MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION

Takeaway: More evidence of the US labor market slowing triggered a global selloff in credit, as CDS for banks and sovereigns worldwide spiked.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM11

 

Key Takeaway:

The drumbeat of recession grows louder seemingly with each new eco data point. Last Friday's NFP was but the latest link in a growing chain of a getting-harder-to-dismiss negative data mosaic. We've been flagging emergent weakness in the labor data since late last year (Here's our late December initial jobless claims note: Raise Shields!), and our overarching bearish tone is unchanged as we enter the second week of February.

While the datapoints worth flagging in our Risk Monitor have waxed and waned from week to week YTD, what hasn't is the heavy skew towards negative trend. Right now the ratio of positive to negative on a short-term basis is 6 to 1, while on an intermediate term basis that ratio is 6 to 3. The long term ratio is 5 to 1. 

 

Last week the big theme was sovereign and corporate default risk rising seemingly across the board globally, partly in reaction to the weakening U.S. labor market. European banks CDS widened significantly with DB rising 56 bps and Barclays rising 40 bps. In the US, GS and MS each rose 20 bps, while BofA and Citi were +14 and +18, respectively.

 

Our heatmap below is more negative than positive across all durations.


Current Ideas:


MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 13 improved / 6 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 3 of 13 improved / 6 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 5 out of 13 worsened / 7 of 13 unchanged

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM15

 

1. U.S. Financial CDS – Swaps widened across the board for domestic financial institutions. GS & MS both widened by +20 bps to 115 and 118 bps, respectively. Meanwhile, Citi and BofA were +18 and +14 to 120 and 109 bps. Insurers PRU and MET also had a rough go of it, widening by +31 and +23 bps.  

Widened the least/ tightened the most WoW: ALL, CB, AGO
Widened the most WoW: PRU, MET, GS
Widened the least/ tightened the most WoW: CB, ALL, MTG
Widened the most MoM: AIG, AXP, PRU

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM1

 

2. European Financial CDS – Swaps widened notably across European financials last week. The median spread widened by a significant +24 bps to 123. Deutsche Bank saw swaps widen by +56 bps to 201 bps, while Barclays widened by +40 bps to 121 bps.

 

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM2

 

3. Asian Financial CDS – Asian financial swaps widened last week as the perceived risk of default rose globally. The Bank of China saw the largest increase, widening by +24 bps to 180.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly widened over last week. Portuguese sovereign swaps widened the most, rising by +34 bps to 252.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM18

 

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM3

 

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Chinese sovereign swaps widened the most, rising by +14 bps to 138. 

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM16

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 11 bps last week, ending the week at 8.84% versus 8.73% the prior week.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 2.0 points last week, ending at 1798.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM6

8. TED Spread Monitor  – The TED spread rose 3 basis points last week, ending the week at 33 bps this week versus last week’s print of 30 bps.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM7

9. CRB Commodity Price Index – The CRB index fell -1.4%, ending the week at 162 versus 164 the prior week. As compared with the prior month, commodity prices have decreased -3.9%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 14 bps.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 1 basis point last week, ending the week at 1.98% versus last week’s print of 1.99%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM10

12. Chinese Steel – Steel prices in China were unchanged last week at 2,028 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 111 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM13

14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread was unchanged at 39 bps.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more