Spending and Income Is Normalizing After It Broke Down During the Pandemic © Goldman SachsYou can read the full Goldman Sachs note here. But what about the future? There’s been a lot of monetary tightening over the past year that will only hit the economy with the proverbial long and variable lags. Mortgage rates have climbed over 7 per cent, and the labour market is beginning to cool down. Even the optimists are therefore becoming a bit more guarded. For example, Joseph Politano of Apricitas Economics reckons that the post-pandemic boom is now ending:The US labor market has cooled significantly over the last two years—ending a recent period of exceptional strength and returning to a situation roughly similar to pre-COVID. Talks of labor shortages continue to wane, with the share of small businesses having trouble filling positions falling to the lowest level since early 2021 and hovering at rates equivalent to late 2019. Gross hiring dipped below 6M in July as slowing demand reduces firms’ incentives to hire new workers and makes it harder for those employed to switch to better jobs. Over the last three months, net growth in nonfarm payrolls has fallen to just above 100,000 per month—sufficient to match population growth but not much else.Wage growth is likewise decelerating—robust data from the Employment Cost Index (ECI) shows private-sector wage growth at 4.6% through the end of June while the higher-frequency measure of average hourly earnings has dipped below 4.3% as of August. Meanwhile, leading indicators like growth in posted wages on Indeed have fallen even more relative to their 2022 highs.But so far we’re only really talking about a slowdown, not a reversal.Making predictions is hard, especially about the future etc etc. But Goldman’s Joseph Briggs argues that “several of the drivers of income growth in 2023 are likely to repeat in 2024”:The labor market is clearly cooling, with job openings falling and job growth slowing closer to sustainable levels based on the most recent data, but remains tight. We expect that job growth will continue to run comfortably in positive territory and average over 100k/month through the end of 2024, leaving the unemployment rate stable at 3.5%.In addition, we expect nominal wage growth will remain fairly elevated—we forecast 3.75% wage growth in 2024 on a Q4/Q4 basis—which combined with falling inflation—we forecast 2.4% headline PCE inflation on a Q4/Q4 basis—should keep real wage growth well above 1% through the end of next year. The combination of continued job gains and positive real wage growth should therefore provide a healthy boost to real income in 2024.Here are Briggs’ charts:The Goldman economist notes that there are two other (possibly under-discussed) factors that will influence American consumption in the coming year: Medicaid enrolment (bad) and higher interest rates (good, actually): In addition, the US household sector holds a substantial amount of interest-bearing assets, meaning that interest income should rise as interest rates increase. While there has been a notable increase since the start of the year, interest income has not yet risen by as much as we’d typically expect based on the increase in interest rates, suggesting we have yet to see the full effect of the Fed’s rate hikes on household cash flows. This partially reflects that deposit rates have not yet risen by as much as they probably ultimately will based on past hiking cycles. Assuming that interest rates remain elevated, household interest income should increase as yields on interest-bearing assets rise to reflect past rate increases.On the negative side, Medicaid’s continuous enrolment provision—which ensured any individual eligible for Medicaid would not lose health insurance coverage as long as the country remained in a public health emergency—came to an end in April, and we have yet to see the pullback in transfer income that we expect as states trim enrolment. It is hard to have much confidence around timing since the trimming of Medicaid rolls will be determined at the state level, but Medicaid spending should trend downwards over the next year and a half, thereby creating a notable headwind to transfer income. This income headwind probably has modest read-through to spending, however, since leading academic studies find that Medicaid expansion impacts who pays for healthcare more than it affects actual spending.All in all, Goldman forecasts that real incomes will grow by another 3 per cent in 2024, below 2023’s ca 4 per cent but comfortably above the 20-year pre-pandemic average of 2.5 per cent (zoomable version):But since this is America we’re talking about . . . . . . we forecast almost 4% real income growth for households in the top income quintile, vs. 1½% in the bottom quintile.If you want more, the full GS note can be found here. More

NEW YORK (Reuters) – Almost half a year after Silicon Valley Bank went belly up and nearly set off a national banking crisis, still-growing borrowing from a Federal Reserve emergency lending facility gives the appearance of lingering trouble for the financial sector. But while the ongoing demand for the Fed’s Bank Term Funding Program may result from some overhang from the initial troubles back in March, the growth in its loan output this summer more likely arises from opportunistic money management strategies some banks may be employing.Usage of the BTFP rocketed at launch, shooting from nothing at the start of March to $79 billion a month later. From early May onward, though, it has taken on another $32 billion, albeit at a much more plodding pace. BTFP loans stood at $108 billion on Wednesday. So far, there is no sense the increase signals a return to bank stress. Instead, borrowing via the program mostly represents longer-term loans taken out at its onset, likely by a limited number of institutions, coupled with some recent additional borrowing from banks who saw economic value in doing so. “Most of the borrowing was done by the troubled banks at the beginning” and when it comes to the modest amount of growth seen over the summer, “I don’t think of this as an indication of trouble,” said Joseph Abate, strategist with investment bank Barclays. The Fed launched the BTFP in March. It did so to help calm the financial sector and support banks in the wake of several high-profile failures that rattled the global economy in a time of high inflation and aggressive Fed rate hikes aimed at quelling those price pressures.Compared to other forms of Fed emergency lending, the terms of the loans are generous. The Fed said it would offer credit at 10 basis points over wherever the one-year overnight index swap rate stood at the time of the loan. The Fed also said it would take as collateral any securities it buys for monetary policy operations at face value, rather than at a discount. A look at how other Fed emergency lending programs have fared backs up the idea BTFP borrowing is happening for reasons other than stress. Fed discount window lending, the central bank’s main tool to offer short-term liquidity to banks, rocketed up in the spring and hit a peak of $153 billion on March 15 before rapidly falling as the much-worried-over banking crisis never developed. As of Wednesday, these loans totaled $2.9 billion, a fraction of their peak in March and the lowest in a year or more. EASY MONEYMarket conditions may also explain why some banks have found some room to tap the BTFP even as overall conditions in their industry have returned to normal. That’s because they can get a favorable treatment for bonds that have lost value due to the surge in yields seen over recent weeks. “The treatment of collateral at par is unusual; the higher yields rise, the greater the implicit subsidy for bonds trading below par,” LH Meyer analyst Derek Tang wrote to clients in a research note last week. Tang also noted data pointing to the duration of the loans taken via the BTFP indicates some banks have been interested in locking down funding rather than possibly having to tap the discount window at an interest rate they can’t predict right now. What’s more, the difference between the rate offered on the BTFP and the central bank’s interest rate target, the federal funds rate, has grown tighter since the late July rate hike, whereas before that, the BTFP rate had been for a number of weeks notably higher, which had degraded some of its attractiveness as a source of liquidity. On Friday the BTFP rate stood at 5.45%, within the federal funds target rate range of between 5.25% and 5.5%. It was also just under the 5.5% discount rate. The BTFP is scheduled to shut down next March and there’s no sense the Fed is fixing to extend its life. And thus far, demand has also been a niche concern. Fed data released in May showed that among participants in its Senior Loan Officer Survey only 15.2% of 92 respondents said they’d tapped the program. One sign of why some may have avoided BTFP loans? A majority of respondents said the eventual reveal of who borrowed from the program was a negative for them. The Fed will disclose this information one year after the program ends. That echoes a long-running problem the Fed has faced with emergency lending: The perception that tapping central bank liquidity will stigmatize the borrower among other financial institutions that did not need to turn to the Fed for cash. More

WASHINGTON (Reuters) -Top Democrats in the U.S. Senate will look to gain the upper hand over House Republicans in talks over government funding when the chamber returns from summer recess on Tuesday, as the threat of an embarrassing October government shutdown looms.A bipartisan group of senators in the Democratic-controlled chamber was collaborating on President Joe Biden’s request for a stopgap spending bill to keep federal agencies funded until deals can be brokered on the full fiscal year beginning Oct. 1. Democrats and Republicans in the Senate Appropriations Committee have backed the 12 separate spending bills that would finance most government operations for fiscal 2024, while their House Appropriations Committee has been producing bills with only Republican support.The Senate so far is sticking with the $1.59 trillion discretionary spending budget Biden and top House Republican Kevin McCarthy agreed to this spring, while some hardline House conservatives push for cuts below what their leader agreed to.”To avoid a harmful and unnecessary government shutdown, the House should follow the Senate’s incredible lead and pass their appropriations bills in a bipartisan way,” Democratic Senate Majority Leader Chuck Schumer boasted in a letter to his fellow Democrats on Friday.The White House last week called on Congress to pass a short-term “continuing resolution” to keep the government funded past Sept. 30, avoiding the fourth shutdown in a decade. Some hardline House Republicans have dismissed the risks of a government shutdown, saying it could be a cudgel for achieving deeper spending cuts to address the $31.4 trillion national debt. Few other lawmakers in the House or Senate have expressed such an appetite.Republicans in the House, which returns from its summer break next week, have internal differences over matters ranging from more emergency aid to Ukraine to the size of government-wide spending.The hardline House Freedom Caucus has insisted on paring discretionary spending for 2024 to the 2022 level of $1.47 trillion, $120 billion below the level McCarthy and Biden agreed to.Less contentious is Biden’s request for approving emergency funds this month to help communities hard-hit by storms, fires and other natural disasters. The White House criticized House Republicans for being ready to break from a deal and warned that a shutdown could take a toll on efforts to stop illegal drugs flowing into the country — specifically referencing fentanyl, a drug often cited by Republicans as a concern.”House Republicans have a stark choice to make: will they honor their word, meet their responsibility to avoid a shutdown, and act on life and death priorities like fighting the fentanyl crisis?” said White House Deputy Press Secretary Andrew Bates, in a memo released on Monday. Unlike spending fights from the last several years, the Senate appears eager to promptly get the stop-gap bill passed and then present its united front to splintered House Republicans in negotiations, which could extend into December, on the longer-term bills. “I’m headed toward the conclusion the Senate has an upper hand in final negotiations,” said William Hoagland, senior vice president at the non-profit Bipartisan Policy Center.’A PRETTY BIG MESS’Top Senate Republican Mitch McConnell has voted for every one of the 12 fiscal 2024 bills advanced by the Senate Appropriations Committee, as have nearly all of his fellow committee Republicans.McConnell last week bemoaned the funding fight, saying, “Honestly, it’s a pretty big mess.” Speaking to a business group in his home state of Kentucky, McConnell flat-out warned that the lower, $1.47 trillion in spending for 2024 is “not going to be replicated in the Senate.”That came before the 81-year-old lawmaker froze up while making remarks in public for the second time in little over a month, raising questions about how long he can continue in his leadership role. Congress’s doctor on Thursday said McConnell, who suffered a concussion after a fall earlier this year, was cleared to continue work. Meanwhile, as some hardline House Republicans push for defense spending cuts instead of a buildup, there is pushback within their 222-member caucus. Republican Representative Tom Cole, who chairs a powerful committee that is the gatekeeper for all legislation, told a group of fellow Republicans in late July: “My guess is, knowing some of our defense guys really well, they ain’t going to fight that hard to hold down defense spending. They’re like ‘please put me in conference so I can surrender immediately.'”He was referring to a special House-Senate negotiating team that likely would be tasked with ironing out differences between House and Senate defense appropriations bills.McCarthy will have to walk a tightrope, balancing the need to carry out the most basic congressional function of funding government services while keeping the support of his hard-line right flank, which could call for his removal at any time.He has so far avoided that trap, including when he held his fractious caucus together through the months-long fight over the nation’s debt ceiling, telling reporters after a key June vote, “Keep underestimating us and we’ll keep proving to the American public that we’ll never give up.” More