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Wednesday, August 10, 2022
Today’s newsletter is by Brian Cheung, an anchor and reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bceungz.
In May, Elon Musk tweeted that a recession is coming, and that “some bankruptcies will have to happen.”
But this “rude awakening” that the billionaire warned about is coming even further in Corporate America.
Despite the erosion of wage earnings by high inflation and a lousy stock market, Corporate America has yet to show a significant increase in bankruptcies, according to recent data from S&P Global Market Intelligence.
In a report published earlier this month, S&P counted just 212 US bankruptcy filings from the start of the year through July 31. This marked the fewest number of bankruptcy filings in the first seven months of any year going back in at least 2010.
Credit investors seem unconcerned about mass defaults in the future.
A recent survey from Bank of America Global Research showed a higher swing in credit investor expectations for the rate of corporate defaults next year. But at 3.1%, the expected corporate default rate is lower than expectations during the pandemic, which is almost double this level.
Those are impressive statistics considering how financial conditions have tightened amid aggressive rate hikes by the Federal Reserve aimed at reducing inflation, resulting in a doubling of long-term interest rates. The resulting rise in rates increases the burden for companies carrying high levels of debt.
The Fed’s battle with inflation will require more interest rate hikes from here, but interestingly, long-term rates – which are more market-driven – appear to have backed off the highs from June.
However, accelerating borrowing costs mean Musk’s point is well taken – companies could crumble under the pressure as the US economy contracts for two consecutive quarters and profit margins may be at risk.
And, in fact, a number of companies have gone under. Among the bigger casualties this year: cosmetics company Revlon and chemical maker TPC Group. Crypto winter also led to the high-profile demise of several crypto companies.
But the aggregated statistics show a Corporate America that is far from Musk’s prediction, likely due to strong fundraising through the pandemic.
So far this year, the Fed has remained steadfast in its post-pandemic policy of near-zero short-term interest rates. In the depths of the crisis, the Fed also switched to direct and indirect purchases of corporate bonds, which had the effect of stimulating the market of large corporations used to strengthen their balance sheets.
Although the Fed’s corporate credit facility is now closed, the boost from cheap and available credit appears to have had a lasting effect on the early part of this year’s economic slowdown.
The same story applies broadly to American households as well, as TKer’s Sam Ro points out. The stimulus checks and other measures taken during the pandemic were largely directed at debt repayment (credit cards, mortgages, car loans).
And while the balance of debt defined as delinquent is not shrinking, data from the New York Fed shows that the number of payments defined as “severely derogatory” has not increased — in fact, it has actually decreased.
The corporate and household debt picture may change as the recession story continues to play out.
But so far, the combination of the economic slowdown with aggressive Fed action has not been enough to undo the pandemic-era measures that still appear to be curbing the worst corporate outcomes.
What to Watch Now
Economic calendar
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7:00 a.m. ET: MBA Mortgage Applicationweek ended August 5 (1.2% last week)
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8:30 a.m. ET: Consumer Price Indexmonthly, July (0.2% expected, 1.3% last month)
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8:30 a.m. ET: CPI excluding food and energymonthly, July (0.5% expected, 0.7% last month)
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8:30 a.m. ET: CPI year-on-yearJuly (8.7% expected, 9.1% last month)
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8:30 a.m. ET: CPI excluding food and energy each yearJuly (6.1% expected, 5.9% last month)
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8:30 a.m. ET: CPI Index NSAMarch (296.740 expected, 296.311 last month)
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8:30 a.m. ET: CPI Core Index SAJuly (295.835 expected, 294.354 last month)
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8:30 a.m. ET: Real Average Hourly Earningsyear-on-year, July (-3.6% last month, revised to -3.4%)
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8:30 a.m. ET: Real Average Weekly Earningsyear-on-year, July (-4.4% last month, revised to -4.0%)
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10:00 a.m. ET: Wholesale Inventorys, month-over-month, June final (-1.9% expected, 1.9% last month)
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10:00 a.m. ET: Wholesale Trade Salesmonthly, June (0.5% expected, 0.5% last month)
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2:00 p.m. ET: Monthly Budget Statement (-$175.0 billion expected, -$302.1 billion last month)
Incomes
Pre-market
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Fox Corp. (FOXA), Jack in the Box (JACK), Sonos (SONO), Wendy’s (WEN), Wolverine World Wide (WWW)
Post-market
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