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.
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
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
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.
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.
4. Sovereign CDS – Sovereign Swaps mostly widened over last week. Portuguese sovereign swaps widened the most, rising by +34 bps to 252.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Chinese sovereign swaps widened the most, rising by +14 bps to 138.
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.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1798.
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.
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.
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.
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.
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.
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.
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.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT