Largest US bank failures of all time 1st Washington Mutual - $386 billion 2nd First Republic - $233 billion 3rd SVB - $209 billion 4th Signature Bank - $118 billion 3 of these have occurred in the last 2 months

POWELL SPEECH SUMMARY⚠️ 1. The Fed decided to keep rates unchanged and to continue quantitative tightening (QT) at the same pace. 2. The Fed are not confident that policy is restrictive enough and are prepared to raise interest rates further if they aren’t happy with progress. However, they are proceeding carefully by pausing as they believe they have time to do so. The committee is NOT thinking about rate cuts at present. Powell emphasised that their current question is HOW high they are going and then the next question will be how long to stay there. 3. Powell iterated that the current stance of policy is restrictive, which he clarified means policy is putting downward pressure on economic activity and inflation. 4. He acknowledged that the risks of doing too much vs too little have become more two sided. 5. Inflation is well above target, but progress has been made. However, he noted that a few months of good data is not enough to convince them they are confidently getting toward target. 6. The Fed believes below trend growth is likely needed to get to target. He commented on the current strong pace of GDP growth, driven by robust consumer spending. He admitted The Fed may have underestimated the strength of household balance sheets following the pandemic. 7. GDP growth is forecasted to slow 8. Below trend growth (which he estimated to be around 2%) and softening of labor market is needed to get to target. Labor market remains tight but coming into better balance. Wage growth has shown some signs of easing to a pace closer to being consistent with their 2% target. They feel gratified that they have managed to see some good progress on inflation without significant job losses so far. 9. When asked about bond yields and their effect on monetary policy he stated that higher bond yields need to be persistent to have an effect on monetary policy stance. They can’t be as a result of market expectations of Fed interest rate decisions. The current rise in yields, if sustained, is going to have a negative impulse on economic activity. However, Powell was not comfortable estimating the equivalent rate hike effect that recent rises in bond yields will have. 10. Powell stated that Fed staff didn’t put a recession back as their baseline projection. 11. He acknowledged that inflation is painful for people, particularly for those with less disposable income. 12. Commented again about the uncertainty of lags of monetary policy changes. Stated It has been 1 year since last 75bps hike. He feels they are seeing the effects of the hikes seen last year. However, it’s hard to say how much. He noted part of implementing monetary policy is knowing there is significant uncertainty and that it takes time to see the effect. 13. He was asked about whether the projections from the dot plot still stood. He responded saying that when things change so do the Fed’s forecast and opinions and generally the further time goes on from the last dot plot the more things change. He also noted that the dot plot is not a policy promise. • Essentially saying their previous projections have changed from September and thus their actions do not need to be in keeping with previous projections. 14. Fed are watching banking stress. They have been working with institutions so they have a plan for their unrealized losses. They don’t feel that rate hikes are worsening the picture for banks at present. 15. The Fed haven’t been thinking about extending the Bank Term Funding Program as of yet; they’ll make a decision in Q1 2024.

POWELL SPEECH SUMMARY⚠️ 1. The majority of Fed members expect there to be another rate hike this year. 2. A soft landing is not the Fed’s baseline forecast. • Powell did emphasise that this is what they hope for 3. Policy is restrictive but Powell not confident that policy is restrictive enough. Priority one is to return price stability. Powell said it would be miserable if the Fed don’t get inflation under control and they are forced to keep hiking again and again with resurging inflation. He acknowledged the risk of recession with hiking rates. 4. Inflation remains well above goal of 2%. The Fed are committed to this target. He said there is still a long way to go prior to achieving this. 5. Powell expects the time for the Federal Reserve to cut will come next year at some point. He emphasised that he doesn’t know when this time will come and doesn’t want us to speculate on timing from what he says because the Fed don’t even know. 6. Real interest rates (interest rates minus inflation) are now meaningfully positive and above neutral policy rate estimates. • Neutral policy rate is the estimate of where rates need to be to not be too tight or too loose for the economy to remain stable. He's saying rates are tighter than this, so expects economic headwinds as result of current monetary policy. 7. Powell said that the Summary of Economic Projections is not a plan but the median of an accumulation of forecasts. He also stated that economic forecasting is very difficult and comes with a significant degree of uncertainty. 8. Economic activity continues to advance at a solid pace. Median GDP growth estimate is 2.1% for 2023 falling to 1.5% in 2024. Below trend growth is needed to achieve targets. If economic activity continues to outperform expectations then the Fed will likely have to do more with interest rates. • Powell basically said if the economy continues to outperform then rates will go higher. 9. Last three core inflation readings have been promising. The Fed tend to look through short term fluctuations in energy prices by focussing on core inflation • This was in response to a question relating to recent oil price increases. 10. Powell stated that many people are locked into low mortgages and even if they want to move they often can’t because the new mortgage would be so expensive. • He acknowledged the golden handcuff effect. 11. Measures of distress in consumer credit are rising from a very low post-pandemic level to a more normal level. Powell currently unconcerned by rising levels of distress in credit. 12. The Fed will continue to reduce their securities holdings – quantitative tightening 13. Softening of labor market required; demand still outstripping supply but coming into better balance. Softening so far has been in the form of falling job vacancies father than significantly up trending unemployment. 14. Powell stated people most hurt by inflation are those on a fixed income. They spend on basics. If prices rise then they are in trouble right away. He also acknowledged the effect that hiking has upon lower income Americans. • This was in response to a question pointing out that people with savings and a low rate mortgages aren't suffering as much at the hand of inflation as people with lower incomes and relying on credit cards. 15. The full effects of tightening so far are yet to be felt and monetary policy lags are uncertain.

Credit Suisse merger with UBS⚠️ 1. $3.3B all share offer 2. Write down of $17.2B CS AT1 shares to zero⚠️ 3. Swiss govt. will cover $9.7bln of potential CS losses imparted on UBS and a further $107.7B liquidity made available from SNB 4. Current CS staff to remain employed for now 5. CS investment bank to be significantly scaled down 6. There will not be a shareholder vote on the deal Simply explained 👇

POWELL SPEECH SUMMARY⚠️ 1. The Fed kept Federal Funds Rates at 5.25%-5.5%. They remain focussed on dual mandate of max employment and stable prices (He reinforced commitment to 2% inflation target). 2. Powell stated that the Fed believe they are now at or near peak rates for this cycle; policy is well into restrictive territory and further tightening effects of previous hikes likely still to come. 3. Further hikes are not off the table but it is not the base case of the FOMC. The question of if rates are high enough still persists. 4. Once the Fed decides it has reached peak rates their next question is when it will become appropriate to dial back monetary policy (rate cuts). Rate cuts were a topic of discussion at the FOMC meeting today. Powell stated members did not reach agreement or debate this; they merely stated what they expect and acknowledged that this is a topic for further discussion. 5. Powell states the Fed are conscious of the risk of holding on to interest rates for too long and stated it is a mistake the Fed don’t want to make. 6. Median forecast for interest rates 4.6% at end of 2024 (3 rate cuts next year) and 3.6% at end of 2025. He reiterated this is not a plan but an accumulation of estimates from FOMC members. 7. He stated no one is declaring victory and that it would be premature to do so; inflation is still too high, with their 2% target forecasted to be reached in 2026. However, the Fed are happy with progress thus far and want to continue to see more of the same. He stated that is has been ‘so far so good’ and that they keep thinking it will get harder but so far it hasn’t. 8. Inflation expectations remain well anchored. Real wages are now positive, and this may improve the mood of consumers. 9. The Fed are not talking about altering rate of QT at present. They have decreased securities holdings by over $1 trillion (QT) but have not yet reached appropriate level of bank reserves. 10. Growth has slowed substantially from the 3rd quarter. Higher interest rates weighing on fixed investment, activity in housing sector has flattened out. Median projection for GDP next year is 1.4%. He stated stronger than expected growth isn’t a problem in itself but if it exerts inflationary pressures that interfere with the Fed’s goals it may force them to alter the path of monetary policy. 11. Job gains have slowed from earlier in the year. Unemployment rate remains low. Wage growth easing but still above levels consistent with 2% target. Job vacancies have declined but labor demand still outweighs supply, despite some normalization and the alleviation of the recent frantic shortage of labor. 12. The economy isn’t in a recession right now. There’s a real possibility that there is a recession in 2024. However, Powell believes and always has believed a recession and significant rise in unemployment can be avoided. The strength of the economy has surprised this year both from a growth perspective and in how low unemployment has remained. 13. When asked about easing of financial conditions caused by market expectations he stated they are focussing on their tools. The Fed wants financial conditions to be as tight as they need to be in the long run to achieve goals and this ultimately will be the case because they will make sure of it. They don’t focus too much on the fluctuations seen in the short term. 14. Powell thinks the inflation we saw in this cycle was not normal ‘pot boiling over’ inflation due to massive demand surge, but more to do with strong demand and significant supply shocks (due to pandemic)

The carpet is his now to be fair

In the last 72 hours⚠️ 1. The Fed announced they are increasing the frequency of standing USD swap lines from once per week to daily. This allows the involved central banks (🇪🇺ECB, 🇨🇭SNB, 🇯🇵BOJ, 🇬🇧BOE, 🇨🇦BOC) to borrow dollars in return for offering their own currency at an agreed exchange rate. Central banks using these swaps will then lend dollars to financial institutions within their own country. At an agreed date the two central banks will then re-exchange currencies, alongside interest, reversing the currency swap. Usually, these swaps occur once per week. An increase of this kind is done occasionally to provide increased availability of liquidity to financial institutions in times of stress. This has only happened twice before - First during the 2008 GFC and second during the COVID crash in 2019. 2. Credit Suisse, 1 of 30 globally systemically important banks, merged with UBS in a deal forced through by regulators, without shareholder vote, wiping out billions of AT1 bonds that were written down to zero. This sparked fears that confidence in AT1 bonds would fall. They are regarded as higher in seniority than common stock yet they have been wiped out and those holding common stock have not. 3. This urged Bank of England to make a statement reinforcing the fact that AT1 in the UK would always take priority over common stock as AT1 bonds are higher in seniority in the corporate capital hierarchy. 4. It emerged that the possibility of guaranteeing ALL DEPOSITS in EVERY bank in the US is being explored. This is despite Janet Yellen explicitly stating that this would not be the case last week. If this happens it would mean $17T of deposits would be guaranteed. For context, the Federal Reserve's balance sheet at peak before QT was less than $9T. 5. News broke that Federal Home Loan Bank (FHLB) lending last week amounted to $304B, almost double the amount of lending accessed via the Fed's discount window. FHLBs saw their biggest ever 1 day issuance in their 90+ years of existence last Monday. FHLBs were created in response to the Great Depression to provide liquidity to US financial institutions. They are touted as the lender of next-to-last resort (with last resort being the Fed's discount window). 6. First Republic Bank climbed almost 30% on Tuesday after closing at a record low on Monday, still down 80% in the last year. The troubled bank are currently exploring strategic options including a possible sale. According to Bloomberg the banks unrealised losses (unsold assets currently worth less than when purchased) are putting off buyers. Apparently, ways in which the government may offload some of these are being considered. This is despite the fact 11 of the largest banks in the US deposited $30B into the bank just last week. The week has been WILD already Don't forget, the Federal Reserve interest rate decision announcement will be at 2pm ET Wednesday. If you enjoy these breakdowns then remember to LIKE, RETWEET and of course FOLLOW for more

POWELL SPEECH SUMMARY⚠️ 1. Rates remain unchanged at 5.25% to 5.5%. The vote was unanimous. Rate of QT left unchanged. 2. Inflation has eased and the economy has made good progress. The Fed initially thought that a loosening of the labor market and below trend GDP growth would be necessary for inflation to return to target but they have been surprised and no longer think this as inflation has fallen without this occurring. They still expect growth to moderate but have expected this for a while now. Powell described that overall they are seeing a pretty good picture. 3. Policy rates are well into restrictive territory and are likely at their peak (changed from at or near their peak). The Fed are currently balancing the risk of cutting too soon vs too late, described by Powell as being in ‘risk management mode’. The Fed will remain data dependent, keeping rates where they are for longer or cutting more quickly if warranted. 4. The Fed feel it will be appropriate to begin dialling back policy at some point this year but do not want to cut rates until they have greater confidence that inflation is on a sustainable path down to 2%. They ARE confident of this but want to see more evidence. Last 6 months of good inflation data not enough for Fed to make this decision to cut but want to see a continuation of what we have been seeing of late. Powell wouldn’t give a specific number of months the Fed needed of good data. 5. Almost every participant on the committee believes it will be appropriate to reduce interest rates. Powell stated that there is a healthy variety of viewpoints in the committee about when rate cuts will occur. 6. Powell stated that he didn’t expect for the first cut to be at March meeting but didn’t entirely rule it out. 7. Rather than a rebound in inflation the Fed see the bigger risk as inflation stabilising above 2%. The Fed aren’t looking for a single 2% print, they are looking for inflation to be anchored there and in the process, there may be some prints below and above target. 8. The risks of monetary policy have come into better balance as inflation has eased. Raising the Fed Funds Rate by 5.25% and reducing the balance sheet (QT) by $1.3 trillion is putting downward pressure on economy. 9. A slide in employment would bring Fed to cut rates faster but this is not something they are looking to achieve. Similarly, if inflation was stickier then this would result in them holding off for longer. 10. Balance sheet run off has gone well so far. The Fed are going to discuss future possible changes to the pace of QT at meeting in March in depth. Fed don’t see the need to see the RRP (Reverse Repo) to go to zero prior to tapering the rate of QT 11. Powell states they have a ways to go prior to achieving a soft landing. They are encouraged by progress but not declaring victory at all at this point. 12. The labor market is at or nearing normal. Job openings and wage increases not yet back to normal. The economy is broadly normalising, and this process will take time (couple of years) to get all the way back. The labor market is rebalancing, there was a severe imbalance due to the pandemic. 13. The Fed is committed to dual mandate of stable prices (2% inflation) and maximum employment

In the last 7 days 1. The 2nd and 3rd largest US Bank failures of all time occurred 2. SVB and Signature Bank had their deposits guaranteed 100% through a systemically important exception despite not technically qualifying for this 3. The Federal Reserve created a new program for lending to help stressed banks avoid insolvency 4. The Fed added $300b to their balance sheet, reversing much of the reduction that had taken place through their QT to fight inflation 5. Credit Suisse had to be backed with liquidity from the Swiss National Bank to prevent a collapse 6. First Republic Bank was provided $30b in liquidity by some of the biggest banks in the US (JPM, BOA, Wells Fargo, MS, GS and others) 7. 2Y T-Bill yields dropped at the fastest rate since the 80s 8. The Federal Reserve saw the largest use of the discount window of all time, $152.3 was borrowed. Higher than any week in the Great Financial Crisis. On top of this, another $11.9b from the new Bank Term Funding Program was borrowed. 9. The European Central Bank hiked 50bps This isn't good for anyone's blood pressure

POWELL SPEECH SUMMARY⚠️ 1. The Federal Reserve voted unanimously to pause, keeping interest rates as they are. However, Powell forecasted that further rate hikes are likely needed this year. 2. The Fed's updated dot plot was released with Fed members forecasting higher peak rates than their previous in March. The median prediction for peak rates is now 5.6% and almost all members agree that further hikes will be needed. 3. The Fed is still committed to 2% inflation 4. The full effects of hikes haven't yet filtered through to the economy 5. The labor market remains too strong despite some evidence of progress 6. The Fed don't know how much conditions are going to tighten (in relation to recent banking sector troubles) and will remain data dependent 7. A slowing of growth in the economy is needed to bring inflation down 8. Core PCE inflation (the Fed's preferred measure of inflation) isn't showing much progress. 9. Powell feels there is still a chance a soft landing can be achieved 10. Rate cuts are not expected this year and could be as long as a few years out Markets are now pricing in a 70% chance of a 0.25% rate hike in July Updated dot plot below 👇

THIS WEEK'S HIGHLIGHTS⚠️ 1. The Fed's Balance sheet decreased by 73.56B 2. US financial institutions borrowed $148.7B from the Fed in the week through April 5th, compared with $152.6B the week prior. Bank Term Funding Program (BTFP) lending increased to $79B from $64.4B. Discount window (DW) borrowing decreased from $88.2B to $69.7B. Banks are still requiring access to emergency liquidity but this appears to be easing • The Fed's DW facilitates lending to certain US financial institutions via collateral backed loans for up to 90 days - regarded as 'lender of last resort' • BTFP provides Fed lending for up to 1 year. Collateral is taken at par value, meaning they will ignore price changes of assets since purchase. This prevents banks from having to sell underwater portfolios of bonds, agency MBS etc 3. Foreign and International Monetary Authorities (FIMA) repo facility usage fell to $40B. The prior two weeks demanded $55B and $60B, respectively • FIMA allows short term lending of dollars to foreign central banks who then lend to banks within their country. T-bills are used as collateral. Foreign banks are still requiring large amounts of emergency dollar liquidity but it does appear to be easing 4. US commercial bank deposits continue to decline - falling by $65B week ending March 29th. Deposits in large US domestically chartered banks fell by ~$40B. Deposits at small US banks increased by ~$1.5B in the week ending March 29th. All seasonally adjusted. Money market funds continue to see significant inflows 5. News broke that US bank lending in the last 2 weeks of March fell at the fastest pace on record (-$105B), suggesting tightening credit (lending) conditions. US top 25 banks' lending decreased $23.5B and $73.6B at smaller banks 6. The American Banker's Association credit conditions index fell to lowest level since the pandemic - reported at 5.8 for Q2 2023. This index, created from survey responses of leading economists at US banks, forecasts future US lending conditions. For context of how low this reading is - any reading below 50 suggests that credit conditions will deteriorate. This reading is lower than any during the Great Financial Crisis. 7. US employment data showed that the US labor market remains historically very strong but is starting to show early signs of softening: • JOLTS job openings fell more than expected to 9.93M (Exp. 10.4M) • Weekly initial jobless claims increased more than expected to 228K and continued claims rose to 1823K, also higher than consensus • March Non-Farms Payrolls added 236K jobs, pretty much in line with expectations (Prev. 326K) • US Unemployment Rate unexpectedly fell to 3.5% (Exp 3.6%) 8. OPEC+ cut oil production by 1.6M barrels per day OPEC+ is a group oil producing countries that collaborate to manage supply of oil around the globe to maintain price stability. Decisions on production significantly impact prices (and therefore energy prices) around the globe The US were critical of the decision amidst fears of increased inflationary pressures as a result 9. US PMIs, suggesting incoming economic slowdown. PMIs collate survey responses of US business managers on business activity. NB >50 = growth, <50 = contraction, 50 = stagnation • ISM Manufacturing PMI for March 46.3. Now at levels (- COVID crash) not seen since the Great Financial Crisis • ISM Services PMI for March 51.2, worse than expected. Services account for >75% of US GDP; this is a poor indicator for the US economy The US banking liquidity crisis appears to be easing but we are now faced with impending tightening credit conditions, as warned by the man J Powell himself. The implications of this are yet to be seen but consensus is that the largest tail risk facing the economy is the possibility of a credit event. Despite this, markets currently expect the Fed to hike in May No one knows exactly what is going to happen but it absolutely will not be boring $MACRO 💊

THIS WEEK'S HIGHLIGHTS ⚠️ 1. Fed Balance sheet increased by $94.5B to $8.73T (Peak before QT $8.97T) 2. It was announced that a further $53.7B was borrowed by US financial institutions via the Bank Term Funding Program, a total of $65.6B in the 11 days since it's inception. BTFP allows banks to take loans from the Fed by posting (primarily) bonds as collateral at the price they paid for them. This prevents banks from having to sell underwater bond portfolios in order to service their financial obligations. 3. The Federal Reserve raised interest rates 0.25% to 5% 4. Powell's speech: He emphasised the Fed are still committed to tackling inflation as a priority, they predict the ongoing banking crisis to tighten lending but they have no idea by how much. Stated they do not plan on cutting rates soon and may raise further. 5. Janet Yellen flipflopped all week on whether all bank deposits in the US would be guaranteed. There is still no definitive answer. 6. The Bank of England raised interest rates 0.25% to 4.25%. 7. US Treasury 2Y yield continues to fall. Yields declined from Tuesday's close (4.18%) in to Friday's close at 3.77%. The 2Y/10Y yield is becoming less inverted. 8. Fed standing USD swap lines increased from once per week to daily. This allows the involved central banks (🇪🇺ECB, 🇨🇭SNB, 🇯🇵BOJ, 🇬🇧BOE, 🇨🇦BOC) to borrow dollars in return for offering their own currency at an agreed exchange rate, they then re-exchange at an agreed date. This was done to provide increased access to liquidity for foreign financial institutions and has only happened twice - First during the 2008 GFC and second during the COVID crash in 2019. 9. The Fed's foreign repo facility (FIMA) experienced record usage of $60B. This allows short term lending of dollars primarily to foreign central banks to access dollar liquidity by posting US Treasury bonds as collateral. The borrowed amount is then repaid to the Fed + interest. Unknown foreign institutions were in dire need of USD. 10. UK CPI reversed its downward trend and surprised to the upside. Core CPI came in at 6.2% YoY in February (Prev. 5.8%). Headline CPI came in at 10.4% YoY (Prev. 10.1%). 11. US initial jobless claims for the week ending March 18th came in at 191K (Exp. 197K) beating expectations and displaying an ongoing very strong labor market. 12. US Durable goods orders surprise to the downside 1% MoM in February (Exp. +0.6%). Durable goods are supposed to last 3+ years. The decline was led by transportation. However, capital goods (goods bought by businesses to produce more goods e.g. manufacturing equipment) also fell, suggesting 🇺🇸companies are being more defensive with their money. 13. US purchasing manager indexes (PMIs) came in hot, suggesting business activity is doing better than expected in 🇺🇸. Eurozone services PMI also came in better than expected but manufacturing surprised to the downside. PMIs are indexes based off of survey responses of business managers reporting on a number of aspects of business performance. 14. News broke that Federal Home Loan Bank (FHLB) lending last week amounted to $304B. FHLBs saw their biggest ever 1 day issuance in their 90+ years of existence last Monday. They are touted as the lender of next-to-last resort (with last resort being the Fed's discount window) and provide liquidity to US financial institutions. 15. Worries surfaced about Deutsche Bank, Germany's largest bank, as the price of credit default swaps on their debt increased significantly. These are derivatives that pay out if DB default (can't pay their debt obligations). This either suggests people holding DB debt feel the need to insure themselves against DB defaulting or that investors that don't own the underlying assets are speculating on them being the next victim to succumb to the ongoing banking crisis. Every week seems more eventful than the last right now. Sometimes I miss precedented times.

THIS WEEK'S HIGHLIGHTS ⚠️ 1. No banks collapsed 2. The Federal Reserve balance sheet decreased by $28B after increasing by $94.5B the prior week 3. Borrowing from the Discount Window (DW) and Bank Term Funding Program (BTFP) fell from $163.9B to $152.6B week ending March 29th. A sign that the banking liquidity crisis may have eased slightly. However, current lending is still significantly higher than is healthy: • DW borrowing $88.2B (-$22.1B from prior week) Simply put, the DW allows certain financial institutions access to collateral backed loans from the Fed that can be extended to 90 days - touted the 'lender of last resort' • BTFP borrowing increased to $64.4B (from $53.7B) Simply put, BTFP provides collateral backed loans for up to 1 year from the Fed. Underlying collateral is taken by the Fed at par value, meaning they will ignore price fluctuations. This prevents banks from having to sell heavily underwater portfolios of T-bills, agency MBS (MBS issued by govt. backed institutions) etc. 4. Foreign and International Monetary Authorities (FIMA) repo facility lending fell to $55B from $60B FIMA repo allows short term lending of dollars primarily to foreign central banks to access dollar liquidity by posting T-bills as collateral. Foreign banks (that are undisclosed) were still requiring liquidity ++ 5. Treasury 2Y yield 3.86% at week beginning, week end 4.0376%. The 2Y/10Y yield curve inverted further this week from -0.41 Monday to -0.58 Friday 6. Money market funds (MMFs) saw $60B of inflows in the week to Wednesday. Meanwhile, US banks saw significant outflows. Banks in the US lost $126 billion in deposits, predominantly from large banks. Banks are struggling keep deposits as money continues to move in search of higher interest MMFs are funds that invest largely in short term debt securities. e.g. US T-bills, certificates of deposit, commercial paper (institutional short-term uncollateralised debt), repo agreements. They are designed to be very low risk and offer almost guaranteed returns while remaining highly liquid (you can cash out quickly if you need to) 7. US Pending Home Sales came in better than expected +0.8% in Feb MoM (Exp. -2.3%), still down -21.1% YoY. This is a leading indicator of existing home sales figures in approx 1-2 months time. 8. Spanish CPI fell to 3.3% YoY in March (Exp. 3.8%) and down from 6% in the prior month, driven largely by energy price declines. Core CPI (core = minus energy and food prices) came in at 7.5% (Exp. 7.2% prev. 7.6%) Spanish CPI is considered a leading indicator of Eurozone inflation, suggesting Eurozone headline inflation may decline sharply in the coming months. 9. Headline Eurozone consumer inflation slightly lower than expected at 6.9%, a decline from 8.5% in Feb. However, core Inflation came in as expected at 5.7%, a new high of the inflation cycle. 10. US Jobless claims w/e Mar 25th initial claims 198k (exp. 196k prev. 191k). The US job market remains very tight despite the number of new unemployment benefit claims rising slightly more than expected. 11. UK Q4 GDP final report +0.1% QoQ. This is confirmation that the UK officially avoided a technical recession for now. 12. UK Nationwide house price index showed the largest decline in housing prices YoY since 2009. House prices down 3.1% YoY in March and -0.8% MoM, showing that the UK housing market is experiencing downward pressure from interest rate rises. 13. Core PCE price index slightly lower than expected at 4.6% (prev. 4.7%) YoY. This is the Fed's preferred barometer of inflation. In response, Fed's Collins stated that the Fed needs more evidence to see that inflation is on a 'sustained downward path' 14. Reports that Brazil, Russia, India, China, and South Africa are developing a currency emerged. This sparked widespread speculation about the future of the USD's world reserve currency status. USD has acted as the world's reserve currency since the end of World War II.

Fed Powell Speech Summary ⚠️ 1. The 25bps rate hike today was voted upon unanimously (bringing the Fed funds rate to 5%) 2. The Federal Reserve plan on continuing balance sheet reductions as planned at the current pace, despite adding over $300B to the balance sheet in the last week. 3. Powell still sees a soft landing as a possibility. 4. The Fed will protect deposits using the tools they have and depositors should have confidence their money is safe as the banking system is sound. (Yellen at the same time said they are no longer considering insuring all deposits) 5. The Fed thinks that credit (lending) tightening will occur as a result of the banking crisis; they have no idea how much. As a result, they may not have to raise rates as much/will take this into account when deliberating on future rate adjustments. 6. The Fed are not planning rate cuts this year and will NOT rule out further hikes if deemed necessary. 7. Unemployment is too low. 8. Inflation is too high, still committed to 2% target. Disinflation is, however, occuring. 9. The Fed considered pausing rates. 10. The US needs to see a period of slower than average growth. Stocks and 2Y yield fell sharply into the close suggesting markets were not reassured by Powell's comments. Given the ongoing banking crisis, it's fair to ask what Powell actually considers to be a soft landing.

POWELL SPEECH AND Q&A SUMMARY ⚠️ 1. The Fed have taken the decision to increase Federal Funds Rate by 0.25% to 5.25%-5.5% (the highest in 22 years). 2. The Fed have not made a decision about any future meeting decisions, they remain data dependent and will raise again (or not) if they believe data warrants. The Fed will continue to reduce securities holdings a brisk pace (QT). Powell does not see any rate cuts this year and was non-committal about when this might happen. Currently the economy is weathering monetary policy changes well. 3. Inflation came in better than expected in the latest CPI report but the Fed want to be careful about taking too much from a single reading. The Fed don't expect to get to 2% inflation until 2025 and are still fully committed to this target. 4. The Fed believes monetary policy is currently restrictive and it is putting downwards pressure on inflation and economic activity. The Fed are seeing progress in the most interest sensitive areas of the economy but it will take time for the full effects to filter through to the economy. 5. Lags with which monetary policy have an effect now start faster than they used to as markets now anticipate the Fed’s next move before it happens. However, the full lags remain very uncertain. 6. Jerome Powell told us that he knows the results of the latest SLOOS. It gives the picture of tight and further tightening credit conditions, as you would expect. Tightening credit conditions will constrain the economy. 7. The Federal Reserve staff are no longer forecasting a recession. Powell states that it has been his consistent view that he doesn't think a recession will happen. He thinks the Fed can achieve a soft landing even though this is a long way from guaranteed. 8. The labor market remains very tight. There are some signs of progress in this area but demand still far outstrips supply. The Fed are not actively aiming to increase unemployment but acknowledge that history shows that this is a side effect of monetary policy changes and we will see some softening of the labor market before their inflation target is achieved. 9. Housing activity may have picked up but remains well below levels seen a year ago. 10. The banking sector remains strong and resilient. MACRO 💊

THIS WEEK’S HIGHLIGHTS ⚠️ 1. The Federal Reserve's total balance sheet DECREASED by $21.15 billion and now stands at $8.34 trillion. The increase in balance sheet seen as a result of recent stress in the banking sector has almost been entirely erased by the Fed’s ongoing QT. 2. US financial institution emergency borrowing INCREASED by $347 million, now standing at $106.3billion. Discount window (DW) borrowing INCREASED by literally $1 million, now at $3.209 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $346 million, now at $103 billion. • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 3. US GDP final estimate for Q1 were released, coming in higher than expected at an annualized 2% (Exp. 1.4%, Prev. 2.6%, Revised from 1.3%). Consumer spending increased +4.2% QoQ, revised upwards in the latest figures. 4. US CB Consumer Confidence for June came in hotter than expected and increased to 109.7 (Exp. 103.85, Prev. 102.3) suggesting a more optimistic consumer and providing the highest reading since Jan 22. The expectations index, despite also improving, has remained below a reading of 80 since Dec 22; the is the level that is supposed to indicate recession within the next 12 months. • Consumer confidence is monitored to predict future consumer spending patterns. This index, based off collated responses of appox. 5000 US households, tracks consumer current and future buying intentions, vacation plans, as well as consumer expectations for inflation, stock prices, and interest rates. Consumer spending accounts for around 70% of US GDP generation. 5. PCE price index fell in line with expectations to 3.8% (Exp. 3.8%, Prev. 4.4%, revised to 4.3%) in May and increased 0.1% MoM. Core PCE Price Index declined to 4.6% (Exp.4.7%, Prev. 4.7%) YoY. • Core PCE (excluding food and energy) is widely known to be the Federal Reserve’s preferred measure of inflation. Although core PCE came in lower than the prior month, it is still running at YoY levels that remain VERY sticky, essentially since late 2022. However, a notable metric that Powell is known to follow closely, core services inflation ex-housing, increased only 0.2% MoM. This is the softest increase for 10 months and could indicate that the Fed are starting to see some early signs of progress in areas they have been hoping for. 6. The Federal Reserve published the results of the annual bank stress test, this year testing 23 of the largest US banks. The test essentially simulates hypothetical adverse economic scenarios to evaluate how banks would fare under severe economic conditions and evaluate systemic risk should those scenarios play out. Overview of the published findings: • All 23 banks tested remained above their minimum capital requirements during the hypothetical recession, despite total projected losses of $541 billion- $424 billion in loan losses, $18 billion in additional items such as loans booked under fair value, $94 billion in trading and counterparty losses, $5 billion in securities losses • Under the most severe stress test scenario aggregate CET1 capital ratio falls to 10.1% from 12.4% (Q4 22). The minimum regulatory capital ratio is 4.5% • Lowest minimum CET1 ratio in severe scenario - Citizens at 6.4% (regulatory minimum 4.5%) • Highest minimum CET1 ratio in severe scenario - Charles Schwab Corp 22.8% • Banks with concentrations in mortgages, credit cards, and commercial real estate generally had larger declines in capital ratios in the stress test this year Why do they focus on CET1? CET1 is considered the most loss absorbing form of capital a bank has. It is the first form of capital to bear losses in the event of a bank's failure/severe distress and for large banks there are minimum regulatory requirements for the amount of CET1 they must have relative to risk weighted assets. Risk-weighted assets are bank assets, including loans, mortgages, securities, and other risk exposed investments. 7. US home prices fell YoY for the first time since 2012 in April according to the S&P/Case-Shiller national index, coming in at -0.2%. However, prices increased 1.3% MoM (seasonally adjusted 0.5%) and are up 2.3% since the start of the year. • The index provides not nationwide insight but is also flagging up some significant discrepancies in performance between cities and regions. Some of the best performing cities YoY include Miami +5.2%, Chicago 4.1%, Atlanta 3.5% vs worst performing Seattle -12.4%, San Francisco -11.1%. The Southeast remains the best performing region at +3.6% YoY while the West remains the worst performing at -6.9%. • Worth pointing out that due to data being from the three months leading to April, this is an index that operates with a significant lag and doesn’t necessarily reflect current conditions or changes in prices since. 8. Unsurprisingly given recent hot housing starts data and construction data, new home sales came in red hot at +12.2% MoM (Exp. -1.2%, Prev. 3.5%). There is a current lack of existing home inventory. This is caused by people (understandably) resisting swapping a low rate mortgage for a rate ~7%. The shift to new homes is compounded by the fact that new home builders are providing financial incentives like buydowns during a time when mortgage payments are through the roof. 9. Pending home sales fell -22.2% YoY in May (Prev. 20.6%) and -2.7% MoM, suggesting a continued slowdown in housing activity for existing homes when compared to the year prior. • This measures the number sales of existing homes that have been agreed (contract signed) but have not yet been finalised in the US. It is a leading indicator for the US housing market. While new home sales are showing strength, existing home sales account for 90% of the US housing market and are far from it. 10. US Durable Goods came in hotter than expected at 1.7% (Exp. -1%, Prev. 1.2%) MoM, suggesting demand in the US is proving to be more resilient than anticipated. This makes the third month in a row of positive MoM readings. Non-Defence goods excluding aircraft (seen as a better indicator of business spending) also came in hotter than expected at 0.7% (Exp. 0%, Prev. 0.6%). • May saw +3.9% in transport (mainly driven by non-defence aircraft and parts +32.5%), motor vehicles +2.2%. New orders increased 0.6% MoM and capital goods +2.8% (capital goods are generally bought by businesses in order to generate more revenue e.g., machinery for production). • Durable goods provide data on the value of orders, shipments, and inventories of products designed to last at least three years. It gives insight into business investment. Durable goods are often expensive and businesses that think near term economic outlook is poor may hold off on making large investments in order to be more conservative and protect their balance sheet. 11. Dallas Fed Manufacturing Index showed ongoing contraction in June, but an improvement from the prior month coming in at -23.2 (Expected -26.5, Previous -29.1). Texas produces approximately 10% of manufacturing output in the US so is a key indicator of manufacturing activity in the US. 12. Eurozone consumer inflation data demonstrated continued declines in headline, associated with drops in energy prices. However, core inflation unexpectedly increased in Germany and came in hotter than expected in Spain: • Eurozone 5.5% (Exp. 5.6%, Prev. 6.1%) Core 5.4% (Prev. 5.3%) • Spain 1.9% (Exp. 1.7%, Prev. 3.2%) Core 5.9% (Prev. 6.1%) • German 6.4% (Exp. 6.3%, Prev.6.1%) Core 5.8% (Prev. 5.4%) Eurozone core inflation re-accelerating makes the ECB more likely to proceed with their forecast rate hike at their next meeting at minimum, not that there is much doubt as Christine Lagarde has all but promised it. Despite this, producer inflation figures for some countries like Spain and Italy are now printing in full deflation while Germany is printing at 1% YoY (pushed mainly by energy price declines). This could signal that consumer inflation in the economic area will fall in the coming months. 13. The German IFO business climate declined to the lowest reading in 6 months, suggesting further troubled waters ahead. The reading for June came in at 88.5 (Exp. 90.7, Prev. 91.5). Notably services, which have been very resilient despite manufacturing contraction, showed signs of weakening and worsening expectations. • IFO Business Climate measures business sentiment in Germany through monthly surveys of around 9000 businesses across manufacturing, construction, wholesaling, and retailing sectors. Respondents are asked to assess their current situation as well as their forecast for the next 6 months. Readings below 100 indicate an overriding pessimistic outlook. 14. German Gfk Consumer Confidence also decreased for the first time in 9 months for July at -25.4 (Exp. -23 ,Prev.24.4). The decline was predominantly due to expectations of economic performance and income. • A reading of 0 represents that historical average consumer sentiment in the country. 15. Unemployment rate in Germany also increased to 5.7% (Exp. 5.6%, Prev. 5.6%) 16. Eurozone Economic Sentiment Index (ESI) for June came in at the lowest reading since November 2022 at 95.3 (Exp. 96, Prev. 96.4). • The ESI surveys businesses from multiple sectors to gauge economic sentiment in the area. A reading of 100 signifies average economic sentiment. - The US economy has proven to be significantly more resilient than most people anticipated during the fastest hiking cycle in history. The bank stress test this week showed acceptable performance of the largest banks in the US. However, only banks >$250 billion in assets are tested every year. Many of the recent issues in the banking sector came from regional banks, small enough to not be tested every year e.g. SVB, Signature. If recent regional collapses were enough to cause systemic risk then it begs the question of how useful the stress tests actually are for assessing systemic risk potential. A mixed picture can be seen in the housing market. New homes are seeing a surge in activity as home builders provide financial incentives and existing home owners remain reluctant to sell into the highest rate environment for decades. Whilst unemployment remains low, this is likely to persist, as few are forced to sell their home. As far as the Eurozone is concerned, data coming out of Germany continues to disappoint and core inflation came in hotter than anticipated. The ECB are very likely going to hike at their next meeting, despite the largest constituent economic member continuing to struggle. US inflation remains very elevated and the Fed have forecast up to two further rate hikes in 2023, as the economy remains resilient. Going into next week markets are currently pricing in an 84.3% chance of a rate hike at the Federal Reserve's next meeting.

THIS WEEK'S HIGHLIGHTS ⚠️ What. A. Week. 1. Collapsed SVB and Signature Bank have all deposits regardless of amount backed 100% despite FDIC $250k limit 2. Worries arise over polarising risk between big systemically important banks and smaller banks not considered to have this status. Bigger banks seeing large influx of deposits as a result. 3. Credit Suisse given emergency liquidity injection of $54b from Swiss National Bank. This doesn't seem to have been enough to stem the bleeding as share price fell in to the close on Friday 4. UBS, largest bank in Switzerland, considering options for acquiring part or all of Credit Suisse in rescue bid but want reassurance from Swiss Central Bank of backstops 5. First Republic Bank given $30b by 11 of the largest US banks to prevent insolvency 6. The 2Y yield finishes the week at 3.825% after being 5%+ the prior week, people are seeking safe havens and fed rate cuts are being priced in this year 7. Announcement that over $160b in lending from the Federal Reserve via the discount window and the new Bank Term Funding Program was needed by US banks cumulatively. A new record for discount window usage. 8. The European Central Bank raised rated by 50bps 9. US housing starts (+10%) and building permits (+13.8%) beat expectations, giving a boost to current and future home construction prospects 10. UK unemployment remains very low (3.7%) with declining unemployment benefit claims in February, showing an ongoing very tight labor market 11. Likewise in the US, Jobless claims saw their biggest weekly decline since July 22 12. US core CPI (5.5% prev. 5.6%) comes in as expected with core PPI YoY declining significantly in Feb (4.6% prev. 5.7%) spurring hopes that future CPI prints may follow suit 13. US retail sales down MoM in Feb -0.4% (prev. 3.2%) suggesting declining demand 14. Eurozone Core inflation YoY increased 5.6% (prev. 5.3%), suggesting the ECB still have a fight on their hands, despite worries over trouble in banking If you like these weekly breakdowns then remember to LIKE, RETWEET and FOLLOW for more.

This year alone we've seen⚠️ 1. 3 of the top 5 largest US bank failures of all time, even when adjusted for inflation. All depositors made whole, including those over the FDIC limit of $250K 2. Janet Yellen announce that the US could default as early as June 1st if the debt ceiling is not lifted, US politicians will sit for approximately 3 weeks prior to this date during which they will have to either raise or suspend the US debt limit 3. The Federal Reserve not only predict a recession in 2023 but raise interest rates despite this. They are also expected to raise a further 25bps on Wednesday 4. The Federal Reserve lending vast amounts of liquidity to US and foreign financial institutions due to the crisis in banking that started in March. Discount Window usage hit record weekly usage, surpassing anything seen in the GFC. The Fed created a new lending facility called the Bank Term Funding Program in order to try and help stabilise the US banking system by allowing banks to post collateral with minimal/no haircut 5. Credit Suisse, 1 of 30 global systemically important banks (G-SIBs), collapsed and was acquired by UBS 6. The 3M10Y and 2Y10Y spreads are at their most deeply inverted readings since the early 80s All this and it's only May

SUMMARY OF FOMC MINUTES⚠️ 1. All members voted for a 25bps hike in March. Some members would have felt 50bps suitable had banking sector troubles not occurred 2. Several members voiced that they considered whether a pause was justified 3. All participants agreed that continuing balance sheet reduction is warranted 4. The Fed forecast a mild recession starting later this year with recovery taking 2 years 5. Inflation is too high and the labor market too strong and as a result some further policy affirming (hike(s)) may be needed 6. Banking sector stress is likely to lead to a reduction in lending from banks (tightening credit conditions) and weigh on economic activity, hiring, and inflation. They are not sure by how much 7. If the effects of stress in the banking sector subside quickly then inflationary pressures and economic activity are expected to shift to the upside 8. If effects of stress in banking sector worsen then risk is skewed to the downside - iterating that recessions caused by trouble in financial markets tend to be more severe and persistent than average 9. Unemployment projected to rise above projected 'natural rate' early 2024 and is currently well below the level required to achieve inflation target of 2% Context: The natural rate of unemployment is the rate at which the Fed forecasts inflation to be stable and the economy to be performing at near potential 10. The Fed expect core and total PCE price inflation to be around 2% target in 2024 and 2025 11. Banking sector stress is expected to affect consumer confidence and may restrain consumer spending Context: Approx ~70% of US GDP is attributed to consumer spending 12. Several members emphasised that the Fed need to remain flexible with regards to monetary policy decisions due to very uncertain economic outlook Sounds like the Fed were very uncertain about, well, most things. In general, inflation is too high and unemployment too low. There was significant worries and uncertainty over the banking sector crisis, which was in full flow at the time of the meeting. They now expect a recession to hit in 2023. Seeing as banking stress appears to be easing and core CPI increased to 5.6% YoY there is a very good chance of a 25bps hike in May - assuming no further drama in the banking sector between now and then. Markets agree - Fed futures now pricing in a ~70% chance of a 0.25% hike in May $MACRO 💊

THIS WEEK'S HIGHLIGHTS ⚠️ 1. Moody’s set the US credit rating outlook to ‘negative’ and stated that political risks (brinksmanship surrounding debt ceiling and possible govt. shutdowns), the fiscal deficit and debt affordability were their major issues of concern. • This is not the same as Moody’s downgrading the US debt rating from its AAA status, a rating Moody’s is the last major agency to hold. However, it likely precedes a downgrade, or at the very least makes it much more likely and is a warning shot to say they are considering it. • As aforementioned, Moody’s is the only major credit rating agency that still holds the US government debt with a triple A rating. Both Fitch and S&P have previously downgraded, with Fitch taking this action following the debt ceiling crisis that was averted last minute back in June this year. • The worry from markets surrounding a downgrade to the US Treasury debt is that it would result in structurally higher borrowing costs (higher Treasury yields). However, the caveat to this is to understand that US Treasury debt is still the most liquid, safest and important asset market on Earth and it is already split rated (i.e. S&P and Fitch have lower than AAA ratings). The impact may be lesser than anticipated. 2. The US Treasury had a $24 billion 30Y Treasury auction that saw weak demand. The primary dealer award climbed to its highest in 2 years. The auction tailed the when issued by 5.3bps and the bid to cover ratio came in at 2.24. • The bid-to-cover ratio is the ratio of bids vs the amount of Treasurys being sold and thus is said to give insight into the level of demand in a Treasury auction. This is much lower than recent bid-to-cover ratios, suggesting lower demand. it is an imperfect indicator as it does not take into account the prices of bids. • Primary dealers are large financial institutions that have to take on board any Treasuries that are not sold to the wider market. They took 24.7% of the auction, much larger a stake than has been seen of late. This also suggests that demand from other bidders, that are not mandated to purchase Treasuries, has fallen markedly for longer dated securities. • Simplified, when issued essentially represents market expectations of what yield the Treasurys in the auction will be sold at. The fact that the auction tailed the when issued means that the yield was higher than expected and thus demand for the auction was well below expectations. This is a substantial when issued tail and the largest since 2016. 3. The University of Michigan Consumer Sentiment Survey inflation expectations report continued to climb, making Powell’s comments about inflation expectations remaining well anchored look like they could be called into question. 12-month inflation expectations came in at 4.4% (Exp 4%, Prev. 4.2%). On top of this, longer term inflation expectations also rose significantly and will most certainly catch the eye of the Federal Reserve. 5-10 year inflation expectations rose to 3.2%. (Exp 3%, Prev. 3%) This is the highest they have been in over a decade. • Buying conditions in the survey also deteriorated in the consumer survey. Buying conditions for homes and vehicles are at their lowest since the 80s. • Inflation expectation matter, a lot. They influence the behaviour of humans. Thus, expectations can affect actual inflation. If inflation expectations become ‘unanchored’, or rise with incoming data, then even if interest rates are elevated, they may not have the desired effect. Inflation expectations have a significant impact on monetary policy decision making. • Powell has been talking at length about expectations remaining ‘well anchored’. The recent rise in expectations is not what the Fed will want to see. • Former Fed chairman Ben Bernanke referred to ‘anchored’ inflation expectations as expectations of longer-term inflation that remain low even if in the short term there are spells of higher or lower than expected inflation. • Rising inflation expectations in times of higher inflation make central bankers more itchy. The Fed' ultimate worry is that higher expectations of inflation make people demand higher wages and thus businesses raise their prices to protect margins, inflation rises, and the cycle continues, becoming very difficult for central banks to control. The concept is that of a wage-price spiral. 4. Powell gave a speech midweek that was interpreted as hawkish by markets. Powell could be heard saying ‘close the fuckin’ door’ on his microphone during a live speech that was interrupted by climate protestors. His speech re-iterated the hawkish rhetoric of his press conference following the latest FOMC meeting. Key points: • Fed not convinced rates are high enough to bring inflation to 2% target but policy is restrictive and putting downward pressure on economy and inflation • They will continue to move carefully • The economy has been much more resilient than expected citing it as ‘quite remarkable’ but expected to slow in coming quarters 5. The Senior Loan Officer Opinions Survey (SLOOS) for Q3 was released this week. It showed banks continue tightening lending standards and demand for credit (borrowing) continues to decline. However, the proportion of banks that reported a tightening of conditions appears to have cooled since the second quarter. Thus, the level of tightening and demand waning in Q3 appears to have been to a lesser extent but is still significant, but us still very significant. Banks tightening for business loans • The SLOOS is a survey conducted by the Federal Reserve of US banks and US branches of foreign banks. It provides insight into the supply and demand picture of lending in the US on a quarterly basis. • Larger shares of banks saw consumer loan demand fall in Q3 and residential mortgage lending standards tightened to a greater extent than in the prior quarter, with demand falling considerably. • Lending demand for subprime mortgages took a particularly significant hit, which may suggest that the lower earners in the US are struggling. There was a VERY notable increase in the number of banks reporting falling demand for mortgages from subprime lenders. A net percentage of 71.4% of banks reported declining demand for subprime in Q3 vs only 9.1% in the prior quarter. This is despite the level of reported tightening from banks for subprime mortgages actually decreasing slightly quarter over quarter. 6. Initial jobless claims fell to 217K (Exp. 218K, Prev. 220K) while initial jobless claims climbed further to 1834K (Exp. 1820K, Prev. 1818K). The pace of layoffs in the US doesn’t appear to be rapidly rising but it seems clear that American’s that are becoming unemployed are finding it more difficult to find employment in a weakening American labor market. Jobless Claims • Since the start of September there has been a clear and persistent upward trend in continued claims. • Initial claims tracks the number or people that are filing for unemployment benefits for the first time and continuing claims tracks the number of people that are filing for the 2nd or more time. As people struggle to find a job after becoming unemployed in a cooling labor market environment they are forced to file for unemployment benefits for a more prolonged duration, and thus continued claims accumulates. 7. US financial institution emergency borrowing INCREASED by $3.14 billion, now standing at $115.16 billion. Discount window (DW) borrowing DECREASED by $722 million, now at $2.23 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $3.87 billion and now stands at $112.9 billion, a new record high and biggest increase week over week since the start of June. • The Bank Term Funding Program saw a significantly larger demand for emergency borrowing in the most recent release from the Federal Reserve. This is worth keeping an eye on to see if is a once off or the start of a trend that could suggest some stress in US banks is re-emerging. Bank Term Funding Program • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 8. UK GDP headline came in at 0% QoQ, actually -0.03% without rounding, (Exp. -0.1% Prev. +0.2%). Meanwhile, September GDP came in stronger at + 0.2% MoM (Exp. 0.0% Prev 0.1%). • Services sector (the largest UK sector) GDP declined -0.1% QoQ, consumer facing services -0.7% and real household expenditure declined -0.4%. UK consumers spent less, especially on miscellaneous good and services, transport and food and alcoholic drinks. As sign that consumers in the UK are starting to feel the headwinds of the BOE rate hike cycle. This is important, consumer spending is the main driver of economic growth in the UK, accounting for over 60% of GDP production. • Real estate activities fell 0.4%, likely due to the reduction in housing turnover as interest rates filter through to the economy. UK mortgage lending from the Bank of England is at historically low levels. • There was a substantial drop in business investment of -4.2% • Net trade contributed over +0.4% to the GDP figure, this was due to a big drop in imports (-0.8%) and uptick in exports (+0.5%). Trade balance (goods and services) = exports - imports. The drop in imports could reflect falling domestic demand, evidenced by other areas of the report. Despite beating estimates for the 3rd quarter there is still weakness starting to show in the UK economy, likely more so than the headline figure suggests. 9. China fell back into deflation as CPI came in at -0.2% YoY (Exp. -0.1%, Prev. 0.0%). Monthly change was -0.1%. • The drop was driven in large by a 4% fall in food prices. 10. Eurozone retail sales came in weaker than expected month over month at -0.3% (Exp. -0.2%, Prev. -0.7%) but better than expected on a year-over-year basis -2.9% (Exp. -3.1%, Prev. -1.8%). This is the reported VOLUME of retail sales, meaning it is the actual amount of goods being purchased. Europeans are buying less than before and measures of discretionary spending such as online goods and non-food posted very weak MoM figures, worse than the headline may suggest. Some notable points from the retail sales report: • German YoY volume of sales is down 4.3% YoY. Germany is responsible for almost 30% of Eurozone GDP and is by far the largest economy in the economic area. • French YoY down 2.7% YoY but posted strong September growth of 0.4% MoM. The second largest economy in Eurozone. • Spanish retail sales continue to power on, still up 7.5% from last year and 0.2% MoM. Spain is the 4th largest economy in the Eurozone. • Italian retail sales down 5.1% YoY and posted strong contraction of -0.4% MoM. Italian retail sales have been notably weak not posting a single month of growth in the last 6, very poor for the 3rd largest economy in the Eurozone. • The Netherlands posted marked contraction in retail sales MoM again at -0.8% and YoY -3.6%. The Netherlands is currently in recession and is the 4th largest Eurozone economy. • European retail sales were exceedingly weak MoM in all categories other than food, drink and tobacco (+1.4%). Other categories include non-food (except automotive) -1.9%, online sales -1.9% and automotive fuel -0.9%. • Retail sales are a barometer of consumer spending, the biggest contributor to GDP generation. 11. The Reserve Bank of Australia raised interest rates to 4.35% from 4.1%. This is the first rate hike in Australia since June. The RBA have continued their hiking cycle after a pause. - Europe and the UK certainly appear to be feeling the economic headwinds of the hiking cycle faster than the United States. UK GDP, although not in contraction enough to deliver a negative headline, was very weak and likely does not bode well for the country in the coming quarter as clears signs of domestic demand shone through. Overall, a less packed week than last. The announcement from Moody’s came after the bell on Friday and the market response is yet to be seen as a result. Banks continued tightening financial conditions, as shown in the SLOOS. The Fed will not be happy and will be keeping a close eye on inflation expectations as Powell has repeatedly stated they have ben glad so far to see them remain well anchored. Despite Powell's hawkish rhetoric of late and rising inflation expectations, markets are pricing in a >90% chance of another Fed pause at their meeting in December with hikes priced in for June.

POWELL DAY ONE SUMMARY ⚠️ 1. More rate hikes are anticipated. The rate at which they will be increased will slow. The Fed are unsure how high they will need to take rates. Decisions will be made on a meeting by meeting basis. 2. The economy must be slowed in order to combat inflation. The economy slowed last year but continues to grow at a 'modest pace' 3. SVB collapse has shown that more regulation/monitoring of mid-sized banks is needed 4. Basel III should be fully implemented but the Fed don't anticipate capital requirements will be increased for many other than the largest banks in the US Context: Basel III is a set of banking regulation capital requirements that were recommended following the Great Financial Crisis in order to improve the financial system's ability to deal with shocks during times of economic stress. It was created by the Basel Committee on Banking Supervision (BCBS). Capital requirements are rules about how much high quality capital banks have to hold relative to their risk assets. 5. The labor market is still very tight (strong) and is currently driving the economy. It is possible to soften the labor market without unemployment rising, i.e. the number of job openings declines but unemployment doesn't increase. There is some evidence that supply and demand in the labor market is getting closer to a 'better balance' but labor demands still far outstrips supply. A softening in the labor market is likely needed to bring down services sector inflation. 6. Housing inflation expected to fall as supply and demand dynamic normalises. 7. The Fed still don't know how much of a lag there will be before rate hikes fully filter through to the economy 8. Combatting inflation is the main goal at present as it remains well above target of 2% and has consistently surprised the Fed and all forecasters. 'without it (price stability) the economy does not work for anyone' 9. Balance sheet reduction will continue but this will get to a level where the Fed do not want to restrict the level of banking reserves too much, risking liquidity issues in the financial system. 10. The United States government budget is unsustainable and must be altered 11. And, as always, he told us that the 'banking system is sound and resilient' - Markets are now pricing in a 77% chance of a 0.25% rate hike at the Fed's next meeting

Bank of Japan Breakdown ⚠️ As many of you will know, the Bank of Japan raised interest rates (+0.1%) for the first time since 2007, taking rates in the country to 0-0.1% from -0.1% previously. What the BOJ is doing • Ending negative interest rates • Ending strict yield curve control • Stopping buying ETFs and Japanese real estate investment trusts (J-REITS) • Planning to stop buying corporate debt and commercial paper in around 1 year What it is not doing • Stopping buying government bonds (QE) – they will continue to purchase JGBs at the same pace and still respond to a ‘rapid rise’ in long term interest rates by purchasing more JGBs. Source: BOJ Source: BOJ A bit of context The Bank of Japan has run ultra loose monetary policy for decades now with negative interest rates put in place from 2016. The Bank of Japan initially brought about unconventional monetary policy in order to combat persistent deflationary pressures, encourage spending and stimulate economic growth. However, the BOJ have now become comfortable that they are approaching their 2% inflation target sustainably and they are able to take a step towards normalisation of policy. Recent wage growth data appears to have been the final nail in the coffin for negative interest rate policy in the country as unions in the country secured the biggest wage increase in 33 years. ‘The Bank considers that the policy framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy to date have fulfilled their roles’ Ultra loose policy has taken the form of the Bank of Japan running negative nominal interest rates (-0.1%), purchasing Japanese ETFs, REITs, corporate debt as well as enacting yield curve control. What is yield curve control? While the short term interest rates are more easily dictated by the Bank of Japan setting rates, further out the curve tenors are more subject to market forces. In order to keep borrowing costs in a range that the Bank of Japan has felt comfortable with they resorted to buying vast swathes of Japanese Government Bonds in order to keep yields down and decrease borrowing costs in the country. While the current governor, Ueda, has tweaked how this is done in recent months the basic premise was that the BOJ would set an upper limit for the yield of the 10 year JGB, initially set at 0% in 2016 but relaxed to 1% by October 2024 after a few recent tweaks. When this upper limit was threatened the BOJ would step in and JGBs, suppressing yields and resulting in the upper limit being maintained and stopping borrowing costs from rising out of the BOJ's comfort zone. As a result of the BOJ’s prolific buying of government debt they now own over 50% of total outstanding supply of JGBs, which is staggering. ETFs? The Bank of Japan started buying ETFs in 2010 and has since become the biggest holder of Japanese stocks, a step which the Bank has also gone back on at the meeting. With the Nikkei around all-time highs it was probably pretty difficult to justify a country’s central bank continuing to prop up stock prices. Why care? Japan has very deep pockets, they are the biggest holders of US Treasurys outside of the United States. The fact that Japanese Government Bond yields have been so low while yields abroad are higher has resulted in Japanese investors looking elsewhere for yield and as such they have become big players in bond markets around the globe. The first move away from Japan’s ultra loose monetary policy may signal a change in the tide to a world where more attractive yield can be found within Japan; this, in theory, might pull back on Japanese foreign bond investment and leaves some uncertainty around future flows out of the country into foreign markets. Furthermore, markets will be looking to see if the BOJ moving away from their ultra loose policy will have an effect on the Yen carry trade. The carry trade is essentially the process of borrowing in Japanese Yen, using low interest rates, to then purchase higher yielding assets in other countries. This is widely used by financial institutions to take advantage of rate differentials (the difference in interest rates between countries). However, it is important to remember that The Bank of Japan have not by any means committed to any rapid or substantial hiking cycle like those seen in Europe and the US and it looks like monetary policy in the country will remain accomodative in the near future: ‘Bank anticipates that accommodative financial conditions will be maintained for the time being.’

The one Powell speech I'm not able to watch live and he shouts 'close the fucking door' mid speech, honestly typical

THIS WEEK'S HIGHLIGHTS ⚠️ 1. The 10Y Treasury yield rebounded with a vengeance hitting a peak of >5% this week, resulting in average US 30Y fixed mortgages climbing above 8%. The recent yield surge in Treasuries has caused a significant tightening of financial conditions and is estimated to, if sustained, exert the same effect as the Federal Reserve hiking by 0.50%. At the start of June 1st this year the 10Y was sitting at only 3.6%; it closed this week at 4.92%. • For a simplified explanation of the 10Y yield and how this affects mortgages, and other borrowing costs, scroll down to the comments where I will share my post from earlier in the week discussing this. 2. US Retail sales came in much stronger than expected, reflecting a US consumer that continues to outperform expectations. Retail sales came in at 0.7% growth for September MoM (Exp. 0.3%, Prev. 0.8%). • Retail sales is a barometer of consumer spending, which makes up around 70% of US GDP generation. Retail sales are not adjusted for inflation, the figures reported are nominal. The data is collected by the US census bureau in a monthly survey of 13,000 retailers. • It is worth keeping in mind that Inflation adjusted, real retail sales came in essentially flat YoY at + 0.05%. 3. Initial Jobless claims came in stronger than expected at 198K (Exp. 211K, Prev. 212K). There has yet to be a significant spike in jobless claims to suggest a significant job losses in the US economy, as the labor market remains tight, despite signs of loosening. Continued claims did increase to 1734K (Exp.1710K, Prev. 1705K), suggesting that people in the US may be finding it more difficult to find another job after losing their old one. • Initial claims tracks the number of people claiming unemployment benefits for the first time and continued tracks the number of those that are still claiming after previously doing so. If people lose their job but immediately get another one they won’t tend to show up in continued claims for long but if people are struggling to find employment we can see a rise in continued claims. 4. US Industrial production increased by 0.3% MoM, beating consensus estimates (Exp. 0%, Prev. 0%). The increase was driven by a 0.4% MoM improvement in manufacturing, which makes up almost 80% of the index. 5. The Federal Reserve's total balance sheet DECREASED by $18.9 billion and now stands at $7.93 trillion. 6. US financial institution emergency borrowing INCREASED by $316 million, now standing at $111.78 billion. Discount window (DW) borrowing INCREASED by $382 million, now at $2.962 billion. Borrowing via the Bank Term Funding Program (BTFP) DECREASED by $66 million and now stands at $108.8 billion. The Discount Window and BTFP • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 7. US Mortgage applications fell another 6.9% in the week ending October 13th. The mortgage market index is at the lowest in almost 30 years, as interest rates continue to freeze up housing turnover. The index includes both mortgage applications and those for refinancing. US MBA Mortgage Market Index 8. US Housing starts came in at +7% MoM (Exp. 9.1%, Prev. -12.5%) after falling the most in over a year in the month prior, driven by multifamily starts at +17% MoM. • Housing starts refer to the beginning of construction on new homes, both single-family homes and multi-unit buildings. It's a coincident indicator (occuring at present) of the level of construction activity in the US. 9. Building permits fell -4.4% MoM (Exp. -5.2%), Prev. +6.9%) • Building permits are a proxy for future construction activity (a leading indicator) as they signal the intent to build prior to actually beginning construction. A caveat to this is that not all permits result in shovel to the ground construction. 10. The National Association of Homebuilders housing market index fell further to 40 (Exp. 47, Prev. 44), showing the most pessimistic sentiment in the last 9 months. • A reading below 50 suggests more homebuilders view conditions as poor than those that consider conditions to be favorable. • The NAHB HMI is split into three indexes - traffic of prospective buyers, current sales and expected sales for the next 6 months. All three components dropped markedly and are below 50, with traffic of prospective buyers coming in with a reading of 26 (down from 30). 11. UK retail sales data came in significantly below consensus; including fuel came in at 0.9% (exp. -0.4%, prev: 0.4%) while ex fuel printed at -1%, (exp. -0.4%, prev. 0.6%). Sales volume (which is unaffected by inflation) dipped by 0.8% in the 3 months to September when compared to the three months prior. 12. Updated UK employment data was released while data on the unemployment rate was delayed until next week • Average growth in pay (excluding bonuses) cooled slightly to 7.8% in the 3 months to August following a record high in the month prior. Furthermore, timelier HMRC PAYE wage growth weakened and payrolls declined by 11K in September. The UK labor market appears to be cooling quickly. • Average earnings including bonus beat expectations coming in at 8.1% (Exp. 8.3%, Prev. 8.5%). This still includes a big bonus paid to NHS (healthcare) staff largely in July, which will skew numbers somewhat to the upside in the current release. • Job openings fell to the lowest reading since 2021 coming in at 988K, a decline of 43K but are still historically elevated. 13. UK Gfk consumer confidence posted the biggest month over month drop since the start of COVID. UK consumers outlook on the economy, willingness to buy and assessment of their own finances all deteriorated. • Quote from the report ‘The volatility we are seeing in consumer confidence is a sure sign of a depressed economic mood, and there’s no immediate prospect of any improvement’ – client strategy director at Gfk • Consumer confidence is closely followed as it is considered to be a leading indicator of consumer spending, which accounts for >60% of UK GDP generation. 14. UK headline CPI came in hotter than expected at 6.7% (Exp. 6.6%, Prev. 6.7%) and core CPI at 6.1% (Exp. 6%, Prev. 6.2%). Month over month readings came in at 0.5% for both core and headline inflation. • 3-month annualized core inflation the UK is still 3.65%, well above the 2% target set by the Bank of England, both core and headline 1 month annualized are running >6%. • Annualized readings are the year over year reading that corresponds to the current month over month change(s) if they are applied over 12 months (i.e. what YoY inflation would be in 12 months’ time if the current monthly change remained the same). • Inflation in the UK is sticky and services inflation accelerated. However, other data released this week suggested a weakening consumer, labor market and wage growth. Inflation in the UK is expected to decelerate in the coming months. 15. German ZEW Economic sentiment improved quite convincingly to -1.1% (Exp. -9.3, Prev. -11.4) as analysts outlook for the German economy in the next 6 months improved. However, current economic conditions were assessed to have deteriorated further, falling by 0.5% to 79.9%. 80.5% of respondents believed that the current economic situation in Germany is ‘bad’ and 73.7% of analysts in Germany still believe that the economic situation in the next 6 months will be either unchanged or be worse. • ZEW economic sentiment collates survey responses from German economist/analyst to gauge their evaluation of the German economy and near-term outlook. 16. China posted some strong GDP data, suggesting that the world’s second biggest economy could be seeing some encouraging signs of recovery. Chinese GDP growth for Q3 YoY came in above consensus expectations at 4.9% (Exp. 4.4%, Prev. 6.3%). However, there are questions being asked about the veracity of the data. • The YoY readings on China’s industrial output growth (the biggest GDP contributing sector of the Chinese economy) are not consistent with the weak month over month readings that have been seen of late. • On top of this, export data from 2022 and 1H23 in China was revised down. This will have the effect of making YoY readings appear in stronger than they would have been prior to the revisions, and seems to come at a convenient time when China are struggling to meet their 5% growth target. One of the revisions was the biggest one month revision for the Chinese economy on record. • Furthermore, the way Chinese officials calculate real GDP growth (adjusted for inflation) uses the producer price index, which is currently at -2.5% YoY in the country and will thus give an apparent boost to the GDP reading. • In essence, take the data with a grain of salt. - Inflation remains very elevated in the UK with large month over month increases in both headline and core inflation seen in the latest release, which will no doubt worry the Bank of England. However, weakening consumption, the biggest drop in consumer confidence since the pandemic, weakening wage growth and employment data suggest that inflation could be set to decline meaningfully in the coming months. The last Bank of England rate decision came down to Governor Andrew Bailey with the decisive vote on whether to pause or hike, a was 5-4 vote. On the balance of things, the Bank of England should likely pause rates again at their next meeting, but it is likely to be a close call and a split decision. The US economy continues to surpass expectations with the labor market remaining tight, the consumer seemingly remaining resilient and manufacturing seemingly staging an apparent comeback after a tough start to the year. However, further headwinds are on the horizon with a significant tightening of financial conditions being implemented by the move in longer date Treasury yields. The Fed are expected to keep interest rates on hold at their next meeting. Powell alluded during his speech that the change in Treasury yields is tightening conditions and this can change the path of monetary policy. The market is currently pricing in a 0% chance (lol) of the Fed hiking at their next meeting, as per CME Fedwatch, and a rate CUT is more likely with a 1.8% priced in.

THIS WEEK'S HIGHLIGHTS⚠️ 1. Fed's balance sheet decreased by $17.6B 2. US banks emergency borrowing fell by $9.2B, now standing at $139.5B 3. Discount window (DW) borrowing fell by $2.1B, now at $67.6B. Borrowing via the Bank Term Funding Program (BTFP) fell by $7.2B, now at $71.8B. Worth noting that this is the first decrease in use of the BTFP since its inception last month • The DW is known as the 'lender of last resort' and is a means by which financial institutions can borrow money from the Fed for up to 90 days by posting collateral (usually in the form of US treasury bonds, agency MBS, etc) to fulfil emergency liquidity needs • The BTFP is another means by which banks can access collateral backed loans from the Fed; collateral is taken at par value, meaning the Fed will ignore price fluctuations. This is designed to prevent banks from having to sell underwater bond and MBS portfolios, realising heavy losses 4. Borrowing via the Fed's Foreign and International Monetary Authorities (FIMA) repo facility fell to $30B from $40B. Foreign banks are requiring less emergency lending by the week, a sign of subsiding dollar liquidity stress, not just within the US but worldwide • FIMA allows short term lending of dollars to foreign central banks who then lend to banks within their country, providing dollar liquidity. They post US treasuries as collateral. 5. US commercial bank deposits increased week over week for the first time since January, rising by $60.6B in the week ending April 5th 6. Deposits in US small banks increased for the second week in a row - up $23.5B the week ending April 5th. The increase comes after deposits fell $236.8B in the two week period between March 8th-22nd 7. Deposits at US large banks increased by $21B week ending April 5th 8. Large banks JP Morgan, Wells Fargo, Citigroup and PNC all posted strong Q1 earnings despite recent stress in the banking sector, suggesting little damage caused to these large financial institutions as a result of recent events 9. The Fed's FOMC minutes revealed that they now are forecasting a recession in the United States in 2023. They believe banking stress will tighten credit (lending) conditions and may lead to a reduction in consumer confidence (and therefore reduced consumer spending). The Fed left the door open for further hikes but stated that they need to 'remain flexible' about future policy decisions 10. US retail sales declined -1% (Exp. -0.4%) and also posted the smallest YoY increase since June 2020 at 2.94% - keep in mind these figures are not adjusted for inflation. This is a sign that consumer spending could be weakening in the US. US consumer spending accounts for ~70% of US GDP. The largest decline in sales was seen at gas stations due to falling gasoline prices. 11. Despite weakening retail sales and the Fed's prediction, University of Michigan Consumer Sentiment index for April came in slightly higher - 63.5 (Prev. 62) - than in March suggesting, as of yet, largely unchanged opinions of consumers on economic conditions 12. US headline inflation in March surprised to the downside while core CPI increased in line with expectations. Headline inflation rate is now at its lowest since May 2021. PPI came in lower than expected, spurring hopes that future CPI prints will follow suit; markets reacted positively to the news as optimism spread that the Fed's efforts to quash inflation may be coming to fruition • US headline CPI 5.0% (Exp. 5.2%) YoY, Core 5.6% (Prev. 5.5%) • US PPI 2.7% (Exp. 3.0%) YoY • Core services still +7.1% YoY, only down 0.2% from 20 year all time high • Gasoline prices now -17.4% YoY, down from June 2021 peak of +59.9% 13. US initial jobless claims surprised to the upside, coming in at 239K (Exp. 232K). This is the second week in a row of higher than expected claims, some small evidence that the US labor market may be at an inflection point and the softening the Fed has been anticipating may be starting to occur. However, it is still too soon to stay and the labor market is still historically strong. 14. UK GDP MoM preliminary estimate shows that the economy stagnated 0.0% MoM in Feb, this comes after the UK narrowly avoided a technical recession in Q4 2022. Despite this, UK BRC retail sales came in stronger than expected in 4.9% (Exp. 4.2%) YoY, flat month over month 15. The Chicago Fed National Financial Conditions Index (NFCI) showed that financial conditions tightened in the week ending April 7th but at a slower pace than they have been since the start February. The tightening credit (lending) conditions forecasted by the Fed following the banking crisis does not appear to be occurring as of yet 16. Eurozone retail sales fell 0.8% MoM, in line with market expectations. They are now down 3% YoY, posting the third contraction in a row All in all, banking sector emergency liquidity needs are clearly easing both within and outside the US. The tightening of credit conditions that the Fed have projected has not yet materialised. However, weakening retail sales suggests that that US consumers may be starting to feel the effects of tightening monetary policy Employment data is starting to suggest we could be at an inflection point in the US labor market and we could start to see some softening, as the Fed have been desperate to achieve Easing bank stress and stronger than expected earnings will likely give the Fed some room to breathe. Despite encouraging signs that inflation is coming down, barring further drama between now and the May meeting, it is likely that the Fed will go ahead with their 0.25% hike Smaller bank Q1 earnings releases in the coming weeks will be interesting Markets are now pricing in a 78% chance of a 25bps hike at the Fed's meeting in May, up from less than ~68% at the start of the week

HIGHLIGHTS FROM FED STRESS TEST ⚠️ 1. Large banks are well positioned to weather a severe recession and continue to lend 2. All 23 banks tested remained above their minimum capital requirements during the hypothetical recession, despite total projected losses of $541 billion- $424 billion in loan losses, $18 billion in additional items such as loans booked under fair value, $94 billion in trading and counterparty losses, $5 billion in securities losses 3. Most severe scenario in stress test included, but not limited to, the following conditions: • 40 percent decline in commercial real estate prices, a substantial increase in office vacancies • 38 percent decline in house prices. • The unemployment rate rises by 6.4 percentage points to a peak of 10 percent and economic output declines commensurately. 4. The tests focussed on commercial real estate and shows that while large banks would experience heavy losses in the hypothetical scenario, they would still be able to continue lending 5. The aggregate and individual bank post-stress common equity tier 1 (CET1) capital ratios remain well above the required minimum levels throughout the projection horizon. 6. Under the most severe stress test scenario CET1 capital ratio falls to 10.1% from 12.4% (Q4 22). The minimum regulatory capital ratio is 4.5%. 7. Banks with concentrations in mortgages, credit cards, and commercial real estate generally had larger declines in capital ratios in the stress test this year 8. Lowest minimum CET1 ratio in severe scenario - Citizens at 6.4% (regulatory minimum 4.5%) 9. Highest minimum CET1 ratio in severe scenario - Charles Schwab Corp 22.8% 10. In the severely adverse scenario, banks (in the stress test) are projected to lose $64.9 billion on CRE exposures What is the Fed bank stress test? The Fed annual stress test essentially simulates hypothetical adverse economic scenarios to evaluate how banks would fare under severe economic conditions and evaluate systemic risk should those scenarios play out. This test included 23 large banks in the US Why do they focus on CET1? CET1 is considered the most loss absorbing form of capital a bank has. It is the first form of capital to bear losses in the event of a bank's failure/severe distress and for large banks there are minimum regulatory requirements for the amount of CET1 they must have relative to risk weighted assets. Risk-weighted assets are bank assets, including loans, mortgages, securities, and other risk exposure investments.

The US 10Y yield is approaching 5%⚠️ A very simplified refresher on why this matters for mortgages: US Treasurys (UST) are US government debt that is sold to bidders so the government can continue to finance its financial obligations. USTs, in terms of price risk, are as risk free an asset as you can hold, as long as you don't need to sell before maturity. Their yields are therefore often considered the 'risk-free return'. Ultimately, mortgages and the 10Y are clearly positively correlated but it is not as simple as banks looking at the 10Y and raising rates for the sake of it. Ultimately, other assets need to be competitive with Treasurys. When the yield of Treasurys rise other assets need to justify themselves against the perceived available risk-free return. If I can earn 5% guaranteed for 10 years then why would I invest in something else unless the possibility of a higher return was worth it for the risk being taken on? This doesn't just apply to mortgages, it acts as a benchmark for broad spectrum borrowing, when the 10Y rises, so do corporate borrowing costs etc. The 10Y in particular is used as a proxy for 30Y mortgage rates. Mortgages are often packed into bond-like securities, called Mortgage backed securities (MBS) that offer a yield. These inherently have more risk associated than UST and thus their yield must rise above that of Treasurys to justify investment. New mortgage originations that are to be packaged into these MBS must then also be at a higher rate, to provide the yield required from the asset. Furthermore, in general, to justify a bank lending to you and taking on all the risk that comes with that, it needs to be worth their while financially. The difference between the 10Y yield and the yield on new mortgages is referred to as the spread. This is currently just over 300bps (3%) and represents the extra yield that investors are demanding to take on the additional risk and part with their money. With the 10Y being almost 5% and the additional spread of around 3%, we are seeing 8% 30Y mortgages in the US for the first time in 23 years.

THIS WEEK'S HIGHLIGHTS⚠️ 1. Debt ceiling talks continue as we fast approach the controversial June 1st X-date set by Janet Yellen. She stated this week that ‘actual default could be a few days or weeks later’ than estimated. Early in the week narrative seemed to be that progress was being made but discussions later stalled. • The Treasury General Account saw a large drawdown early this week falling from $139.9 billion to $87.4 billion between May 12th and 15th. It finished the week at $57.3 billion. This sparked some worries that the X-date could come sooner than expected. • The White House stated that the stock market could crash as much as 45% in the event of a default and Biden stated he is considering using the 14th amendment in order to raise the debt limit. The 14th amendment states that the ‘validity of the public debt of the United States... shall not be questioned’ and therefore it is argued that this could be used to bypass Congress if needed in order to raise the debt limit. However, it would very likely cause a lengthy legal battle and not be straightforward. • For now, the highest stakes game of chicken continues 2. The Federal Reserve barely delivered any speeches this week *sarcasm* with only 14 speakers. Jerome Powell spoke on Friday and didn’t provide much new information. Main points: • inflation too high and will take longer than expected to cool • Bank credit tightening likely means the Fed don’t have to hike rates as much • The Fed are worried about the lagged effects of their rate hikes • Further rate decisions will be data dependent 3. The Federal Reserve's total balance sheet DECREASED by $46.26 billion, now standing at $8.46 trillion. 4. US bank emergency borrowing INCREASED by $3.6 billion to $96 billion. Discount window (DW) borrowing DECREASED by $275 million, now at $9.05 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $3.9 billion, now at $87 billion • The DW and the BTFP are both means by which financial institutions can borrow collateral backed emergency liquidity from the Fed. 5. Securities held outright by the Federal Reserve DECREASED by $29.8 billion, currently at $7.77 trillion • This typically includes US Treasuries, mortgage backed securities and government backed debt securities. Govt. backed debt securities are debt issued by government sponsored enterprises (GSEs) e.g. Fannie Mae, Freddie Mac, Federal Home Loan Banks (FHLBs) 6. The US CB Leading Economic Index (LEI) fell by a 0.6%. • This is the 13th straight month of decreases. The LEI is a combination of leading indicators of the US economy and is supposed to predict future economic performance by around 7 months. A quote from the report reads 'The Conference Board forecasts a contraction of economic activity starting in Q2 leading to a mild recession by mid-2023'. 7. US Retail Sales came in worse than expected but increased 0.4% MoM in April (Exp. 0.8%, Prev. -0.7%) This is a reversal of the declines we had seen in February and March. Retail sales ex-autos came in as expected at 0.4% (Prev. 0.5%). • Retail sales is an important barometer of consumer spending, which accounts for around 70% of US GDP. 8. NY empire State Manufacturing index came in well below expectations at -31.8 (Exp. 3.75 Prev. 10.8) for May. This is the largest one month drop on record for the index and suggests a significant contraction in manufacturing in New York State. • The index is based off of survey responses from business managers in the New York State manufacturing industry. Readings below 0 indicate contraction. New orders and shipments nosedived. Capital spending index fell to a 3 year low, indicating businesses are planning on being more conservative with their money. 9. The Philly Fed Manufacturing Index came in above expectations and improved significantly in May, coming in at -10.3 (Exp. -19.8, Prev. 31.3%). However, business conditions still signal contraction. 10. Despite the above, US industrial production grew in April, surpassing expectations by growing 0.5% MoM (Exp. 0.0%, Prev 0.0%) 11. US Housing weakness continues despite housing starts coming in hot. Existing home sales, representative of around 90% of the US housing market, took a nosedive making for the 20th consecutive YoY decline in the index. Building permits, a leading indicator for future housing starts and construction activity also disappointed, pointing to possible further future slowdown in housing. • MBA Mortgage Applications -5.7% (Prev. +6.3%) • Building Permits -1.5% MoM in April (Exp. 0.2%) • Housing Starts +2.2% (Exp. -1.5%, Prev. -4.5%) • Existing Home Sales -3.4% (Prev. -2.6%) 12. Jobless claims came in below expectations this week after last week’s skyrocketing figures were said largely to be due to fraud attempts in Massachusetts. Jobless claims came in at 242K (Exp. 254K Prev. 264K). Jobless claims have been gradually trending higher of late suggesting the beginning of some softening in the US labor market. 13. In the UK labor market, for the first time since February 2021 the number of payrolled UK employees declined MoM (this does not include those under self-employed status). Furthermore, UK jobless claims surprised to the upside. The cost of living crisis is also bringing previously economically inactive people back to the workforce with higher labor force participation: • UK HMRC Payrolls Change for April at -136K (Exp. +15k Prev. 42K) • Unemployment rate climbed to 3.9% (Exp. 3.8% Prev. 3.8%) • Claimant Count Change (UK jobless claims) for April 46.7K (Exp. -15K, Prev. 26.5K) • Employment Change +182K (Exp. 160K, Prev. 169K) • 556,000 working days were lost in March due to strikes • Job vacancies fell 55,000 QoQ to 1,083,000 (10th consecutive decline) 14. Eurozone headline inflation came in as expected but increased month-over-month. Energy and services inflation rate increased whilst food, alcohol and tobacco cooled: • Headline 7.0% (Exp. 7.0% Prev. 6.9%) • Core 5.6% (Exp. 5.6% Prev. 5.7%) 15. Eurozone Industrial production came in well below expectations in March at -4.1% Mom (Exp. -2.5% Prev. +1.5%), now down -1.4% YoY. 16. Eurozone GDP for Q1 came in as expected at 0.1% growth for the quarter (Prev. 0.1%) 17. ZEW economic sentiment came in well below expectations this month at -10.7 (Exp. -5.0, Prev. 4.1) • ZEW economic sentiment is a collation of survey responses from around 350 German economists/analysts on their assessment of the German economy now and in the next 6 months The report adds that: • Economists expect worsening of already unfavourable conditions in the next 6 months • Germany may slip in to a 'mild' recession • Unfavourable expectations partly due to possibility of US default and the European Central Bank increasing interest rates further 18. Canadian headline and core inflation rates both came in hotter than expected. This may serve as a warning sign to other central banks as inflation may well be re-accelerating in the country after they were one of the first central banks to pause rate hikes this cycle. • Headline 4.4% (Exp. 4.1%, Prev. 4.3%) • Core 4.1% (Exp. 3.8%, Prev. 4.3%) 19. Japanese GDP grew by 0.4% in Q1, surpassing expectations (Exp. 0.1%, Prev. 0.0%) - Both the UK and US labor markets are showing some signs of weakening, despite employment still being at historically very tight levels. US leading indicators continue to suggest that a recession will ensue in the US by the end of 2023 with signs of weakening in the manufacturing sector in the Philly and NY regional Fed Surveys. Economic data coming out of Germany, the 4th largest world economy, continues to be poor and economist opinion is that the country may slip into recession this year. Germany accounts for almost 30% of Eurozone GDP. Debt ceiling talks will no doubt continue to take the spotlight as worries about the possibility of a US default grow. The drawdowns seen in from the TGA are worrying some that the X-date could come even sooner than expected and extraordinary measures may need to be taken. Meanwhile, Yellen stated the X-date may be further out than previously thought. It is pretty clear that no one actually knows exactly when the X-date is. The markets are now pricing in an 82% chance of a rate hike pause at the Fed’s next meeting – per CME FedWatch

FOMC MINUTES SUMMARY⚠️ Meeting date December 12th-13th 1. Vote to keep Federal Funds Rate unchanged at 5¼ to 5½ percent was unanimous. 2. Rates are at or near peak; the committee added the word ‘any’ into the following sentence from the FOMC statement to convey this: “the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time.” However, future monetary policy decisions will remain data dependent - door still left open to further hikes if warranted. 3. Participants generally perceived a high degree of uncertainty surrounding the economic outlook. 4. Members agreed that the most likely scenario would include rate cuts in 2024. However, they observed that circumstances might warrant keeping the Fed Funds target range at present levels for longer than currently anticipated and that a restrictive stance should be maintained for 'some time' until the Fed are confident of achieving their target. Despite this, they also acknowledged the risk of an overly restrictive stance. 5. The Committee remains committed to 2% inflation target and need more evidence of a sustainable move towards this. The minutes mention the Fed potentially having a tradeoff in their dual mandate. • The Fed’s dual mandate is for maximum employment and stable prices. Thus, this is either them saying they may need to run unemployment higher so that they can achieve their inflation target or they will accept higher inflation in order to prevent further loosening of the labor market. • Considering they are unwavering in their 2% target and the minutes mention that supply chain and labor supply issues appear to have resolved (stating that further progress on inflation may need to come as a result of reduction in demand for products and labor) it sounds like they are referring to the former scenario. 6. 'All participants observed that clear progress had been made in 2023 toward their 2 percent inflation objective.' Although, risks around the inflation forecast were seen as skewed to the upside by Fed Staff. 7. Data suggests growth of economic activity had slowed from its strong pace in the third quarter 8. Job gains slowing but remain strong, unemployment remains low. Labor supply and demand moving towards better alignment. However, several participants noted that if labor market demand were to weaken substantially further it could transition quickly from a gradual easing to a more abrupt deterioration. 9. Usage of the overnight reverse repo facility continued to fall – down about $1.3 trillion since early June. The decline was put down largely to money market funds investing in Treasurys rather than parking their money at the Fed. 10. Financial conditions eased between the December meeting and the prior FOMC meeting. Many participants remarked that an easing in financial conditions beyond what is appropriate could make it more difficult for the Committee to reach its inflation goal. 11. 'Several participants noted that the weakness in gross domestic income (GDI) growth relative to GDP growth over the past few quarters may suggest that economic momentum during that period was not as strong as indicated by the GDP readings.' 12. Several members noted that discussion of how the Federal Reserve slows and then stops its balance sheet run off (QT) should happen well before it actually is implemented. They did not indicate that they were near the cessation or slowing of QT, merely broaching the topic of discussion for planning purposes.

THIS WEEK'S HIGHLIGHTS⚠️ 1. At long last an agreement on the US debt ceiling was reached. The debt ceiling is likely to be suspended through to January 2025 once the bill passes through Congress, preventing the US Treasury from having to take further measures to prevent a US default. A vote is expected to take place on Wednesday. • The exact details of the US debt ceiling have not been released but it is thought that around $50 billion of spending cuts have been negotiated by the Republicans. Furthermore, the pause on student loan repayments in the US will come to an end ‘within 60 days’ of the bill being signed according to Republican speaker McCarthy. This does not mean that Biden's loan forgiveness won't happen, it just means that payments will resume while it goes through the courts. • It seems like general consensus is that this has all been a waste of time. The US is currently spending at an annualised rate of $928.9 billion on interest payments alone according to data from the first quarter of 2023, so $50 billion is most certainly a drop in the ocean. • The details of the bill are likely to be released this Sunday so that lawmakers can have 72 hours to read it before voting; it must pass in both the House of Representatives and the Senate. • The deluge of issuance of Treasuries that will be allowed once the limit is raised is likely to drain liquidity from the financial system as new Treasuries are purchased by financial institutions. The extent of the impact of this remains to be seen. 2. The Federal Reserve's total balance sheet DECREASED by $20.5 billion, now standing at $8.436 trillion. Total assets held by the Fed stands now $94 billion above March 8th just prior to the surge seen as a result of the banking crisis. • Trough to peak increase in balance sheet during crisis was around $391.5 billion. 3. US financial institution emergency borrowing INCREASED by $64 million, now standing at $96.12 billion. Discount window (DW) borrowing DECREASED by $4.84 billion, now at $4.2 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $4.9 billion, now at $91.9 billion • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 4. US bank lending decreased for the 3rd week in a row in the week ending May 17th according to the Federal Reserve’s H.8. Release. This is after an increase in lending seen for 4 consecutive weeks prior to the banking liquidity crisis. • This may signal the start of a sustained tightening of credit conditions in the US banking sector following the recent stressors 5. US bank deposits in all commercial banks rose by $30 billion in the week ending May 17th. This is the first increase for 3 weeks. US bank deposits are now $658.7 billion lower than they were at the start of the year. 6. Germany, the 4th largest economy on Earth by nominal GDP, entered a technical recession. German GDP QoQ final report was revised down to -0.3% (Exp. 0%, Prev. 0.0%). This is two consecutive quarters of -ve GDP growth after a contraction of 0.5% seen in Q4 2023. • Germany accounts for just under 30% of Eurozone GDP 7. US Core PCE price index for April increased and came in higher than expected 4.7% (Exp. 4.6%, Prev. 4.6%), Headline 4.4% (Exp. 4.3%, Prev. 4.2%) • Core PCE is the Federal Reserve’s favoured measure of inflation (it excludes more volatile food and energy prices to look more closely at underlying inflation) and is proving to be stickier than anticipated. Following the upwards surprise, market expectations of a Federal Reserve rate hike at the next meeting rose significantly. 8. US durable goods orders increased by 1.1% in April, surpassing expectations (Exp. -1%, Prev. 3.3%). However, core durable goods (minus transport) came in at -0.2% (Exp. 0.3%, Prev. -0.1%) • A 32.7% increase was seen in defence aircraft, despite a decline of 8.3% in civilian aircraft. Value of orders for electronic products and computers fell by 1.4%. Inventories increased by 1%. • Durable goods are goods that are expected to last longer than 3 years. Core durable goods excludes very expensive items like aircraft and vehicles that can be more volatile. 9. Eurozone Consumer Confidence came in at -17.4 (Prev.-17.5, Exp. -16.8) • Consumer Confidence in the Eurozone remains pessimistic but has been improving generally since September 2022. A negative reading on this suggests more -ve sentiment whilst 0 = neutrality and >0 = consumer optimism. 10. Manufacturing Flash PMIs for May saying recession while Services continue to perform. PMI readings are based off of survey responses from managers within the relevant sector reporting on current business activity. A reading <50 = contraction, >50 = expansion and 50 = stagnation. Manufacturing: • US 48.5 (Prev. 50.2) - 3 month low • UK 46.9 (Prev. 47.8 - 5 month low • Eurozone 44.6 (Prev. 45.8)- 3 year low • Germany 42.9 (Prev. 44.5) - 3 year low After 3 months of expansionary manufacturing readings (>50) in the US, contraction has resumed Services: • US 55.1 (Prev. 53.6) - 13 month high • UK 55.1 (Prev. 55.9) - 2 month low • Germany 57.8 (Prev. 56) - 21 month high • Eurozone 55.9 (Prev. 56.2) - 2 month low 11. US New Home Sales increased significantly and unexpectedly by 4.1% to an annualised rate of 0.683M (Exp. 0.665M Prev. 0.656M) • The highest reading since March 2022. The increase seen in new home sales vs existing home sales in the US may reflect the reluctance of people who have locked in a mortgage with a low 30Y fixed rate to move and take on a new mortgage with sky high rates. Thus, newly built homes that have not had a previous owner are more likely to be on the market. • Median price of sold new houses was $420,800 vs $458,200 in the same period last year 12. Inflation continues to surge in the United Kingdom with both core and headline inflation surprising to the upside. Rishi Sunak, the Conservative UK prime minister, called for price caps on basic food prices to be put in place to protect consumers from the surging prices in the country. • UK CPI surprised to the upside but fell below 10% for the first time in 7 months, coming in at 8.7% (Exp. 8.2%, Prev. 10.1%) • UK core inflation surprised massively to the upside coming in at 6.8% (Exp. 6.2%, Prev. 6.2%) in April. This is the highest core CPI reading the UK has seen since in over 30 years. 13. UK Retail sales volumes grew 0.5% MoM in April, beating expectations, after falling 1.2% last month (Exp. 0.3%, Prev. -1.2%) 14. FOMC minutes were released from the last Federal Reserve meeting: • Members generally expressed uncertainty over how much more tightening is needed • Many participants focused on the need to be data driven and flexible • Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary. • Mild recession still forecasted to start later this year despite Powell previously admitting this was not his own base case 15. US GDP rose at an annualised rate of 1.3% in Q1 23 (Exp. 1.1%, Prev. 2.6%). • This is how much the US GDP would grow over a 12 month period if the rate of growth remained the same. - Thankfully the US debt ceiling drama finally seems to be coming to an and end we can move on and find out what the next next crisis of 2023 is going to be... The bill for the debt ceiling suspension still needs to be passed in Congress this week. Germany has become the first G7 country to fall victim to technical recession since the pandemic and are projected to be the worst performing country out of them in 2023. Seeing as Germany makes up almost 1/3rd of Eurozone GDP and the last two quarters have shown 0.0% and +0.1% growth, it doesn't seem likely that Europe is going to see stellar growth this year. Despite this, the ECB are still fully expected to raise rates further. After this week's PCE data and strong rally in risk assets. Markets are now pricing in a 66.5% chance of a 25bps rate hike by the Federal Reserve in June.

POWELL SPEECH SUMMARY ⚠️ 1. The Fed Funds Rate was kept at 5.25-5.5% and the Federal Reserve are to continue QT at the same pace for now. Powell reiterated that interest rates are likely at their peak and rate cuts will likely come at some point this year but refused to give a prediction on when this will be, citing ongoing data dependence. 2. January and February inflation prints were hotter - January in particular. The Fed now wants to see if these are bumps in what the Fed stated would be a bumpy path back to 2% inflation or if they are something more (like a reacceleration in inflation). Powell stated that the Fed are happy to keeps rates higher longer if data supports the need for this. 3. The Fed are still looking for ‘greater confidence’ that inflation is returning sustainably to 2% target. 4. Powell discussed that the January inflation print could have been affected by seasonal factors but they have to be wary of dismissing data that they don’t like. He did note, however, that stronger inflation tends to be seen in the first part of the year. 5. The inflation in February was high but not terribly high. Powell iterated that the overall disinflation story has not changed. However, it has justified the Fed’s decision to be careful. 6. The Fed are committed to their dual mandate of maximum employment and stable prices (2% inflation target). However, Powell did emphasise that their 2% target would be achieved ‘over time’, seemingly insinuating they aren’t in a rush. 7. Powell states that the risks of policy are coming into better balance. Acknowledged risk of waiting too long but also moving too quickly; in a situation where they ease too much or too soon they could see second spike in inflation. However, waiting too long could cause unnecessary detriment to the economy. 8. Powell reinforced that they are committed to both sides of dual mandate – price stability and maximum employment. Thus, a weakening in the labor market could also be a reason to cut rates. Having said that, Powell doesn’t currently see cracks in the labor market. 9. Powell feels the labor market is coming into better balance - unemployment remains low, job creation has been met with an increase in the supply of workers, wage growth is moderating to closer to more sustainable levels, jobless claims remain very low. 10. The Fed have achieved almost $1.5 trillion in balance sheet reduction. They discussed slowing of quantitative tightening at this meeting. They did not make any firm decisions, but Powell stated that it will be appropriate to slow the balance sheet run off ‘fairly soon’. He states the slowing of balance sheet reduction would be so that they can avoid unnecessary stress in the financial system and ultimately achieve more balance sheet run off than they could if they maintained current pace. 11. Powell stated that the longer term goal will be to have a balance sheet of mostly US Treasurys but this is not their priority at present - essentially saying the Fed aren’t in a rush to start offloading mortgage backed securities etc from their balance sheet. 12. Fed think when the Reverse Repo stabilises at or near zero they think that bank reserves will decline close to dollar to dollar to balance sheet reduction. Right now, the Fed feel that bank reserves are abundant but will want to maintain a buffer because demand for bank reserves is volatile. 13. Powell has some confidence that lower market rent increases will show up in housing services inflation over time. Uncertain when but confident they will show up. 14. Powell doesn’t know if rates are going to be higher in the longer run. Feel rates were low in pre-pandemic and post GFC era. Instinct is that rates will not return to the very low levels seen then. However, he is very uncertain. 15. Powell feels like financial conditions are weighing on the economy. He cited falling job openings, increased quits rate and lower hiring rate from JOLTS as evidence of this affecting the labor market. He also commented on the fact that inflation seemed to fall last year regardless of whether financial conditions were tighter or looser at times. 16. Powell stated that the Fed are not getting ready to propose a Central Bank Digital Currency (CBDC)

POWELL SPEECH SUMMARY ⚠️ 1. Further rate hikes may be needed. The Fed will proceed with caution on whether to hike again. 2. Policy is restrictive but not sure what neutral rate is. However, real interest rates are now positive (meaning interest rates are higher than inflation) and above most neutral rate predictions. 3. The Fed are aware there risks of both under and overtightening 4. Rates are to remain elevated until inflation moving meaningfully towards 2% target. This may require further tightening and still has a long way to go even with recent promising readings in headline inflation. 5. Powell interated that he will remain focussed on core PCE inflation going forward 6. The Fed need to see more progress in services ex-housing inflation. This accounts for over half of core PCE and includes things such as health care, food services, transportation, and accommodations. 7. Softening of labor market needed to achieve inflation target. Further hikes may be needed if the labor market doesn't show further signs of cooling. 8. If GDP growth remains persistently above trend this may warrant further tightening. Below trend growth is likely needed for 2% inflation target. 9. The Fed don't know how long the lags of monetary policy will be 10. Powell finished by stating that the Fed are 'navigating by the stars under cloudy skies' essentially saying they have no idea where they are going right now. MACRO 💊

FEDERAL RESERVE BALANCE SHEET UPDATE⚠️ In the week ending April 19th: 1. The Federal Reserve's total balance sheet decreased by $21.5 billion, now standing at $8.593 trillion 2. US financial institution emergency borrowing INCREASED by $4.4 billion to $143.9 billion 3. Discount window (DW) borrowing INCREASED by $2.3 billion, now at $69.9 billion • The DW is known as the 'lender of last resort' and is a means by which financial institutions can borrow money from the Fed for up to 90 days by posting collateral (usually in the form of US treasury bonds, agency MBS, etc) to fulfil emergency liquidity needs 4. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $2.15 billion, now at $74 billion. Worth noting that this is the first decrease in use of the BTFP since its inception during the banking crisis. • Created in March in response to the banking sector troubles the BTFP is another means by which banks can borrow from the Fed in an emergency. They post collateral and the Fed values it at par value, meaning they will ignore any price fluctuations since purchase. This means banks are not forced to sell underwater portfolios and realise massive losses 5. Borrowing via the Fed's Foreign and International Monetary Authorities (FIMA) repo facility fell to $20 billion from $30 billion • FIMA allows short term lending of dollars to foreign central banks who then lend to banks within their country, providing dollar liquidity. They must post US treasuries as collateral. A bit of a plot twist as emergency borrowing increases within US financial institutions. Nothing like the spike we saw at the start of the trouble in the banking sector but not the steady decline that had been anticipated by many.

US CPI BREAKDOWN⚠️ Jerome Powell emphasized at the FOMC press conference that the Fed want to see a continuation of what they had been seeing in the 6 months leading up to their last meeting. That wasn’t what they got, as month over month core CPI rose to 0.4%; in annualized terms this amounts to a rate of 4.9%. The Fed obviously look past single fluctuations in prices but on a 3 month and 6 month annualized basis core CPI rose 4% and 3.7% respectively, well above the Federal Reserve 2% inflation target. Month over month CPI 0.3% (Exp. 0.2%, Prev. 0.2) Core 0.4% (Exp. 0.3%, Prev. 0.3) Year over year 3.1% (Exp. 2.9%, Prev. 3.4%) 3.9% (Exp. 3.7%, Prev. 3.9%) Services, insurance, food, transport, medical services and shelter all pushed the print higher on a monthly basis, as can be seen in the heatmap below. US CPI Heatmap The rate of price increases in shelter, the highest weighted services category, advanced at a rapid pace of 0.6% MoM, contributing two thirds of the monthly inflation print and up 6% this year. This might lead you to think that the problem is focussed in housing. However, a closely watched metric of Powell’s known as supercore (core services excluding shelter) advanced by 0.85% MoM, a pace not seen since April 2022. Supercore is now running at a 3 month annualized pace of 6.6%, which will absolutely catch the eye of the Federal Reserve as it delivers the message that services inflation is a wider issue than housing alone. It wasn’t all hot, as used car prices plummeted 3.4%, apparel -0.7% (led by women’s clothing while men’s clothing ran hot) while core goods and energy continued to deflate in price. It should be noted that in the data used for cars and trucks prices has just had a change of methodology applied for the first time this month relating to mileage estimations used vehicles. Thus, I would take it with a pinch of salt. The Federal Reserve's chances of cutting rates in March has gone from being the market's baseline expectation at the start of January to a 91.5% chance of a continued pause. Markets are now pricing in the first cut to come in May 2024, a significant push back on rate cut bets. Fed meeting probabilities as per CMEFedWatch US Treasury yields rose on the news and the S&P fell 1.37% on the day. Simply explained CPI Release by the Bureau of Labor Statistics monthly The Consumer Price Index measures the change in prices for goods and services for consumers and thus is a measure of inflation. A basket of goods and services is sampled monthly. The good and services in question are supposed to reflect the spending patterns of consumers in the United States. The data is meant to be representative of prices for over 90% of the US population. Different items in the CPI are given different weighting relative to their deemed importance. Core CPI is the most closely watched metric within CPI as it excludes food and energy, which tend to be more volatile, and as a result allows for a closer look at underlying inflationary pressures within the economy. While CPI is not the Fed’s preferred measure of inflation, well known to be core PCE, it still is of significant importance bearing on the direction of monetary policy as the Federal Reserve try to achieve their dual mandate of maximum employment and stable prices (2% inflation target).

THIS WEEK'S HIGHLIGHTS ⚠️ 1. The Federal Reserve kept interest rates unchanged at 5.25-5.5% and confirmed that quantitative tightening (reduction of the Federal Reserve balance sheet) would continue at the same rate. • Powell stated that despite policy currently being restrictive the Fed are not confident that it is restrictive enough yet and are prepared to raise interest rates further if they aren’t happy with progress. However, he explained that they are proceeding carefully by pausing, as they believe they have time to do so. • He reported that the Fed is NOT thinking about rate cuts at present and emphasised that their current question is HOW high they are going and then the next question will be how long to stay there. • The Fed did not reinstate a recession as their baseline forecast but Powell stated that policy will continue to be a headwind to the economy and as a result the labor market should soften further, economic growth should slow and inflation too. • Powell acknowledged that changes to Treasury yields can affect monetary policy decisions but they need to be sustained and not temporary changes driven by market predictions of future Fed policy. Following this, 10Y Treasury yields then fell from >4.9% to finish the week at 4.59%... 2. Friday's Nonfarms payrolls print came in weak, reinforcing that the US labor market is cooling off. The US gained 150k jobs in October, below expectations of 180k and the prior month’s downwardly revised 297k. This is well below the average print for the last 12 months of 258k. Furthermore, the household employment survey reported a drop of 348k jobs. • The majority of jobs added came from government (+51k), health (+58k) and social care (+19k) • The unemployment rate ticked up to 3.9%, which now marks an increase of 0.5% from the lowest point in the last 12 months. You may have heard some people talking about the Sahm rule recession indicator. The concept of this is that an increase in the unemployment rate 3-month moving average of 0.5% from the lowest point in the last 12 months is a reliable indicator of the beginning of a recession. Now, the criteria is not actually yet met but if the unemployment rate stays at 3.9% (or higher) for November and December then the Sahm rule WILL be met by the end of the year. The Sahm rule is yet to have any false positives in data spanning back to the 1950s. • The Sahm rule was created by Claudia Sahm, an ex Federal Reserve economist, and used as a method to identify a recession in its early stages. It has been very accurate and signals recession much faster than NBER recessions, which can take years. However, it is worth noting that Sahm has been interviewed recently and said that if there was ever a time for her rule to trigger and there not be a recession then it would be now. • There are two surveys released in the employment update. The household survey (current population survey (CPS)) and the survey of businesses (current employment statistics (CES)). The household is a survey of American citizens and the CES which is a survey of businesses. This is part of why there is discrepancy between nonfarms and the employment change seen in the household survey. • Ultimately, the data was weak and continued a pattern of softening in the labor market. US Nonfarms vs unemployment rate 3. JOLTS job openings increased despite signs of a loosening labor market in the US. Openings came in well above expectations at 9.553 million (Exp. 9.4M, Prev. 9.497) but the general downward trend in job vacancies is still clear. • The number of job openings have been declining of late, leading the Fed to suggest that we might be able to see a loosening in the labor market without a significant increase in the unemployment rate. However, as mentioned above, the above is suggesting this is unlikely. 4. Continuing jobless claims continued to rise in the US, suggesting that people are finding it harder to find a job once they become unemployed. Initial jobless claims surprised slightly to the upside marking the 6th consecutive weekly increase in initial claims, but they are by no means spiking: • Initial 217k (Exp. 210k, Prev. 212k) • Continuing 1.818M (Exp. 1.8M, Prev. 1.783M) • Initial claims tracks the number or people that are filing for unemployment benefits for the first time and continuing claims tracks the number of people that are filing for the 2nd or more time. As people struggle to find a job after becoming unemployed in a cooling labor market environment they are forced to file for unemployment benefits for a more prolonged duration, and this continued claims accumulates. • It should be noted that the US labor market is coming from an extremely tight place and thus although the pattern is that of weakening it would still be considered historically tight. 5. ISM Manufacturing PMI this week gave a significantly weaker than expected reading, suggesting the manufacturing sector pain in the US is likely not over after staging a recovery from a 2023 low in June. Manufacturing came in at an overall 46.7 (Exp. 49.0, Prev. 49.0). • Production 50.4 (prev. 52.5), the only component in expansion. New Orders declined to 45.5 (prev. 49.2), suggesting demand fell markedly and is now in contraction. Furthermore, employment fell to 46.8 (prev. 51.2), suggesting manufacturers are offloading staff. • A quote from the report on the employment situation in US manufacturing reads: "Attrition, freezes and layoffs to reduce head counts increased during the period, with layoffs the primary tool, indicating a more urgent need to reduce staffing,” • PMIs are indexes which are created from collating survey responses from business managers in which they are asked to assess the business activity through a series of questions. A reading <50 suggests contraction. 6. The ISM services PMI came in worse than expected at 51.8 (Exp. 53, Prev. 53.6) but still suggested that the services sector in the United States remained in expansion.The services sector in the US is by far the biggest sector and is responsible for >70% of GDP generation. • New orders did improve, despite overall deterioration of the headline figure, suggesting expansion in demand. However, exports declined very markedly from 63.7 to 48.8, plummeting from rapid expansion to slight contraction, indicating global weakening demand for US services. New orders gives insight into demand regardless of origin, while exports provides insight into demand from outwith the US. • The employment component of ISM fell to 50.2 from 53.4 previously, essentially suggesting stagnation. The rate of hiring is slowing in the US services sector and fits with the picture of a weakening labor market. 7. The Federal Reserve's total balance sheet DECREASED by $41.16 billion and now stands at $7.867 trillion. US financial institution emergency borrowing DECREASED by $217 million, now standing at $112 billion. Discount window (DW) borrowing DECREASED by $219 million, now at $2.95 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $2 million and now stands at $109.07 billion, a record high. • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 8. The Bank of England left interest rates unchanged in the United Kingdom as the economy continues to show signs of weakening, especially in the labor market. The Monetary Policy Committee voted 6-3 for a pause, with 3 members voting for a 0.25% hike. Andrew Bailey, governor of the BOE emphasized that policy would need to remain restrictive for an ‘extended period of time’. They updated their projections for the coming years, which included the following: • Rate cuts expected by Q4 2024 •Unemployment expected to rise to 5% by 2025 (currently 4.3%) • GDP was forecasted to be very week in the coming year in the UK. GDP growth in Q4 predicted to be 0.1% quarter on quarter and in Q4 2024 expected to be 0% YoY. • Inflation expected to still be 3.1% by next year in Q4 but it is estimated to reach target (1.9%) by 2025 Q4 9. UK mortgage approvals increased by the smallest amount since January in September at 43.3k, well below consensus 45k estimates, as housing turnover in the UK is throttled by the Bank of England’s hiking cycle. UK mortgage approvals are at historically very suppressed levels, but not as severe as seen in the US. This is likely due to the lack of prolonged golden handcuff effect, as seen in the US, due to 30Y fixed rate mortgages encouraging people not to move. In the UK the majority of fixed rate mortgage products at 2-5Y fixed and thus will either have to take onboard significantly higher payments or sell their house in the more near term future, thus hitting household balance sheets. UK Mortgage approvals 10. Eurozone preliminary GDP printed in contraction in the third quarter, coming in at -0.1% (Exp. 0%, Prev. 0.1%), worse than expected, and may signal the start of recession in Europe. • Germany, the largest economy in the Euro Area, also reported contraction in GDP in Q3 at -0.1% (Exp. -0.3%, Prev. 0.1%). The German economy accounts for almost 30% of Eurozone GDP generation and therefore has a substantial impact on the Europe wide GDP print. • GDP is the total value of good and services produced in a period of time and is usually considered the bottom-line measure of economic growth of an economy. 11. Eurozone inflation also came in lower than expected, showing continuation of the trend of disinflation seen in the economic area. CPI came in at 2.9% YoY (Exp. 3.1%, Prev. 4.3%) with core CPI coming in at 4.2% (Exp. 4.2%, Prev. 4.5%). • Inflation is dropping rapidly as the European economy weakens. 12. Chinese purchasing managers indexes were released, showing an ongoing sluggish Chinese economy and increasing the likelihood of more major economic stimulus to be injected to try and spur on growth in the world’s second largest economy. • NBS PMI Manufacturing PMI 49.5 (est. 50.4, prev. 50.2) & Services PMI remained in weak expansion at 50.6 (est.52.0, prev. 51.7) • Caixin Manufacturing PMI fell to 49.5 in October (Exp, 50.8, Prev.50.2) while the services came in at 50.4 (Prev. 50.2) The NBS PMI is an index based off the collated responses from a survey conducted of larger, mainly state-owned Chinese companies, meanwhile the Caixin PMI is created using responses from smaller to medium sized, mainly private sector, companies. 13. The Bank of Japan tweaked the 1% 10Y yield cap to call it a ‘loose upper bound’ rather than a firm cap and thus loosened their yield curve control policy in a slightly ambiguous way. However, the tweak to yield curve control was less than markets were expecting going into the meeting, where the BOJ kept interest rates unchanged at -0.1%. Ueda (BOJ governor) emphasized that they are still willing to continue massive stimulus unless yield rises ‘reflect fundamentals’. • On the back of the meeting the Yen saw a sell off against the dollar despite this being the opposite of the desired effect of the policy tweak, as the BOJ continue to try and support the weakening Yen. • Japan is one of the world’s largest holders of foreign debt securities. Tweaks to the BOJ yield curve control policy can have far reaching repercussions. It is speculated that increasing yields within Japan may lead to investors repatriating their cash as they don’t need to look as far afield for assets that offer an acceptable yield. Thus, it is feared that bond yields around the globe could rise significantly, resulting in a substantial tightening of financial conditions as borrowing costs rise in tandem. • Furthermore, loosening of yield curve control makes the Yen carry trade less profitable. This is an important investment technique that involves borrowing in Japanese Yen, with negative interest rates, and then deploying that capital in other markets that offer a higher yield. If interest rates in Japan rise then this trade becomes less lucrative. - Well, that was a big week. We have likely seen the last rate hikes of the cycle from the ECB, Fed and Bank of England. Their rhetoric has shifted towards one of optionality and across the board inflation is falling and labor markets softening. Despite the US economy proving exceedingly resilient and posting strong (and likely peak) growth last week Powell emphasized that this is forecast to slow significantly in the coming months. Powell did admit. however, that the Fed underestimated the strength of the household balance sheets following the pandemic. Powell in his speech/Q&A emphasized that the Fed are prepared to raise rates again, if warranted by data, giving a hawkish overall tone in the press conference. However, it remains very likely that the Fed are done. Markets are currently pricing in a 95.4% chance of the Fed keeping rates on hold on the meeting on the 13th of December with rate cuts prices in as early as May 2024. CME Interest Rate probabilities

THIS WEEK'S HIGHLIGHTS⚠️ 1. The Federal Reserve's total balance sheet decreased by $21.5 billion to $8.593 trillion 2. US financial institution emergency borrowing INCREASED by $4.4 billion to $143.9 billion. Discount window (DW) borrowing INCREASED by $2.3 billion, now at $69.9 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $2.15 billion, now at $74 billion. This is bit of a plot twist as demand for emergency lending deviated from the path of steady decline we have seen in the past few weeks, the last thing Yellen and the Fed want to see is emergency lending starting to spike again. • The DW is touted as the 'lender of last resort' and is a means by which financial institutions can borrow money from the Fed for up to 90 days by posting collateral (usually in the form of US treasury bonds, agency MBS, etc) to fulfil emergency liquidity needs • The BTFP is another (Est. Mar 2023) means by which banks can borrow emergency liquidity from the Fed. They post collateral and the Fed values it at par value, meaning they will ignore any price fluctuations since purchase; interest is essentially Fed Funds Rate + 0.1%. This helps stop banks being forced to sell underwater portfolios and realise massive losses 3. Borrowing via the Fed's Foreign and International Monetary Authorities (FIMA) repo facility fell to $20 billion from $30 billion. • FIMA (Established in March 2020) allows short term lending of dollars to foreign central banks who then lend to banks within their country, providing dollar liquidity. They must post US treasuries as collateral. 4. US commercial bank deposits declined by $76.2 billion in the week ending April 12th. Deposits fell in large, foreign and small banks across the board. The biggest increase was seen in large and foreign banks. Despite this, commercial bank lending increased $13.8 billion, when seasonally adjusted. 5. Conference Board Leading Economic Indicators Index (LEI) fell by 1.2%. The LEI index is a combination of 10 leading indicators that are used to predict the near term course of the US economy. Throughout history it has been very reliable at predicting future recessions and is currently signalling one within the next 12 months 6. US Building Permits declined more than expected in March to 1.413M (Exp. 1.45M, Prev. 1.55M). Housing Starts surprised to the upside but declined to 1.42M (Exp. 1.42M, Prev. 1.432M). US existing home sales fell 2.4% MoM and inventory climbed by 1%. Demand for real estate softens after a rebound in February • Housing starts refer to the initiation of construction of both multi-unit and single family homes, a coincident indicator of construction activity • Building permits gives insight into future construction activity and is a leading indicator - this includes both residential and non-residential construction projects • Existing home sales account for around 90% of sales within the US housing market 7. 5 year credit default swaps in the United States have increased to highest level since 2011 as investors start to hedge against the possibility of a debt ceiling related US government default • Credit default swaps pay out when the underlying asset defaults. In this case, investors are betting that the US government will default on debt payments. • The debt ceiling (cap on how much the US federal government can borrow) is quickly being approached. Politicians in the US are currently playing the highest stakes game of chicken on planet Earth. Debt ceiling raises have to be passed through Congress (both Republicans and Democrats have to agree) so politicians can delay the process and push through political agendas while using the risk of a US financial system disaster as leverage. • The debt ceiling being raised or suspended is not a novel circumstance. It was created in 1917, the number of times it has been raised, suspended or altered in some form is up for debate but is around 80-90, not the rarest occurrence. It has never once led to a US default. It has, however, previously led to the credit rating of the US being downgraded (2011) 8. The Chicago Fed National Financial Conditions Index (NFCI) showed that financial conditions loosened in the week ending April 14th and have done so since the end of March, just after emergency borrowing from the Federal Reserve spiked - some context for the recent rally in risk assets that we have been seeing. • Recent peak Fed balance sheet W/E March 22nd • Recent peak NFCI W/E March 31st 9. US Jobless claims surprised to the upside again, further supporting that the US jobs market could be at an inflection point and the softening that the Federal Reserve has been desperate to see could be starting to materialise: • Initial 245K (Exp. 240K, Prev. 239K) • Continued 1.865M (Exp. 1.825M, Prev. 1.810M) 10. Not a great week for the United Kingdom and the Bank of England - hot CPI and a miss in retail sales. However, BOE will likely be happy to see unemployment beginning to tick upwards, as well as unemployment benefit claims: • CPI 10.1% (Exp. 9.8%) YoY in March, now the seventh month in a row of +10% CPI. Worth noting that food and non-alcoholic beverages came in at +19.1% (Prev. +18%). A really grim figure for average consumers. Which? also published inflation tracker results for basic foods in UK supermarkets showing items like milk +33.6%, bread +22.8%, cheese 28.3%+ YoY. • Retail sales -0.9% (Exp. -0.5%) MoM in March; this was somehow reported as being due to the weather being more rainy than usual • UK Unemployment 3.8% (Exp. 3.7%) • Employment change 169K (Exp. 50K); people in the UK that were previously economically inactive are returning to the workforce, likely in part due to the worsening cost of living forcing people to do so. • Claimant count change increased 28.2K (Exp. -9.5K) - UK equivalent of jobless claims 11. German ZEW economic sentiment missed expectations for April coming in at 4.1 (Exp. 15.3) suggesting a less optimistic expert forecast for the 4th largest economy on Earth. This is the 3rd month in a row of declining optimism, however, a reading above 0 still suggests the majority of economists believe the German economy will grow in the next 6 months. 12. Eurozone HICP inflation rate came in as expected for March, 6.9% (Prev. 8.5%) YoY, a fifth consecutive decline. However, core inflation rate was reported as 5.7% YoY (Exp. 5.7%, Prev. 5.6%) - the highest ever core inflation rate within the Eurozone. • HICP - Harmonised Index of Consumer Prices is the ECB's preferred measure of consumer inflation and is standardised across Eurozone countries • Declining headline inflation rate was led by declining energy prices as well as non-energy industrial goods. However, prices for food, alcohol and tobacco rose to 15.5% YoY (Prev. 15%) and services also continue to rise 5.1% YoY (Prev. 4.8%) 13. S&P Global Flash Manufacturing and Services PMIs for April showed a fairly consistent picture of services in expansion and outpacing expectations whilst manufacturing continues to contract - other than in the US which saw expectation beats in both, increasing the likelihood of a 25bps in May. PMIs collate survey responses of managers on business activity. Nota bene >50 = growth, <50 = contraction, 50 = stagnation Manufacturing PMIs: • US 50.4 (Exp. 49, Prev. 49.2) • Eurozone 45.5 (Exp 48, Prev. 47.3) • Germany 44 (Exp 45.7, Prev 44.7) • UK 46.6 (Exp. 48.5, Prev. 47.9) Services PMIs: • US 53.7 (Exp. 51.5, Prev 52.6) • Eurozone 56.6 (Exp. 54.5, Prev. 55) • Germany 55.7 (Exp. 53.3, Prev. 53.7) • UK 54.9 (Exp. 52.8, Prev. 52.9) 14. The Philly Fed Manufacturing Index came in significantly below expectations at -31.3 (Exp. -19.2). This is despite US PMIs suggesting manufacturing is going to slightly expand/be stagnant in April. Every time the Philly Fed index has been below -25 since the 70s it has led to a recession, no exceptions. Like PMIs, a reading below 0 is contractionary. • The Philly Fed Index gives data on manufacturing in the Third Federal Reserve District - Southeastern Pennsylvania, southern New Jersey, and Delaware US leading indicators are signalling a recession, in line with the consensus from the most recent Fed meeting minutes. Housing continues its decline after a rebound in February. Emergency lending increased, deviating from the steady decline many had anticipated. Furthermore, bank deposit outflows have returned. The fear of a US default is beginning to rise as the deadline for action on the debt ceiling approaches. Politicians in the US are currently playing high stakes chicken with the global financial system. The debt ceiling will almost certainly be raised as it always has been, the main uncertainty is how much of a song and dance will occur in the run up. Inflation in the UK is beyond a farce and the Bank of England are more dovish in their narrative than the Fed. Markets strongly expect rate hikes at the Federal Reserve, Bank of England and European Central Bank's next meetings.

FED MINUTES SUMMARY ⚠️ 1. The vote to pause was unanimous. The majority of members felt that another rate hike would be needed at a future meeting. However, this will be data dependent and is subject to change. 2. Participants feel that current policy is restrictive, and as rates are near or at their peak the discussions will shift to being more about how long they need to keep rates high in order to ensure that inflation is returning to 2% target. 3. Inflation risk deemed still to be skewed to the upside. Members were worried about oil prices undoing some of the disinflation that has been seen thus far. However, they acknowledged that larger than anticipated tightening might occur as lags of policy and economic outlook are uncertain. 4. With household and corporate borrowers having a limited need to refinance debt in the near term, it could take longer than expected for monetary policy decisions to fully pass through to the economy. 5. Some members stated that assessing the economy is difficult due to some large revisions being made (*cough* Nonfarms *cough* BLS *cough* personal consumption in Q2). 6. Government shut down may delay release of economic data and make it harder for the Fed to conduct assessment of appropriate monetary policy decisions. 7. Economic activity is expanding at a solid pace (upgraded from ‘moderate’ in their statement). However, tighter credit conditions will weigh on economic activity, hiring and inflation. GDP growth expected to slow in the near term and continue to be slower from 2024 through to 2026. 8. The labor market remains tight but is easing. 9. Financial conditions tightened, with higher longer-term rates, lower equity prices, and a stronger dollar. 10. Bank lending tightened over the intermeeting period but is still generally accessible. 11. A number of participants expressed concerns about vulnerabilities in the commercial real estate sector. 12. The consumer has generally been more resilient than expected. However, some households now having to access credit in order to finance their spending. The return of student loans, reduced government support for families and tightening lending conditions is expected to weigh on this further. 13. Tightening of credit conditions due to banking stress in March now expected to have less of an effect than previously thought. 14. QT (balance sheet reduction) could continue even if rate cuts begin

THIS WEEK’S HIGHLIGHTS ⚠️ 1. US Retail Sales US Retail Sales surprised significantly to the upside in December coming in at 0.6% MoM (Exp. 0.4%, Prev. 0.3%). Deeper dive Both online and in store spending was strong in December as the US consumer remains resilient, as evidenced by the heatmap below. Control group retail sales, which essentially excludes food services, gasoline, cars and building supplies and has the greatest predictive impact on GDP growth figures came in at 0.8%, a very robust pace. US Retail Sales 2023 MoM Heatmap 2. University of Michigan Consumer Sentiment University of Michigan consumer sentiment survey showed a marked improvement in sentiment 78.8 (Exp: 70, Prev: 69.7). This is the most optimistic consumers have been since July 2021. On top of the rise in consumer sentiment, inflation expectations also dropped to 2.9%, a marked improvement given the puzzling increase seen in the twilight months of 2023. Deeper dive Both current conditions 83.3 (Prev. 73.3) and consumer expectations indexes increased markedly 75.9 (Prev. 67.4). Simply explained The UMICH Consumer Sentiment index is based on a survey conducted by the University of Michigan. It is released monthly and is designed to survey a cohort representative of US households; approx.. 500 surveys are completed monthly. The survey gauges the expectations and opinions of households on their financial situations, their thoughts on the near and long-term US economic outlook through a series of approx. 50 questions. It is considered to be an important leading indicator of future consumer spending and the US economy. Consumer spending accounts for approx 70% of US GDP. The index is split in to two sub-indices: 1. Current Economics Conditions index 2. Consumer Expectations index 3. Bank Term Funding Program use skyrockets Discount window (DW) borrowing INCREASED by $189 million, now at $2.3 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $14.3 billion and now stands at a massive $161.5 billion, a new all-time high. Deeper Dive We continue to see a clear pattern of increasing use of the bank term funding program after a period of muted growth/stagnation. This is the seventh consecutive increase in usage of the Bank Term Funding Program due to financial institutions taking advantage of the arbitrage between what interest rates banks can take out BTFP loans at and the interest they can earn on the loan if they just leave it at the Fed, accruing the interest on reserve balance rate, essentially risk free money and an opportunity that banks are taking advantage of. The Bank Term Funding Program is supposed to end in March and there is a lot of chatter about the Fed making the Discount Window more accessible to banks due to some banks not being able to easily access the Discount Window in March during the banking stress. It remains to be seen whether the BTFP is extended. BTFP usage Simply Explained The DW and the BTFP are both means by which financial institutions can borrow 'emergency liquidity' from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis in March this year. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in bank assets used as collateral are ignored by the Fed when being used as collateral. This was designed so that banks aren’t forced to sell asset portfolios at heavy losses, they can lend against them to meet immediate obligations and continue to hold. To top it off, interest on lending through the BTFP is done at 1 year overnight index swap (OIS) rate + 0.1%. 4. Fed speak aimed to pare back expectations of rate cuts The Fed continued to try and manage market expectations of rate cut timings. Raphael Bostic gave a speech this week and stated that his baseline prediction for rate cuts would be in the third quarter of 2023. Markets no longer price in a March rate cut as consensus, but it is pretty much 50/50. Fed meeting probabilities - as per CMEFedWatch 5. Hot UK CPI print UK CPI came in hotter than anticipated for December and increased from the prior month, driven largely by services. December’s headline CPI print came in at 4% (Exp. 3.8%, Prev. 3.9%) while core (excluding energy and food) also surprised to the upside at 5.1% (Exp. 4.9%, Prev. 5.1%) YoY. On a month over month basis UK CPI rose a robust 0.4% (Exp. 0.2%, Prev. -0.2%) and core rose a rapid 0.6% (Prev. -0.3%). Deeper dive The figures were skewed by a few categories with outsized price changes. In particular, air travel rose by 57.1% month over month. There was also a large increase in alcohol and tobacco, driven entirely by tobacco MoM which increased 4.1%, while alcoholic beverage prices fell 1.6%. Services inflation, which accounts for >46% of CPI weighting, advanced 0.9% month over month, the fastest pace since July. Goods inflation was non-existent month over month. All in all, the hotter than expected print came from a few heavily weighted categories that are unlikely to repeatedly print as hot. UK CPI 2023 Heatmap Simply explained The consumer price index (CPI) measures price changes in consumer goods and services. It compares the prices of a fixed basket of goods and services over time and is released monthly in the UK by the Office for National Statistics (ONS). 6. Monthly UK labor data was released: Average growth in pay (excluding bonuses) cooled more than expected to 6.6% in the 3 months to November (Exp. 6.8%, Prev. 7.2%). Average earnings including bonus also fell more than expected to 6.5% (Exp. 6.8%, Prev. 7.2%). Job openings fell further coming in at 934K, a decline of 49K. Vacancies fell for the 18th consecutive 3-month period; this is the longest consecutive fall in history and vacancies are rapidly heading toward pre-pandemic levels as demand for labor softens. PAYE payrolls declined by 24K in December (Exp. +30K, Prev. +9K) Claimant count change increased by 11.7K in December (Exp. 3K, Prev. 0.6K) Unemployment Rate remained at 4.2% Overall The UK labor market is cooling. Job openings are showing a clear declining trend and are moving toward their pre-pandemic levels. The timeliest measures of employment (PAYE and Claimant Count) show job losses and increased employment benefit seeking. Current cooling of wage growth is historically rapid and will be well received by the Bank of England as it has been one of their biggest worries as an ongoing inflationary impulse in the UK economy. Wage growth obviously still remains elevated but the rate of cooling is notable. Simply explained PAYE (pay as you earn) data is based off 'real time' data based on tax records in the UK whereas the ONS wage growth data is based off of surveys of employers. The PAYE data is more timely but not as comprehensive as the ONS survey which captures people that do not work via PAYE system in the UK. Claimant count change is essentially a monthly jobless claims report in the UK, counting those filing for unemployment benefits. The Office for National Statistics is currently using an experimental method for calculating unemployment rate due to a fall off in responses to the Labour Force Survey (LFS) usually used for data collection. The LFS is currently temporarily suspended but will be reintroduced in the near future. 7. UK Retail sales were abysmal in December UK retail sales came in at -3.2% (Exp. -0.5%, Prev. 1.4%) MoM by volume. This is the worst month over month decline for December on record spanning back to 1996 (but keep in mind figures are seasonally adjusted for holiday spending). Deeper dive On a year over year basis there has only ever been 5 UK retail sales December prints that have been negative (data back to 1997): 1. 2022 (-7.2%) 2. 2023 & 2010 (-2.4%) 3. 2008 (-2.1%) 4. 1998 (-0.2%) The latest print was the biggest month over month decline since January 2021, during COVID lockdowns; all main sectors saw declines (broad-based). Non-food stores saw a 3.9% decline, Black Friday sales in November have a significant impact on this but the figures are weak nonetheless. Non-store (online shopping) fell 2.1%, food store sales down 3.1% MoM Retail sales volumes fell 2.8% in 2023. Overall, this was broad-based weak retail sales data. Simply explained Retail Sales is published by the Office for National Statistics on a monthly basis and used as a barometer of consumer spending, the biggest driver of GDP growth in the UK. It measures the value and volume of goods sold in retailers. Sales volume adjusts for price changes (inflation) so that the figure is the actual amount of goods being purchases. Value is the monetary value of goods purchased. 8. German GDP contracted in 2023 German GDP contracted 0.3% for the full year 2023. Germany will likely be the only G7 country to post negative GDP growth for 2023. Simply explained GDP is the estimated value of goods and services produced in a given period of time within a country or economic area. By nominal GDP Germany is the 3rd largest economy on the planet and makes up almost 30% of Eurozone GDP. 9. German ZEW economic sentiment improved German ZEW economic sentiment headline figure improved to 15.2 (Exp. 12, Prev. 12.8) on expectations that the ECB will begin to cut rates early in 2023 Deeper dive 77.9% of respondents saw Germany’s current economic situation as bad, a 0.8% increase from the month prior. However, 33.2% of experts see Germany’s situation improving in the next 6 months, a 2.6% improvement on the prior month. Simply explained ZEW economic sentiment is a collation of survey responses from German economists/analysts on their assessment of the German economy now and in the next 6 months. This month’s survey saw 173 responses. 10. Eurozone industrial production fell Industrial production contracted 0.3% (Exp. -0.3%, Prev. -0.7%) as expected month over month. On a year over year basis Eurozone industrial production is now down 6.9% (Exp. -5.9%, Prev. -6.6%). Deeper dive This was the third month in a row of contraction of industrial production. Simply explained Industrial production measures the output of the industrial sector. This is made up largely of manufacturing but also contains mining and utilities. The sector accounts for a sizeable chunk of GDP. 11. US Hombuilder sentiment improved markedly The National Association of Homebuilders (NAHB) sentiment index improved markedly and beat expectations, coming in at 44 (Exp. 39, Prev. 37). After mortgage rates peaking in October, homebuilders have seen an increase in demand as borrowing costs have eased. 12. Building permits and housing starts surprised to the upside Building permits surprised to the upside coming in at an annualized 1.495M (Exp. 1.48M, Prev. 1.467M), a 1.9% improvement in December. Housing starts fell to 1.46M (Exp. 1.426M, Prev. 1.525M), a fall of 4.3%. Despite start falling they still surprised to the upside after a 10.8% increase seen in November. Simply explained Housing starts records the number of homes in a given time period in which construction has started. This is a coincident indicator as it gives insight into current construction activity. On the other hand, building permits record the number of approved applications for construction. Not all approved projects will actually be built but it is a forward looking indicator of future construction activity in the coming months. 13. Existing home sales saw their worst year since 1995 Existing home sales declined 1% MoM, coming in at an annualized 3.78M units (Exp. 3.82M, Prev. 3.82M). 2023 marks the worst year for existing home sales since 1995 due to the high interest rates, with mortgage rates seen breaching 8% this year. Simply explained Existing home sales record the turnover of homes sold that have had a previous owner. This usually accounts for 80-90% of home sales in the US but since rates have risen and many have understandably become reluctant to give up their low fixed rate mortgages the composition has changed. As a result of the golden hand cuff effect of people not wanting to leave their current mortgage and accept higher rates we have seen the lowest existing home sales in multiple decades. 14. Still no sign of layoffs spiking in jobless claims US initial jobless claims came in below expectations at 187K (Exp. 207K, Prev. 203K), continuing claims fell to 1806K (Exp. 1845K, Prev. 1832K). Simply explained Initial jobless claims tracks those that are filing for unemployment benefits for their first week whereas continuing claims includes those that are filing after previously already having done so. Thus, initial claims gives an idea of how many people are newly becoming unemployed (current layoffs) whereas continuing claims provides insight into how long people are remaining unemployed once they have lost their job (how hard it is to get a new job). The US labor market remains tight despite signs of loosening in terms with falling numbers of vacancies. 15. China reported some mixed economic data and short selling was restricted by the biggest brokerage in the country China GDP came in softer than expected but hit the country’s target for the 2023. GDP for the 4th quarter grew 5.2% (Exp. 5.3%, Prev. 4.9%) YoY and 1% (Exp. 1%, Prev 1.5%) QoQ. The unemployment rate increased to 5.1% (Exp. 5%, Prev. 5%) and retail sales came in weaker than expected 7.4% (Exp. 8%, Prev. 10.1%). On the other hand, industrial production surprised to the upside, coming in at 6.8% (Exp. 6.6%, Prev. 6.6%). However, for the full year, production remains below pre-pandemic levels. The biggest brokerage in China added restrictions to short selling stocks in an attempt to boost asset prices. Deeper dive China continues to battle with deflation and weak economic activity amidst the ongoing real estate crisis in the country. Further stimulus from the Chinese central bank (the People’s Bank of China (PBoC)) as well as stimulus from the government is expected in the coming months in order to try and promote economic growth. Roundup UK CPI seemingly threw a spanner in the works for the BOE in their fight against inflation but readings are still coming in below where they had been expected to be at the last BOE meeting and much of the hot reading came from heavy fluctuations that are unlikely to persist in future prints. Markets are currently pricing in the first BOE cut for June 2024. Germany, the biggest economy in the Eurozone, posted GDP contraction for the year. We go into next week awaiting a decision on rates from the European Central Bank (ECB) on Thursday. Currently, the first ECB cut is priced in for April. Data coming out of the US this week painted a stronger than anticipated picture in jobless claims, retail sales and according to UMICH consumers' spirits are lifting. Fed speakers tried to pare back some of the market expectations for rate cuts and Treasury yields rose Markets are no longer pricing in the first cut to be in March, however, it remains a live meeting and very much could go either way. We have a big week ahead with PCE prices (the Fed’s favored inflation metric) and GDP for Q4 to be released.

German Manufacturing PMI at 38.8 Other times this has happened, COVID and GFC Germany is the 4th largest economy on Earth

THIS WEEK'S HIGHLIGHTS⚠️ 1. The US government passed compromise legislation to prevent a looming government shutdown hours before it began. • This is the second standoff situation of the year after the debt ceiling crisis concluded in June. The bill will keep the US government up and running until November 17th, giving politicians some wiggle room to iron out a bill to prevent a shutdown. This is not a resolution to the problem. There’s every chance that the can has just been kicked down the road and the same game of chicken will return in 2 months. 2. The US 10Y yield hit 4.68%. This is the highest level in 16 years and mortgage rates as a result climbed to their highest in 20 years. As we approached the latter stages of the week the 10Y yield faded from its highs, finishing the week at 4.57%. • The 10Y yield is a US government bond. It is used as a proxy for borrowing costs, most notably, mortgage rates. The 10Y yield increasing leads to an increase in the yield that investors can achieve from an essentially risk free an asset. As a result, when you take out a mortgage you must borrow with a spread (additional interest) on top. This spread mainly accounts for additional risk that lending to a consumer entails. Therefore, surging 10Y yields means surging mortgage costs. 3. Core PCE, the Fed’s preferred measure of inflation, came in at 0.1% (Prev. 0.2%) month-over-month and 3.9% (Prev. 4.3%) year-over-year. This is the smallest month over month gain in core since 2020 and will bolster the argument that the Federal Reserve should be pausing at their next meeting, despite the recent dot plot predicting that the Fed have one more rate hike in them. 4. US GDP final estimate for Q2 was released and remained at an annualized rate of growth of 2.1%. • The main talking point from the revised data was that US personal consumption final estimate for Q2 was released coming in at 0.8% annualized after the initial estimate of 1.7%. This is the lowest reading since Q1 2022 for the largest contributor to the United States economy and suggests the US consumer is less robust than data had originally suggested. 5. On top of the above, personal consumption (consumer spending) in the US increased by 0.4% in August, as expected, down from an increase of 0.9% in the month prior. Real personal consumption (consumption inflation adjusted) was 0.1%. 6. US Consumer confidence deteriorated coming in at 103 versus expectations of 105.5 and down from a revised 108.7. This a four month low in sentiment. 7. House prices in the USA hit a RECORD HIGH in July after the Corelogic Case-Shiller national house price index posted a 0.6% MoM increase (Exp. 0.7%, Prev. 0.9%), home prices were up 1% YoY and 5.3% year-to-date, well above the long term median for 12 months. • Although, US house prices remain extremely high, turnover volume is at very suppressed levels as less and less people are opting to give up their previously locked in low interest rate 30Y fixed mortgage and first-time buyers are being put off by soaring levels of unaffordability. 8. US new home sales plummeted -8.7% month over month (Prev. 8%), significantly worse than consensus expectations and pending home sales also saw a significant drop of 7.1% MoM (Exp. -0.8%, Prev. 0.9%) now -18.7% YoY (Exp. -11%, Prev. -14%). • new home sales typically account for around about 10% of the US housing market. However, due to significant supply constraints in existing homes with rising interest rates, the percentage is closer to about 30% at present. The downturn is in keeping with a recent decline in homebuilder sentiment. • Pending home sales are deals that have not yet closed. The index only tracks existing homes. It is regarded as a leading indicator of existing home sales, a key barometer of the US housing market. 9. The Federal Reserve's total balance sheet DECREASED by $22 billion and now stands at $8 trillion. The Federal Reserve have now reduced their balance sheet by $963.4 billion from peak in April 2022. • US financial institution emergency borrowing INCREASED by $231 million, now standing at $110.9 billion 10. UK mortgage approvals came in lower than expected in August, suggesting that the UK housing decline has further to go. UK Mortgage approvals came in at 45.4K (Exp. 47.4K, Prev. 49.5K). This was the lowest reading in 6 months; mortgage approvals are now down over 35% since August last year. • The UK housing market is in clear contraction with house prices moving lower and projected to fall at least 10% from peak. In the United Kingdom mortgage rates tend to be 2Y to 5Y fixed rates rather than the 30Y fixed in the US. As a result, you would expect that monetary policy transmission from higher rates would occur faster than in the US as consumers in the US can decide to not sell their house. However, UK citizens are forced to re-negotiate their mortgage at a much higher price. • Having said that, the Bank of England effective mortgage rate on outstanding mortgages is only 3%. This is the average rate at which mortgages in the UK are currently at. Therefore, there is a lot more filtering of interest rates to do for the UK economy. 11. More weak economic data came out of the largest Eurozone economy, Germany, with both business and consumer sentiment deteriorating further: GfK Consumer confidence (Oct) -26.5 (Exp. -26, Prev. 25.6) • This is garnered from surveys of around 2000 consumers asking questions that attempt to evaluate their assessment of the current and near term economic picture as well as their own spending intentions and assessment of their financial situation. • Propensity to save increased markedly and contributed the majority to the fall in consumer sentiment. Consumers tend to try and save more money rather than splashing out when they are worried about their financial situation. However, willingness to buy, consumer economic outlook and income expectations improved marginally. • Consumer confidence is a proxy for future consumer spending, which accounts for over 50% of GDP generation in Germany. Quote from Gfk in the report: 'Private consumption will not make a positive contribution to economic development this year'. The German economy is now expected to contract in 2023. Ifo Business Climate (Sep) 85.7 (Exp. 85.2, Prev. 85.8) • This is the 5th month in a row of declines in business sentiment, this month being the smallest of 5. Business pessimism in Germany (in data spanning back to the early 90s) is at historically very low levels. However, it is worth noting that while current conditions deteriorated, future expectations did tick up slightly, providing some green shoots. 12. German Retail Sales, a barometer of consumer spending, unexpectedly fell in August by -1.2% (Exp, +0.5%, Prev. O%) MoM and -2.3% (Exp. -0.7%, Prev. -2.2%) YoY. 13. German inflation fell more than expected to the lowest level in 2 years coming in at 4.3% (Exp. 4.5% Prev. 6.4%) YoY. • Much of the YoY drop was due to base effects. In Germany there was a discounted public transport ticket that was discontinued 12 months ago. This led to a large one off rise in prices, making this month’s reading look more rapidly disinflationary than it is. • German producer prices have been dropping like a rock and PPI is firmly in deflationary territory, with the most recent print being the most deflationary since records began. 14. Eurozone consumer and economic sentiment deteriorated further in September. Economic sentiment printed at 93.3 (Exp. 92.5 , Prev. 93.6) while consumer confidence came in at -17.8 (Exp.-17.8, Prev. 16). Key takeaways: • Consumer sentiment notably deteriorated for the second consecutive month. • Uncertainty across all sectors and consumers increased • Large EU economies seeing most significant declines were Italy and Spain • French economic sentiment improved convincingly while German and Netherlands' sentiment improved but to a lesser extent • Consumer price expectations rose while unemployment expectations fell 15. Eurozone core inflation rate fell more than expected to 4.5% YoY in September (Exp. 4.8%, Prev. 5.3%) and 0.2% month over month. This is a 1 month annualized rate of around 2.4%. Headline inflation fell to 4.3% (Exp, 4.5%, Prev. 5.2%) • Despite the above being encouraging for the ECB there was some cause for concern as Spanish inflation re-accelerated following the recent increase in fuel prices on the back of surging oil. Spain’s inflation YoY came in at 3.2%, up from 2.4% in the prior month and is now increasing at a 3-month annualized rate of 4%, double the ECB’s inflation target. - The UK is seeing house prices drop as short-term fixed interest rates have to be replaced by much more expensive rates and monthly payments. Eurozone inflation appears to be rapidly cooling but there will be some cause for concern from surging oil prices, especially given the re-acceleration of headline HICP in Spain. Economic and consumer sentiment deteriorated in Eurozone and in its largest constituent economy. Germany, accounting for almost 30% of Eurozone GDP, is expected to contract in 2023. In the US we have falling consumer confidence, falling home sales volumes on already suppressed levels with near all time high prices. The 10Y yield continues to surge, putting further pressure on lending. Core PCE came in at a very low month over month pace and consumer spending in Q2 was revised significantly lower, suggesting US consumers weren’t quite as robust as initially thought. Markets are now pricing in a 64% chance of a Fed pause at their meeting in November despite the Fed signalling in their Summary of Economic Projections that they think one more interest rate hike is on the horizon prior to the end of the year.

Two lines from the FOMC statement that stand out ⚠️ 'The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.' - pushback on cuts 'In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.' - QT to continue as is for now Now we wait

Breakdown of some of Today's CPI % change over 12 months Food +6.7% Meat, poultry, fish and eggs +0.3% Dairy +4.6% Fruit and veg +2.7% Food away from home +8.3% The price of eggs declined 13.8% in May, the largest decline in egg prices since 1951. Energy -11.7% Oil -37% (down 7.7% in one month) Gasoline -19.7% Electricity +5.9% Core CPI (minus food/energy) +5.3% Services (minus food/energy) +6.6% Core commodities +2% New vehicles +4.7% Medical care commodities +4.4% Medical care services -0.1% Transport services +10.2% Used cars and trucks -4.2% Used cars and trucks increased 4.4% month over month, however. Shelter +8% (+0.6% MoM) Shelter increase accounts for over 60% of the total Core CPI increase Household furnishings and operations fell 0.6% month over month. The first decline since June 2021 and also the largest MoM decline since 2009. - Although headline CPI is trending down promisingly, core inflation is still well above the Federal Reserve's target of 2% at 5.3%. Furthermore, should energy prices rise again, there is a material risk that we see another meaningful rise in inflation, despite the Fed's best efforts. Interestingly, 60% of the year's increase in core CPI is as a result of the shelter index. Not that this is of any solace to average American's that all happen to need somewhere to live. Despite this, the Fed are very likely to keep rates as they are, as they've alluded to in the past few weeks. Today's release didn't provide any shocks that would likely convince the Fed to change from their skip/pause rhetoric. They hate surprising markets.

POWELL SPEECH SUMMARY ⚠️ 1. The Federal Reserve held rates at 5.25-5.5% 2. The CPI print today has been confidence building for the Fed but they are yet to achieve the level of ‘greater confidence’ that they deem necessary to commence rate cuts. Inflation readings earlier in the year were higher than expected but more recent months have eased somewhat and shown ‘modest’ progress. The Fed wish to see more good inflation data going forward prior to commencing rate cuts. 3. As always, Powell emphasized the data dependence of the Fed saying that they need to let the data ‘light the way’. Powell refused to specify when cuts might come and stated the ‘totality of the data’ would be considered when deciding when to cut, rather than any one inflation print or economic variable. 4. If the Fed sees incoming data that gives them greater confidence inflation is moving sustainably to 2% target then they would commence their cutting cycle. Powell emphasized the Fed’s dual mandate of both stable prices and full employment, noting that an unexpected deterioration in the labor market would also give the Fed grounds to cut rates. 5. Powell noted that it is not the Fed’s plan to wait for things to break and try fix them. They are trying to balance their two mandate goals. 6. Median forecast for the Federal Funds Rate for the end of the year is 5.1% 7. The labor market is coming into better balance and is relatively tight but not overheated. Powell noted that unemployment remains low and we continue to see strong job growth; wage growth has eased but still running above a sustainable path that would be conducive with 2% target. 8. Powell commented on payrolled jobs still being strong but also noted there’s an argument they may be overstated. He commented on not being able to reconcile the differences seen between the establishment and household survey in the monthly BLS jobs report. He acknowledged that this is part of the uncertainty that the Federal Reserve have to deal with when making decisions. When the monthly BLS jobs report is released the report has data from different surveys. One survey gives data used for things like the unemployment rate (Household Survey) and the other provides reports like Nonfarm payrolls (Establishment Survey). The most recent print saw a huge discrepancy between the two surveys - Household reporting weakness and Establishment continued strength. This sent mixed messages and called into question the veracity of the continued strong payroll numbers. This is not a new argument and there has been notable and unprecedented difference in the signals being sent by the two surveys of late. 9. Powell noted that labor supply has increased due to immigration and increased labor force participation but specified mainly due to immigration. 10. The Fed’s increased forecast of core PCE at the end of 2024 was discussed (2.8%). Powell explained this is a conservative forecast which they don’t have high confidence in. 11. Powell feels policy is restrictive and having the effects the Fed hope for. Time will tell if it is restrictive enough. He feels the Fed have made pretty good progress with current stance. 12. Powell commented that the long run neutral rate of interest (R*) is an important theoretical concept but states that this isn’t useful when trying to decide current policy decisions. The neutral rate is the interest rate at which monetary policy is neither restrictive or accommodative. It is a hot topic of debate and fluctuates over time. 13. Powell states that the banking system seems to be in good shape and banks have made moves to bolster since the crisis starting in March last year. 14. GDP continues at a solid pace, consumer spending remains solid. Households not in as good a shape as they were a year ago but remain in good shape. This is something the Fed are keeping an eye on. 15. Discussed that shelter inflation is operating with long lags that could take years to be worked off. Fed sees this happening more slowly than they initially anticipated.

THIS WEEK’S HIGHLIGHTS ⚠️ 1. US GDP absolutely crushed expectations for the 3rdquarter, coming in at a seasonally adjusted annualized rate of 4.9% (Exp. 4.3%, Prev. 2.1%). Furthermore, real consumer spending for Q3 came in at an annualized 4% (Exp. 0.7%, Prev. 0.8%). • Gross domestic product (GDP) is the value of all goods and services produced in a given period of time. Seasonally adjusted annual rate just means how much GDP would grow in a year if the current rate continued. • Consumer spending is the primary driver of the US economy. It accounts for around 70% of GDP. Last quarter saw a huge downward revision following the initial release. • Of course this data is subject to revision but it does appear that the US economy in Q3 remained resilient, growing at a substantial pace. However, around 2.1% of the 4.9% print came from inventory increases and government spending, which are unlikely going to be as hot in Q4. It is thought that much of the 1.3% of the GDP print that came from inventories was down to car makers stocking up prior to the ongoing UAW strike. • While it is clear the US is not currently in recession, like many anticipated it would be by now, there are a number of economic headwinds that make current GDP growth exceedingly unlikely to be sustained. 2. US purchasing manager indexes (PMI) for manufacturing and services posted stagnation and mild expansionary readings, respectively: Manufacturing PMI 50.0 (Exp. 49.5, Prev. 49.8) Services PMI 50.9 (Exp.49.9, Prev. 50.1) • PMIs are indexes which are created from data garnered through monthly surveys of businesses in a multitude of sectors. They ask respondents to answer questions about business activity and expectations to try and provide a snapshot of business conditions. A reading above 50 signals expansion while a reading below signals contraction. 3. Continuing jobless claims came in higher than expected this week at 1790k (Exp. 1740k, Prev. 1727k). Meanwhile, initial jobless claims remained subdued 210k (Exp. 208k, Prev. 200k). The upwards trend in continuing jobless claims is suggesting that Americans, once out of a job, are finding it harder to find new work. We are yet to see a large uptick in initial claims to suggest that widespread layoff are occurring, however. • Continuing claims is the number of people who are filing for unemployment in the US for the 2nd or more time. It is reflective of how difficult US citizens are finding it to get work after they have lost their job. • Initial claims is the number of people filing for unemployment benefits for the first time. It is reflective of the current rate of layoffs in the US and usually rises substantially higher during time of recession/economic turmoil. 4. The PCE price index reported YoY US inflation at 3.4%, as expected, unchanged from the prior month. Core PCE (known to bed the Fed’s favored measure of inflation) came in at 3.7%, as expected, down from a revised 3.8% in the month prior. The month-over-month reading came in slightly hotter than anticipated at 0.4% (Exp. 0.3%, Prev. 0.4%) while core PCE accelerated, in line with expectations, to 0.3% from 0.1% in the prior month (Exp. 0.3%). • Despite the re-acceleration in core PCE MoM change the Fed is unlikely to raise rates again at their next meeting. As Powell repeatedly iterates, the Fed focus on longer term trends. The 3-month and 6-month annualized core PCE readings are currently at 2.5% and 2.8% respectively, well on their way towards the Fed’s 2% target. 5. Personal consumption expenditures showed that personal spending continued to be very strong among US consumers, coming in at +0.7% MoM in September (Exp. 0.5%, Prev. 0.4%). However, real personal income fell month over month suggesting that the current surge in spending is unlikely to be sustainable. 6. The personal savings rate as a % of disposable income fell to its lowest since late 2022; It came in at 3.4% (Prev. 4%), well below the year-to-date high of 5.3% seen in May this year and it continues to decline rapidly. Personal savings rate is at historically suppressed levels that have been rarely seen in data spanning back to the 1940s. Periods during which current readings have occurred include now, 2022 (COVID), 2005-2008 (GFC) and 2001 (Dotcom). 7. Consumer 1-year inflation expectations rose in the latest University of Michigan consumer survey to 4.2% from 3.8%. This will worry the Fed that inflation could again rear its head after the progress in disinflation that has occurred over the summer. • If consumers are expecting higher inflation this can pull demand forward and lead to higher prices, a self-fulfilling prophecy. If people think their money is going to be worth much less in 1 year’s time then they may choose to spend now rather than later. This, in conjunction with the ongoing elevated consumer spending will have caught Powell’s eye, no doubt. 8. US MBA Mortgage applications fell another 2.2%, suggesting very low turnover of housing in the United States real estate market. This takes the index to its lowest level since the 17th of February 1995. This comes in tandem with US 30Y mortgages hitting new 23 year highs of >8% this week. 9. The Federal Reserve's total balance sheet DECREASED by $25.3 billion and now stands at $7.907 trillion. Securities held outright by the Federal Reserve DECREASED by $18 billion (QT), currently at $7.377 trillion. • Securities held by the Federal Reserve typically includes US Treasuries, mortgage backed securities and government backed debt securities. Govt. backed debt securities are debt issued by government sponsored enterprises (GSEs) e.g. Fannie Mae, Freddie Mac, Federal Home Loan Banks (FHLBs) 10. US financial institution emergency borrowing INCREASED by $458 million, now standing at $112.2 billion. Discount window (DW) borrowing INCREASED by $208 million, now at $3.17 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $250 million and now stands at $109.1 billion, a new record high. • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March 2023. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous than the DW because banks can use collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed and they will treat the collateral at par value. This essentially means price fluctuations in banks' assets are ignored by the Fed. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses in their bond portfolios, which have been hammered this year. To top it off, lending through the BTFP is done at Fed Funds + 0.1%, the Fed are taking essentially no haircuts. 11. German PMIs signalled recession with the composite PMI coming in at 45.8 (Prev. 46.4), services PMI at 48.0 (Prev. 50.3) and manufacturing at 40.7 (Prev. 39.6). The composite index (combined manufacturing and services) signalled the 4th consecutive contractionary month. Some key takeaways from this months German PMI: • New business inflows saw the biggest decline since May 2020 • Services (largest sector in German economy) saw worst sales in 3.5 years • Manufacturing contraction eased, improving slightly but still in deep contraction • Job cutting in manufacturing fastest since October 2020 A quote from the release: "Germany is kicking off the final quarter on a sour note. The HCOB Composite Flash PMI is still stuck in the red this October and even slipped a notch from last month. Therefore, there is much to suggest that a recession in Germany is well underway." 12. Eurozone (EZ) PMIs suggested that the economy is in contraction. Manufacturing came in lower at 43.0 (Exp. 43.7, Prev. 43.4), its 7th consecutive contraction. Services clocked in at 47.8 (Exp. 48.6, Prev. 48.7), the 3rd consecutive contraction. Finally, composite PMI came in at 46.5 (Exp. 47.4, Prev. 47.2), its 5th consecutive contraction. Key points: • Composite PMI at levels that have historically been associated with contracting GDP • New orders slowdown is accelerating (dropping demand) • Manufacturers increased rate of job cuts and services sector stalled hiring A quote from the report: “In the Eurozone, things are moving from bad to worse. Manufacturing has been in a slump for sixteen months, services for three, and both PMI headline indices just took another hit." 13. The European Central Bank kept interest rates unchanged, signalling that rate hikes are likely over and in policy decisions will likely shift their focus on to how long to keep interest rates elevated. They did leave the door open to more hikes but strongly iterated that they will be data dependent. They also announced that the bonds bought during their pandemic emergency buying program (PEPP) will continue to have their principle re-invested when they mature until at least the end of 2024. • During the pandemic, like many central banks, the ECB bought a load of government bonds as part of a quantitative easing effort to stimulate the economy. When bonds mature (reach the end of their duration) the principle is paid back to the buyer. This means that the ECB is reinvesting that pricinple and thus keeping the liquidity from those bond purchases in the system. 14. UK Purchasing Manager Indexes signalled contraction of the economy. Services PMI for October came in at 49.2 (Exp. 49.3, Prev. 49.3), suggesting slight contraction and giving the worst reading in 9 months. UK Manufacturing PMI improved to 45.2 (Exp. 44.7, Prev. 44.3) but is still in contractionary territory. Composite PMI came in lower at 48.6 (Exp. 48.7, Prev. 48.5). PMI readings are currently in-keeping with a recession in the United Kingdom. 15. Despite the uptick in UK Manufacturing PMI the CBI industrial trends business survey for October suggested manufacturers in the UK’s outlook deteriorated. CBI industrial orders fell to -26 from -18 in the prior month, the lowest reading since Jan 21. Business optimism fell to -15 from +6. The number of factories reported to be operating below capacity is now at 60%. • CBI industrial trends is an index consisting of the collated survey responses of around 400 manufacturers in the UK, giving insights into the UK manufacturing sector. • There was glimmer of hope in the CBI data, however, as although output volumes fell, firms expect them to return to growth within the next 3 months. 16. The CBI distributive trades survey, which is a barometer of the UK retail sector fell, coming in at -36 (Exp. -16, Prev. -14). This is a weak reading and precedes the release of the official government data on retail sales. Retailers expect sales to decline next month, by an even larger margin. • This is a release from the Confederation of British Industry which surveys around 150 wholesalers in the UK. A negative reading suggests more respondents see a negative outlook of the sector with +/- 100 being the max/min reading as it represents the % difference between those reporting an increase vs those reporting a decrease in retail sales. 17. The Bank of Japan did what they do best and announced an unscheduled bond buying operation 18. The Bank of Canada left interest rates unchanged at 5%. - The United States economy up until now has remained more resilient than many would have predicted. Whether the same can be said for the United Kingdom and the Eurozone is more up for debate as data begins to turn. PMIs in the EZ and UK are signalling economic contraction. The Bank of England this week at their Monetary Policy Committee meeting are very likely to follow suit from the ECB and keep rates unchanged; recent labor market releases suggest cooling, retail sales look weak and worsening and PMIs continue to signal contraction of both manufacturing and services. The Fed are also very likely to hold things steady and continue to cite their data dependent higher for longer rhetoric. There has been substantial tightening of financial conditions in the past few months with rising Treasury yields and global geopolitical tensions have risen. Despite strong GDP and an uptick in inflation expectations the Fed are expected to stay on pause this week, with markets pricing in a 98% chance of this outcome and cuts priced in by June 2024.

THIS WEEK'S HIGHLIGHTS⚠️ 1. The Fed surprised 1% of people by keeping interest rates at 5.25-5.5% (markets had priced in a 99% chance of a pause lol). • Powell stated that the majority of Federal Reserve members expect a further rate hike in 2023. He also remarked that a soft landing is not in the Fed's base forecast. He emphasized that rates would be higher for longer and that the full effects of tightening so far are yet to be felt due to lagging effects of monetary policy. • Powell stated the Fed are not confident that policy is restrictive enough and emphasised the miserable nature of a scenario where the Fed don't quash inflation and they must keep hiking over and over as inflation returns. • Powell expects the time for the Federal Reserve to cut will come next year at some point. He emphasised that he doesn’t know when this time will come and doesn’t want markets to speculate on timing from what he says because the Fed don’t have a clue either. • Additionally, he noted that economic activity continues to advance at a solid pace but below trend growth is needed to achieve targets and if economic activity continues to outperform expectations then the Fed will likely have to do more with interest rates. 2. The Fed updated their dot plot in the latest Summary of Economic Projections Each dot on the graph represents where a voting Federal Reserve member sees interest rates at that point in time, providing an idea of the consensus in the FOMC over the path of future interest rates. The plot signals that the majority of Fed members expect a further rate hike. Graph: Dot plot (Left current, Right previous) The Fed increased their interest rate projections for the coming years: 2023: 5.6% (Prev. 5.6%) 2024: 5.1% (Prev. 4.6%) 2025: 3.9% (Prev. 3.4%) 2026: 2.9% Long run: 2.5% (Prev. 2.5%) 3. The US 10-year yield surged to highs not seen since the Great Financial Crisis, finishing the week at 4.438% (with week highs of over 4.5%). • The 10Y yield is used as a proxy for borrowing costs and, most notably, mortgage rates. Ultimately, mortgages and the 10Y are clearly positively correlated but it is not as simple as banks looking at the 10Y and raising rates for the sake of it. • Essentially, mortgages have to be competitive with Treasury yields, which are considered the baseline risk-free rate of return. If investors can buy a 10Y Treasury at 4.5% or a mortgage-backed security (big bundles of mortgages that are sold and traded like bonds) at the same yield, then it would make no sense to purchase the MBS. You would be earning the same yield on a significantly riskier investment. • As a result, MBS yields rise with Treasurys. To then make more MBS that can deliver the yield being demanded by investors the rates of new originations that will be packed into the MBS have to also rise. • The difference (spread) between Treasury yields and mortgage rates largely (but not only) represents risk. You pay a premium when you take out a mortgage for the fact that you as a lender are a riskier bet than US government debt. • This spread of late has been just short of 300 bps, suggesting 30Y mortgage rates in the US to be around 7.4% at the moment. 4. UK CPI came in softer than expected but YoY remains well above BOE target: Core: 6.2% YoY (Exp. 6.8%, Prev. 6.9%) 0.1% MoM (Exp. 0.6%, Prev. 0.3%) Headline: 6.7% YoY (Exp. 7%, Prev. 6.8%) 0.3% MoM (Exp. 0.7%, Prev. -0.4%) Key takeaways: • UK disinflation was pretty broadbased • Lowest headline YoY since February 2022 • Annualized 1M core CPI is well within the BOE target at 1.2% and 3M comes in around 2.46% • Services inflation made progress falling from 7.4% to 6.8% YoY with a 0% month over month increase 5. The Bank of England paused for the first time in the current hiking cycle • Rates were unchanged at 5.25% with a very clear split in opinions amongst members after a 5-4 majority vote • It was announced that the rate of QT in the UK is to increase by 25% over next 12 months to £100 billion from previous £80 billion. This includes both sales of bonds and allowing them to mature and roll off the balance sheet. • The Bank of England will raise rates further if warranted and will keep rates high as long as necessary to achieve 2% target Members votes: A.Bailey Governor - hold (flip) B.Broadbent - hold (flip) J.Cunliffe - hike (same) S.Dhingra - hold (same) M.Greene - hike (same) J.Haskel - hike (same) C.Mann - hike (same) H.Pill - hold (flip) D.Ramsden - hold (flip) Total: 5 hold 4 hike • 4 members of the MPC flipped from voting for a hike to voting for a pause between the last and current meeting, including the governor Andrew Bailey. • The BOE projected lower growth than forecast at previous meeting, now expecting GDP growth of only 0.1% in Q3 • Within the Bank of England's Monetary Policy Committee Minutes the following can be found, suggesting the Bank of England may have been heavily influenced in their decision making by the latest weak PMI data that was yet to be released to the public at the time: 'Ahead of its final meeting, the Committee was made aware of the flash S&P Global/CIPS UK composite PMI for September that would be released publicly on Friday 22nd September.' 6. Eurozone consumer confidence deteriorated in September, coming in at -17.8 (Exp -16.5, Prev. -16.0), most pessimistic reading since March and second consecutive decline after consumer sentiment had been improving since January. • Consumer confidence is a leading indicator of consumer spending. Consumer spending accounted for 52.3% of Eurozone GDP in the most recent data. 7. United States existing home sales fell more than expected to 4.04 million (Exp. 4.1M, Prev. 4.07M). • Existing home sales in the United States are suppressed at present due to increased borrowing costs. People who are locked into low interest rate 30-year mortgages from the heyday of zero interest rate policy are opting not to move in the current high rate environment. Powell acknowledged this in his FOMC speech. 8. United States building permits surprised to the upside coming in at 1.543 million versus consensus estimates of 1.443 million (Prev. 1.443 million). However, US housing starts came in well below consensus at minus 11.3% month over month (Prev. 2%), largely down to multifamily construction decline. • Housing starts record properties on which work has commenced. Building permits records applications to build and is used as a leading indicator of future construction. 9. German PPI came in lower than expected YoY and in the deepest deflation since records began in 1949. PPI for August came in at -12.6% (Exp -12.5%, Prev -6.0%). However, MoM change accelerated to +0.3% (Exp. 0.2%. Prev. -1.1%), an annualized rate of 3.66%. • Producer price index reflects price changes for producers of good and services and is considered to be a leading indicator of consumer price indexes because price changes higher up the supply chain are passed down to consumers by businesses that need to maintain profit margins. Chart: German PPI 10. German house prices fell 9.9% in Q2 23. This is the largest YoY decline since the index began in 2000. 11. Jobless claims came in well below expected at 201K (Exp. 225K, Prev. 221K), one of the lowest readings in the last 50 years. Continuing claims also fell convincingly to 1662K (Exp. 1695K, Prev. 1683K) suggesting that the US labor market remains resilient. • Initial claims represent people filing for their first week of unemployment benefits while continuing claims counts people that are filing again after previously doing so. 12. The Bank of Japan kept interest rates at -0.1%. • Bank of Japan governor Ueda walked back expectations that they will be moving away from their ultra-loose monetary policy. He stated they won't hesitate to ease further if needed and that he was unsure of the circumstances under which the BOJ would opt for normalization (moving away from ultra-loose policy). • The Bank of Japan have ran extremely loose monetary policy for many years to combat deflationary pressures in the country. Recently, there has been speculation that the they could begin to tighten their monetary policy (from an incredibly loose starting point). They appeared to take a step in this direction earlier in the year by raising the acceptable range of the Japanese 10Y bond to go beyond their 0.5% target so long as yields remain below 1%. However, Ueda’s latest comments have put this in doubt. • The Japanese Yen fell sharply on the news. 13. S&P flash purchasing manager indexes came out for September; readings below 50 signal contraction: Eurozone: Services 48.4 (Exp. 47.7, Prev. 47.9) Manufacturing 43.4 (Exp. 44, Prev. 43.5) • Both services and manufacturing in the Eurozone remain in contraction. However, services saw less severe contraction than the month prior, after seeing the lowest composite PMI reading for 34 months in August. The Eurozone economy, according to PMIs, remains in contraction. The services sector saw the biggest contraction in new business since the pandemic. A quote from the Chief Economist at Hamburg Commercial Bank in the report states: ‘The numbers for PMI services in the Eurozone paint a grim picture… we expect the eurozone to enter a contraction in the third quarter. Our nowcast, which incorporates the PMI indices, points to a drop of 0.4% compared to the second quarter.’ – She does caveat this by saying hiring in the Eurozone remained robust. Germany: Services 49.8 (Exp. 47.2, Prev. 47.3) Manufacturing 39.8 (Exp. 39.5, Prev. 39.1) • Manufacturing in Germany remains in deep contraction, but this month saw a slight improvement on last; the services sector remains in very slight contraction and also improved MoM. The German economy accounts for almost 30% of Eurozone GDP. France: Services 43.9 (Exp. 46, Prev 46) Manufacturing 43.6 (Exp. 46, Prev. 46) • Horrible readings from France, suggesting the economy is currently in deep contraction and deteriorating further. France is the 2nd largest economy in the Eurozone. Chart: French PMIs UK: Services 47.2 (Exp. 49.2, Prev. 49.5) Manufacturing 44.2 (Exp. 43, Prev. 43) • United Kingdom services, which had remained relatively resilient for most of the year are now in their second consecutive month of contraction and came in well below expectations. This is the deepest contraction since January 202. The composite PMI is in recessionary territory. • On top of this, employment data from the survey showed the steepest rate of job cuts since COVID lockdowns. Excluding the pandemic, employment readings were at the worst since October 2009. Declines in employment were significant in both the manufacturing and services sector. US Services 50.2 (Exp. 50.6, Prev. 50.5) Manufacturing 48.9 (Exp. 48, Prev. 47.9) • US services PMIs are essentially in stagnation while manufacturing remains in slight contraction. However, new orders for services fell at the fastest pace year-to-date. On top of this, inflationary price pressures intensified as businesses feel the brunt of rising energy prices. 14. Macro Dose hit 10K followers (and also somehow 11K just a few days later)🍾 - The two largest economies in the Eurozone are posting some very weak PMI data, alongside the Eurozone itself. Despite this, the European Central Bank have just opted to hike a further 25 bps. The future doesn’t look particularly bright for Europe. Germany, which has been the standout underperformer in the Euro Area this year, saw the largest decline in house prices since the turn of the millennium - that last 25 bps hike will feel particularly painful. The United Kingdom’s PMIs this week, in combination with last week’s unemployment data, is beginning to signal a possible paradigm shift in the UK’s labor market. Both manufacturing and services sectors are cutting jobs according to PMIs. The Bank of England unexpectedly paused for the first time in the cycle after a softer CPI print and likely at least in part due to the PMI data. The MPC meeting minutes explicitly stated that the committee had been made privy to the PMI data before its public release prior to the meeting. Markets didn’t like Powell’s Q&A. The Federal Reserve are saying higher for longer and increasing their rate projections. Powell explicitly stated that if the US economy continues to outperform then more will likely have to be done. Markets are now pricing in a 25% chance of a rate hike at the Fed’s November meeting.

THIS WEEK'S HIGHLIGHTS ⚠️ 1. FOMC minutes were released: • US economic growth continued at a ‘strong’ pace in 3rd quarter but GDP likely to be below potential growth in medium term • Unemployment remains low despite some loosening of (a still strong) labor market • Tighter financial conditions likely to weigh on economy and inflation in coming months • They noted that further tightening would be appropriate if data suggests inadequate progress toward target. However, since the meeting inflation has surprised to the downside in CPI, despite not being the Federal Reserve's preferred metric (Core PCE), it is still notable and supports the argument that the Fed are done hiking. • Members agreed that ‘vulnerabilities of the US financial system were notable’. They commented that ‘In particular … valuations in equities, housing, and CRE were high.’. . The S&P 500 is up >10% in the last month. • Fed members agreed policy needs to remain restrictive for ‘some time’ – more higher for longer rhetoric • Financial conditions in the run up to the meeting had tightened substantially due to US longer duration Treasurys seeing significant yield increases and causing mortgage rates to climb to the highest in ‘many years’. They discussed that yields can be volatile so this needs to be monitored but if the move is sustained it could lead to the Fed having to take this in to account when deciding the path of future monetary policy decisions. Since the meeting yields have fallen substantially. These are the minutes of the most recent FOMC meeting (Oct 31st-Nov 1st) during which the Federal Reserve voted to keep Fed Funds Rate at 5.25-5.5%. 2. US Inflation expectations as reported in the University of Michigan consumer survey final report rose more than previously thought from the initial release. Final consumer year ahead (12 month) expectations rose to 4.5% (preliminary 4.4%, Prev. 4.2%). This is despite the recent fall in energy prices, which tend to be a big influence on consumer inflation expectations and sentiment as people notice the price at the pump. • Longer run expectations remained at the preliminary report level of 3.2% (Prev. 3%). Strangely, expectations for gasoline prices for consumers rose to the highest since summer 2022 despite prices falling markedly from their highs. • Inflation expectation matter. They influence behaviour. Thus, expectations can affect actual inflation. If inflation expectations become ‘unanchored’, or rise with incoming data, then even if nominal interest rates are elevated, they may not have the desired tightening effect as perceived real interest rates are seen to be lower. Thus, Inflation expectations can have a significant impact on monetary policy transmission and decision making. • Former Fed chairman Ben Bernanke referred to ‘anchored’ inflation expectations as expectations of longer-term inflation that remain low even if in the short term there are spells of higher or lower than expected inflation. • Rising inflation expectations in times of high inflation make central bankers worry. A nightmare scenario for the Fed is that higher expectations of inflation make people demand higher wages and thus businesses raise their prices to protect margins, inflation rises, and the cycle continues, becoming very difficult for central banks to control. This is the concept of a wage-price spiral. • With the above being said, the UMICH inflation expectations tend to be far from where things actually turn out and how useful the survey is right now is being called into question by some economists. So, while being a metric that the Federal Reserve keep an eye on, it remains to be seen how much it will alter their perception of the appropriate path for monetary policy. UMICH Inflation Expectations 3. US durable good came in well below consensus estimates at -5.4% MoM (Exp. -3.2%, Prev. +4%). The decline was driven largely by transport. However, non-defense goods excluding aircraft fell -0.1% MoM. On top of this, a massive revision of last month's data from +0.5% to -0.2% was made, suggesting business investment is weakening in the US. • Non-defense goods excluding aircraft is a closely watched proxy of business investment from the durable goods report. • Durable goods is a monthly report released by the US Census Bureau. It provides data on the value of orders, shipments, and inventories of durable goods, which are products designed to last at least three years e.g. cars, planes, and electrical appliances. They tend to be more expensive items and thus demand more consideration from consumers and businesses when purchasing them. Poor future economic outlook may cause businesses and consumers to refrain from purchasing more expensive items. 4. This week it was revealed that Chinese government are considering allowing Chinese banks to give out unsecured loans, supported by the Chinese central bank (PBoC) so that developers that have sold not-yet-finished developments are able to finance the means needed to finish them. This would mean that the loans would not have to be backed by collateral, inherently increasing the risk of the investment. The Chinese government continue to consider ways in which they can stimulate the real estate sector in the country as liquidity issues continue to pervade. • I mean, it doesn’t take too much explaining to convey why giving out loans to already struggling homebuilders without any collateral backing the loan is risky. Lenders would be taking on substantially more risk on borrowers that are already struggling. • China have already added two supported lending programs to allow support for developers in the past few years which have not yet been heavily utilized. They all essentially aim to loosen lending conditions to real estate developers in the country to ease the ongoing liquidity squeeze. • Essentially, the Chinese government are trying their best to convince banks to lend to real estate developers that are an extremely risky bet right now. 5. Zhongzhi, one of the largest wealth managers and shadow banks in China, with significant exposure to the Chinese real estate sector announced that it Is ‘significantly insolvent’ and with $36.4 billion in which they are unable settle. A quote from a letter from Zhongzhi to investors read “The group’s investment products have defaulted one after the other, and we deeply apologise to investors”. • A shadow bank is essentially an organization that engages in lending activity like a regular bank but falls outwith the same regulatory framework. • The Chinese government have announced they are pursuing a criminal investigation into the company in response. • The money in businesses like Zhongzhi tend to be from retail investors e.g. money from savings in wealthier individuals. This money is then used to invest in investment products across sectors, but in particular funds are funnelled heavily into real estate. 6. The Federal Reserve's total balance sheet DECREASED by $4.18 billion and now stands at $7.81 trillion. Discount window (DW) borrowing INCREASED by $201 million, now at $2.44 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $1.16 billion and now stands at $114.01 billion, a new record high. Bank Term Funding Program • Ultimately the Bank Term Funding Program has come to be used as an indicator of stress in the banking sector since its creation in March this year. While it hit a new record high in outstanding loans this week the rate of increase has dramatically slowed from earlier in the year. However, the past few weeks have seen a bit of an uptick again and worth keeping an eye on. • The DW and the BTFP are both means by which financial institutions can borrow emergency funds from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 7. The minutes from the European Central Bank’s (ECB) most recent meeting were released and they signalled that the ECB are likely done with rate hikes. They remarked that ‘rates were at levels that, maintained for a sufficiently long duration, would make a substantial contribution to a timely return of inflation to target’ although inflation will still be ‘too high for too long’ they are happy with the recent fall in headline and underlying inflation. • They remarked that their rate hikes continue to be transmitted ‘forcefully’ into credit (lending) conditions and thus this is quelling demand in the economy. • On progress in inflation a quote from the report reads ‘The adjusted Persistent and Common Component of Inflation measure – a good predictor of inflation developments in the past – was now close to 2%’ • They remarked that the risks to inflation are two sided. Risks skewed to the upside included a possible increase in energy and food prices, ‘heightened geopolitical tensions’ could put upward pressure on energy prices. They also commented that a persistent rise in consumer inflation expectations, ongoing strong wage increases and better than expected profit margins may exert further upward pressure on inflation. ‘On the other hand, weaker demand – for example owing to a stronger transmission of monetary policy or a worsening of the economic environment in the rest of the world amid greater geopolitical risks – would ease price pressures, especially over the medium term.’ • They obviously, as always, caveated that their future decisions will be based on incoming data. 8. Eurozone Composite (combined) S&P Purchasing Managers Index (PMI) came in at 47.1 (Est. 46.9, Prev. 46.5), better than expected but still the 6th consecutive contraction. The report suggests that the Eurozone economy is contracting at a slower rate than in the prior month. However, it is important to remember that despite the rate of contraction slowing, it is still contracting. Both manufacturing and services gave contractionary readings of 43.8 (Est. 43.4, Prev. 43.1) and 48.2 (Est. 48.1, Prev. 47.8) respectively but both surprised to the upside. • Employment, as reported by the PMIs, fell for the first time in ~3 years, largely in the manufacturing sector. • The current PMI readings from the Eurozone are consistent with negative GDP growth. GDP shrank by 0.1% in the 3rd quarter and, thus far, PMI readings for the 4th quarter have been weaker than those seen in the 3rd. • French PMIs suggest that the second largest economy in the Eurozone is deteriorating at a more brisk pace with composite PMIs coming in at 44.5 (Prev. 44.6), significant contraction. A quote from the report reads ‘The French economy is kind of in a dead-end’ while it reported the biggest downturn in new orders in 3 years. The data is consistent with contraction in French GDP in the 4th quarter. • It wasn’t entirely doom and gloom as the German PMIs did suggest that the rate of decline in Germany, the largest Eurozone economy, slowed. However, it did remain in contraction at 47.1 (Prev. 45.9). • PMIs are indexes created by surveying hundreds of purchasing managers from businesses in a given economic area and asking them to respond to questions about business activity. The managers are asked whether conditions are improving, staying the same or worsening. They respond to questions surrounding a number of variables so that the index can report on employment, new orders (demand), delivery times, and other metrics. A reading below 50 = contraction of the sector, while greater than = expansion and 50 = stagnation. 9. This week, The German Constitutional Court, ruled that current spending from the government is unconstitutional and has banned the use of ~€60 billion of fiscal spending. The court, which is the highest court in Germany, made this decision as the funding had been diverted from borrowing that had been conducted for the pandemic and diverted to different ventures, such as environmental projects. The exact impact of this on the German economy is uncertain at present but it is likely to exacerbate downward pressure on GDP growth if a solution isn’t found, not good news for the biggest European economy that has already struggled in 2023. • The German government will be working to try and find a solution as there is now a €60 billion hole in the German budget. 10. PMIs in the UK printed better than expected, driven mainly by the services sector. UK Composite PMI came in at 50.1 (Exp. 48.7, Prev. 48.7). Services PMI came in at 50.5 (Exp, 49.5, Prev. 49.5), a 4-month high and returning to expansion. Manufacturing also improved from last month at 47.9 (Exp. 45, Prev. 44.3), a 5-month high, but still in contraction. • Something the Bank of England will be wary of is the fact the PMI release showed inflationary pressures within both manufacturing and services increased. 11. The Reserve Bank of Australia (RBA) minutes were released and were overall hawkish. They commented on stronger than expected underlying inflation as they chose to raise interest rates after a pause earlier in the year. They also left the door open to further hikes, stating that they would do ‘what is necessary’ to bring inflation to target. • The RBA is Australia’s central bank. 12. German IFO Business Climate showed some easing of gloomy business sentiment for the third consecutive month but ultimately outlook remained pessimistic. Headline figure came in at 87.3 (Exp. 87.5, Prev. 86.9) with current conditions of 89.4 (Exp. 89.5, Prev. 89.2) and expectations of 85.2 (Exp. 85.8, Prev 84.7). • The biggest improvement was seen in manufacturing in both current and expected conditions. However, new orders were still weak suggesting ongoing sluggish demand. • The services sector saw a decline in both current conditions and expectations. Services are in negative balance (-2.5%), suggesting more businesses are pessimistic in outlook than they are positive. The services sector is by far the largest sector in the German economy. German services IFO business climate • Overall, some improvement especially in manufacturing and trade but sentiment remains pessimistic with every surveyed sector still having a net negative outlook. • IFO business climate is an indicator of business sentiment within Germany. It surveys ~9000 businesses spanning multiple sectors, including manufacturing, construction, trade, and services. It asks respondents about their view about current business conditions as well as their expectations for the next 6 months. They can describe their situation as “good,” “satisfactory,” or “poor” and their business expectations as “more favorable,” “unchanged,” or “less favorable.” • A reading of 100 is the average of the year 2015. Above 100 is more favorable conditions and below 100 are less favorable conditions. • Germany is the biggest Eurozone economy, accounting for almost 30% of Eurozone GDP. - Overall, a quieter week than last but that isn’t saying much these days. UK PMIs suggested that the economy has been more resilient than expected, with a rebound in services taking the composite index to marginally expansionary territory. Input and output prices increased further and may worry the Bank of England about further inflationary pressure. However, markets are currently pricing in only a 5% chance of a Bank of England rate hike with CPI recently surprising to the downside. The ECB minutes read quite dovish and suggest that they are done with their current hiking cycle. They commented on how they are happy with progress on underlying inflation measures and emphasised the impact that their hiking cycle is currently having, and is likely to continue to have, as the effects of monetary policy filter through. Germany, the largest economy in the Eurozone showed some signs that the deterioration in economic activity is slowing within the country, with an uptick in manufacturing in particular. However, business sentiment did show further deterioration in services sentiment, the largest sector in the country. Furthermore, the ruling this week that around €60 billion of government spending will not be allowed leaves some significant uncertainty about how the German economy will perform in 2024. Trouble in Chinese real estate continues despite government intervention and attempts at stimulus. The government are trying to significantly loosen lending regulation so that homebuilders are able to source the liquidity needed to finish building projects. The FOMC minutes didn’t tell us all too much that we didn’t know already. How much the Fed will focus on inflation expectations rising remains to be seen with downside surprises in recent inflation data and evidence of further labor market loosening. Markets remain resolute in the consensus that the Federal Reserve is done hiking with a 95.5% chance of another pause currently being priced in – as per CMEFedWatch – with the first rate cut priced in by May next year. CME FedWatch FOMC meeting probabilities

In the 74 days since 2023 started⚠️ 1. The 2nd and 3rd largest US bank failures of all time occured 2. The 2Y yield started to drop at its fastest rate since the 80s 3. The Fed made emergency alterations to their lending and created a new program designed to help banks with liquidity issues 4. Tech layoffs continue (Meta announcing another 10,000 today) 5. CPI 6% (Feb) but Core PCE (FED's favourite inflation measure) rose in January 6. Unemployment remains at historically low levels 7. US Mortgage applications at lowest levels for decades, house prices falling with not much sign of stopping I'll say it again, 2023 will not be boring.

FEDERAL RESERVE BALANCE SHEET UPDATE⚠️ In the week ending May 3rd: 1. The Federal Reserve's total balance sheet decreased by $58.8 billion, now standing at $8.5 trillion 2. US financial institution emergency borrowing DECREASED by $74 billion to $81.1 billion 3. Discount window (DW) borrowing MASSIVELY FELL by $68.5 billion, now at $5.35 billion. This decrease is almost entirely down to the Federal Reserve re-classifying the borrowing that was outstanding to First Republic Bank prior to its collapse. An interesting insight in to the level of emergency lending the bank had at the Federal Reserve prior to its demise. • The DW is known as the 'lender of last resort' and is a means by which financial institutions can borrow money from the Fed for up to 90 days by posting collateral (usually in the form of US treasury bonds, agency MBS, etc) to fulfil emergency liquidity needs 4. Borrowing via the Bank Term Funding Program (BTFP) DECREASED by $5.55 billion, now at $75.8 billion • Created in March in response to the banking sector troubles the BTFP is another means by which banks can borrow from the Fed in an emergency. They post collateral and the Fed values it at par value, meaning they will ignore any price fluctuations since purchase. This means banks are not forced to sell underwater portfolios and realise massive losses 5. The Fed's 'Other Credit' section of the H.4.1. release INCREASED by $57.85 billion, now at $228.2 billion. There is an addendum in the release that says this section now includes the loans made to First Republic Bank via the BTFP and DW. 6. Borrowing via the Fed's Foreign and International Monetary Authorities (FIMA) stayed at $0. A positive sign that the surge in emergency liquidity needs from foreign central banks has subsided for now • FIMA allows short term lending of dollars to foreign central banks who then lend to banks within their country, providing dollar liquidity. They must post US treasuries as collateral. Interesting one this week. The Federal Reserve have re-classified the lending to First Republic. This may be a good thing as we will be able to see how the wider banking system is doing (despite the obvious) in upcoming releases Total decline in emergency borrowing = $74 billion Total increase in other credit = $57.85 billion There's a gap of over $16 billion. This may suggest that emergency borrowing did indeed fall regardless of the re-classification of the loans given to First Republic Bank

THIS WEEK’S HIGHLIGHTS⚠️ 1. The Federal Reserve raised interest rates. Fed Funds Rate is now 5.25-5.5%, the highest in 22 years. The rate hike was unbelievably unsurprising with markets pricing in >99% chance of it prior to the announcement. Jerome Powell’s FOMC speech salient points: • Future meeting decisions will be made at the time. There is a lot of data to come out before September’s meeting. They may (or may not) raise rates at the next meeting but he signalled that the Fed are likely coming to the end of their hiking cycle, stating rates are in restrictive territory. • Fed staff are no longer forecasting recession as their base case. Jerome Powell insisted this was never his personal base case. • Powell alluded to the results of this quarter’s Senior Loan Officer Opinions Survey (SLOOS) that will be released this coming week. He stated it shows, as expected, tight and further tightening credit conditions that are likely set to restrain the economy. • The Fed don’t expect 2% inflation target to hit until 2025. • Labor market is still tight; housing has picked up but still much weaker YoY; the banking sector is sound and resilient. 2. US GDP preliminary data for Q2 2023 surprised to the upside coming in at 2.4% annualized, an improvement in growth from the first quarter (Exp. 1.8%, Prev. 2.0%). Consumer spending came in at 1.6% annualized (Exp. 1.2%), better than expected but significantly lower than 4.6% in Q1. • Annualized = if growth at current pace was maintained for 12 months then YoY GDP would come in at 2.4% 3. New rules enforcing up to a 19% increase in minimum capital requirements for the largest banks in the US were announced by the Federal Reserve. Banks with above $100 billion in assets will be required to hold around 16% more capital, with only the 8 largest banks facing the aforementioned 19%. Banks will likely have years to adjust to changes in regulations, bringing themselves into compliance. • The requirements come as a result of Basel III, a set of international recommendations formed by the Basel Committee on Banking Supervision (BCBS) following the Great Financial Crisis, in order to reduce systemic risk in the global financial system. • Minimal capital requirements for banks enforce a certain % of high quality capital that banks have to hold relative to the amount of risk-weighted assets that they have on their books. Risk weighted assets are assets banks own e.g. loans, mortgages, securities and other risk exposure investments. 4. The Bank of Japan sort of announced their decision to loosen yield curve control. The BOJ’s new governor Ueda stated that the Bank of Japan will offer to purchase 10Y Japanese govt. bonds (JGB) at 1% every working day. The BOJ kept their official cap of 0.5% but their actions effectively nullify this as they have offered to purchase 10Y bonds at 1%. This follows on from the decision in December by the BOJ to raise the limit from 0.25% to 0.5%. JGBs hit their highest yields in 9 years in response. • The BOJ has enacted yield curve control since around 2016; it was introduced by the previous governor, Kuroda, to suppress yields on Japanese bonds, thus decreasing interest rates and attempting to stimulate the Japanese economy. This is part of the famous BOJ ultra loose monetary policy used to combat Japanese deflation. As a result of this ultra-loose monetary policy Japanese investors have had to search for yield elsewhere in the world as owning Japanese bonds effectively yielded nothing. • Simply put, to exert yield curve control, the BOJ sets a target yield for a bond. When the yield rises above their preferred yield (e.g. until this week 0.5% on the 10Y) they would buy these, driving prices up and yield lower, thus controlling the yield. This has resulted in the BOJ owning OVER HALF OF ALL Japanese government bonds. • Japan is the 3rd largest economy in the world and has very deep pockets. As aforementioned, Japanese investors have A LOT of money in foreign markets. They are the largest foreign holder of US government debt, holding over $1 trillion in US Treasuries. The move from the BOJ worried markets that Japanese debt will be more attractive to buyers as yields rise, encouraging Japanese investors to keep their money in domestic markets, driving selling/reduced buying of foreign bonds and increasing yields around the globe. 5. The ECB raised interest rates by 0.25% to 4.25%. Christine Lagarde warned of headwinds for the European economy and their statement lacked the section that previously hinted rates would be hiked again. However, Lagarde left the door open to further hikes at future meetings. 6. June’s Personal Consumption Expenditures showed slowing inflation as well as improved consumer spending, continuing to paint the picture of the Fed’s prophesised Goldilocks soft landing scenario. • Core PCE came in at 4.1% YoY (Exp. 4.2%, Prev. 4.6%) and 0.2% MoM (around 2.4% annualized), softer than expected. This is the Federal Reserve’s favored measure of inflation showing real progress, advancing the least since 2021 YoY. Headline PCE came in at 3% (Exp. 3%, Prev. 3.8%) • Services inflation excluding housing and energy, a metric known to be watched by Powell, came in at 0.2% MoM for the second month in a row, supporting the picture of disinflation in the US. • Inflation adjusted consumer spending increased by 0.4% in June, non-adjusted 0.5%. This is the biggest one month increase since January. More evidence that the US consumer continues to defy forecasts. 7. Consumer confidence continued to improve in the US, coming above expectations at 117 (Exp. 112, Prev. 110.1). • Consumer confidence is a closely followed metric as it is an indication of future consumer spending patterns and around 70% of US GDP is generated as a result of consumer spending. Improving consumer confidence indicates consumers are more optimistic about the economic outlook and thus this may translate into increased spending (and therefore economic) activity. 8. US Jobless claims fell to 221K (Exp. 235K, Prev. 228K) in the week ending July 22nd. This is the smallest number of claims since February, suggesting an ongoing tight labor market. • Initial jobless claims reflect the number of new people in the US claiming unemployment benefits and is seen as a timely indicator of the strength of the US labor market. 9. Despite the above, the Employment Cost Index (ECI) for Q2 2023 released this week suggested that the labor market is starting to see slowed wage increases, something the Fed will be happy to see. The ECI came in at 1% for Q2 (Exp. 1.1%, Prev. 1.2%). This is the smallest QoQ increase since 2021. • Why does the ECI matter? Well, essentially, if the labor market cools and wages stop rising as quickly then businesses won’t need to raise their prices as quickly to maintain profit margins. This then leads to slowing inflation, or so the Fed hopes. 10. New home sales for June came in lower than expected and fell from the month prior, coming in at 697K (-2.5% MoM) annualized (Exp. 725K, Prev. 715K (Revised)). • New homes are dwellings that have not had a previous occupier • The general trend, despite fluctuations MoM has been that New Home Sales have been increasing since around July 2022; as a result, homebuilder confidence has been improving significantly. This is being driven be record low inventories of existing homes on the market as US citizens are reluctant to give up locked in 30Y mortgages with low rates for the current sky high rates on offer. • There was an almost farcical revision to new home sales data last month with the reading initially coming in at +12.2% MoM in May before being revised down to 6.6%. 11. Pending Home Sales increased 0.3% MoM, beating expectations (Exp. -0.5%, Prev. -2.7%). The first MoM increase since February but still -15.6% YoY seasonally adjusted. This is pending sales of EXISTING homes. Approx. 80% of pending home sales become existing home sales in the coming few months and is therefore seen as a leading indicator of existing home sales, that are at very suppressed levels due to very low inventory levels. • Existing home sales being sales of homes with previous inhabitants. 12. Durable goods surprised massively to the upside coming in at +4.7% MoM in June (Exp. 1.3%, Prev. 2% revised), the highest reading since July 2020 and marking the 4th consecutive month of positive readings. The figure was significantly boosted by non-defence aircraft and parts coming in at +69.4% MoM. • Core capital goods orders, a metric watched closely as it is supposed to more accurately reflect business spending, came in at 0.2% MoM, suggesting businesses are still spending in the defiance of tightening monetary policy. However, it should be noted that the MoM rate of increase in durable goods has been weakening since April despite posting increases. • Durable goods provide data on the value of orders, shipments, and inventories of products designed to last at least three years. It gives insight into business investment. Durable goods are often expensive and businesses that think near term economic outlook is poor may hold off on making large investments in order to be more conservative and protect their balance sheet. 13. Small Heartland Tri-State Bank was seized by the state regulator. The 5th US bank failure of 2023 but DRASTICALLY smaller than those seen earlier in the year in SVB and First Republic etc with only around $139 million in assets held by the bank. 14. US bank deposits increased by $47.1 billion in the week ending July 19th after falling $79.3 billion the week prior 15. The Federal Reserve's total balance sheet DECREASED by $31.2 billion and now stands at $8.243 trillion. Securities held outright by the Federal Reserve DECREASED by $22.55 billion, currently at $7.6 trillion. • Securities held by the Federal Reserve typically includes US Treasuries, mortgage backed securities and government backed debt securities. Govt. backed debt securities are debt issued by government sponsored enterprises (GSEs) e.g. Fannie Mae, Freddie Mac, Federal Home Loan Banks (FHLBs) 16. US financial institution emergency borrowing INCREASED by $1.77 billion, now standing at $107.3 billion. Discount window (DW) borrowing DECREASED by $384 million, now at $2.25 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $2.15 billion, now at $105.1 billion. A new record for the BTFP. • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 17. German GDP preliminary Q2 data posted 0% quarter over quarter (Exp. +0.1%, Prev. -0.1%) • GDP is the sum value of all goods and services produced in a given time period by a country. It is the most comprehensive metric of economic output. However, it is a very lagged indicator and is subject to significant revisions. 18. The German Manufacturing PMI came in considerably worse than expected in July at 38.8 (Exp. 41, Prev. 40.6), in deep contractionary territory and the lowest reading since COVID and the Great Financial Crisis. • The composite PMI for Germany is now unexpectedly in contractionary territory coming in at 48.3 (Exp. 50.3, Prev. 50.6). While services remain in expansion according to PMIs at 52 (Exp. 53.1, Prev. 54.1) they are weakening considerably after a 2023 peak of 57.2 in May. • Germany is the 4th largest economy on Earth, which was in technical recession prior to the 0% GDP reading this week. Economic data coming out of the country continues to be gloomy with contracting manufacturing and declining business optimism. - The most surprising story of the week came out of Japan, loosening their yield curve control and presenting an uncertain picture for bond markets around the globe with fear of foreign investment from Japanese investors being sapped from markets. The ECB left the door open to further rate increases but Lagarde very much shifted to a more dovish stance than has been previously seen by the ECB while acknowledging the possibility of economic headwinds in the wake of rising interest rates and tightening monetary policy. This week we had a glut of data suggesting that the US is starting to follow the trajectory that the Federal Reserve want to see for their goldilocks ‘soft landing’ scenario - cooling inflation with no recession or significant rise in unemployment. As Powell alluded, the Fed staff no longer forecast recession in the US and consumer and business spending is defying estimates. Markets think that the Federal Reserve are done hiking. They are currently pricing in an 80% chance of the Fed holding rates at their next meeting and bringing rate cuts as soon as May 2023, as per CME FedWatch.

THIS WEEK'S HIGHLIGHTS ⚠️ 1. The European Central Bank raised interest rates by 25 basis points to the highest level in 22 years at 4.5%. Markets had priced in a 50% chance of this prior to the decision. • A quote from Lagarde after the decision: 'With today’s decision, we have made sufficient contributions, under the current assessment, to returning inflation to target in a timely manner'. This has led to consensus becoming that this was the last hike of the cycle from the ECB. She did leave the door open for further hikes despite saying that the focus for the ECB would be upon 'duration', hinting at a higher for longer stance. • The Euro fell sharply against the Dollar following Lagarde's speech, finishing the week at $1.0664. This is the 9th consecutive week that the Euro has finished down against the Dollar, a new record. • It's worth remembering that the European Central Bank has a single mandate, which is price stability. This is different from the Federal Reserve that have a dual mandate for stable inflation and max employment. 2. The US 10Y yield finished the week at 4.336%, approaching year to date highs and levels, prior to this year, not seen since 2007. • The 10 year US Treasury yield is used by many as a proxy for borrowing costs. If the 10Y yield goes up, so do mortgage rates (and other borrowing costs). US 10Y Treasury yield Source: Trading Economics 3. US Mortgage applications, despite already being at lows not seen since the 90s, fell by 0.8% week over week to the lowest level since December 1996. MBA Mortgage market index 4. United States CPI came in hotter than expected with both core and headline month over month change accelerating. Year over year change increased for headline and fell for core. Headline 3.7% YoY (Exp. 3.6%, Prev. 3.2%) 0.6% MoM (Exp. 0.6%, Prev. 0.2%) Annualized 7.44% Core 4.3% YoY (Exp. 4.3%, Prev. 4.7%) 0.3% MoM (Exp. 0.2%, Prev. 0.2%) Annualized 3.66% Some takeaways: • Headline CPI YoY general trend has been of disinflation but for the past two months it has increased. This is largely to do with rapidly increasing energy costs. • The YoY core trend is one of clear disinflation. Core excludes volatile food and energy. However, the reacceleration of MoM change from 0.2% to 0.3% is worrying. Especially, core services ex housing, a closely watched metric of the Fed rose at the fastest rate in 5 months. • 3 month annualized core CPI is at+2.4%. This is acceptable for the Fed. • Shelter had the slowest MoM increase since start of 2022. 5. Oil prices continued to rise this week, with WTI crude oil finishing the week at $90.77 a barrel, the highest level since November 2022. Oil is now up over 15% year to date. • Very simply put, oil prices are a massive component of headline inflation and also, in general, increasing energy costs lead to higher running costs with businesses needing to pass this on to the consumer to protect profit margins. This will no doubt worry the Fed. • On top of this, the Saudi driven cuts to oil production currently look to leave a deficit of oil vs predicted demand, which could be set to drive prices even higher as winter approaches. Bloomberg have estimated that the deficit could be as much as 3 million barrels per day in Q4, the largest deficit in over a decade. 6. US PPI came in hotter than expected with the fastest month over month change since June 2022: Headline MoM 0.7% (Exp. 0.4%, Prev. 0.4%) Core MoM 0.2% (Exp. 0.2%, Prev. 0.4%) Headline YoY 1.6% (Exp. 1.2%, Prev. 0.8%) Core YoY 2.2% (Exp. 2.2%, Prev. 2.2%) • Soaring energy costs accounted for much of the advance in headline with gasoline surging 20%. • PPI reflects price pressures for producers of goods and services higher in the supply chain. It can therefore be used as a leading indicator for CPI. 7. Italian industrial production dropped by 0.7%, significantly more than expected (Exp.-0.3%, Prev. +0.5%) . Production is now down 2.1% YoY (Exp. -1.7%, Prev. -0.7%). • Capital goods (business investment barometer) were down 1.5% MoM while consumer goods were down 1.6%. • This release measures the value output from the industrial sector of the Italian economy. Within this, manufacturing is the largest component making up almost 90% of production. Industry, makes up over 22% of Italian GDP. • Italy's GDP last quarter was down 0.4%; another quarter of contraction would put the country in a technical recession. 8. United Kingdom employment change in the 3 months to June came in slightly worse than expected at -207K (Exp. 185K, Prev. -66K). Excluding COVID, this is the largest decline since the Great Financial Crisis. • Employment change records the number of people in employment over the last 3 months compared to the 3 months prior. This fall was mainly driven by full time self-employed workers. 9. UK Unemployment rate ticked higher to 4.3% (Exp. 4.3%, Prev. 4.2%) and is showing a clear upwards trend. The UK labor market is cooling with unemployment at the highest since 2021. UK Unemployment 10. United Kingdom wage growth including bonuses increased by 8.5% (Exp. 8.2, Prev. 8.4%) YoY in the 3M to July. Other than in June 2021 with a reading of 8.9% this is the highest print going back to 2001. Excluding bonuses, we saw the highest wage growth on record at 7.8% • The Bank of England are faced with a weakening labor market but also the most inflationary wage growth on record. 11. The United Kingdom RICS Housing Balance plummeted, showing that house prices continue to fall in the country. It came in at -68 (Exp. -55, Prev. -53). • There's only two periods in the data spanning back to the 1970s where a reading this low has been reported - now, and the Great Financial Crisis. RICS housing balance • RICS Housing Balance takes the % of real estate appraisers reporting house price increases in their area and subtracts the number reporting a decrease. 12. UK GDP contracted by 0.5% In July (Exp. -0.2%, Prev. +0.5%). This is the largest contraction seen this year: • Services Sector led the decline, healthcare contracted significantly by - 3.4%, likely impacted by NHS strikes and retail trade was down by 1.2%. Industrial production Fell by 0.7% MoM. Note: Take these figures with a grain of salt. Month-over-month GDP estimates are subject to significant revisions and fluctuations. 13. ZEW Economic sentiment in Germany improved slightly, coming in at -11.4 (Exp. -15, Prev. 12.3) - suggesting a less pessimistic outlook for the largest economy in the Eurozone. However, the reading still suggests an overall pessimistic outlook from analysts. • ZEW economic sentiment is a collation of survey responses from around 350 German economists/analysts on their assessment of the German economy now and in the next 6 months. A reading below zero suggests an overall pessimistic view from analysts. 14. ZEW Economic sentiment for the Eurozone deteriorated further and more than expected coming in at -8.9 (Exp.-6.2 Prev. -5.5) • 83.7% of analysts expected either stagnation in economic activity or deterioration (58.5% stagnation, 25.2% deterioration) in the Eurozone 15. US financial institution emergency borrowing INCREASED by $755 million in the week ending Sept 13th, now standing at $110.7 billion • Discount window (DW) borrowing INCREASED by $647 million, now at $2.7 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED, as always, by $138 million, now at $108 billion, another all time high. • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 16. Chinese industrial production and retail sales both surprised to the upside in August, offering some reprieve from the recent onslaught of poor economic data from the world's second largest economy: Retail sales YoY +4.6% (Exp. 3%, Prev. 2.5%) Industrial production +4.5% (Exp. 3.9%, Prev. 3.7%) • The figures suggest that consumer spending and manufacturing output improved in August after the PBoC has taken measures to inject stimulus into markets, following the unravelling real estate crisis within the country. 17. Michigan consumer sentiment fell to 67.7 (Exp. 69.1, Prev. 69.5) in September. Sentiment has fallen two months in a row now from a near 2 year high in July. • Consumer sentiment is a leading indicator of consumer spending, which makes up almost 70% of US GDP generation. • 5 year Inflation expectations fell to 2.7% from 3%. This is the lowest reading for a year, suggesting the US consumer is expecting inflation to fall significantly despite the recent surge in oil prices and increase in headline inflation. - The UK labor market is weakening with a clear upward trend in unemployment. However, this comes packaged in the context of some of the highest wage growth on record. On top of this, UK GDP MoM estimates came in at the lowest this year and house prices continue their decline at the fastest pace since the Great Financial Crisis. The Bank of England are expected to hike by 25bps this coming week, bringing interest rates in the country to 5.5%. Consensus is that the ECB are done hiking rates for the current cycle, in the context of weakening economic data, despite sticky inflation in the economic area. Retail sales surprised to the upside in the US, alongside PPI and CPI. On top of this, oil prices continued to rise, worrying that headline inflation will continue to rise. Despite this, US consumers are expecting inflation to drop further than before in the UMICH survey. Borrowing costs continue to rise in the US with the 10Y yield approaching YTD highs. The US mortgage market remains sluggish with applications to buy at their lowest since the 90s. Markets are now pricing in a 99% (lol) chance of a rate pause at the Fed's meeting this week. There are now no further rate hikes priced in and 3 cuts are expected by November 2024, despite the Fed's 'higher for longer' rhetoric. We'll get an updated dot plot from the Fed this week with the latest FOMC projections of where they see interest rates headed. It's going to be a VERY interesting week.

THIS WEEK'S HIGHLIGHTS ⚠️ 1. US JOLTS data was released, surprising significantly to the upside, with job openings coming in at 9.62 million (Exp. 8.8M, Prev, 8.92), the highest since May. The trend in US job openings is still downwards from post pandemic highs but they remain historically elevated. US JOLTS Job Openings Source: BLS • The JOLTS quits rate remained unchanged at 2.3%, historically elevated but much lower than post-pandemic highs. Quits represent the number of people leaving their job voluntarily. People tend to leave of their own accord when they have a better offer/another job lined up. Decreasing quits suggest that people are finding it harder to find new/better jobs. • Interestingly, the quits rate in the information industry (which includes big tech) fell dramatically from July into August from 1.8% to 0.9%. 2. US Challenger job cuts came in well below expectations at 47.457K (Exp. 86K, Prev. 75.151K). However, in Q3, employers laid off 92% more people than in the same quarter a year ago. The total YTD job cuts is the highest since COVID and prior to that 2009 and almost triple that of the same period in 2022. 3. Headline Non-farm payrolls absolutely eclipsed expectations. The print came in at almost double consensus estimate 336K (Exp. 170K, Prev. 227K). The initial market reaction resulted in a significant bond sell off, causing yields to spike, as markets priced in a higher likelihood of further Federal Reserve rate hikes. However, under the surface the data didn’t appear quite as rosy. • The Household Survey (Survey of households used to calculate the unemployment rate) was not as optimistic as the Establishment Survey (Survey of businesses used to calculate the Nonfarms figure) adding only 86K jobs (Prev. 222K). If the same methodology for seasonal adjustment was used for the household survey then the print would actually suggest that the US economy lost jobs. Furthermore, much of the jobs added in Nonfarms were in seasonally impacted areas of the labor market, such as leisure and hospitality. Part time employment also rose, leading some to suggest the figures may be skewed as they represent people with multiple jobs being counted multiple times. • Unemployment came in unchanged at 3.8% • Average hourly earnings grew 0.2% MoM, below market consensus of 0.3%. This pace of wage growth will be encouraging for the Federal Reserve as it is conducive with their 2% inflation target. • Nonfarm payrolls can have significant revisions and the initial print can vary wildly from reality. Markets seemed to, correctly, take this print with a pinch of salt after the initial reaction. 4. Jobless claims came in slightly softer than expected at 207K (Exp. 210K, Prev. 205K). Historically speaking, both initial and continuing jobless claims are yet to reflect any significant increase in job losses in the US and remain at historically low levels. • This tracks the number of people in the US that are filing for unemployment claims. Initial counts those filing for the first time, while continuing claims can give insight into how difficult people are finding it to get another job after being unemployed. 5. ADP Employment change came in weaker than expected at 89K (Exp. 153K, Prev. 180K). • This report looks at payrolls exclusively at the MoM change in employment in the private sector. Overall, the US labor market remains historically tight, but there appears to be some cracks beginning to show suggesting that future employment data might not be as strong. 6. The US 10Y yield skyrocketed to as high as 4.88%. Yields spiked on the back of the JOLTS and Nonfarms payrolls data with markets pricing in higher chances of higher for longer/ another rate hike from the Federal Reserve. The 10Y retreated a little into the close, finishing the week at 4.8%. • The 10Y is used as proxy for borrowing costs. Treasury yields represent the risk free rate the investors can earn by buying US government debt. Whenever someone else wants to borrow money, e.g. consumer for a mortgage, they have to borrow with a spread (added interest) on top of the risk free rate that can be earned. This largely (but not only, other factors apply) represents risk, as consumers/businesses/anyone that wants to borrow money is deemed to be a higher risk of non-repayment than the US government. Therefore, to make it worth investors’ while, a spread must be added. 7. Average 30Y mortgage rates in the US hit new 23 year high during the week, hitting 7.84%. They finished the week at 7.81%, according to Mortgage News Daily. 8. MBA Mortgage applications fell another 6%. MBA Mortgage purchase index fell 5.7% and is now at the lowest level since 1995. We have the highest mortgage rates in decades, on top of the lowest housing turnover in decades, combined with the highest and most unaffordable house prices of all time. 9. The German S&P Construction PMI came in extremely weak at 39.3 (Prev. 41.5). A reading below 50 signals contraction. German Construction PMI Source: Trading Economics • The report suggests severe contraction in the German construction industry, and the future doesn’t yet seem to be looking up. There was a sharp steepening in contraction in new orders and future expectations for constructors is at historically very low levels. • This is on top of German house prices already falling almost 10% this year. • A quote from the report reads: 'Hold on to your hats, the rollercoaster is not done'. This is worrying stuff for the largest Eurozone economy and 4th largest world economy. • PMI = purchasing manager index. PMIs are essentially surveys that are sent out to businesses asking about current business conditions and future expectations and are used to asses the current market conditions within sector. 10. The Federal Reserve's total balance sheet DECREASED by $46.3 billion and now stands at $7.956 trillion. This is the first time since June 2021 that the Fed balance sheet has been sub $8 trillion dollars. Securities held outright by the Federal Reserve DECREASED by $27.73 billion (QT), currently at $7.41 trillion. • Securities held by the Federal Reserve typically includes US Treasuries, mortgage backed securities and government backed debt securities. Govt. backed debt securities are debt issued by government sponsored enterprises (GSEs) e.g. Fannie Mae, Freddie Mac, Federal Home Loan Banks (FHLBs) 11. US financial institution emergency borrowing DECREASED by $470 million, now standing at $110.44 billion. Discount window (DW) borrowing DECREASED by $420 million, now at $2.77 billion. Borrowing via the Bank Term Funding Program (BTFP) DECREASED by $50 million and now stands at $107.665 billion. • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 12. UK Nationwide house price index MoM came in at 0% MoM (Exp. -0.4%, Prev. -0.8%) and is now -5.3% YoY (Exp. -5.7%, Prev. -5.3%). The Halifax House Price Index fell 0.4% MoM (Exp. -0.8%, Prev. -1.8%). Halifax House Price Index • According to Halifax the average house in the UK is now worth 4.7% less YoY. The average price of a house in the UK is £257,808, >£14K less than a year ago. • UK consumers are feeling the hit from rising interest rates more quickly than in the US; UK mortgages tend to be, in the majority, short term fixed deals that demand rates to be renegotiated every 2-5 years. This is in stark contrast to US consumers that can sit on their low interest 30Y mortgages, enabling them to shield themselves from the Fed’s rapid hiking cycle. • Both Nationwide and Halifax are large mortgage lenders in the UK and they release separate monthly reports on the UK house prices. 13. ISM Manufacturing came in better than expected at 49 (Exp. 47.8, Prev. 47.6). This is the smallest contraction in around 1 year for US manufacturers, which have been in contraction since November 2022, but appear to be recovering somewhat: • New Orders 49.2 (Prev. 46.8) – Slight contraction • Employment 51.2 (Prev. 48.5) – Slight expansion • Prices 43.8 (Prev. 48.4) – strong contraction, suggesting costs for manufacturers are decreasing rapidly, a sign that inflationary pressures are cooling for producers of goods. 14. ISM Services came in slightly better than expected at 53.6 (Exp, 53.5, Prev. 54.5). The 9th month of services expansion in the sector in a row. However, some of the data under the surface painted a more gloomy picture on the horizon for the biggest GDP contributing sector to the US economy. • New orders fell significantly to 51.8 (Prev. 57.5), the lowest this year, suggesting demand for services is weakening. • Employment index fell to 53.4 (Prev. 54.7) suggesting hiring is slowing down • Prices index continued to show strong inflationary pressures at 58.9 (Prev. 58.9) - The UK continues to see declines in house prices. Economists are forecasting around a 10% fall in the country. Bleak data continues to come out of Germany. Construction accounts for around 6% of German GDP and German GDP accounts for around 30% of Eurozone GDP. Borrowing costs are skyrocketing in the US in tandem with Treasury yields. Housing continues to signal that activity is seizing up, while manufacturing appears to be rebounding in the US. Some of the data in the latest ISM services print showed some weakening in demand with still raging inflationary pressure. We had a gluttony of US labor market data released this week that, although showing some blowout headline readings in Nonfarms and JOLTS job openings, actually had some underlying signs of weakness and significant discrepancy between the Establishment Survey and the Household Survey. Markets are currently pricing in a 13.7% chance of the Fed hiking at their next meeting in November. This is despite the consensus amongst FOMC members that there will be one last hike in 2023. Rate cuts are currently priced in for June 2024. Market probabilities of Fed Funds Rate Source: CME FedWatch

THIS WEEK’S HIGHLIGHTS ⚠️ 1. The FOMC minutes were released this week and revealed that the Federal Reserve were at least in part split in their views about whether a pause or a rate hike was appropriate at their last meeting on June 13th-14th. However, ALL Federal Reserve members voted for the pause: • Some members stated they would have supported a 0.25% rate hike. Those that did not want to pause cited a very tight labor market, continued resilience of the economy and minimal progress on inflation as their reasoning. • The Fed’s baseline economic projection is still of mild recession with slowing GDP in Q2 and Q3 2023 before two quarters of negative GDP growth (technical recession) in Q4 23 and Q1 24. Despite this, the minutes noted that the likelihood of the US avoiding a recession altogether is almost as likely as their baseline projection. • Some members of the Fed raised the possibility that much of the effects of rate hikes have already filtered through to the economy. This is despite them also acknowledging that they have no idea about the lags with which monetary policy operates. • Ultimately, the minutes signalled again that the Federal Reserve plans on raising interest rates further. 2. A lot of US labor market data was released: Jobless Claims • 248K (Exp. 245K, Prev. 236K) • Continuing claims fell by 13,000 to 1,720,000 in the prior week, the lowest in four months. This suggests that those losing their jobs are not remaining unemployed for long. ADP Employment Summary • Ridiculously hot print for June, causing markets to price in further rate hikes • + 497,000 jobs (Exp. 228,000) • ADP employment tracks hiring in the private sector only JOLTS • Job openings decreased slightly more than expected to 9.824M (Exp. 9.885M, Prev. 10.32M), a decrease of 496K openings MoM in May. • The number of job openings per unemployed persons is now around 1.6 - still historically high, but the lowest since 2021 • The number of quits increased to 4.0 million (2.6%)(+250,000) from 3.765 million (2.4%), layoffs remain little changed • Quits is a key part of the JOLTS report. If people are quitting their jobs it usually means that they have other employment lined up/are confident of future employment prospects. Therefore, a higher quits rate suggests a tighter labor market. Nonfarm Payrolls • June Nonfarm Payrolls 209K, (Exp. 230K, Prev. 339K), the smallest nonfarm payrolls print since December 2020. • Unemployment rate 3.6 %, (Exp. 3.6%, Prev. 3.7%) • Average hourly earnings 0.4%, (Exp. 0.3%, Prev. 0.4%) The data from the labor market this week was mixed, from a very hot ADP jobs report to the lowest Nonfarm Payrolls since December 2020. Despite some signs of progress for the Fed the overriding message is that the US labor market remains very tight with low unemployment, higher than expected wage growth and increasing number of people leaving their jobs voluntarily (JOLTS quits rate). Demand still far outstrips supply in the US labor market. 3. As a result of the ridiculously hot ADP jobs report, markets began pricing in further rate hikes. The 2Y yield broke above 5%, before falling on the softer than expected Nonfarm Payrolls data on Friday, finishing the week at 4.95%. The 2Y/10Y spread remains the most inverted since the 1980s and the 3M/10Y spread remains the most inverted since data on the Federal Reserve website begins. 4. The Federal Reserve's total balance sheet DECREASED by $42.6 billion and now stands at $8.3 trillion. The Fed balance sheet is now clearly below the level it was prior to the regional banking turmoil spike in March. The Fed continue their quantitative tightening program, reducing their holdings of securities. 5. US financial institution emergency borrowing DECREASED by $975 million, now standing at $105.3 billion. Discount window (DW) borrowing INCREASED by $147 million, now at $3.356 billion. Borrowing via the Bank Term Funding Program (BTFP) DECREASED by $1.12 billion, now at $102 billion. This is only the third week over week decline in the BTFP since its inception in March. • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 6. US ISM Manufacturing PMI came in worse than expected at 46 (Exp. 47, Prev. 46.9). Not only is this further in contractionary territory but ALL of the ISM sub-indices came in below 50. The index has now been below 50 (readings <50 signal contraction) for 8 consecutive months. The last time this occurred was 2009. • The last time the ISM manufacturing report was this low and not led to a recession was in 1995-96. The others since then have been COVID, the Great Financial Crisis and the Dotcom crash. 7. On the other end of spectrum, the US services sector continues to show resilience, despite manufacturing woes, and rebounded from the previous month. ISM Services posted a reading of 53.9 (Exp. 51, Prev. 50.3), an improvement from May. This makes the 6th consecutive month of expansion in services and means the sector has now produced expansionary readings in 36 of the last 37 months. 8. Eurozone manufacturing PMI came in lower than expected at 43.4 (Exp. 43.6, Prev. 44.8). Excluding the COVID 19 pandemic, the last time a reading this low was reported was during the Great Financial Crisis. The same rings true for Germany, the largest contributor to Eurozone GDP, manufacturing came in at 40.6 (Exp. 41, Prev. 43.2). 9. Eurozone construction PMIs showed the sharpest fall in construction activity this year coming in at 44.2 (Exp. 45.1, Prev. 44.6). A quote from the report reads ‘Weaker demand for construction materials and other inputs reduced the pressure on supply chains, which allowed for a further shortening in lead times that was the most marked in over 14 years.’ 10. As for European services, they remain in expansionary territory but came in below expectations at 52 (Exp. 52.4, Prev. 55.1). Like in the US, Eurozone services have also proven to be very resilient but are starting to show signs of weakening after peaking in April. As for Germany, services also came in expansionary, but declined from a 13 month high in May to 54.1 (Exp. 54.1, Prev. 57.2). The recession in Europe is primarily driven by the manufacturing sector. 11. Despite the German manufacturing PMI slump, there was a glimmer of hope as factory orders surprised to the upside in May at +6.4% MoM (Exp. 1.2%,.Prev. 0.2%), the largest rise since June 2020; they remain down 4.3% YoY. Following on, Eurozone industrial production came in worse than expected at -0.2% MoM (Exp. 0%, Prev. 0.3%), indicating the slump in manufacturing very much remains ongoing within the country and adding to a glut of recent poor economic data. 12. UK Manufacturing PMI came in better than expected but in further contraction at 46.5 (Exp. 46.2, Prev. 47.1), services came in as expected, softer but still expansionary, at 53.7 (Exp. 53.7, Prev. 55.2) and construction entered contraction territory, missing expectations 48.9 (Exp. 51, Prev. 51.6). UK housing activity within the construction PMI came in at 39.6, posting the biggest decline since COVID. 13. The UK Halifax house price index showed that house prices are fell in the UK by -2.6% YoY (Exp. -1.7%, Prev. -1.1%) - the fastest decline since 2011 and the third month in a row of declining prices. • UK borrowers are struggling with surging interest rates. Millions need to renegotiate their mortgage at much higher interest rates in the UK this year as short term fixed interest agreements come to an end. 14. On top of already falling housing prices in the UK, markets this week were pricing in interest rates rising to 6.5% in the UK by February. This would take rates to the highest level since 1998. The UK 10Y GILT bond yield rose to 4.7% while the 2Y GILT rose as high as 5.55%. Both are at levels not seen since the Great Financial Crisis. 15. Reserve Bank of Australia held rates at 4.1% despite being expected to raise to 4.35%. - UK house prices are falling at the fastest rate in over a decade; with bond yields, and therefore borrowing costs, surging it is likely to continue. Stress in the banking sector appears to continue to subside. After essentially erasing any balance sheet reduction from QT due to the regional banking turmoil the Federal Reserve balance sheet is now below levels seen prior to March. Markets were spooked this week with data continuing to show a strong US labor market and a rebounding services sector. Markets are decisively pricing in further rate hikes in the US. Markets are now pricing in a 93% chance of the Federal Reserve raising rates by 0.25% at their July 26th FOMC meeting.

POWELL SPEECH SUMMARY⚠️ 1. Decided to lower interest rate by 25bps to 4 ¼ - 4 ½%. Have lowered policy rate by 1% from peak and substantially reduced restrictiveness. Can now afford to be more cautious with rate cuts. Today’s decision to cut was a closer call (one dissent). Compared increased levels of uncertainty to walking in the dark or driving on a foggy night and choosing to slow down to be more careful. 2. Powell states Fed are in a new phase in the process of their cutting cycle; they are now closer to but not at neutral rate (R*). Powell believes the Fed are still meaningfully restrictive. Going forward they are going to be moving more slowly but Powell believes Fed policy remains restrictive. Context: neutral rate is the interest rate that neither stimulates or restricts the economy too much and essentially achieves the Fed’s dual mandate goals. Powell noted that there are many difficult models for trying to calculate this and they all give widely varying answers. Essentially no one knows for certain what this rate is and the Fed are trying to navigate towards it. 3. Powell was asked why the Fed would be cutting if inflation only falls from 2.8% to 2.4% in 2025, as projected in todays SEP. He stated that this would still be meaningful progress towards goal and they also need to keep an eye on the cooling of the labor market. Powell refuted the idea that was suggested to him that the wording in the Fed’s statement could reasonably be believed to indicate that this could be the last cut for a while. 4. The US economy is performing exceptionally well in comparison to global peers and has cooled from being overheated. Powell feels the outlook is pretty bright for the US economy and 2025 will be a good year. Growth is stronger than expected, spending is resilient although the housing sector is weak. FOMC members feel downside risks are less. 5. Inflation still somewhat elevated and have more work to do but longer-term inflation expectations remain well anchored. The Fed have increased inflation expectations in current SEP in response to higher-than-expected inflation readings and associated higher Federal Funds Rate projections reflect this (3.9% 2025 and 3.4% 2026). Inflation might take another year or two to get to target but Powell confident the Fed will get there. 6. The US labor market is cooling but Powell emphasised that this is at a gradual pace and stated that much of the downside risk has diminished. The unemployment rate is higher than it was but remains low. People are not losing their jobs are abnormal rates but hiring has slowed and it is harder to find a job. Labor market conditions are now less tight than immediately pre-pandemic and no longer causing inflationary impulse in economy. 7. Asked about Trump tariffs: Stated some people at the meeting took this into account and some didn’t. Powell was asked whether it would be appropriate to look through inflation figures if they were to be once off increases because of tariffs. Powell was cautious with commenting on this and emphasized the level of uncertainty around future policies. However, he did note that it might be appropriate to do so in the case of once off increases but this is being considered by the Fed. The Fed are trying to consider how new fiscal policies might affect inflation as they prepare for when they do actually see the new policies of the incoming Trump government. 8. Powell was asked about a strategic Bitcoin reserve. He stated that the Fed are not allowed to hold Bitcoin and are not seeking for a change to the law around this.

China fell into deflation today ⚠️ CPI -0.3% YoY (Exp. -0.4%, Prev 0%) PPI -4.4% YoY (Exp. -4.1%, Prev. -5.4%) Here is why deflation terrifies economies around the globe Downward pressure on consumer spending If goods are persistently falling in value and something is going to cost 10% less in a year then why wouldn’t someone save that money and buy later. Saving is highly incentivised and consuming discouraged. Consumer spending accounts for a massive percentage of GDP. Debt becomes more expensive to pay off and the underlying assets fall in price If I take out a loan for $10,000 and a there is YoY deflation of 10% throughout then the loan essentially has 10% added to its nominal interest rate. Meaning, even a loan with 0% interest with 10% deflation has a REAL 10% interest rate. Fear of lack of effectiveness of monetary policy Central banks are terrified of deflation because their tools of enforcing monetary policy are less effective. For example, if interest rates are 0% and deflation is running at -5% YoY then REAL interest rates are still 5%. Similarly, if governments start handing out lots of money as stimulus, this money may not actually make its way into the financial system as people are still incentivised to not spend. Worries of deflationary spiral The theory of a deflationary spiral is essentially that as business earnings fall with prices, they spend less. This results in decreased investment and layoffs/lowering of wages. The lowering of wages/rapid rise in unemployment then leads to further reduced consumer spending as people have less money, businesses then see even lower earnings. Then people can't pay their loans that are becoming more expensive, they default, banks stop lending/go under and it all goes south from there and central banks are helpless. Not all deflation leads to terrible economic repercussions and it very much remains to be seen/is unlikely that China experiences any actual period of prolonged deflation. However, the above is why the thought of it strikes fear into the hearts of central bankers; just ask Japan.

Germany in review⚠️ The largest Eurozone economy The 4th largest economy on Earth GDP: · Flat QoQ in Q2 · This follows a winter technical recession with two consecutive contractions in Q4 22 (-0.4%) and Q1 23 (-0.1%) Inflation: · 6.4% YoY (6.3%, Prev. 6.5%) · 0.4% MoM – annualized 4.9% · Core CPI unchanged at 5.5% (core high of 5.8%) · Well above 2% target and sticky Services: PMI · 47.3 (Prev. 52.3) · First time services PMI has signalled contraction since December 2022 (a reading below 50) Manufacturing: PMI · 39.1 (Prev. 38.8) · Production down in all categories surveyed reflecting widespread slowing in demand · New orders lowest in 3 years Factory orders · Down 11.7% MoM in July · Biggest MoM decline since before 2000 other than COVID lockdowns Production · Manufacturing -0.4% June Industrial Production · Down -1.5% in June MoM (Exp. -0.5%, Prev. -0.1%) · Manufacturing accounts for 80% of industrial production Composite PMI: · Composite PMI fell to lowest level since May 2020. Prior to this has not been as low since the Great Financial Crisis. · Composite PMI combines manufacturing and services sector to provide a broader picture of the economy · The composite PMI has never been this low without a recession (data available only dates back to 08 though) Labor market: Unemployment · Trending upwards from 5% post-pandemic low in April 2022 to now 5.7% in August 2023 · Latest release was stagnant at 5.7% Job vacancies · Down from August 2022 high of 886.724K to 771.154K and stabilised for around 7 months, still historically elevated Consumer sentiment: Consumer spending accounts for around 50-60% of German GDP generation GfK consumer climate · September reading -25.5 (Exp. -24.3, Prev. -24.6) · Income expectations declined, plans on buying deteriorated, consumer economic sentiment hit a new low for the year · German consumers are pessimistic, had been becoming less so since October but this now appears to be reversing Consumer spending: Retail sales · -0.8% MoM in July (Exp. +0.3%, Prev. -0.2%) · The German consumer is spending less Business Sentiment: Ifo Business climate 85.7 (Exp. 86.7, Prev. 87.4) · Fourth consecutive decline, lowest since October 22 · This is a survey of businesses in Germany, with a large sample size, asking about their current view of the business environment and their expectations for the near future · German businesses are rapidly becoming more pessimistic Trade · Exports fell 0.9% in July – demand particularly weak from the UK and China · Imports increased 1.4% in July Real Estate: House price index · Down 6.8% YoY in Q2 Building permits · Lowest since 2015 · BP is a leading indicator of construction activity Construction PMI · 41.5 (Prev. 41) small uptick but in deep contraction · Housing construction activity fell the most since 2010 in August PMI · Building companies reduced staffing for 17thstraight month · Worst expectations since Nov 2022 DAX: · Less than 6% from all time highs Summary: GDP growth – stagnant following winter technical recession Consumer – pessimistic and spending less Inflation – remains high and core sticky Services – in contraction Manufacturing – in deep contraction with falling new orders and production Composite PMI – other than COVID, lowest since GFC Unemployment – Trending upwards but still historically low Business sentiment – low and rapidly declining Trade – Exports fell on weak external demand. Imports increased. House prices – falling Construction – deep contraction and lowest building permits since 2015

Credit Suisse ⚠️ Founded 167 years ago Number of Employees 50,000+ Assets held end of 2022 - $574b Asset management - $1.5T+ Down 75%+ YTD Down 20% today 1 of 30 'systemically important' institutions as per International Financial Stability Board. Things don't look great 👇

That time machine is pretty reasonably priced to be fair

Washington Mutual inflation adjusted ofc

Concerns over small US banks ⚠️ Something has happened since the start of the banking liquidity crisis we are all watching unfold. It has created a scenario in which perceived risk is completely polarised within the banking world. Let me explain 👇

Just did a simple thread about it where I explain it for anyone unfamiliar👇

THIS WEEK’S HIGHLIGHTS ⚠️ 1. Both core and headline consumer price indexes (CPI) came in better than expected; Headline CPI came in at +3.0% (Prev. +4%) and core CPI (excl. food and energy) at +4.8% (Prev. +5.3%). • On a month over month basis, core CPI only increased 0.2%, the slowest pace since 2021. Only around 30% of CPI goods rose by more than 0.2% and we have now seen 12 consecutive declines in headline CPI. It is clear that progress has now been made on inflation. However, it is forecasted that the rate of disinflation is unlikely to be sustained as base effects become less favorable. • In simple terms, an example of base effects would be a large spike in inflation in one month, this can then artificially make the YoY figure next year come in very low even when the month over month change still represents strong inflationary pressures. • Core services ex-shelter, which is known to be a closely watched metric by Jerome Powell, is now coming in at a 3-month annualised 1.4% (meaning if this aspect of CPI was to remain increasing at the same pace as the last 3 months MoM then it would come in at 1.4% YoY in a year’s time). • We are now seeing real terms positive interest rates, which has only been the case for 2 months now. Real terms positive interest rates occur when interest rates are higher than inflation. 2. US producer price index (PPI) came in lower than expected at 0.1% YoY (Exp. 0.4%, Prev. 1.1%) in June with core coming in at 2.4% (Exp. 2.6%, Prev. 2.8%). • This is further evidence that inflation is falling in the US. PPI reflects price changes for producers of good and services. It measure price changes higher up the supply chain and can be used as an indicator for future consumer price index prints, as it takes time for price changes to filter through to the consumer. 3. The US Federal Budget monthly statement showed that the US deficit has increased by 170% in the 9 months up to June when compared to the same period in the year prior. On top of this, the cost of servicing the US government debt rose by 25% with increasing interest rates, costing the US $652 billion. • Simply put the budget deficit is how much more the government spends than it makes. 4. US Consumer Credit fell short of expectations at 7.24B (Exp. 20B, Prev. 23.01B). • This is the smallest growth since November 2020. Non-revolving credit decreased by -0.4% YoY while revolving credit advanced at a relatively robust pace at + 8.2% YoY. The decline came in non-revolving credit. Non-revolving credit is credit (loans) taken out for a single purpose i.e. student loan, vacations or a car loans etc. Revolving credit includes credit that can be paid off and taken out again, like credit cards. • Consumer credit tells us how much the US consumer is borrowing. This is important because it can reflect consumer spending. If people are taking out loans then it means they plan on spending it. Therefore, If consumer credit drops it may reflect a drop in consumer spending intentions. This is important; consumer spending accounts for around 70% of US GDP generation. 5. University of Michigan consumer sentiment surprised significantly to the upside for June coming in at 71.6 (Exp. 65.5, Prev. 64.4). However, the decrease in pessimism was not one-size-fits-all; lower income consumer sentiment declined. • This is the highest reading since September 2021, suggesting the US consumer is feeling more positive about the economy. Consumer sentiment is closely watched as it can reflect future spending intentions. 6. The NFIB small business optimism index rose to a seven month high of 91 (Exp. 88.5, Prev. 89.4) , suggesting some reprieve for small businesses in the US. Despite this, small businesses still remain pessimistic; the index has now spent 18 months below its historical average of 98. A quote from NFIB chief economist in the report ‘small business owners remain very pessimistic about future business conditions and their sales prospects.’. • The index is based off of survey responses of NFIB registered small businesses. NFIB is the largest small business trade association in the US. 7. The Federal Reserve's total balance sheet DECREASED by $1.39 billion and now stands at $8.3 trillion. Discount window (DW) borrowing DECREASED by $664 million, now at $2.69 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $346 million, now at $102.305 billion. The Fed balance sheet is now at its lowest since 2021; they have wound down the spike seen in March as a result of the regional banking crisis. • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 8. Japan core machinery orders MoM -7.6% (FORECAST 1%, PREVIOUS 5.5%), now -8.7% YoY. • This suggests that capital spending could be set to decrease in the coming months (typically 6-9). Machinery orders are considered a leading indicator of capital spending as they indicate the willingness of businesses to invest in future production/expansion. If businesses expect poor business conditions in the near term then they hold off in making large purchases and become more conservative with their spending. 9. Chinese exports came in lower than expected at -12.4% YoY (Prev. -7.5%, Exp. -9.5%) suggesting further weakening of global demand and painting a worsening picture for the Chinese economy. Imports also weakened, suggesting demand is also falling domestically, likely paving the way for PBoC to take further steps to try and stimulate the economy. 10. Chinese inflation figures sparked worries of possible deflation in the country. Headline CPI came in at 0% YoY in June (Exp 0.2%, Prev. 0.2%) and PPI came in at -5.4% YoY (Exp. -5%, Prev. -4.6%). 6 out of 8 categories showed month over month deflation. • Deflation is the opposite of inflation; prices for goods and services fall and money becomes worth more over time. • PBOC are expected to further cut rates in an attempt to stimulate the Chinese economy. 11. German ZEW Economic sentiment came in significantly worse than expected at -14.7 (Exp. 10.5, Prev. -8.5), the most pessimistic reading since December, suggesting a worsening outlook for the German economy that is already in recession. • ZEW economic sentiment is a collation of survey responses from around 350 German economists/analysts on their assessment of the German economy now and in the next 6 months 12. German YoY inflation increased in June coming in at 6.4% (Exp. 6.4%, Prev. 6.1%). This comes after 3 months of consistent declines in YoY CPI prints. German HICP came in at 6.8% (Exp. 6.8%, Prev. 6.3%). 13. Eurozone industrial production came in much softer than expected YoY for May at -2.2% (Exp. -1.2%, Prev. 0.2%). Manufacturing in the Eurozone continues to struggle, in tandem with deteriorating business confidence in the largest GDP contributor, Germany. 14. UK unemployment rose to 4%, higher than expected (Exp. 3.8%, Prev. 3.8%). Furthermore, the number of payrolled employees fell by 9000 in June, despite an expected gain of 23,000. Although the BOE appears to have made some progress in the loosening of the labor market, worries about further interest rate hikes grew as wage growth came in higher than expected with average weekly earnings at +7.3% YoY (Exp. 7.1%, Prev. 7.3%) excluding bonuses. Regular pay in the UK is rising at the joint fastest pace on record, something that the Bank of England do not want to see whilst they try to tame runaway inflation. 15. UK GDP estimate for May came in at -0.1%, better than expectations (Exp. -0.3%, Prev. 0.2%). Given the non-recurring bank holiday for King Charles III’s coronation, which the Office for National Statistics won’t adjust their figures for, the UK’s economy remained resilient. 16. The Bank of England published their Financial Stability Report. In summary: • Household and businesses are under pressure from rate rises as fixed-rate mortgage deals expire. • UK banks are resilient and can withstand severe downturn • Vulnerabilities in certain parts of market-based finance remain and could further tighten financial conditions. This is referring to the non-banks (e.g. UK pension funds) that ran into trouble in September last year when they started getting margin called after the disastrous Truss mini-budget. 17. Bank of Canada raised interest rates to 5% form 4.75% as per expectations. Rates in the country are now at the highest level since 2001. - The effects of falling demand are taking a toll on China as inflation plummets with weakening demand. Worries grow about the country experiencing a period of deflation. The PBoC are fully expected to cut rates further in attempts to stimulate the economy. The UK’s economy is holding up better than expected, a familiar story, likely as a result of tight labor market and high wage growth. Fears of higher rates in the UK grew after the hot wage growth report. UK CPI in the upcoming week will be crucial to the Bank of England’s next move; terminal rates as high as 5.75% are being predicted (Bloomberg). A combination of softer US PPI and CPI with signs of progress has left markets pricing in an almost guaranteed rate hike of 0.25% later this month. However, despite Fed rhetoric, markets do not believe that the second hike will come to fruition. The US Dollar saw its largest drawdown since November, pushing risk assets higher as markets become ever more confident that the Fed is very close to the end of its hiking cycle. Markets are now pricing in a 96.7% chance of a rate hike at the July 26th FOMC meeting according to CME FedWatch, with this being priced in hike. Markets are expecting rate cuts as early as March 2024. 💊

THIS WEEK’S HIGHLIGHTS ⚠️ 1. FOMC minutes from July meeting were released: • Vote for raising by 25bps was unanimous but some Fed members would have also supported a pause. They did not commit to any further move at next meeting, cited data dependence. • Most FOMC members see upside risk to inflation and the possibility for further rate hikes being needed. Some FOMC members see downside risk to inflation and think the Fed have done enough. There appears to now be some split opinions within the Fed. • No recession as base forecast. Softening of labor market needed for 2% inflation target. • The minutes stated members felt valuations in both residential and commercial property markets remained high relative to fundamentals; they basically called out real estate for being overvalued. • The Fed expressed uncertainty about monetary policy lags. PCE price inflation is expected by the Fed to be 2.2 percent, and core inflation expected to be 2.3 percent by 2025. • The minutes noted that when the Fed finally decide to cut this does not mean they will necessarily end shrinking their balance sheet (QT) • Credit conditions are tightening and expected to tighten further. There is risks of deterioration in credit quality, especially in commercial real estate as the sector may be permanently limited by the move to work from home following the pandemic. 2. Japan GDP for Q2 came in well above expected at 6% annualized pace (Exp. 2.9%, Prev. 3.7%). The headline figure appears significantly more robust than some of the underlying data as exports (external demand) accounted for a large chunk of the upwards surprise. • The upside surprise was largely as a result of very strong exports, accounting for +1.8% of the GDP report, rather than strong domestic (within the country) demand as both domestic business spending and personal consumption came in weaker than anticipated. Japan relaxed travel restrictions earlier and is experiencing a tourism boost reflected in the data: Business spending +0% Private consumption -0.5% Household consumption -0.5% Expenditure by foreign residents +16.5% Imports -4.3% Exports + 3.2% • Ultimately markets were worried by the headline as it fuelled speculation that the Bank of Japan may move towards ‘normalization’ or in other words, cutting back on their ultra-loose monetary policy. This would have significant ramifications globally as the Yen carry trade (borrowing cheaply in Yen to buy foreign assets) will become less lucrative. Also, if yield can be found domestically in Japan because the BOJ back off then investment in foreign bonds may weaken, driving global yields higher. The Japanese are the largest foreign holders of US Treasuries, holding over $1 trillion of US govt. debt. They have very deep pockets with >$3 trillion in major bond markets. 3. Japanese CPI came in hotter than expected at 3.3% (Exp. 2.5%, Prev. 3.3%) while core CPI (in Japan this is excluding food) cooled as expected to 3.1% (Exp. 3.1%, Prev. 3.3%) and CORE-CORE (lol) accelerated to 4.3% (Exp. 4.3%, Prev. 4.2%). Japanese core-core is excluding fuel and food, like core CPI in the US. • Services inflation came in >2% YoY for the first time since the 90s; further fuelling speculation that the Bank of Japan may pull back on their ultra loose monetary policy. 4. Trouble in China • China announced that they will stop publishing youth unemployment data. Of late the data has not been painting a particularly optimistic picture with unemployment for 18-24 year olds reaching a record 21.3% in June. The latest release of the data was supposed to be published on Tuesday but this didn’t happen. Probably just a coincidence…. • Chinese industrial production, which has been in a general long-term downtrend since around the GFC, came in below expectations at 3.7% (Exp. 4.4%, Prev. 4.4%) • Chinese retail sales for July disappointed coming in at 2.5% YoY (Exp. 3.1%, Prev. 4.5%) The data paints a picture of weakening consumer spending, rising unemployment and sluggish output. 5. Country Garden, the 5th largest real estate developer in China announced that it was suspending trading of some of onshore bonds while it considers options for restructuring the debt to avoid default. • We also saw the long troubled Evergrande, the 2nd largest property developer in the country, file for chapter 15 bankruptcy in the US to seek protection for its US assets whilst it undergoes restructuring in China after defaulting 2 years prior. • ON TOP OF THIS, Chinese trust asset manager Zhongzhi, with over >$135 billion assets under management, announcing that they are in a liquidity crisis. This heightened worries about the country’s economy and possible shadow bank contagion. The company have already missed several payments. Furthermore, the firm Zhongrong International Trust, which is around 1/3rd owned by Zhongzhi has also missed payments, precipitating some protest by scorned investors outside their main office. • China, by value, has the largest real estate market in the world. With >20% of the world’s real estate by value. • Real estate is the largest asset class in existence. 6. The People’s Bank of China (PBoC), China’s central bank, announced a 15bps cut to a key interest rate (1Y loans) to 2.5% as the CB reacts to a weakening economic outlook. The announcement came just before the country released the above weaker than expected data as the central bank starts to react to the worsening economic outlook for the 2nd largest economy on Earth. 7. The US average 30Y mortgage hit the highest levels seen in 23 years as 10Y Treasury yield peaked during the week at > 4.27%. According to Bankrate(dot)com the average 30Y US mortgage peaked at 7.6% this week, finishing at 7.55%. According to Mortgage News Daily, 30Y mortgage rates finished the week at 7.37%. 8. The Federal Reserve's total balance sheet DECREASED by $62.5 billion and now stands at $8.146 trillion. The Fed have now decreased their balance sheet by around $820 billion since its peak. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $378 million, now at $106.864 billion. A new record for the BTFP. • BTFP was created in response to the banking crisis in March. the BTFP is more generous in than the discount window, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 9. The Netherlands fell into technical recession reporting Q2 GDP growth of -0.3% QoQ (Prev. -0.4%, Exp. -0.2%). This is now the 4thEurozone country to be in technical recession in 2023. Comments from Christine Lagarde stating earlier this year that no countries in the Eurozone would see recession in 2023 have not aged well. The Netherlands is the 5th largest economy in the Eurozone. • Lithuania, Germany and Estonia are the other 3 countries to experience technical recession in 2023. 10. US retail sales reflected ongoing robust US consumer spending coming in at 3.2% YoY (Prev. 1.6%, Exp. 1.5%) and 0.7% MoM (Prev. 0.3%, Exp. 0.4%). • Non-store (online) retail sales came in particularly hot at 1.9% MoM (10.3% YoY). Areas in which the US consumer appears to be spending less on the report were furniture -1.8% MoM (-6.3%) amidst very low housing turnover, vehicles & parts -0.3 MoM (7.6% YoY) and electronics & appliances -1.3% MoM (-3.1% YoY). • Retails sales are closely watched economic release as they reflect consumer spending patterns. US consumer spending accounts for around 70% of GDP generation. 11. UK wage growth data showed the highest wage growth since comparable records began in 2001 coming in at 7.8% (Exp. 7.4%, Prev. 7.5%). • However, employment data painted a weaker picture - Employment change came in at -66K (Exp. 75K, Prev. 102K); the first negative print since August 2022. • Unemployment rate was reported higher than expected at 4.2% (Exp. 4%, Prev. 4%). • Job openings also fell on the quarter fell for the 13th consecutive time • Hot wage growth exacerbated worries that the Bank of England will need to raise rates further as wage growth is well above the 3-3.5% needed to meet the BOE 2% inflation target. However, employment data showed signs of softening. 12. German ZEW Economic sentiment showed worsening of current conditions while outlook for the future improved. However, future expectations still remain well below historical average, painting an uncertain picture of economic recovery in the largest Eurozone economy. Current conditions -71.3 (Exp. -63, Prev. -59.5) Expectations -12.3 (Exp. 14.9, Prev.-14.7) 13. The National Association of Homebuilders sentiment declined for the first time in 2023 coming in below expectations at 50 (Exp. 56, Prev. 56) • Up until this point this year homebuilder sentiment has been improving as golden handcuff low rate 30Y fixed mortgages from the days of zero interest rate policy are preventing people from moving and keeping US existing home inventory at extremely suppressed levels. This has forced homebuilders to fill the gap in supply and demand for housing. 14. Housing starts in the US beat expectations coming in at +3.9% MoM (Exp. 1.1%, Prev. -8%) reflecting the recent increase in demand for new homes, driven by low existing inventory. However, building permits came in below consensus at 0.1% (Exp. 1.5%, Prev. -3.7%), suggesting that the surge in building may not be sustained. • Building permits acts as an indicator of future construction. Housing starts signal projects that have begun construction, usually lagging permits by a few months. 15. UK CPI fell but came in hotter than expected for July at 6.8% YoY Exp. 6.7%, Prev. 7.9%), core CPI came in at 6.9% (Exp. 6.8%, Prev. 6.9%). This further fuelled worries that the Bank of England will have to raise interest rates further than expected. Prior to this week, expectations were of a 5.75% peak rate; this has now increased to a 6% peak being priced in by markets by December 2023 following this report and the wage growth data from earlier in the week. • The fall in headline inflation was marked mainly due to drops in energy (gas and electric) prices. Services inflation in the UK increased to 7.4% from 7.2%, something the Bank of England will be monitoring closely. 16. Both Core and headline consumer inflation in the Eurozone came in as expected for July. Headline HICP came in at 5.3% (Prev. 5.5%) YoY and core at 5.5%, unchanged from the prior month. Core inflation came in at -0.1% MoM. • Progress is beginning to be made on inflation in the Eurozone, supporting the view that the ECB are likely almost done hiking. - It was an exciting week. We saw trouble brewing in China coming to the forefront following an array of bleak (and absence of) economic data as well as large firms struggling to meet payments. There are real worries about contagion within Chinese shadow banks. The above issues are in addition to a recent onslaught of weak data coming out of the country and deflation reported last week on the most recent CPI print. Fears surrounding possible shifts in Japanese monetary policy continued following higher than expected inflation and an extremely robust headline GDP print. The Bank of England likely still have multiple hikes ahead of them with sticky underlying inflation while the ECB’s next possible hike hangs in the balance. The US consumer continues to prove resilient, the Fed continue to wind down their balance sheet and mortgage rates continue to surge. As per CME Fedwatch, markets are still pricing in an 89% chance of a Fed pause at their meeting in September but are interestingly pricing in a 33% chance of a rate hike at their November meeting. Going into next week we have the Jackson Hole Symposium which will see Powell speak. Last year’s Jackson Hole speech resulted in huge market sentiment shifts and 3.4% erased from the S&P 500 in a single day after Powell spoke for just 8 minutes. It's going to be a fun week.

FED BALANCE SHEET UPDATE⚠️ Rest in Peace Bank Term Funding Program In the week ending January 24th: 1. The Federal Reserve's total balance sheet INCREASED by $3.5 billion and now stands at $7.677 trillion. Total Assets (a.k.a. balance sheet) 2. Securities held outright by the Federal Reserve DECREASED by $4.8 billion, currently at $7.153 trillion. • Securities held by the Federal Reserve typically includes US Treasuries, mortgage backed securities and government backed debt securities. Govt. backed debt securities are debt issued by government sponsored enterprises (GSEs) e.g. Fannie Mae, Freddie Mac, Federal Home Loan Banks (FHLBs). The Fed allowing securities to mature and not reinvesting all of the principle so that they reduce their balance sheet is the process of QT (quantitative tightening). 3. US financial institution borrowing via the Fed’s emergency borrowing facilities INCREASED by $6.76 billion, now standing at $170.55 billion. 4. Discount window (DW) borrowing INCREASED by $490 million, now at $2.8 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $6.27 billion and now stands at a massive $167.8 billion, a new all-time high. We continue to see a clear pattern of increasing use of the bank term funding program after a period of muted growth/stagnation. This is the eighth consecutive increase in usage of the Bank Term Funding Program likely due to financial institutions taking advantage of the arbitrage between what interest rates banks can take out BTFP loans at and the interest they can earn on the loan if they just leave it at the Fed, accruing the interest on reserve balance rate, essentially free money. However, we have had the news that the Bank Term Funding Program will be closing its doors on March 11th, as announced this week by the Federal Reserve. On top of this, the Fed has now REMOVED the risk free arbitrage opportunity offered by the BTFP by raising the interest rate of any borrowing done via the Bank Term Funding Program to equal to the interest on reserve balances rate. Expect BTFP usage to stop accelerating in the coming weeks as banks are no longer able to take advantage of this. Any further surge of usage of the BTFP and Discount Window from now on will be down to banking stress. Bank Term Funding Program Discount Window • The DW and the BTFP are both means by which financial institutions can borrow 'emergency liquidity' from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis in March this year. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in bank assets used as collateral are ignored by the Fed when being used as collateral. This was designed so that banks aren’t forced to sell asset portfolios at heavy losses, they can lend against them to meet immediate obligations and continue to hold. To top it off, interest on lending through the BTFP is done at 1 year overnight index swap (OIS) rate + 0.1%.

THIS WEEK'S HIGHLIGHTS ⚠️ 1. The Eurozone fell into technical recession after reporting two consecutive quarters of negative GDP growth. GDP for Q1 23 was reported at -0.1% after downward revision of GDP growth for Q4 22 to -0.1% • This comes after Christine Lagarde (President of ECB) repeatedly forecasted that the Eurozone would not see a recession in 2023. Eurozone countries now in technical recession include Germany, Lithuania and Estonia. Germany alone constitutes almost 30% of Eurozone GDP generation and is the 4th largest economy in the world. 2. The Federal Reserve's total balance sheet INCREASED, for the first time since March 22nd, by $3.6 billion and now stands at $8.389 trillion. 3. US financial institution emergency borrowing INCREASED by $5.74 billion (the biggest increase for 1 month), now standing at $103.3 billion. Discount window (DW) borrowing DECREASED by $800 million, now at $3.17 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $6.55 billion, now at $100.2 billion. • The DW and the BTFP are both means by which financial institutions can borrow emergency liquidity from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis that started in March. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in banks' assets are ignored by the Fed when being used as collateral. This was designed so that banks are not forced to sell underwater portfolios and realise massive losses. To top it off, lending through the BTFP is done at Fed Funds + 0.1%. 4. US commercial bank deposits increased by $46.6 billion to $17,282.5 billion. Deposits at small banks increased by $12.37 billion and by $17.2 billion at large banks. All seasonally adjusted. 5. Eurozone S&P Services PMI May 55.1 (Prev. 56.2 Exp. 55.9) • Despite surprising to the downside, the services sector still reported expansion. Thus far the sector has remained extremely resilient in the Eurozone, unlike manufacturing that continues to plummet. 6. Eurozone PPI MoM APR -3.2% (Prev. -1.3% Exp. -3.1%), PPI YoY APR 1% (Prev. 5.5% Exp. 1.4%) • A drop of -3.2% in PPI is the biggest 1 month drop on record. Eurozone producer price inflation has absolutely plummeted from it's cycle peak of 43.4% in August 22, now at just 1% YoY. This is an indication that consumer price inflation is likely to continue its decline as producers do not have to pass as many price increases down to consumers. 7. US ISM Services PMI for May came in lower than expected at 50.3 (Prev. 51.9 Exp. 52.2). This is the lowest reading since December and suggests the US services sector is marginally above stagnation. • Supplier delivery times were faster (47.7 vs 48.6), new orders declined (52.9 vs 56.1) and inventories increased significantly (58.3 vs 47.2) suggesting slowing demand. Prices paid came in at (56.2 vs 59.6) suggesting businesses are seeing prices increase less quickly, supporting the argument that consumer inflation is likely to fall in the coming months. 8. US Initial Jobless Claims surprised significantly to the upside at 261K (Prev. 233K Exp. 235K) • The US labor market remains very strong with a huge upside surprise to employment data last week. However, this week's report is the highest number of jobless claims seen since October 2021. Despite the high initial claims report, continuing jobless claims, a barometer of how difficult people are finding it to get a job once they have been laid off, decreased to the lowest level since Feb, suggesting people are still able to find employment. 9. The Reserve Bank of Australia unexpectedly raised interest rates by 0.25% to 4.1% from 3.85%, surprising markets. 10. The Bank of Canada raised interest rates by 0.25% to 4.75%, surprising markets and joining the Reserve Bank of Australia on the surprise rate hike train. 11. German Factory Orders MoM came in significantly below expectations in April at -0.4% (Prev. -10.9% Exp. 3%). Industrial Production also came in lower than expected at 0.3% (Prev. -2.1% Exp. 0.6%). • Demand is falling within Germany and the manufacturing sector is currently feeling the brunt of it. As large backlogs of orders are cleared, industrial production will start to decline as new orders are not sustaining the levels that have been seen of late. 12. Eurozone Retail Sales MoM APR 0% (Prev. -0.4% Exp. 0.2%) • A look into consumer spending in the Eurozone. Eurozone retail sales have not posted an increase month over month since January after posting two months of declines prior. Considering that retail sales are not inflation adjusted, this is clear indication of weakening in consumer confidence. 13. The UK Halifax house price index fell 1% YoY in May 2023, the first decline since December 2012 - The Eurozone falls into recession with Germany, the country accountable for almost 1/3rd of the economic area's GDP. Demand appears to be falling in the country, suggesting there could be more weakness ahead. Despite this, the ECB are currently expected to raise interest rates at their meeting this coming week despite the Eurozone now being in a recession. The ECB have a history in raising rates at questionable times e.g. July 2008 during the early stages of the Great Financial Crisis. US bank emergency lending continues to increase despite troubles in the sector falling out of the limelight of late. The strength seen in the services sector in the US is starting to wane, with orders decreasing as well as prices paid. It sets up nicely going into the Federal Reserve meeting this week where the Fed are widely expected to pause after very dovish remarks from a number of speakers prior to the blackout window. Current market expectations are pricing in a 71.2% chance of the Fed keeping rates as they are this week.

The Federal Reserve have announced a new system created to protect banks from collapse in response to SVB and Signature Bank. They've called it the Bank Term Funding Programme Let's get this explained simply 👇

THE WEEK SO FAR⚠️ 1. OPEC+ cut oil production by 1.6M barrels per day • Organization of the Petroleum Exporting Countries (OPEC+) is a group of countries that produce oil that have banded together in order to try and ensure stability of oil prices around the globe by managing supply and demand. Decisions on oil production made by OPEC+ have major implications for worldwide oil prices. Oil prices opened >$80 per barrel on Monday, now +8% week over week • OPEC+ includes 23 countries - largest producers being Saudi Arabia, Russia, Iraq, UAE & Kuwait • Cuts are not new and is something OPEC+ does in order to try and match supply to demand. Examples of some previous cuts - 2016 (1.2M barrels), 2019 (500k barrels), 2020 (9.7M barrels in response to COVID 19 pandemic) • Biden disagreed with the OPEC+ decision to cut production during the ongoing inflation fight. Increasing oil prices = increasing energy prices = increased inflationary pressures = worried markets. • A decline like this suggests that OPEC+ is expecting a decline in demand, indicative of concerns over a cooling global economy 2. JOLTS Job openings decreased more than expected 9.93M (Exp. 10.4M, Prev. 10.56) and ADP employment missed 145K (Exp. 210K, Prev. 242K) • We are seeing some of the early signs that the labor market (which is still historically very strong) in the US is beginning to soften. Something the Federal Reserve have spoken about trying to achieve for months now in order to fight inflation • However, JOLTS also showed that labor turnover is still strong with increased numbers leaving their jobs voluntarily. This suggests employees still feel confident about their ability to find employment/already have a new job lined up 3. Manufacturing and Services PMIs both weakened, further suggesting incoming economic slowdown. PMIs = Purchasing Manager Indexes and are produced collating survey responses of US business managers reporting on numerous aspects of business activity. NB >50 = growth, <50 = contraction, 50 = stagnation • US ISM Manufacturing PMI for March showed faster contraction of the sector coming in at 46.3 (47.7). Now at levels (excluding COVID crash) not seen since the Great Financial Crisis • US ISM Services PMI for March came in at 51.2 (Prev 55.1), worse than expected and showing a significant reduction in growth. Services account for >75% of US GDP so this is a poor indicator for the US economy as inventories grew faster and new orders slowed 4. US Treasury 2Y/10Y spread became less inverted of late (-0.54 to -0.49 this week). 2Y yield has fallen from 3.98% to 3.792% Mon-Wed, down from >5% in early March, suggesting recent increased flight to safety/expectations of rate cuts. However, the 3M/10Y spread inverted further and is now at its most inverted since, well, pretty much ever. 5. Chicago Fed National Financial Conditions Index (NFCI) showed further tightening in the week ending March 31st. Financial conditions in the US have been tightening since the start of February. Keep in mind Thursday is the last trading day of the week and Non-Farm Payrolls comes on Friday when markets are closed...

THIS WEEK’S HIGHLIGHTS⚠️ 1. US CPI surprised to the upside, with one of Powell’s favored measures of services inflation (supercore) accelerating notably, worrying markets that inflation will be stickier than previously anticipated. Month over month core CPI rose 0.4%; in annualized terms this amounts to 4.8%. The Fed obviously look past single fluctuations in prices but on a 3 month and 6 month annualized basis core CPI rose 4% and 3.6% respectively, well above the Federal Reserve 2% inflation target. Jerome Powell emphasized at the FOMC press conference that the Fed want to see a continuation of what they had been seeing in the 6 months leading up to their last meeting; that clearly isn’t what they got. Month over month CPI 0.3% (Exp. 0.2%, Prev. 0.2) Core 0.4% (Exp. 0.3%, Prev. 0.3) Year over year 3.1% (Exp. 2.9%, Prev. 3.4%) 3.9% (Exp. 3.7%, Prev. 3.9%) Services, insurance, food, transport, medical services and shelter all pushed the print higher on a monthly basis, as can be seen in the heatmap below. US CPI Heatmap The rate of price increases in shelter, the highest weighted services category, advanced at a rapid pace of 0.6% MoM, contributing two thirds of the monthly inflation print. Shelter is up 6% YoY. This might lead you to think that the problem is focussed in housing. However, a closely watched metric of Powell’s known as supercore (core services excluding shelter) advanced by 0.85% MoM, a pace not seen since April 2022. Supercore is now running at a 3 month annualized pace of 6.6%, which will absolutely catch the eye of the Federal Reserve as it delivers the message that services inflation is a wider issue than housing alone. It wasn’t all hot, as used car prices plummeted 3.4%, apparel -0.7% (led by women’s clothing while men’s clothing ran hot) while core goods and energy continued to deflate in price. It should be noted that in the data used for cars and trucks prices has just had a change of methodology applied for the first time this month relating to mileage estimations used vehicles, thus take with a large pinch of salt. While the January print alone does not confirm that we are about to see a reacceleration in inflation, it certainly will make the Fed feel justified in their hesitancy to start their cutting cycle prior to being sure that inflation in on a sustainable path to their 2% target. Simply explained CPI Release by the Bureau of Labor Statistics monthly The Consumer Price Index measures the change in prices for goods and services for consumers and thus is a measure of inflation. A basket of goods and services is sampled monthly. The good and services in question are supposed to reflect the spending patterns of consumers in the United States. The data is meant to be representative of prices for over 90% of the US population. Different items in the CPI are given different weighting relative to their deemed importance. Core CPI is the most closely watched metric within CPI as it excludes food and energy, which tend to be more volatile, and as a result allows for a closer look at underlying inflationary pressures within the economy. While CPI is not the Fed’s preferred measure of inflation, well known to be core PCE, it still is of significant importance bearing on the direction of monetary policy as the Federal Reserve try to achieve their dual mandate of maximum employment and stable prices (2% inflation target). 2. PPI was released on Friday; It further indicated that returning inflation to the Fed’s 2% target may be on a more rocky path going forward than it has been so far. Combined with a hot CPI print, this month’s PCE price index report looks to be at risk of coming in hot as PPI came in above forecast. PPI increased 0.3% (Exp.0.1%, Prev. -0.1%) in January on a month over month basis and 0.9% YoY (Exp. 0.6%); the fastest MoM pace in 5 months. Core PPI, which excludes volatile food and energy prices, rose 0.5% MoM (Exp. 0.1%), advancing 2% YoY (Exp. 1.6%). Given the CPI and PPI data from this month both coming in markedly hotter than anticipated, it is likely that we could see an acceleration in the month over month rate of the Federal Reserve’s most closely watched measure of inflation, the PCE price index. Simply explained Although consumer price inflation measures in PCE and CPI are regarded as the most important measures of inflation to the Federal Reserve the PPI is watched closely by then and markets for a few reasons. One, the price changes in the PPI provide insight into price changes earlier in the supply chain that are yet to be passed on to consumers. Thus, if PPI is running hot producers may well pass on costs down to consumers to protect profit margins, causing consumer price inflation to increase. However, the exact relationship between PPI and CPI is a topic for debate and not straightforward. Secondly, there are several components of PPI that directly affect the Federal Reserve’s most watched inflation measure, Personal Consumption Expenditures price index (PCE). 3. United States preliminary retail sales missed in January, suggesting that consumers were spending less following the festive period. December’s blockbuster hot retail sales print was also revised meaningfully lower. Headline -0.8% (Exp. -0.2%, Prev. 0.4%) Excluding autos and fuel -0.5% (Exp. 0.1%, Prev. 0.6%) Control group retail sales, which exclude building material, vehicles, fuel and food services fell 0.4% (Exp. 0.2%, Prev. 0.8%). US Retail Sales Heatmap December’s retail sales reading on a month over month basis was revised down from the 0.6%, that at the time made quite the impact, to 0.4%. The cooling in retail sales, as can be seen in the heatmap above, was broad-based and in stark contrast to the prior month. It is worth keeping in mind that retail sales are seasonally adjusted, and thus the decline seen in consumer spending activity here was more than usual for the time of the year. It is normal for consumers to cool their spending in the New Year after splurging over the Christmas period, but this is taken in to account in seasonal adjustment. A few notable changes include the 0.8% fall in non-store (mainly online shopping) retail sales. This is only the second fall month over month since January 2023, reflecting that consumers were purchasing less online. Simply explained Released monthly by the Census Bureau from data collected in their Monthly Retail Trade Survey Retail sales tracks the value of spending by consumers in retail. While retail sales account for a small portion of GDP themselves the release is seen as a barometer of wider consumer spending, which accounts for 70% of US GDP generation. 4. Japan and the United Kingdom fell into technical recession according to preliminary GDP growth readings. Japan lost its spot as the 3rd largest economy in the world, with Germany (which had an awful year) taking its place. The 4th and 6th biggest economies on the planet are now in technical recession. Japan GDP -0.1% QoQ in Q4 (Exp. 0.3, Prev. -0.8%) -0.4% on annualized basis(Exp. 1.4%, Prev. -3.3%) United Kingdom GDP -0.3% QoQ (Exp. -0.1%, Prev. -0.1%) Simply explained Gross Domestic Product (GDP) is the measure of value of all goods and services produced by a country or economic area in a period of time. It is regarded as one of the most comprehensive measures of economic performance. Two consecutive quarters of negative GDP growth triggers a technical recession. However, it is worth noting that there are different definitions of recession and this is but one. Keep in mind these are preliminary readings and subject to revision. 5. UK CPI surprised to the downside, providing some much needed respite to the Bank of England as they continue to deliberate over how long to hold off before initiating a cycle of rate cuts. Headline 4% (Exp. 4.2%, Prev. 4%) YoY -0.6% (Exp. -0.3%, Prev. 0.4%) MoM Core 5.1% (Exp. 5.2%, Prev. 5.1%) YoY -0.9% (Exp. -0.8%, Prev. 0.6%) MoM UK CPI Heatmap Furniture and household goods, food and non-alcoholic beverages as well as clothing and footwear contributed most heavily to the downside on a month over month basis. Food prices fell for the first time since 2021. Airfares fell by 38.9% in January, pushing transport services prices lower. 6. UK retail sales for January came in well above expectations following the worrisome print seen a month earlier, posting the biggest month over month increase since 2021. Headline 3.4% (Exp. 1.5% , Prev. 3.3%) On a month over month basis, every category measured in UK retail sales advanced barring textile, clothing and footwear stores advanced. UK Retail Sales Heatmap UK retail sales volumes recovered to inline with the general downtrend that has been seen since April 2021. Volumes still remain below their pre-pandemic benchmark. 7. The latest UK employment figures were released. They showed continued sticky wage inflation. However, the ONS also noted that many of their current labor market related released are currently unfit to be considered official national statistics. Upon digging beyond headlines the Office for National Statistics appear unhappy with the Labor Force Survey (LFS), due to lower response rates. They stated that data from their LFS cannot be published as official statistics until it has has been officially reviewed. They are currently working on a Transformed Labour Force Survey which will be implemented in September 2024: It is worth noting that wage data is not subject to the same carnage as the Labor Force Survey as it is extracted from different data. Unemployment Rate (3M/Dec) 3.8% (Exp. 4.0%, Prev. 3.9%) Source: Labour Force Survey Status: Statistic in Development The data used to estimate the unemployment rate is from the LFS and is currently classed as 'Statistic in Development' which was formerly known as 'experimental statistics' by the ONS. UK Avg. Earnings inc. bonus 5.8% (Exp. 5.6%, Prev. 6.5%) Source: Monthly Wages and Salaries Survey (MWSS) UK Avg. Earnings ex. bonus 6.2% (Exp. 6.0%, Prev. 6.6%) Source: Monthly Wages and Salaries Survey (MWSS) Monthly Wages and Salaries Survey (MWSS) is a sample of around 9000 businesses in the UK, separate from the LFS. Does not include self employed people. PAYE Payrolls change 48K (Exp. -12K, Prev. 31K) Status: Statistic in Development Source: HMRC PAYE payrolls was hotter than expected, showing more jobs added in the UK economy than anticipated. PAYE data is based off of 'real time' data based on tax records in the UK. It is more timely but does not include people that do not work via PAYE in the UK. As a result, self-employed people are not included. A benefit of PAYE payrolls is it is not reliant on response rates like traditional survey methods and is relatively hard data, despite its current experimental status. Job vacancies fell by 26,000 to 932,000 (Jan) Source: mixture between Labor Force Survey, Short-Term Employment Surveys and Quarterly Public Sector Employment Surveys. The number of job vacancies remain above pre-pandemic levels. However, they have fallen consecutively for the longest period on record. 8. ZEW economic sentiment improved to 19.9 (Prev. 15.2). However, participants assessment of current conditions within Germany deteriorated markedly falling to an extremely pessimistic -81.7. Simply explained Survey of up to 300 experts within banks, insurance and finance are surveyed each month, with data spanning back to 1991. Participants are asked to provide their outlook on their expectations for the next 6 months on inflation, interest rates, markets. It is regarded as a bellwether for the German economy (leading indicator). A reading of 0 indicates a neutral outlook. The index is calculated as the % of experts that are optimistic minus the % that are pessimistic. - The United Kingdom saw signs of inflation cooling faster than economists and the Bank of England had forecast, increasing the likelihood of earlier rate cuts. Although the UK fell into technical recession at the end of 2024, retail sales were off to a good start in January, undoing much of the plunge taken the month before. Inflation data in the United Stated came in much hotter than had been previously anticipated in both CPI and PPI reports. Prior to this, the continued robust economic expansion of the US economy had been viewed by many to have occurred alongside seemingly immaculate disinflation. However, the Federal Reserve’s search for ‘further confidence’ that inflation is moving sustainably to their 2% target certainly wasn’t found this week. According to CME FedWatch, markets are now pricing in an 89.5% and 71.6% chance of a continued pause at the Fed’s next two meetings, respectively. The first rate cut is priced in by markets for June.

FED BALANCE SHEET UPDATE⚠️ The first balance sheet update of 2024 In the week ending January 3rd: 1. The Federal Reserve's total balance sheet DECREASED by $31.76 billion and now stands at $7.68 trillion. Total Assets (a.k.a. balance sheet) 2. Securities held outright by the Federal Reserve DECREASED by $37.2 billion, currently at $7.19 trillion. • Securities held by the Federal Reserve typically includes US Treasuries, mortgage backed securities and government backed debt securities. Govt. backed debt securities are debt issued by government sponsored enterprises (GSEs) e.g. Fannie Mae, Freddie Mac, Federal Home Loan Banks (FHLBs) 3. US financial institution emergency borrowing INCREASED by $5.06 billion, now standing at $143.4 billion. 4. Discount window (DW) borrowing DECREASED by $333 million, now at $2.16 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $5.4 billion and now stands at $141.2 billion, a new all time high. We are seeing a clear pattern of increasing use of the bank term funding program after a period of muted growth/stagnation. This is the fifth consecutive increase in usage of the Bank Term Funding Program likely due to financial institutions taking advantage of the arbitrage between what interest rates banks can take out BTFP loans at and the interest they can earn on the loan if they just leave it at the Fed accruing the interest on reserve balance rate, essentially free money. Bank Term Funding Program Discount Window • The DW and the BTFP are both means by which financial institutions can borrow 'emergency liquidity' from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis in March this year. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in bank assets used as collateral are ignored by the Fed when being used as collateral. This was designed so that banks aren’t forced to sell asset portfolios at heavy losses, they can lend against them to meet immediate obligations and continue to hold. To top it off, interest on lending through the BTFP is done at 1 year overnight index swap (OIS) rate + 0.1%.

What happened today?⚠️ Let’s break down some of the main takeaways from what was a busy day 1. US GDP slammed expectations, showing ongoing robust economic growth, driven by consumer spending, government spending and exports: GDP QoQ 3.3% (Exp. 2%, Prev. 4.9%) The above figure is the seasonally adjusted annualized rate (SAAR), which essentially means the yearly rate at which GDP would be estimated to grow if the current rate of growth continued for a full year. • Consumer spending increased more than anticipated at 2.8% (Exp. 2.6%, Prev. 3.1%). This is the main driver (around 2/3rds) of GDP and it continued at a robust pace. Consumer spending contributed 1.91% to the overall headline rate while expenditures on services alone contributing 1.07%. • Government spending contributed 0.56% to the overall headline reading. • Overall 2023 GDP grew by 2.5% • Core Personal Consumption Expenditures (PCE) prices for Q4 came in at 2%, in line with the Fed's target and the prior quarter. The December monthly report of PCE is due Friday. Overall: The US economy continues to grow at a robust pace, whatever way you look at it, even considering the role of government spending. Quarterly core PCE prices for the last 2 quarters have fallen in line with the Fed’s 2% inflation target. 2. The ECB kept interest rates unchanged with deposit rate at 4% 3. Both initial and continuing jobless claims came in higher than expected. Initial claims came in at 214K (Exp. 200K, Prev. 189K), Continuing claims came in at 1833K (Exp. 1828K, Prev. 1806K). • On a longer term horizon, both continuing claims and initial claims are essentially around pre-pandemic levels. Last week’s lower initial jobless claims reading was possibly due to some seasonal affects. We still haven't seen a spike in initial claims that would be indicative of a big surge in layoffs. Continuing claims has risen gradually from lows below 1300K seen in September 2022 as the labor market in the US has cooled off from the post pandemic mania. • Initial jobless claims tracks those that are filing for unemployment benefits for their first week whereas continuing claims includes those that are filing after previously already having done so. Thus, initial claims gives an idea of how many people are newly becoming unemployed (current layoffs) whereas continuing claims provides insight into how long people are remaining unemployed once they have lost their job (how hard it is to get a new job). 4. January’s IFO Business Climate showed ongoing struggles for German business with both current and future expectations dropping further from already depressed levels. Headline 85.2 (Exp. 86.6, Prev. 86.4) Current 87 (Exp. 88.5, Prev. 88.5) Expectations 83.5 (Exp. 84.8, Prev. 84.3) • While manufacturing saw a mild improvement on the prior month (while still remaining notably pessimistic) services, trade and construction all saw further deterioration. • The IFO provide a heatmap of activity over time, highlighting which sectors are in recovery, boom, crisis or slowdown. The proportion of the economy currently flashing ‘crisis’ in the survey is quite frankly staggering. Of the 52 different classifications of economic activity of the heatmap I count 11 which are NOT in crisis. There are only FOUR that are not in contraction. That leaves 48 out of 52 (>92%) of areas of economic activity surveyed either classed as in crisis or in slowdown… ouch. The IFO’s definition of crisis is sectors reporting both worse than average business conditions and worse than average expectations. IFO Heatmap - Source IFO IFO primer: With data extending back to the 70s the IFO business climate is an important indicator of business sentiment within Germany and bellwether for the largest economy in the Eurozone. It surveys ~9000 businesses in Germany spanning multiple sectors, including manufacturing, construction, trade, and services. It asks respondents about their view about current business conditions as well as their expectations for the next 6 months. They can describe their situation as “good,” “satisfactory,” or “poor” and their business expectations as “more favorable,” “unchanged,” or “less favorable.” A reading of 100 is the average of the year 2015. Above 100 is more favorable conditions and below 100 are less favorable conditions. 5. UK CBI Distributive Trades plummeted and came in well below consensus at -50 in January (Exp. -30, Prev. -32), suggesting retail sales declined in the UK on a YoY basis at the fastest pace since January 2021, while the UK was in the middle of pandemic lockdown. • With data spanning back to the 80s, CBI's distributive trades really hasn't been as negative other than during the GFC and COVID. • CBI Industrial Trades is a survey-based index that surveys businesses in retail and wholesale. it asks respondents to compare last year's sales to this year's. The figure reported represents the percentage of businesses reporting an increase in sales minus those reporting a decrease. 6. US Durable goods missed consensus expectations and were essentially unchanged MoM, increasing by $0.1 billion, or 0% (Exp. 1.1%, Prev. 5.5%). • Excluding transport, durable goods orders rose 0.6% (Exp. 0.2%, Prev. 0.5%) and excluding defense spending 0.5% (Exp. -0.1%, Prev. 6.9%). A closely watched metric, meant to more closely resemble business spending and remove some of the more volatile aspects of the report, nondefense capital goods ex-aircraft, came in at +0.3%. • Durable goods is a report released by the US Census Bureau. It provides data on the value of orders, shipments, and inventories of durable goods at US manufacturers. • Durable goods are products designed to last at least three years e.g. airplanes, machinery, equipment and electrical appliances. As such, they tend to be more expensive items that businesses purchase less frequently. • The report provides insight into trends in business investment. Durable goods are often expensive and businesses that think near term economic outlooks are poor may hold off on making large investments in order to be more conservative and protect their balance sheet.

THIS WEEK'S HIGHLIGHTS ⚠️ 1. US GDP slammed expectations, showing ongoing robust economic growth, driven by consumer spending, government spending and exports: GDP 3.3% (Exp. 2%, Prev. 4.9%) SAAR The above figure is the seasonally adjusted annualized rate (SAAR), which essentially means the yearly rate at which GDP would be estimated to grow if the current rate of growth continued for a full year. Deeper dive The US economy continues to grow at a robust pace, whatever way you look at it, even considering the role of government spending and trade. Consumer spending increased more than anticipated at 2.8% (Exp. 2.6%, Prev. 3.1%). This is the main driver (around 2/3rds) of GDP and it continued at a robust pace. Consumer spending contributed 1.91% to the overall headline rate while expenditures on services alone contributing 1.07%. Net exports of goods and services added 0.43% to the overall rate of growth, a significant uptick from the prior quarter while government spending contributed 0.56% to the overall headline reading. In 2023 GDP grew by 2.5% Simply explained GDP is the estimated value of goods and services produced in a given period of time within a country or economic area and is widely considered the most comprehensive measure of a country’s economic growth. 2. Core PCE continued to paint a picture of disinflation with 6 month and 3 month annualized readings now inline with the Fed's 2% target Core PCE (excluding energy and food) rose 0.2% MoM (0.17% w/o rounding, Exp. 0.2%, Prev. 0.1%), up from November. Headline PCE rose 0.2% MoM (Exp. 0.2%, Prev. -0.1%). On a year over year basis core PCE is now at 2.9% (Exp. 3%, Prev. 3.2%) while headline came in at 2.6% (Exp. 2.6%, Prev. 2.6%). Deeper dive Despite month over month change picking up in both core and headline PCE the 3 month and 6 month annualized readings of core PCE are now running below the Federal Reserve’s 2% target, coming in at 1.5% and 1.9% respectively. Jerome Powell expressed at his last FOMC pressor that waiting until inflation is running at 2% to lower interest rates would be too late. Inflation is running cooler than the Fed anticipated and there is no doubt that the echoes of the argument for imminent rate cuts is growing louder. Interestingly, markets are still pricing a pause at the Fed’s meeting in March after pricing in a cut for the majority of January. That being said, it is still very much a coin flip. The coming week’s FOMC press conference will no doubt be pivotal to expectations. PCE Price Index YoY Simply explained The personal consumption expenditures price index is measure of consumer price inflation, like CPI. However, PCE tends to be more dynamic and changes in line with consumer spending patterns. E.g. if consumers swap spending on one item for another then the PCE will reflect this; CPI is less responsive to consumer behaviour changes. On top of this, PCE reflects urban and rural inflation whilst CPI focusses on urban consumers. PCE is also measured by data provided by businesses, while CPI is based on consumer survey responses. 3. US S&P PMIs were released signalling continued economic strength in the first month of 2024. Manufacturing 50.3 (Exp. 47.9, Prev. 47.9) 15 month high Services 52.9 (Exp. 51, Prev. 51.4) 7 month high Composite 52.3 (Prev. 50.9) 7 month high Deeper dive New orders (demand) improved at the fastest pace since June 2023; manufacturing reported the first growth in new orders since Oct 2023 and they expanded at the briskest pace since May 2022. Businesses became more optimistic as confidence for the coming year came in at its highest since May 2022. Employment grew but was marginally slower than in December. To add to the melting pot of positive data, businesses increased their prices at the slowest rate since May 2020. The rate of increase in input prices ticked up at a pace slower than the PMI series average. However, there is a notable divergence between services and manufacturing with manufacturers seeing faster input inflation and selling prices increasing more quickly. A bit of a goldilocks report to start the year with business activity in manufacturing and services improving as well as inflationary pressures cooling. Simply explained Purchasing manager indexes (PMIs) are indexes which are based on survey responses from businesses. The surveys ask questions about whether businesses are seeing increasing business activity, no change or a decline. Multiple topics are enquired about such as business activity, output, new orders (demand), delivery times, input costs and output costs (inflationary pressures) etc. PMIs give a timely snapshot of business outlook on current and future activity. The composite index is the weighted average (combination) of services and manufacturing indexes, creating a representation of the economy as a whole. A reading below 50 = contraction A reading above 50 = expansion A reading of 50 = stagnation 4. Jobless claims surprised to the upside Both initial and continuing jobless claims came in higher than expected. Initial claims came in at 214K (Exp. 200K, Prev. 189K), Continuing claims came in at 1833K (Exp. 1828K, Prev. 1806K). Deeper dive On a longer term horizon, both continuing claims and initial claims are essentially around pre-pandemic levels. Last week’s lower initial jobless claims reading was possibly due to some seasonal affects. We still haven't seen a spike in initial claims that would be indicative of a big surge in layoffs. Continuing claims has risen gradually from lows below 1300K seen in September 2022 as the labor market in the US has cooled off from the post pandemic mania. Simply explained Initial jobless claims tracks those that are filing for unemployment benefits for their first week whereas continuing claims includes those that are filing after previously already having done so. Thus, initial claims gives an idea of how many people are newly becoming unemployed (current layoffs) whereas continuing claims provides insight into how long people are remaining unemployed once they have lost their job (how hard it is to get a new job). 5. The European Central Bank (ECB) kept interest rates unchanged with deposit rate at 4%. Lagarde (ECB president) didn’t indicate with any degree of certainty when she feels that cuts will be necessary but did mention that it is likely before Autumn. 6. Eurozone PMIs showed ongoing weakness in the two largest economies in the economic area- France and Germany - and delivery times starting to rise due to conflict in the Red Sea Eurozone Manufacturing 46.6 (Est. 43.8, Prev. 44.4) 10-month high, above consensus estimates Services 48.4 (Est. 49.0, Prev. 48.8) 3-month low, below consensus estimates Composite 47.9 (Est. 48.0, Prev. 47.6) 6-month high, below consensus estimates Deeper Dive The Eurozone saw the slowest contraction in 6 months. Nonetheless, both services and manufacturing remain in contraction. Business optimism for the coming 12 months improved and provided the best reading since last May. The economic downturn is concentrated in France and Germany. Others Eurozone countries improved overall. Regardless, these are the two largest economies in the Eurozone, contributing over 40% of overall GDP. Red Sea disruptions caused supply delivery times to lengthen. This is in reference to missiles that have been targeting commercial ships passing through the Red Sea, one of the most vital shipping lanes in the world, connecting Asia to Europe. The report saw the steepest overall rise in prices for goods and services since May, rate of price increases has risen for 3 months consecutively. Manufacturing new orders saw the smallest decline in nine months suggesting an easing of demand contraction. Businesses remain cautious about hiring with ongoing weak demand. Employment slightly increased in services and contracted in manufacturing. Germany Manufacturing 45.4 (Exp. 43.7, Prev. 43.3) 11-month high Services 47.6 (Exp. 49.3, Prev. 49.3) 5-month low Composite 47.1 (Exp. 47.8, Prev. 47.4) 3-month low Deeper dive German business activity fell for the seventh consecutive month, the composite PMI is at lowest level since last October. Services, the biggest contributing sector to GDP, saw a marked fall in activity and came in at a 5-month low, now convincingly in contraction. To add insult to injury services continue to increase prices rapidly and are seeing increased input costs. Manufacturing input prices fell but less rapidly due to disruption in Red Sea shipping route but selling prices from manufacturers sped up and output prices fell to one of the lowest in three years. Backlog of orders fell as new orders remained weak, companies are completing orders faster than they are receiving new ones. France Manufacturing 43.2 (Exp. 42.5, Prev. 42.1) 4-month high Services 45.0 (Exp. 46, Prev. 45.7) 4-month low Composite 44.2 (Exp. 45.2, Prev. 44.8) 4-month low, 8th consecutive contraction Deeper dive French manufacturing and services are FIRMLY in contraction, posting the steepest decline since last September. Factory production fell at fastest pace in >3.5 years. The improvement seen in manufacturing was mostly due to an uptick in delivery times caused by Red Sea disruptions. Increasing delivery times positively affects the PMI reading as they usually represent high demand, but not in this case. Inflationary pressures persisted in French PMIs, remaining above 50 in both input and output. However, rate of increase in input prices was amongst the slowest in 3 years. Having said that, rise in selling prices (what companies are charging for their products) rose at its fastest in seven months as costs are being passed on to consumers. Overall a bleak report for France with both services and manufacturing in deep contraction and the bounce in manufacturing caused by increased delivery times due to Red Sea conflict. Not a good start to the year for the second largest Eurozone economy. 7. United Kingdom PMIs were released, showing a better than anticipated improvement in activity in both manufacturing and services Manufacturing 47.3 (Exp. 46.7, Prev. 46.2) Services 53.8 (Exp. 53.2, Prev. 53.4) Composite 52.5 (Exp. 52.1, Prev. 52.1) Deeper dive UK services are convincingly in expansion, providing the best reading since May as businesses provided the most optimistic outlook of the coming 12 months since May. Employment saw growth on demand improvement and improved business outlook. This breaks a 4 month consecutive run of workforce reduction. However, businesses saw the highest input costs rises since August, led by manufacturing. There were widespread reports of Red Sea disruptions causing higher freight costs. The rate of increase in manufacturing cost inflation was at its highest since March but factory gate prices (the prices manufacturers sold at) only rose modestly. That being said, it was still the fastest rate in 8 months. Services prices charged increased at the weakest pace since October. 8. The Bank of Japan left interest rates unchanged Interest rates in Japan remain at -0.1% (Exp. -0.1%, Prev. -0.1%). Deeper dive There has been much speculation of late regarding whether the Bank of Japan will start unwinding their ultra loose monetary policy. BOJ governor Ueda did make a comment at his press conference following the rates decision mentioning that the BOJ do plan to move away from yield curve control but he did not give any indicated timeframe. 9. US mortgage applications, pending home sales and new home sales increased as interest rate respite since October continues to spur housing turnover US MBA Mortgage Applications for the week to Jan 19th increased 3.7% (Prev. 10.4%). Pending home sales for December were up 1.3% YoY (Prev. -5.4%), the first YoY increase since May 2021. New home sales rose 8% in December (Exp. 10%, Prev. -9%) and were up 4.2% in 2023. MBA Mortgage Market Index Deeper dive Mortgage applications have now increase in the US for the last 3 weeks as US consumers have seen some respite on interest rates. The Mortgage Market Index has been in a general uptrend since late October after mortgage rates peaked around 8%. That being said, the mortgage market index, which measures activity in the both refinances and mortgage applications is still sitting at historically VERY supressed levels not seen since the 1990s prior to the current rate hiking cycle. Simply explained Pending home sales measures the number sales of pre-existing homes that have been agreed (contract signed) to but have not yet been finalised in the US and is a leading indicator of existing home sales (leads by 1-2 months). It uses the MLS (Multiple Listing Service) to record pending sales. This is a widely used private US database used by real estate agents to record what stage of the sales cycle a home is in. New home sales tracks the number of units of homes without prior owners. It is responsible for a much smaller portion of the housing market than existing home sales but the proportion has increased substantially of late as people are reluctant to sell their existing homes and accept higher mortgage rates. 10. The Bank Term Funding Program was laid to rest by the Federal Reserve (RIP sweet arbitrage prince) and we had the final H.4.1. report (Fed balance sheet) that will include the recent arbitrage use by banks. Obviously, usage of the BTFP continued to surge. Loans from the BTFP can still be taken up until March 11th when the facility will end. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $6.27 billion and now stands at a massive $167.8 billion, a new all-time high. We continue to see a clear pattern of increasing use of the bank term funding program after a period of muted growth/stagnation. This is the eighth consecutive increase in usage of the Bank Term Funding Program likely due to financial institutions taking advantage of the arbitrage opportunity. Discount window (DW) borrowing INCREASED by $490 million, now at $2.8 billion. Simply explained After the BTFP initially being a good barometer or stress in the banking system its usage for this purpose has since dwindled because the interest rate at which you could borrow money from the Fed was lower than the rate the Fed would pay you to just leave the money they loaned you with them, accruing their interest on reserve balance rate. This presented an opportunity for risk free profit for banks. This led to the BTFP not being used for what it was designed for - emergency lending. The DW and the BTFP are both means by which financial institutions can borrow 'emergency liquidity' from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis in March this year. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in bank assets used as collateral are ignored by the Fed when being used as collateral. This was designed so that banks aren’t forced to sell asset portfolios at heavy losses, they can lend against them to meet immediate obligations and continue to hold. To top it off, interest on lending through the BTFP is done at 1 year overnight index swap (OIS) rate + 0.1%. 11. January’s IFO Business Climate showed ongoing struggles for German businesses with both current and future expectations dropping further from already depressed levels. Headline 85.2 (Exp. 86.6, Prev. 86.4) Current 87 (Exp. 88.5, Prev. 88.5) Expectations 83.5 (Exp. 84.8, Prev. 84.3) Deeper dive While manufacturing saw a mild improvement on the prior month (while still remaining notably pessimistic) services, trade and construction all saw further deterioration. The IFO provide a heatmap of activity over time, highlighting which sectors are in recovery, boom, crisis or slowdown. The proportion of the economy currently flashing ‘crisis’ in the survey is quite frankly staggering. Of the 52 different classifications of economic activity of the heatmap I count 11 which are NOT in crisis. There are only FOUR that are not in contraction. That leaves 48 out of 52 (>92%) of areas of economic activity surveyed either classed as in crisis or in slowdown… ouch. The IFO’s definition of crisis is sectors reporting both worse than average business conditions and worse than average expectations. IFO Heatmap - Source IFO Simply explained With data extending back to the 70s the IFO business climate is an important indicator of business sentiment within Germany and bellwether for the largest economy in the Eurozone. It surveys ~9000 businesses in Germany spanning multiple sectors, including manufacturing, construction, trade, and services. A reading of 100 is the average of the year 2015. Above 100 is more favorable conditions and below 100 are less favorable conditions. 12. German GfK consumer confidence nosedived going into February Consumer confidence came in at -29.7 (Exp. -24.5, Prev. -25.4), well below expectations of improvement and the worst reading since March 2023. Deeper dive Across the board declines were seen in consumer propensity to buy, income and economic expectations. The biggest driver of the decline came in German consumers’ propensity to save rising to the highest level since August 2008. 60% of respondents cited inflation as their reason for their aversion to making big purchases. Other factors were economic uncertainty and their poor financial situation. GfK Consumer Confidence Simply explained The GFK consumer confidence index is based on around 2,000 monthly consumer interviews with data stemming back to the 1980s. A reading of 0 represents the long-term average reading of consumer confidence. If consumers increase their propensity to save it often means they are not confident in their financial security. Consumer spending is the biggest driver of GDP growth and if consumers are choosing not to spend then this doesn’t bode well for economic performance. 13. UK CBI Distributive Trades plummeted and came in well below consensus CBI distributive trades came in at -50 in January (Exp. -30, Prev. -32), suggesting retail sales declined in the UK on a YoY basis at the fastest pace since January 2021, while the UK was in the middle of pandemic lockdown. Simply explained With data spanning back to the 80s, CBI's distributive trades really hasn't been as negative other than during the GFC and COVID. CBI distributive trades is a survey-based index that surveys businesses in retail and wholesale. it asks respondents to compare last year's sales to this year's. The figure reported represents the percentage of businesses reporting an increase in sales minus those reporting a decrease. It is not the government official retail sales report. That is published monthly by the Office for National Statistics. 14. The Chinese central bank (PBoC) announced a cut to the required reserve ratio (RRR) in response to ongoing economic fallout from the crisis in the Chinese real estate sector The new RRR will be 10% after a 50 basis point cut. Deeper dive The PBoC have already lowered the RRR multiple times in 2023 from 11% in Jan 2023. It has thus far not been able to stem the continued weakness in the Chinese economy. The last two cuts have, however, been of 0.25%. The PBoC are likely to continue announcing measures designed to boost the Chinese economy as the country continues to struggle with slowing economic growth and deflation. Simply explained The RRR basically is the amount of bank reserves (bank money) relative to bank deposits that banks have to keep aside (at the PBoC). Thus, lowering the RRR frees up new liquidity (Estimated $140 billion) for banks that they previously did not have access to. 15. The Bank of Canada held interest rates at 5% for the fourth meeting in a row Roundup Weakness in the Eurozone is exacerbated by the economies of France and Germany, the two largest economies in the economic area. Germany seems unable to catch a break as economic data arising from the European giant continues to worsen. The ECB is moving closer to interest rate cuts as Lagarde began to entertain the possibility of reducing rates prior to summer’s end. Markets are currently pricing in first ECB cut in April. Markets are currently pricing in the first BOE cut in June and a continued pause from them at their meeting this coming week. US economic data continues to paint a rosy picture in defiance of higher interest rates and an inverted yield curve, with achievement of a soft landing becoming a more commonly held belief as unemployment remains low, inflation subsides, consumers continue to spend and the economy continues to grow. Going into the coming week’s FOMC, markets are certain of a further pause and are pricing in the first rate cut in May. However, March’s meeting remains a coinflip.

POWELL SPEECH SUMMARY ⚠️ 1. 25bps cut to Federal Funds Rate, now 4.5-4.75% 2. Powell gave a firm response to questions surrounding whether he would step down if asked by Trump and advisors. He responded with an emphatic ‘no’ and also stated that it is ‘not permitted by law’ for the president to demote a member of the Fed. 3. Fed feels balance of inflation and employment mandates now roughly in balance. Economy remains strong. Consumer spending resilient. Labor market solid but job gains slowed, recent figures worsened by strikes and hurricanes. District contacts report that people are feeling pretty good about the economy in general and stated that it is remarkable how resilient the US economy has been. 4. The Fed don’t want further loosening of the labor market and don’t feel they need this to achieve their inflation target. Feels the cooling seen has been normalisation. 5. Spoke about the Fed now being on a path to a more neutral rate of policy but acknowledging of risk of being too fast or slow with this; they will allow data to dictate pace of loosening. Powell confident that with appropriate ‘re-calibration’ economic strength can be maintained. 6. The rate at which the Fed will loosen is uncertain to them. Powell believes that the neutral rate (rate at which policy is neither restrictive or loose) is something that is found by being careful and they are not in a rush. 7. Fed not declaring victory but deemed current story very consistent with inflation following a bumpy path to target sustainably. Non housing goods and services inflation back to levels seen when last had 2% sustained inflation. Housing inflation remains higher but believes will be a matter of time until this normalises, believes effect is to do with a lagged effect filtering through to leases rather than persistent inflationary pressure. 8. Powell batted away many questions about fiscal policy, as expected given the election this week. He did comment that while the Fed will not comment on fiscal policy specifically, any changes to policy is simulated and they try to incorporate this into their models for the economy alongside everything else. He noted that their models are multifaceted and complex. At present they have nothing to change because they will not speculate on possible future policy changes. 9. Did reiterate that current fiscal path is unsustainable as he has multiple times before. 10. Asked about the rise in Treasury yields and borrowing costs. Powell stated that these are not yet sustained enough for the Fed to be worried but they are paying attention to it and will see where they settle. States he feels rising yields not mainly due to inflation expectations but rather some removal of perceived downside risk. 11. Told people not to read into statement changes much. Removal of ‘further confidence’ was done as this was a once off entry associated with the Fed seeing the evidence they needed to commence their rate cutting cycle. 12. States will take some years of real wage gains for recovery from the inflation shock to be felt in the wallets of many. Believes this is happening but will take some time. States the Fed respect the feelings of people struggling with the rises in prices.

US CPI Breakdown⚠️ Again, Jerome Powell and the Fed will likely have to look elsewhere to achieve their ‘greater confidence’ that inflation is returning sustainably to their 2% target as this month's print confirms January's hotter than expected print was not a once off. As such, the Federal Reserve will find it more difficult to look through. Both headline and core consumer prices came in higher than expected in February on a year over year basis. The month over month change in headline inflation rose to 0.4% from 0.3% in the prior month, meanwhile core inflation advanced at the same 0.4% rate as seen in January. Headline 0.4% (Exp. 0.4%, Prev. 0.3%) MoM 3.2% (Exp. 3.1%, Prev. 3.1%) YoY Core 0.4% (Exp. 0.3%, Prev. 0.4%) MoM 3.8% (Exp. 3.7%, Prev. 3.9%) YoY Core inflation, which excludes the more volatile food and energy categories, is now annualizing at a 6 month rate of 3.8% and a 3 month rate of 4.2%, well above the Federal Reserve’s 2% inflation target. Core inflation is watched closely as a metric which is more reflective of underlying inflation by excluding food and energy, which are known to be more fluctuant. Annualized readings are the year over year inflation rate that would be reported if the rate of inflation seen over a certain period of time was applied consistently over a 12 month period. Looking at a closely watched metric of Powell’s, supercore, month over month change declined from an astronomical 0.85% in January to 0.47% MoM in February. This is still running markedly hot; the pre-pandemic average was around 0.2% month over month. 3 month annualized supercore is now running at 6.9%. Supercore inflation measures core services inflation excluding housing US CPI Heatmap Looking at the breadth of the price changes, 42.8% of categories are still reporting equal to or greater than 0.4% month over month change, or a rate that corresponds to an annualized rate of 4.9% or higher. Only 31.9% of categories were registering this hot back in the December print. However, it should be noted this is down from January's 48%. Food prices stagnated month over month (Prev. 0.4%), while energy accelerated 2.3% (Prev. -0.9%) after falling in January. On top of this, the falls seen in core goods prices in the last 8 months came to an end with a small uptick of 0.1%. Apparel surged 0.6% after falling 0.7% in the month prior, driven by the biggest month over month change in girls apparel on record, coming in at 6.8% month over month. Infants apparel also advanced rapidly in price (5.1%). Shelter, which accounts for over a third of CPI, advanced at 0.4% month over month, down from 0.6% in the prior month. Shelter has thus far been very sticky and remains so, but it is up to a point reassuring that it has retreated from the pace seen in January. Overall February’s print will lift further eyebrows at the Federal Reserve, whom are trying to find the evidence they need to be confident enough that inflation is returning to 2% so they can start their rate cutting cycle. It is very unlikely they found that confidence today in the CPI report. Following the print, markets are now pricing in a 99% chance of a further hold in rates at the March FOMC meeting. The first cut in the Federal Funds Rate is pencilled in by markets for June at present. There has been a dramatic repricing by markets of their predictions for rate cuts since the start of the year. In January, predictions for a rate cut in March were as high as 76%... Simply explained CPI Released by the Bureau of Labor Statistics monthly The Consumer Price Index measures the change in prices for goods and services for urban consumers and thus is a measure of inflation. To achieve this, a basket of goods and services prices is sampled monthly. The goods and services in question are supposed to reflect the spending patterns of consumers in the United States. The data is representative of prices for over 90% of the US population. While CPI is not the Fed’s preferred measure of inflation, well known to be core PCE, it still is of significant importance bearing on the direction of monetary policy as the Federal Reserve try to achieve their dual mandate of maximum employment and stable prices (2% inflation target).

The US 10Y yield closed at 4.36%⚠️ This is the highest level, and I know it seems like everything I say is followed by this, since the Great Financial Crisis The 10Y yield is a proxy for borrowing costs. The spread (difference) between average mortgage rates and the 10Y yield right now is just short of 300bps (3%) This means (assuming unchanged spreads) that average 30Y mortgages in the US will be sitting >7.3%... Keep in mind that the mortgage market is already in a sedentary state, with mortgage applications at the lowest levels since the 1990s. Tomorrow's FOMC will have markets hanging on every word. Over to you, Powell

Non-farm payrolls absolutely eclipsed expectations⚠️ Print came in at almost double consensus estimate 336K (Exp. 170K, Prev. 227K) Bond yields are skyrocketing on the news: 2Y 5.14% (2.29%%) 10Y 4.88% (+3.39%) 30Y 5.04% (+2.94%) Since trying to write this tweet yields are moving so quickly that keep having to redo the numbers Looks like 8% mortgages could be a reality very soon

THIS WEEK’S HIGHLIGHTS⚠️ 1. Headline CPI came hotter than anticipated at 3.4% YoY (Exp. 3.2%, Prev. 3.1%), 0.3% MoM (Exp. 0.2%, Prev. 0.1%). Core CPI came in at 3.9% YoY (Exp. 3.8%, Prev. 4%) and 0.3% MoM (Exp. 0.3%, Prev. 0.3%). Deeper dive 3 month annualized CPI is now running at 3.3% while 6 month annualized consumer prices are rising at 3.2%, still well above the Federal Reserve’s 2% target. Energy prices rose 0.4% MoM (-2% YoY) in December after months of deflation. Electricity and gasoline accelerated with gasoline up 0.2% MoM (Prev. 6%). Core services remain hot at 0.4% MoM (annualized 4.9%) and core goods were flat after 6 months of price declines. Shelter contributions accelerated to 0.5% MoM (Prev. 0.4%) and contributed over half of the monthly increase in total CPI. Shelter is up 6.2% YoY. Used cars and trucks rose 0.5% MoM (Prev 1.5%). Motor vehicle insurance continues full steam ahead up 20.3% YoY and increasing 1.5% MoM. It's 6 month annualized pace is increasing at a staggering 22.2%. US CPI 2023 Heatmap (MoM) Simply explained CPI measures the change in prices for consumers in a fixed basket of good and services. It is not the Federal Reserve’s preferred measure of inflation (which is PCE). Core CPI strips out energy and food components of CPI which are more volatile and is preferred by the Fed as it provides a better idea of underlying inflation. Annualized readings are what year over year inflation would be if the current monthly rate of inflation was applied over a 12 month period. 3 month annualized would take the average rate over 3 months and apply this over 12. 2. Offsetting the hotter than expected CPI print, US PPI declined in December for the third consecutive month, coming in at -0.1% MoM (Exp. +0.1%, Prev. -0.1%). This firmed up market expectations of a Fed rate cut in March. On a year over year basis PPI came in at 1% (Exp. 1.3%, Prev. 0.8%) while core PPI (excluding energy and food) came in at 1.8% (Exp. 1.9%, Prev. 2%) YoY. On a monthly basis, core producer prices remained unchanged (0% MoM). Simply explained The producer price index measures price changes for producers of goods and services. As this is an observation earlier in the supply chain it is said to lead consumer prices as price changes faced by producers tend to then be passed on to consumers. Furthermore, some metrics of the PPI report feed directly into PCE (the Fed’s preferred inflation measure) and make it more likely that this may come in on the softer side. 3. The US and UK fired missiles at Houthi rebels in Yemen over recent attacks on ships in the Red Sea, an escalation of conflict in the Middle East. Simply explained The Red Sea sees over 10% of global marine trade and is thus a vital part of the world’s economy continuing to function. While, hopefully, the conflict does not escalate further it has the possibility to increase shipping costs (and already is doing so) as ships divert their course to prevent the possibility of an attack. The alternative is rerouting round the Cape of Good Hope in Africa, a substantially longer and more expensive journey for ships travelling between Asia and Europe. Cape of Good Hope vs Suez Canal (Red Sea) 4. The US fiscal deficit for the first quarter of the fiscal year 2024 (the fiscal year runs from October) came in at $509 billion, substantially (21%) more than the prior year Oct-Dec period that clocked in at $421 billion. This means that the US fiscal deficit is running at a rate of over $2 trillion per year and should the pace of the current deficit accumulation continue 2024 will see largest (excluding COVID stimulus) fiscal deficit ever. At a time when the US economy has been expanding at a robust pace this is difficult to justify. Simply explained A fiscal deficit is the difference between what a country makes and what it spends. The US government is spending substantially more than it makes and the level at which it is currently doing so is unsustainable. 5. Initial jobless claims came in better than expected at 202K (Exp. 210K, Prev. 203K) and continuing claims also beat expectations at 1834K (Exp. 1871K, Prev. 1868K) showing continued strength in the US labor market. The US is yet to see a meaningful spike in layoffs. Simply explained Initial jobless claims tracks those that are filing for unemployment benefits for their first week whereas continuing claims includes those that are filing after previously already having done so. Thus, initial claims gives an idea of how many people are newly becoming unemployed (current layoffs) whereas continuing claims provides insight into how long people are remaining unemployed once they have lost their job (how hard it is to get a new job). The US labor market remains tight but, nonetheless, it has shown some signs of loosening of late. 6. Discount window (DW) borrowing DECREASED by $53 million, now at $2.1 billion. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $5.97 billion and now stands at $147.2 billion, a new all-time high. Deeper dive We continue to see a clear pattern of increasing use of the BTFP after a period of muted growth/stagnation. This is the sixth consecutive increase in usage of the Bank Term Funding Program, likely due to financial institutions taking advantage of the arbitrage between what interest rates banks can take out BTFP loans at and the interest they can earn on the loan if they just leave it at the Fed, accruing the interest on reserve balance rate, essentially free money. Simply explained The DW and the BTFP are both means by which financial institutions can borrow 'emergency liquidity' from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis in March this year. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in bank assets used as collateral are ignored by the Fed when being used as collateral. This was designed so that banks aren’t forced to sell asset portfolios at heavy losses, they can lend against them to meet immediate obligations and continue to hold. To top it off, interest on lending through the BTFP is done at 1 year overnight index swap (OIS) rate + 0.1%. 7. The Bitcoin ETF was approved by the SEC Deeper dive The SEC’s X (Twitter) page was hacked the prior day and a premature announcement was made. The approval was subsequently denied by the SEC before they officially announced it the following day. Bitcoin then proceeded to finish the week in the red. 8. German factory orders came in at +0.3% MoM in November, well below expectations but reporting growth nonetheless (Exp. 1.1%, Prev. -3.8%). Moreover, industrial production dropped 0.7% in November (Exp. +0.3%, Prev. -0.3%). Simply explained Factory orders report on the volume of orders received by manufacturers. Thus, this is a barometer for demand in the German manufacturing industry. Industrial production measure the output of the industrial sector. The largest player in this is manufacturing, accounting for almost 80% of German industrial production. A technical recession is two consecutive quarters of negative GDP growth. 9. Eurozone economic sentiment came in better than expected at 96.4 (Exp. 94.2, Prev. 94), marking the third consecutive monthly improvement, suggesting the Eurozone may on the cusp of a bounce in economic activity, after seeing its GDP contract 0.1% in the third quarter. However, keep in mind economic sentiment still remains more pessimistic than the historical average. Deeper dive Industries seeing improvement in sentiment included retail trade, services, and construction. Of the biggest Eurozone economies France and Netherlands saw a deterioration in economic sentiment while Italy, Spain and Germany all saw an improvement. Simply explained The economic sentiment index (ESI) is released by the European Commission. It is released on a monthly basis and is a combination of the outlook from businesses and consumers compiled into a composite index. This is done by collecting survey responses from consumers as well as businesses across multiple sectors. A reading of 100 is equal to the long term average sentiment. 10. Eurozone retail sales volumes for November fell 0.3% MoM, as expected (Prev. +0.4%) and are now down 1.1% YoY (Exp. 1.5%, Prev. -0.8%). Simply explained Retail sales measure the revenue and volume of sales in retail online and in brick and mortar stores. It is a barometer of consumer spending, a key driver of GDP growth. The above 0.3% contraction is in sales volumes, this strips out the misleading effect of retail sales turnover increasing when consumers are actually purchasing less. The effects of inflation can be seen in the chart below, while amount of money spent continues to trend upwards, the volume of goods sold decreases as consumers spend more for less. Eurozone Retail Sales 11. China remained in year-over-year deflation with CPI printing at -0.3% (Exp. -0.4%, Prev. -0.5%), while month over month CPI increased by 0.1%, the first month of price increase since September. 12. UK GDP increased by 0.3% MoM in November after falling 0.3% in the prior month. It remains to be seen if the UK fell into a technical recession in the final quarter of 2023 after the economy contracted by 0.1% in the 3rd. Simply explained Considered the most important measure of a country’s economic performance, GDP is the measure of the value of all goods and services produced in a given period of time. 13. Eurozone unemployment fell to 6.4% (Exp. 6.5%, Prev. 6.5%), matching the low seen in June 2023. This is the lowest unemployment rate on record for the economic area. Simply explained The unemployment rate is the % of the labor force that are out of work and currently looking for a job. Unemployment tends to rise in recessions, something that is not currently happening in the Eurozone despite clear evidence of economic slowdown, not least a negative GDP print for the third quarter. A severe recession in the Eurozone would inevitably lead to a rising unemployment rate; it is yet to be seen. Eurozone unemployment rate - Overall a dramatic week, with tensions in the Middle East rising with the potential to further ramp up shipping costs to the SEC being hacked in the lead up to the approval of the Bitcoin ETF. China remains in deflation as it battles the ongoing crisis stemming from the real estate sector. The situation in Europe remains tenuous with Germany (responsible for almost 30% of Eurozone GDP) continuing to post weak economic data. The probability of technical recession in the final stretch of 2023 for Germany is substantial after GDP contracted in Q3. The latest GDP data will be released in the coming week. Despite softening economic data in Europe, the EU labor market remains remarkably strong with unemployment at record lows; economic sentiment also continued to recover despite remaining historically pessimistic. Markets are still pricing in 7 rate cuts by the Federal Reserve in 2024, starting with a 77% chance of a rate cut in March. Soft PPI fed into the current narrative of rate cuts galore, despite hotter than expected CPI and the recent substantial loosening of financial conditions.

THIS WEEK'S MACRO PICKS ⚠️ Monday: 1. Watch the fallout unfold from this weekend of insanity (Mar) 2. German PPI (Feb) Tuesday: 3. German economic sentiment (Mar) 4. US existing home sales (Feb) 5. Canada CPI (Feb) Wednesday: 6. UK CPI (Feb) 7. US Fed interest rates decision ⚠️ Thursday: 8. UK BOE interest rate decision ⚠️ 9. US Jobless claims (Weekly) 10. US New home sales (Feb) 11. Japan CPI Friday: 11. UK retail sales (Feb) 12. S&P global PMIs (Mar) 13. US durable goods (Feb) An absolutely massive week of Macro events ahead of us 👀

THE WEEK AHEAD ⚠️ A behemoth of a week incoming Monday 🇺🇲 15:00 NAHB Housing M Index(Sept) Tuesday 🇦🇺 02:30 Aus RBA Minutes 🇪🇺 10:00 Eurozone Inflation (Aug) 🇨🇦 13:30 CAN CPI (Aug) 🇺🇲 13:30 US Building Permits (Aug) 🇺🇲 13:30 US Housing Starts (Aug) Wednesday 🇩🇪 07:00 German PPI (Aug) 🇬🇧 07:00 UK CPI (Aug) 🇺🇲 12:00 US MBA Mortgage Apps 🇺🇲 19:00 FED RATES DECISION ⚠️ Thursday 🇬🇧 12:00 BOE RATES DECISION ⚠️ 🇺🇲 13:30 US Jobless Claims 🇺🇲 13:30 Philly Fed Mfg. index (Sept) 🇺🇲 15:00 CB Leading Index (Aug) 🇺🇲 15:00 Existing Home Sales (Aug) Friday 🇦🇺 00:00 AUS Judo Bank PMIs (Sept) 🇬🇧 00:01 Gfk Consumer Conf. (Sept) 🇯🇵 00:30 Japan CPI (Aug) 🇯🇵 04:00 BOJ RATES DECISION⚠️ 🇳🇱 05:30 Netherlands GDP (Q2 final) 🇬🇧 07:00 UK Retail Sales (Aug) 🇪🇺 09:00 Eurozone HCOB PMIs (Sept) 🇬🇧 09:30 UK S&P PMIs (Sept) 🇬🇧 11:00 CBI Industrial T. Orders (Sept) 🇨🇦 13:30 CAN Retail Sales (Jul) 🇺🇲 14:45 US S&P PMIs (Sept)

FEDERAL RESERVE BALANCE SHEET UPDATE⚠️ In the week ending April 26th: 1. The Federal Reserve's total balance sheet decreased by $30.5billion, now standing at $8.56 trillion 2. US financial institution emergency borrowing INCREASED by $11.3 billion to $155.2 billion 3. Discount window (DW) borrowing INCREASED by $4 billion, now at $73.85 billion. This is the second week in a row of increases in the DW. Only once have we seen a decrease in discount window lending since the banking crisis started in March. • The DW is known as the 'lender of last resort' and is a means by which financial institutions can borrow money from the Fed for up to 90 days by posting collateral (usually in the form of US treasury bonds, agency MBS, etc) to fulfil emergency liquidity needs 4. Borrowing via the Bank Term Funding Program (BTFP) INCREASED by $7.35 billion, now at $81.3 billion. • Created in March in response to the banking sector troubles the BTFP is another means by which banks can borrow from the Fed in an emergency. They post collateral and the Fed values it at par value, meaning they will ignore any price fluctuations since purchase. This means banks are not forced to sell underwater portfolios and realise massive losses 5. Borrowing via the Fed's Foreign and International Monetary Authorities (FIMA) repo facility fell to $0 from $20 billion. This is the first week since the troubles in banking in which foreign central banks have not needed emergency dollar liquidity from the Fed. • FIMA allows short term lending of dollars to foreign central banks who then lend to banks within their country, providing dollar liquidity. They must post US treasuries as collateral. A positive sign this week for foreign dollar liquidity as central banks abroad are no longer requiring vast amounts of emergency lending via access to the FIMA repo facility. However, the stress in banking continues as US financial institutions are requiring increased levels of emergency lending. Given the situation at First Republic Bank, it's pretty clear there are more chapters to unravel in the ongoing banking crisis.

THE WEEK AHEAD ⚠️ Week beginning 11/12/23 This week is intense MONDAY 07:00🇯🇵 Machine Tool Orders (Nov) TUESDAY 00:30🇦🇺 Wstpac Cons Confdnce (Dec) 00:50🇯🇵 Japan PPI (Nov) 01:30 🇦🇺 NAB Businss Confidnce (Nov) 08:00🇬🇧 UK Unemployment Rate (Oct) 08:00🇬🇧 Claimant Count Chnge (Nov) 08:00🇬🇧 HMRC Payrolls Change (Nov) 11:00 🇩🇪 ZEW Econmic Sentment (Dec) 11:00 🇪🇺 ZEW Econmic Sentment (Dec) 12:00 🇺🇲 NFIB Busness Optimsm (Nov) 14:30 🇺🇲 US CPI (Nov)⚠️ WEDNESDAY 00:50 🇯🇵 Tankan Large Mfg. indx (Q4) 00:50 🇯🇵 Tankan Large Non-Mfg (Q4) 08:00 🇬🇧 UK GDP MoM (Oct) 08:00 🇬🇧 Industrial Production (Oct) 08:00 🇬🇧 Manufctrng Production (Oct) 11:00 🇪🇺 Industrial Production (Oct) 13:00 🇺🇲 MBA Mortgage Apps 14:30 🇺🇲 US PPI (Nov) 20:00 🇺🇲 ⚠️FED RATES DECISION ⚠️ THURSDAY 00:50 🇯🇵 Machinery Orders (Oct) 01:00 🇬🇧 RICS House Price Bal (Nov) 01:30 🇦🇺 Unemployment Rate (Nov) 13:00 🇬🇧 ⚠️BOE RATES DECISION ⚠️ 14:15 🇪🇺 ⚠️ECB RATES DECISION ⚠️ 14:30 🇺🇲 US Retail Sales (Nov) 14:30 🇺🇲 US Jobless Claims FRIDAY 01:00🇬🇧 GfK Consmer Confdnce (Dec) 01:30 🇯🇵 Jibun Mfg. PMI (Dec) 01:30 🇯🇵 Jibun Services PMI (Dec) 02:30 🇨🇳 House Price Index (Nov) 03:00 🇨🇳 China Retail Sales (Nov) 03:00 🇨🇳 Industrial Production (Nov) 08:45 🇫🇷 France Flash PMIs (Dec) 09:30 🇩🇪 Germany Flash PMIs (Dec) 10:00 🇪🇺 Eurozone Flash PMIs (Dec) 10:30 🇬🇧 UK Flash PMIs (Dec) 14:30 🇺🇲 NY Empire State Mfg. (Dec) 15:15 🇺🇲Industrial Production (Nov) 15:45 🇺🇲 US S&P Flash PMIs (Dec) We'll get an updated Summary of Economic Projections from this week's FOMC. You know what that means, new dot plot.

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THE WEEK AHEAD ⚠️ TUESDAY 🇦🇺 Aus consumer confidence 01:30 🇬🇧 UK unemployment data (Jul) 07:00 🇬🇧 UK average earnings (Jul) 07:00 🇩🇪 GER ZEW Econ. Sent. (Sept) 10:00 🇪🇺 EU ZEW Econ. Sent. (Sept) 10:00 🇺🇸 US NFIB Bus. Optimism (Aug) 11:00 WEDNESDAY 🇯🇵 JPN Tankan Index (Sept) 00:00 🇯🇵 JPN PPI (Aug) 00:50 🇬🇧 UK GDP MoM (Jul) 07:00 🇬🇧 UK Industrial Production (Jul) 07:00 🇬🇧 UK Mfg. Production (Jul) 07:00 🇪🇺 EZ Industrial Production (Jul) 10:00 🇺🇸 US MBA Mortgage Apps. 12:00 🇺🇸 US CPI (Aug) 13:30 ⚠️ THURSDAY 🇬🇧 UK RICS House Prc Bal. (Aug) 00:01 🇦🇺 Aus Unemployment (Aug) 02:30 🇪🇺 ECB RATES DECISION 13:15 ⚠️ 🇺🇸 US Retail Sales (Aug) 13:30 ⚠️ 🇺🇸 US PPI (Aug) 13:30 🇺🇸 US Jobless Claims 13:30 🇺🇸 US Business Inventories (Jul) 15:00 FRIDAY 🇨🇳 CN Indust. Production (Aug) 03:00 🇨🇳 CN Unemployment (Aug) 03:00 🇨🇳 CN Retail Sales (Aug) 03:00 🇨🇳 CN Fixed Asset Invest. (Aug) 03:00 🇺🇸 US Empire State Mfg. (Sept) 13:30 🇺🇸 US Industrial Product. (Aug) 14:15 🇺🇸 UMICH Cons. Sent. (Sept) 15:00 🇨🇳 PBoC 1Y MLF Rate Announcement Times in GMT as per follower poll

POWELL DAY TWO SUMMARY ⚠️ 1. The Federal Reserve members feel that it's likely appropriate to raise rates further and do not envision rate cuts in the near future. A 'strong majority' see rates rising twice more. However, they want to assess more data before committing and risking overtightening. 2. The Fed paused so that they have more time to assess and make decisions about where to take rates 3. Larger banks will likely have capital requirement increases imposed upon them that could be as much as a 20% increase and will require more scrutiny following SVB collapse. There may be capital requirement increases for banks down to $100 billion in size. 4. 'The process of getting inflation back to 2% has a long way to go' 5. Services inflation has shown little improvement and this is where monetary policy should be having its effect. Food and fuel inflation coming down doesn't have much to do with the Fed's intervention. 6. Unemployment is likely to rise 'a little bit' and they expect the labor market to gradually cool but the ideal scenario for the Fed would be not to see unemployment rise, rather the number of job openings decreasing and quit rates falling 7. The Fed expect below trend growth of the US economy (below 2%) 8. So far, there hasn't been a significant tightening above what was already seen as a result of the banking troubles seen in March but they are continuing to monitor this 9. Activity in housing sector remains weak due to mortgage rate increases, this also is having an effect on business fixed investment 10. The Federal Reserve is no longer sending profits to the Treasury like they were during the QE era. This will require more money to be raised by the Treasury via means available (taxes, bond issuance etc.) 11. There is no consensus on how long lags of rate hikes take to filter through to the economy 12. Concerns around banks with high levels of exposure to commercial real estate are not large banks like was the case in 2008/9 13. Due to the speed at which money can now be moved liquidity regulations need to be improved

SUMMARY OF FOMC MINUTES ⚠️ 1. Vote for raising by 25bps was unanimous 2. The Fed will remain data dependent ultimately at future meeting, remaining non-committal about future hikes/pauses 3. MOST Fed members see significant upside risk to inflation that may warrant further rate hikes 4. SOME felt there could be significant downside risk to inflation forecast and that the Fed essentially may have already overdone it, seeing significant downside risk to the economy and upside risk to unemployment 4. No recession forecasted by the Fed anymore but slower growth through both 2024 and 2025 5. The staff judged that asset valuation pressures remained notable. In particular, measures of valuations in both residential and commercial property markets remained high relative to fundamentals. • Sounds like they basically called out a real estate bubble 6. Some signs of credit quality deterioration in commercial real estate (CRE) but delinquencies remain at low levels. The change in work patterns (work from home) that have happened post-pandemic may be permanent. If this is the case then this may lead to further troubles ahead for CRE and deterioration in credit quality. 7. Core services ex-housing inflation is yet to show significant progress 8. The Fed have no idea about how long the lags of monetary policy take to fully filter into the economy or to what extent the full effect of monetary policy changes will have 9. By 2025, total PCE price inflation is expected by the Fed to be 2.2 percent, and core inflation expected to be 2.3 percent. 10. Below trend growth and softening of labor market is needed to bring inflation to target of 2% 11. GDP growing at modest pace in 1H23. Consumer spending remains resilient but policy tightening expected to slow this down. 12. When the Fed finally decide to cut interest rates this does not necessarily mean they will stop shrinking their balance sheet (QT) 13. The Fed discussed how the reverse repo had been drained somewhat (around $390 billion) by money market funds pulling funds to invest in the short term Treasuries that Yellen has been issuing to refill the TGA 14. Credit (lending) availability tightened for businesses. The most cited reason in the SLOOS for this was economic uncertainty. 15. Credit conditions in consumer credit markets remained generally accommodative, with credit available for most consumers - TLDR: Inflation too high. Most members think inflation risk is skewed to upside and may need more hikes. Some feel they may have already done enough. They'll remain data dependent. Credit conditions are expected to tighten further. They are very unsure about the lags of monetary policy. Real estate prices are elevated above fundamentals. CRE is getting hit by work from home and tightening credit standards. If this continues there could be deterioration in credit quality. More job losses/labor market cooling needed and slower economic growth to reach inflation target.

Three things in life are certain: 1. Death 2. Taxes 3. Japan announcing an emergency bond buying operation

Perfect example of not seeing the big picture. PPI is still 34.5% in Germany. People are paying 34.5% MORE year on year. That is AWFUL. Please everyone stop celebrating decreases from ridiculously high to slightly less ridiculously high.

THE WEEK AHEAD ⚠️ If you thought last week was fun then you're in for a treat MONDAY 15:30 🇺🇲 Dallas Fed Mfg. Index (Jan) 23:30 🇯🇵 Unemployment Rate (Dec) TUESDAY 06:30 🇫🇷 France GDP (Q4) 09:00 🇩🇪 German GDP (Q4) 09:30 🇬🇧 BOE Consumer Credit (Dec) 09:30 🇬🇧 Mortgage Approvals (Dec) 10:00 🇪🇺 Economic Sentiment (Jan) 10:00 🇪🇺 Eurozone GDP (Q4) ⚠️ 14:00 🇺🇲 S&P C-S Home Prices (Nov) 15:00 🇺🇲 JOLTS (Dec) ⚠️ 15:00 🇺🇲 CB Consumer Confdnce (Jan) 23:50 🇯🇵 Retail Sales (Dec) 23:50 🇯🇵 Industrial Production (Dec) WEDNESDAY 01:30 🇨🇳China NBS PMIs (Jan) 05:00 🇯🇵 Consumer Confidence (Jan) 07:00 🇩🇪 Retail Sales (Dec) 07:00 🇬🇧 Ntnwide House Prices (Jan) 07:45 🇫🇷 France CPI (Jan) 08:55 🇩🇪 Unemployment Rate (Jan) 09:00 🇪🇺 ECB Bank Lending Survey 13:00 🇩🇪 German CPI (Jan) 13:15 🇺🇲 ADP Employment Chnge (Jan) 13:30 🇺🇲 Treasury Qrterly Refunding⚠️ 13:30 🇺🇲 Employment Cost Index (Q4) 19:00 🇺🇲 FED RATES DECISION ⚠️ THURSDAY 01:45 🇨🇳 Caixin Mfg. PMI (Jan) 10:00 🇪🇺 Eurozone CPI (Jan) ⚠️ 12:00 🇬🇧 BOE RATES DECISION ⚠️ 12:30 🇺🇲 Challenger Job Cuts (Jan) 13:30 🇺🇲 US Jobless Claims 13:30 🇺🇲 Unit Labor Cost (Q4) 15:00 🇺🇲 ISM Manufacturing (Jan)⚠️ FRIDAY 13:30 🇺🇲 Nonfarm Payrolls (Jan)⚠️ 13:30 🇺🇲 Unemployment Rate (Jan) ⚠️ 13:30 🇺🇲 Average Hourly Earnings (Q4) 15:00 🇺🇲 US Factory Orders (Dec)

⚠️Powell speech round 2 summary⚠️ 1. The Fed have not made a decision on their next rate hike (likely 0.25% vs 0.5%) 2. He basically said they have no idea how China reopening will effect inflation (could worsen, could improve) 3. Their goal is not to cause a recession 4. The Fed have no idea exactly how long it will take for their rate increases to take effect (due to lag effect) and they may slow down increases at some point to observe 5. Not tackling inflation would have extreme consequences 6. The Fed are likely to take interest rates higher than they previously expected #Powell

THIS WEEK’S HIGHLIGHTS ⚠️ 1. US ISM Manufacturing purchasing manager index came in weaker than expected in November, remaining unchanged at 46.7 (Exp. 47.6, Prev. 46.7), signalling the 15th consecutive month of contraction in the sector. • There was some improvement in new orders but they remained in contraction, suggesting that demand continues to contract, but at a slower pace. Overall production fell from marginal growth to contraction and the employment index fell further into contraction, suggesting US manufacturers are reducing their workforce size at a faster rate. • PMIs are indexes which are created from collating survey responses from business managers. The managers are asked to assess business activity through a series of questions. A reading <50 suggests contraction. US ISM Manufacturing Breakdown 2. US PCE Price index was released, and headline came in, as expected, on a year over year basis at 3.0% (Exp. 3.0%, Prev. 3.4%), month over month change came in slightly cooler than anticipated at 0.0% (Exp. 0.1%, Prev. 0.4%) MoM. • Core PCE (excluding food and energy, which are more volatile) also came in as expected at 3.5% (Exp. 3.5%, Prev. 3.7%) YoY and 0.2% (Exp. 0.2%, Prev. 0.3%) MoM. Annualized 6-month and 3-month core PCE came in at 2.5% and 2.4% using rounded figures, well towards Fed target and showing progress, as can be visualized in the heatmap below. Annualized figures give the year over year inflation rate that would be reported if the same pace of inflation was maintained for a year. Month over month PCE heatmap • Stubborn services inflation is softening, still above target, but making progress coming in at 0.2% and now at a 6-month and 3-month annualized rate of 3.63% and 3.65% respectively. Year over year cooled to 4.4% from 4.7%. • The data echoes some of the narrative from the Fed's Beige Book released this week that reported a consumer slowdown on non-essential spending and durables, as goods inflation was essentially non-existent on a month over month basis. The data supports the narrative of a slowing US economy. • Personal consumption expenditures (PCE) price index is the Federal Reserve's preferred measure of inflation within the United States, released monthly by the Bureau of Economic Analysis. It differs from CPI (consumer price index) in a number of ways and is essentially a more dynamic measure of inflation as it reflects changing spending patterns rather than focussing on a fixed basket of goods. 3. The US jobless claims report showed that continued claims came in higher at 1927K (Exp. 1872K, Prev. 1841K), well above expectations and at their highest since 2021, suggesting that people in the United States are finding it more difficult to find a job once unemployed. Some of the uptick can be put down to seasonal adjustments, as previously discussed, but the readings are still suggestive of a weakening US labor market. Continued claims have been trending upwards despite there not yet being a large uptick in layoffs evidenced by initial claims or jobs reports. Initial claims increased to 218K (Exp. 218K, Prev. 211K) • The jobless claims report is a very timely report of US unemployment, reported on a weekly basis by each state for compilation and seasonal adjustment by the US Department of Labor. It is closely monitored to take the pulse of the US labor market. • Continuing claims are the number of people who are filing for unemployment benefits in the US for their 2nd or more time. It is reflective of how difficult US citizens are finding it to get work after they have lost their job. Initial claims is the number of people filing for unemployment benefits for the first time. It is reflective of current layoffs in the US. 4. US new home sales fell more than expected at -5.6% (Est. -5.1%, Prev. 8.6%), now at an annualized rate of 679K (Exp. 723K, Prev. 719K). Generally, sales of new homes have been increasing over the course of the year; the supply of homes with existing owners has been historically low, as US citizens choose not to move amid elevated interest rates. As a result, new homes have become a larger fraction of total US inventory than normal, with existing homes usually making up over 80% of US housing inventory. • Median price of sold new homes fell to $409,300, down 17% YoY. This doesn’t necessarily mean house prices have fallen, as evidenced by the S&P Case-Shiller showing that house prices in the US have increased 3.9% YoY and +0.7% in September alone. It can represent a demographic shift, i.e. people may be buying less expensive homes or homes are selling in areas where house prices are lower, thus the figure can be skewed to the downside in a scenario where house prices haven’t actually declined. 5. US CB consumer confidence improved in November according to the Conference Board consumer confidence index coming in at 102 (Exp. 101, Prev. 99.1). Consumers were more optimistic about hiring prospects and were more likely to be planning to make an expensive purchase but their opinion on current economic conditions deteriorated. • The report is a barometer of how consumers in the US currently feel about the economy, out of a sample of 3000 US consumers. Consumer confidence is important as it can reflect change in consumer behaviour early (leading indicator). If consumers are pessimistic about the economy, they may change their spending patterns – and consumer spending accounts for around 70% of US GDP. 6. The S&P Case-Shiller national home price index showed that US house prices rose to all time highs in September, in defiance of elevated interest rates, likely as a result of suppressed inventory. House prices are up 3.93% YoY (Prev. 2.5%) and increased by 0.7% MoM, the eighth consecutive month over month increase. • The S&P Case-Shiller indexes compare current sold prices to previous sold prices of the same homes. It is a lagging indicator, clearly, as the data relates to prices in September. 7. German unemployment increased to 5.9% (Exp. 5.8%, Prev. 5.8%) and is in a clear uptrend, rising well above the post-pandemic low of 5%, as the country’s economy continues to struggle, as it has done throughout 2023. • Germany is the largest economic power in the Eurozone, responsible for almost 30% of GDP generation in the economic area. German Unemployment Rate 8. Eurozone inflation came in softer than pretty much anyone anticipated, with headline at 2.4% YoY (Exp. 2.7%, Prev. 2.9%), nearing the 2% inflation target set by the ECB. Month over month came in at -0.5% MoM (Exp.-0.2%, Prev. 0.1%). Core inflation also moderated more than expected at 3.6% (Exp. 3.9%, Prev. 4.2%). • Looking at some of the underlying figures paints a pretty convincing picture that the Eurozone is seeing broad based disinflation and there will likely be no more need for further ECB rate hikes. Eurozone Inflation heatmap • Just look at that services inflation -0.9% MoM. This is the biggest driver of the economy, likely reflecting some of the economic slowdown. On a 3-month annualized basis, using rounded figures, services inflation in the Eurozone is currently running at -7%... On a year over year basis services are up 4%, down from 4.6% in the month prior. • Food alcohol and tobacco inflation had the highest reading in the basket at 6.9% YoY, still a significant drop from 7.4% last month and currently running at a respectable 3-month annualized rate of 2.8%. • Furthermore, inflation in Germany and France, the 1st and 2nd largest economies in the Eurozone respectively, both fell markedly and more than expected. Inflation in Germany came in at 2.3% (Prev. 3%) and France at 3.8% (Prev. 4.5%). • The headline figure in Germany is likely to increase in the coming months as base effects from government energy support packages from December 2022 affect figures. The German government paid energy bills for small-medium businesses and households in December 2022 as a once off, which resulted in a large drop in German headline inflation figures in December 2022. Following this, further subsidies from the government were delivered to protect consumers and businesses from some of the rise in the price of energy by trying to cap prices. However, now a year on, this will result in the energy component of CPI having less of a suppressive effect on headline CPI. 9. The Federal Reserve Beige Book delivered a pretty negative outlook on the US economy and there were some notable narrative shifts from the previous release. Overall US economic activity was reported to have slowed since the previous report (Oct 18). 4 districts reported modest growth, 2 flat to marginally down, 6 reporting declines. Some key takeaways from the Beige Book: • ‘The economic outlook for the next six to twelve months diminished’, a change from the previous report which read 'The near-term outlook for the economy was generally described as stable or having slightly weaker growth.'. • Sales of discretionary items (non-essential) and durable goods, (items that last 3 years and tend to be more expensive) declined... as consumers became more price sensitive. However, travel and tourism remained healthy. Consumer credit was also noted to be healthy but some banks noted increasing delinquencies. • Commercial real estate continued to slow • Several districts noted slightly decreased home sales with an increase in homes for sale (inventory). Previous October report: 'Real estate conditions were little changed and the inventory of homes for sale remained low'. Another slight change in narrative. • Demand for labor eased, more applicants were available and less people were leaving their current job, something usually observed in weakening labor markets, as people less often have another job lined up with better pay/conditions. However, it should be noted several districts were still reporting a tight labor market. What is the Beige Book? The Beige Book is a collated report from all 12 Federal Reserve district branches. Each district reports on economic activity within their respective area, based off of anecdotal evidence (soft data) from economists, businesses, and market experts. The reports are then collated and consolidated into an overview of the US economy as a whole, published 8 times per year. The Federal Reserve members pay close attention when considering the path of monetary policy. 10. China NBS PMIs suggested that the Chinese economy continues in troubled water as the effects of stimulus from the government appear not yet to be having the desired effect; more stimulus is likely on the way. Manufacturing worsened and continued to display contraction at 49.4 (Exp. 49.7, Prev. 49.5) while non-manufacturing weakened but posted marginal expansion 50.2 (Exp. 50.9, Prev. 50.6). The Composite index fell to 50.4 (prev. 50.7). • New orders in manufacturing contracted at a faster rate, suggesting further weakness in demand. • The NBS PMI is the official Chinese government released purchasing manager index in the country, released by China's National Bureau of Statistics (NBS). The report tends to cover larger, government owned companies. 11. UK Nationwide House Price index showed some signs that the UK housing market has strengthened, as house prices increased by 0.2% MoM (Exp. -0.4%, Prev. +0.9%), YoY figure came in at -2% (Exp. -2.3%, Prev. -3.3%). • Since the Bank of England paused rate increases at their September meeting there has been been an uptick in activity, likely as a result of people in the UK thinking that mortgage rates have peaked. However, there is still a lot of the lagged effects of rate hikes to filter through to the economy as the Bank of England average mortgage rate on outstanding mortgages is still only 3.2%, when new mortgages are on average being originated at 5.25%. • Furthermore, UK mortgage approvals increased, according to the Bank of England, but still remain historically suppressed. Approvals came in at 47.4K (Exp. 45.3K, Prev. 43.7K). - Inflation is falling convincingly in both the US and the Eurozone, as further evidenced by data released this week. Both the Federal Reserve and the European Central Bank are thought to be done with rate hikes and markets have turned to trying to predict when cuts will be implemented. The European economy has taken a turn for the worse more quickly than the US, already posting GDP contraction in Q3 while the US economy remained rampant. However, despite an improvement in consumer confidence, the Federal Reserve’s Beige Book, painted the picture of an economy that is starting to weaken. Markets are currently pricing in a >97% chance of a Federal Reserve pause at their meeting in December, with rate CUTS now priced in as early as MARCH… At the start of the week cuts were not expected until June. Markets keep bringing forward their rate cut calls, despite all the Fed speakers' rhetoric trying to push expectations further into the future. Only time will tell who is right.

THIS WEEK’S HIGHLIGHTS⚠️ 1. US ISM Services was released and showed ongoing expansion in the services sector. November’s reading came in better than expected at 52.7 (Exp 52, Prev. 51.8), marking the 11th consecutive month of expansion. Business activity 55.1 (Prev. 54.1) and employment 50.7 (Prev. 50.2) improved and continued in expansion. New orders 55.5 remained in expansion and unchanged from the previous month. Prices paid remained strongly in expansion at 58.3 down from 58.6, suggesting inflationary pressures receded marginally. • The services sector is the largest sector in the US by a long way and thus is responsible for the biggest proportion of GDP, when compared to other sectors. In 2022 services accounted for almost 80% of US GDP. 2. US Consumer sentiment in the University of Michigan Consumer Survey improved markedly and inflation expectations fell alongside, a nice combo for the Fed. Sentiment improved to 69.4 (Exp. 62, Prev. 61.3), almost entirely reversing 4 months of decline. US consumers’ assessment of both the current state of the economy and their expectations for the future improved impressively. Current increased to 74 (Prev. 68.3), Expectations 66.4 (Prev. 56.8). • Inflation expectations for 1 year ahead plummeted to 3.1% from November’s reading of 4.5%, the lowest since March 2021. On top of this, longer term expectations fell to 2.8% from 3.2% (Exp. 3.1%). The Fed will be glad to see this. Rising inflation expectations reduce real interest rates and promote spending, thus loosening monetary policy. This supports the argument the Fed will pause this week, not that the argument really needed supported further. • Consumer sentiment is closely watched as it is used to gain insight into future consumer spending patterns; consumer spending makes up around 70% of US GDP. 3. Bank Term Funding Program usage surged the most since April with the 5th largest weekly increase since the facility’s creation. This is worth keeping a close eye on to monitor for stress potentially reappearing in the banking sector. • When usage of the BTFP rises sharply it reflects that banks are having to access emergency liquidity from the Federal Reserve. • The BTFP is a means by which financial institutions can borrow emergency liquidity from the Fed. It was created in response to the banking crisis in March this year. The BTFP offers lending for up to 1 year to financial institutions and is more generous than the much older the Discount Window. Banks can post collateral (usually in the form of US treasury bonds, agency mortgage-backed securities etc) at the Federal Reserve at par value, essentially meaning any price fluctuations in the assets used as collateral are ignored by the Fed. This was designed so that banks aren’t forced to sell asset portfolios at heavy losses, they can lend against them to meet immediate obligations and continue to hold. To top it off, interest on lending through the BTFP is done at Fed Funds Rate + 0.1%, which isn’t much (if any) of a haircut for banks. BTFP top 10 weekly increases 4. We had an onslaught of employment data with JOLTS, Nonfarm payrolls, ADP employment change and jobless claims: • Nonfarms payrolls beat consensus expectations coming in at 199K jobs added in November (Exp. 180K, Prev. 150K). The rise was dominated by jobs in healthcare +77K (Average 54K) and government 49K (Average 55K). On top of this, workers returning after UAW strikes added 30K to the headline print, without this the manufacturing workforce would have contracted. • The Unemployment rate unexpectedly fell to 3.7% (Exp. 3.9%, Prev. 3.9%) and the U6 unemployment rate to 7% (Exp. 7.3%, Prev. 7.2%). The Sahm Rule recession indicator, which is when then 3 month moving average of unemployment rises 0.5% above its lowest point in the last 12 months, has not been triggered. It is still very possible that it will trigger in the coming months, however. ⁃ U6 unemployment includes not only traditionally unemployed people (unemployed and actively seeking work) but also people that want a job but have given up looking, and those that are employed on a part time basis and are looking for full time work (underemployed). • US Job Openings and Labor Turnover Survey for October was released and showed a significantly larger than expected decline in job openings. Job openings came in at 8.733 million (Exp. 9.3M, Prev. 9.35M), lowest since March 2021. The report recorded -236K jobs in health and social care, -168K in finance and insurance, -49K in real estate and rental. The report suggests job openings continue to fall in the US while we are yet to see a dramatic spike in layoffs or unemployment. So far, Powell’s claims that the labor market can loosen without a large uptick in unemployment is playing out. Whether this remains the case is another question. ⁃ Quits rate 2.3% (Prev. 2.3%), has been stagnant for 4 months now. Quits is the number of people who are leaving their job voluntarily. Decreasing quits suggest that people may be finding it harder to find jobs as people tend to leave of their own accord when they have a better offer/another job lined up. ⁃ Hires rate 3.7% (Prev. 3.8%). This is the percentage of new hires relative to current respondent workforce. Companies continue to hire less people. ⁃ The response rate of the JOLTS data has declined and thus the power of the data has been called in to question of late, with response rates as low as 30% this year. • ADP employment change, which tracks employment only in the US private sector, came in lower than expected at 103K (Exp. 130K, Prev. 106K) in November. Hiring has softened markedly from the YTD high in June of 455K. The increase in jobs was driven overwhelmingly by the services sector: ⁃ Services sector +117K, leisure and hospitality -7K, professional/businesses services -5K, construction -4K. • US initial jobless claims came in around consensus at 220K (Exp. 222K, Prev. 219K). However, continuing jobless claims surprised to the downside and fell, coming in at 1861K (Exp. 1910K, Prev. 1925K). This data was from Thanksgiving week. Of late, the trend in continued claims has been increasing, as US citizens find it more challenging to find work once unemployed. ⁃ The jobless claims report is a very timely proxy report of US unemployment, reported on a weekly basis by each state for compilation and seasonal adjustment by the US Department of Labor. ⁃ Continuing claims are the number of people who are filing for unemployment benefits in the US for their 2nd or more time. It is reflective of how difficult US citizens are finding it to get work after they have lost their job. Initial claims is the number of people filing for unemployment benefits for the first time. It is reflective of current layoffs in the US. 4. US MBA mortgage applications increased by 2.8% on the week, marking the 5th weak in a row of improvement in the US. This coincides with loosening financial conditions and mortgage rates falling from 8% to closer to 7%. The increase was driven by a 13.9% increase in refinancing applications; new mortgage applications actually fell 0.3% on the week. • US mortgage applications both for purchase and refinancing remain at very suppressed levels amidst high interest rates, lower turnover of houses and suppressed inventory of existing homes. 5. US Factory Orders fell more than expected coming in at -3.6% month over month (Exp. -2.8%, Prev. -2.3%), suggesting that trouble for US manufacturers is not over. This is the biggest decline since April 2020. The data refers to the month of October, so is backwards looking. However, more timely manufacturing PMIs continue to report contraction. Factory orders excluding transport declined -1.2% (Prev. +0.4%). This metric gives a better look at underlying demand as headline factory orders can be heavily skewed by demand for transportation like aircraft that fluctuates heavily e.g. non-defence aircraft and parts declined 49.6% in October, transport was down 14.7% overall. 6. Deflation continued for the second consecutive month in China as headline CPI printed in at -0.5% (Exp. -0.1%, Prev. -0.2%), the biggest decline since November 2020, driven largely by food (pork in particular) prices. Core inflation, which excludes the most volatile components of CPI (food and energy), rose 0.6%. • Further suggesting deflationary readings may continue in the coming months, producer price index (PPI) came in at -3% YoY (Exp. -2.7%, Prev. 2. 6%), the 14th consecutive deflationary reading. PPI reflects price changes higher up the supply chain than the CPI and thus can act as a leading indicator of consumer prices as prices are passed down to consumers. • The worsening of headline deflation will likely prompt the People’s Bank of China and the Chinese government to continue and intensify their attempts to stimulate the economy as demand remains sluggish in the midst of the ongoing downturn in the Chinese real estate market. In a statement released this week, the Chinese government hinted at increasing fiscal stimulus in 2024 in order to try and increase demand. • Deflation terrifies economies around the globe for a number of reasons: It can exert downward pressure on consumer spending. If goods are persistently falling in value and something is going to cost less in a year then this may encourage consumers to save money and buy later. Thus, saving is highly incentivised and consumer spending suppressed. Furthermore, debt becomes more difficult to pay off and the underlying assets fall in price. If I take out a loan for $10,000 and deflation takes place then even if the nominal interest on the loan is 0% the real value of the $10,000 has increased and thus I am having to pay back a loan that costs more in real terms, as the money is worth more than when it was initially borrowed. Central banks also fear deflation due to worries over the possible lack of effectiveness of monetary policy in combatting it once it has taken hold; even if governments/central banks start handing out lots of stimulus, this money may not actually make its way into the financial system as people are still incentivised to save while prices are declining. The worst-case scenario envisaged by central banks is that of a deflationary spiral in which business revenues drop due to falling prices, unemployment rises due to lower revenues, consumer spending falls due to the unemployment rise, this leads to further revenue decline, price declines and so on and so forth. It should also be noted that not all deflation leads to awful repercussions. 7. Ongoing weak domestic demand in China was further evidenced in the country’s trade balance. Exports increased 0.5% YoY in November, the first increase in exports since April. However, imports dropped by 0.6% YoY (Exp. +3.9%), a huge miss, and when taken in to account that it is compared to last November, when China was still pursuing their zero COVID policy with widespread lockdowns, it speaks volumes about how weak the Chinese consumer is at the moment. 8. European Construction PMIs were released, generally showing contractionary readings. Eurozone contraction eased slightly, France’s more so. Italian construction expanded at a faster pace, while the UK remained in contraction. However, Germany’s construction industry continues to deteriorate, seeing an increase in the rate of contraction from an already rapid pace of decline: Eurozone 43.4 (Prev. 42.7) France 44.6 (Prev. 41) Germany 36.2 (Prev. 38.3) Italy 52.9 (Prev. 51.8) UK 45.5 (Prev. 45.6) • In the German report the first line reads ‘Germany's construction sector remained deep in recession midway through the final quarter of the year’, another quote reads ‘The building sector in Germany is experiencing a perilous plunge’. • There was rapid decline in German housing projects, a steep decline in demand and further fall in employment. New orders (a reflection of current demand) remained firmly in contraction. German housing is being hit the hardest according to the report seeing some of the worst readings since 1999. • Germany is the largest economy in the Eurozone, providing almost 30% of GDP for the economic area. 9. German factory orders fell 3.7% in October alone and is now down 7.3% YoY, well below expectations of +0.2% and September's +0.7% revised reading. There was decline of 13.5% in machinery and equipment orders. Furthermore, capital goods (-6%) and intermediate goods (-1.4%) orders fell. However, consumer goods (+2.8%) new orders did increase and domestic (from within Germany) orders grew 2.4%, indicating an uptick in demand in the country. On the other hand, foreign demand fell markedly and more than offset this with orders from Europe -7.6% and Everywhere else -7.4%. • The index tracks the volume of orders for in the manufacturing sector in Germany. Sample size of around 6000 manufacturers. 10. Japanese final GDP came in weaker than expected at a rate of -2.9% on an annualized basis (Exp. -2.0%, Revised from -2.1%) and -0.7% QoQ (Exp. -0.5%) • Consumer spending, the largest driver of GDP in the 3rd largest economy on the planet, fell 0.2% (Revised down from 0.2%) • This may act as a softener on the view that was rip-roaring this week that the Bank of Japan is set to increase interest rates at their December meeting. BOJ governor Ueda stated this week that monetary policy would become more difficult from year end, fuelling speculation in markets that the BOJ are set to end their reign of negative rates. Japanese Government Bond (JGB) yields rose and the Yen strengthened against the dollar as markets began to price in an increased likelihood of a pivot away from the Bank of Japan’s ultra loose monetary policy and a step towards normalisation. • The BOJ has implemented negative interest rates and yield curve control since around 2016; the ultra-loose monetary policy was introduced by the previous governor, Kuroda, to stimulate the Japanese economy and combat deflation in the country. 11. The Bank of Canada decided to hold interest rates at 5%, as expected 12. The Reserve Bank of Australia left interest rates at 4.35%, as expected - Domestic demand continues to be weak in China with falling imports and deflationary CPI persisting. The PBoC and Chinese government are likely to step up measures intended to stimulate the economy in the New Year. Japanese GDP being worse than expected may have pushed back some of the expectation that the Bank of Japan will end negative interest rates at their December meeting. While the Bank of Japan are likely to take steps towards policy normalisation in the near future, it does remain unclear exactly when it will happen. European construction PMIs continued to paint a weak picture with Germany continuing to stick out like a sore thumb as the worst affected, with collapsing construction activity and weaker than expected factory orders. Meanwhile, in the US, employment data released this week continues to suggest a similar narrative of an ongoing tight labor market with some signs of loosening, but no marked surge in unemployment or layoffs as of yet. Whether this remains the case remains to be seen. US consumers seemed pretty happy, erasing 4 months of consumer sentiment declines and predicting better outcomes for both the economy and inflation, something the Fed will be delighted to see. Going into next week we have a central bank triple header with the Bank of England, European Central Bank and Federal Reserve all set to make their next decision on interest rates. It is likely that all three will hold rates where they are. The meetings are going to be all down to narrative, as markets try and decipher when we might see rate cuts. Plus, we'll get an updated Summary of Economic Projections from the Fed, which is always fun. Markets are currently pricing in a 98.4% chance of a Federal Reserve pause, with the first rate cut priced in for May 2024.

THE WEEK AHEAD ⚠️ TUESDAY 03:00 🇯🇵 BOJ RATES DECISION ⚠️ 15:00 🇪🇺 Euro Consumer Confid. (Jan) WEDNESDAY 00:30 🇯🇵 Japan Jibun PMIs (Jan) 08:15 🇫🇷 France HCOB PMIs (Jan) 08:30 🇩🇪 Germany HCOB PMIs (Jan) 09:00 🇪🇺 Eurozone HCOB PMIs (Jan) 09:30 🇬🇧 UK HCOB/CIPS PMIs (Jan) 11:00 🇬🇧 CBI Industrial Trends (Jan) 12:00 🇺🇲 MBA Mortgage Apps 14:45 🇺🇲 US S&P PMIs (Jan) 15:00 🇨🇦 BOC RATES DECISION ⚠️ THURSDAY 09:00 🇩🇪 IFO Business Climate (Jan) 11:00 🇬🇧 CBI Distributive Trades (Jan) 13:15 🇪🇺 ECB RATES DECISION ⚠️ 13:30 🇺🇲 Durable Goods (Dec) 13:30 🇺🇲 US GDP Growth (Q4) ⚠️ 13:30 🇺🇲 US Jobless Claims 15:00 🇺🇲 New Home Sales (Dec) FRIDAY 00:01 🇬🇧 GfK Consmer Confdnce (Jan) 07:00 🇩🇪 Gfk Consmr Confdnce (Feb) 13:30 🇺🇲 US PCE Price Index (Dec) ⚠️ 15:00 🇺🇲 Pending Home Sales (Dec) An action packed week ahead. What are you looking out for?

THE WEEK AHEAD⚠️ MONDAY 00:50 🇯🇵 Tankan Mfg. index (Q3) 07:00 🇬🇧 Nationwide house price (Sep) 08:-- 🇪🇺Manufacturing PMIs (Sep) 09:30 🇬🇧 Manufacturing PMI (Sep) 10:00 🇪🇺 Unemployment rate (Aug) 15:00 🇺🇲 ISM Manufacturing PMI (Sep) TUESDAY 04:30 🇦🇺 AUS RBA RATES DECISION 15:00 🇺🇲 JOLTS Job Report (Aug) WEDNESDAY 10:00 🇪🇺 Retail Sales (Aug) 10:00 🇪🇺 PPI (Aug) 12:00 🇺🇲 MBA Mortgage Applications 13:15 🇺🇲ADP Employmnt change (Sep) 15:00 🇺🇲 ISM Services PMI (Sep) 15:00 🇺🇲 US Factory Orders (Aug) THURSDAY 08:30 🇪🇺 Construction PMIs (Sep) 09:30 🇬🇧 Construction PMI (Sep) 13:30 🇺🇲 Jobless Claims FRIDAY 07:00 🇩🇪 German Factory Orders (Aug) 07:00 🇬🇧 Halifx House Price Indx (Sep) 13:30 🇨🇦 Canada Unemployment (Sep) 13:30 🇺🇲 Nonfarm Payrolls (Sep) 13:30 🇺🇲 Unemployment rate (Sep) Number of Fed Speakers: 100,000 (12)

THE WEEK AHEAD ⚠️ MONDAY 🇺🇲 15:00 US New Home Sales (Oct) 🇺🇲 15:30 Dallas Fed Mfg. Index (Nov) TUESDAY 🇩🇪 07:00 Gfk Consmr Confdnce (Dec) 🇫🇷 09:45 Consumer Confidence (Nov) 🇺🇲 14:00 S&P/C-S Home Prices (Sep) 🇺🇲 15:00 CB Consumr Confdnce (Nov) WEDNESDAY 🇪🇸 08:00 Spain Inflation Rate (Nov) 🇬🇧 09:30 BOE Mortgage Lending (Oct) 🇬🇧 09:30 BOE Consumer Credit (Oct) 🇪🇺 10:00 EZ Economic Sentment (Nov) 🇺🇲 12:00 MBA Mortgage Apps 🇩🇪 13:00 German inflation rate (Nov) 🇺🇲 13:30 US GDP 2nd estimate (Q3) ⚠️ THURSDAY 🇨🇳 01:30 China NBS PMIs (Nov) 🇬🇧 07:00 Ntnwide House Prices (Nov) 🇩🇪 07:00 Retail Sales (Oct) 🇫🇷 07:45 France Inflation Rate (Nov) 🇩🇪 08:55 Unemployment Rate (Nov) 🇪🇺 10:00 Euro Inflation Rate (Nov) ⚠️ 🇪🇺 10:00 Unemployment Rate (Nov) 🇨🇦 13:30 Canada GDP (Q3) 🇺🇲 13:30 PCE Price Index (Oct) ⚠️ 🇺🇲 13:30 US Jobless Claims ⚠️ 🇺🇲 15:00 Pending Home Sales (Oct) FRIDAY 🇨🇳 01:45 Caixin Manufact. PMI (Nov) 🇮🇹 09:00 GDP Growth Final Est (Q3) 🇨🇦 13:30 Unemployment Rate (Nov) 🇺🇲 15:00 ISM Manufacturing (Nov) ⚠️ 🇺🇲 16:00 Powell Speech ⚠️

The original October Nonfarm Payrolls number was revised down 30% by the BLS in today's report, 30% 150,000 down to 105,000 jobs added

Evergrande, Chinese real estate giant has filed for chapter 15 bankruptcy in New York ⚠️ This is the second largest property developer in China Less than a week ago we saw Country Garden, 5th largest Chinese developer, stop trading on some onshore bonds and have expressed 'major uncertainties' about their ability to pay. China has more real estate than any other country on Earth with >20% of the world's real estate by value. Let that sink in.

THIS WEEK'S HIGHLIGHTS ⚠️ 1. Core PCE, the Federal Reserve's preferred measure of inflation, INCREASED in line with expectations to 4.2% from 4.1%. Headline PCE came in higher at 3.3% YoY (Exp. 3.3%, Prev. 3%). • Core PCE MoM remained unchanged at +0.2% in-line with expectations, 1 month annualized to around 2.4%, essentially compatible with the Fed’s target. 3 month annualized clocks in at 2.9%. • However, what is notable is that the Fed’s most closely followed measure within PCE – core services ex-housing advanced 0.5% MoM, which annualizes to 6.17%. However, this is said to have been largely down to temporary advances in portfolio management services and is likely to cool in the coming months. • Powell likes core-services ex-housing as it represents less interest rate sensitive areas of the economy and better examines underlying inflation trends. 2. ISM Manufacturing rebounded from the prior month coming in better than expected at 47.6 (Exp. 47, Prev. 46.4%). This is the highest reading since February, suggesting manufacturing contracted more slowly in August. This still signifies the 9th consecutive month of contraction in US manufacturing. • New orders fell to 46.8 from 47.3 (contracting faster), Production increased to 50 (stagnation) from 48.3, Employment rebounded to 48.5 from 44.4 (contracting slower), Prices 48.4 from 42.6 (falling slower). 3. Non-farm payrolls came in above expectations. 187,000 jobs were added to the US economy in August (Exp. 170K, Prev. 157K). However, most are wondering what can actually be taken from these figures because almost all of the releases this year have been revised down heavily. • More notably, unemployment rate in the US increased from 3.5% to 3.8%. • U-6 unemployment, which includes people that have given up looking for a job but do want to work and people that are working part-time because they can't find a full time job, rose to 7.1% in August from 6.7% (Exp. 6.8%). • This is touted by many as a more realistic unemployment release as it provides a wider array of people who are seeking work but were/are unable to find what the work they were looking for. 4. US Job openings in the Job Openings and Labor Turnover Survey (JOLTs) fell significantly more than expected to 8.827 million (Est. 9.5 million Prev. 9.165 million) in July. • The Fed will be relieved. The ratio of jobs to unemployed fell to 1.51 - lowest since March 2021. • JOLTs hires rate fell to 3.7%, the lowest level since April 2020. Businesses are hiring less new staff. • Quits rate fell to 2.3%, the lowest since January 2021 Quits represents the number of people leaving their job voluntarily. People tend to leave of their own accord when they have a better offer/another job lined up. Decreasing quits suggest that people are finding it harder to find new/better jobs. 5. The Challenger job cut report for August 23 reported a 217% increase from July and a 267% increase from August 22 coming in well above expected at 75,151 (Prev. 23.69K, Exp. 26K). • 83.3% of the industries in the Challenger report have increased planned layoffs this year • Yellow Corp bankruptcy contributed significantly to the figures but this year companies have announced plans to cut 210% more people than the previous year 6. US CB consumer Confidence fell to 106.1 from 117 (Exp. 116) well below expected. This is the biggest fall in US consumer confidence in 2 years. • as previously mentioned, consumer confidence is a leading indicator of consumer spending behaviour, which accounts for almost 70% of GDP generation in the US economy. 7. The Dallas Fed Manufacturing Index saw a slight uptick to -17.2 from -20 better than expected (-21.6). Manufacturing in Texas is still in contraction and some of the comments from this were pretty damning. • e.g. 'Customer orders came to a sudden halt. The overall volume dropped 51 percent year over year.', ‘The phone is not ringing. Our sales team is working harder with less results.’, some went for the kill ‘Our industry is in a technical recession.' • Texas accounts for around 10% of US manufacturing output 8. The Nationwide house price index in the UK suggested prices in August alone fell 0.8%. This is a -9.3% annualized rate. House prices according to the index are now down YoY -5.3% (Exp. 3.9%, Prev. -3.8%). • People in the UK don't have 30Y fixed rates like in the US. There are no long-term golden handcuffs. People will be forced to sell or renegotiate at current interest rates. The standard fixed rate period in the UK tends to be 2-5 years. 9. German Gfk consumer confidence declined to -25.5 (Exp.- 24.3, Prev. -24.6). German consumer confidence throughout the year has generally improved and done so since October 2022 but the trend appears to be reversing/topping out. With the poor economic data coming out of Germany it is likely that consumer confidence will deteriorate in the coming months. • Although Germany has exited technical recession seen earlier in the year, recent economic releases are not painting the picture of the idyllic path toward recovery. • Germany is the fourth largest economy in the world and the largest in Europe. Where the German economy goes, so too goes the Eurozone (typically). 10. To further rub salt in the wounds German retail sales declined by 0.8% in July. This is worse than consensus expectation of +0.3% and follows a decline of 0.2% in the month prior. 11. House prices in the 20 largest US cities increased by 0.9% in June (Exp. 0.6%, Prev. 1.5%) according to the S&P Case-Shiller. This is the 4th straight month of increases as house prices are propped up by record low inventory despite historically extremely low mortgage activity. According to the National Home Price Index, house prices are essentially flat YoY. 12. Eurozone economic sentiment deteriorated for the fourth consecutive month coming in at 93.3(Exp. 93.7, Prev. 94.5). This is the lowest since 2020. • Eurozone economic sentiment gauges sentiment in a composite index which collates responses from services (30%), manufacturers (40%) as well as consumers (20%), construction (5%) and retail (5%) to garner a rounded overview of sentiment. 13. Eurozone core inflation rate came in at 5.3% YoY down from 5.5% the month prior and in line with expectations. Headline remained at 5.3% from the prior month, higher than the expected 5.1%. MoM headline inflation rate came in at 0.6%, which annualizes to around 7.4%. • This is the last inflation report that the ECB will have before their next meeting on September 14th. Whether they hike again or not hangs in the balance. There will likely be split opinions in the ECB as core inflation ticks down but headline re-accelerates. Supporting the case for a potential last hike, Spanish and French inflation picked up again in the most recent releases this week. 14. Japanese industrial production also fell 2% in July (Exp. -1.4%, Prev. +2%) 15. China's NBS manufacturing PMI index increased to 49.7 from 49.3 (Exp. 49.4). Non-manufacturing decreased to 51 from 51.5 (Exp. 51.1). Caixin Manufacturing PMI ticked up into expansionary territory at 51 (Exp. 49.3, Prev. 49.3). 16. People’s Bank of China (PBoC) cut the foreign-exchange reserve requirement from 6% to 4%, meaning banks in China will need to hold less of their foreign-exchange deposits in reserve (stored away). This releases liquidity that banks otherwise had to keep tucked away. This is an effort to support the Yuan and provide dollar liquidity domestically. The move follows the Yuan falling to the weakest level vs USD since 2007. • On Thursday we saw the PBoC reduce required down payments on mortgages in an effort to stimulate the trembling housing market as well as reducing mortgage rates for existing mortgages to the loan prime rate -0.2%. • It is clear that the PBoC are increasingly considering how to best try and stimulate the economy while the economic picture remains weak and worries surrounding the real estate market continue to deteriorate. 17. Country Garden, Chinese homebuilding giant, extended its repayment period on a bond worth $540 million after a vote from creditors enabled it to avoid default. The extension allows Country Garden to repay the bond over the next 3 years. It had been supposed to pay this off by Saturday. 18. Italian GDP fell by 0.4% in the second quarter, worse than the expected -0.3% and down from +0.6% in Q1. 19. Canadian GDP came in at -0.2% annualized; this is well below the 1.2% expected. QoQ Canadian GDP stagnated, below the expected 0.3% growth. - The UK housing market is feeling the heat with the fastest decline in house prices since the GFC. The Eurozone is seeing persistent inflation and deteriorating economic outlook, a headache for the ECB as they mull over whether to implement a final hike. In China, the PBoC continue to take action to try and stimulate the economy as economic worries persist and the real estate market seemingly perches on the brink. The last time the PBoC asked banks to lower mortgage rates the way they did this week was during the Great Financial Crisis. This week we saw the distorted world that has become modern day sentiment as markets raced higher on *checks notes* rising unemployment, falling job openings and *rubs eyes* the biggest MoM decline in consumer confidence in years. The US labor market is showing clear signs of cooling alongside inflation. Markets are pricing in a 93% chance of a Fed pause at their next meeting.

THIS WEEK'S HIGHLIGHTS ⚠️ 1. US CPI Headline and core (excluding energy and food) for October both came in lower than expected. Headline came in at 3.24% (Exp. 3.3%, Prev. 3.7%). Core CPI came in at 4.02% (Exp. 4.2%, Prev. 4.13%). On a month over month basis headline CPI came in at 0% and core came in at 0.2% (annualized 2.4%) • There was some contentiousness surrounding the dramatic 34% fall in medical insurance prices YoY that came with a change in the way insurance costs were calculated. It cut 18 basis points from the headline CPI figure. • it is clear that inflation is falling and the Fed are seeing marked progress in their battle against inflation. Markets priced in rate cuts earlier than they had previously following the result. 2. US Industrial Production -0.6% MoM(Exp. -0.4%, Prev. 0.1%) and -0.7% YoY (Exp. -0.3%, Prev. -0.2%). This is the largest YoY drop in production since 2021. • Capacity utilization fell to 78.9% from 79.5%, worse than expected (Exp.79.4%) • industrial production reports the output of the industrial sector which includes manufacturing, mining and utilities. It is a release from the Federal Reserve. 3. UK consumer inflation (CPI) fell to 4.6% YoY, better than expected (Exp. 4.8%, Prev. 6.7%) while core inflation (excluding volatile food and energy) also fell to 5.7% (Exp. 5.8%, Prev. 6.1%). • month over month change in headline inflation was 0% (Exp. 0.1%, Prev. 0.5%), a steep slowdown on the prior month as energy prices fall. Meanwhile, core CPI monthly change remained at pace consistent with higher than BOE target at 0.3% MoM (Exp. 0.4%, Prev. 0.5%). 4. UK Unemployment rate remained unchanged in the 3 month to September at 4.2%, better than expected (Exp. 4.3%, Prev. 4.2%). • UK Claimant Count change in October also beat expectations at 17.8K (Exp. 25K, Prev. 9K). HMRC Payrolls change also surprised drastically to the upside at +33K (Exp. -18K, Prev. 32K) • Employment change surprised massively to the upside coming in at +54K (Exp. - 198K, Prev. -80K) in the three months up to August • Wage growth also came in stronger than expected at 7.9%, down from 8.2% (revised up) and significantly higher than expectations at 7.3%, bolstered by government pay packets. This level of growth remains well above levels that could be considered with the BOE 2% inflation target. • The United Kingdom's labor market remains tight despite recent signs of weakening. However, it is worth noting the the Office for National Statistics, who report unemployment data, had to use experimental analysis techniques to calculate employment data due to falling response rates in their surveys. 5. Japanese GDP growth was much lower than expected and posted contraction at an annualized -2.1% rate (Exp. -0.6%, Prev. 4.5). QoQ GDP came in at -0.5% (Exp. -0.1%, Prev. 1.1%). • Business spending was very weak and contracted by 0.6% while private consumption (consumer spending) stagnated • GDP is the total value of goods and services produced over a period of time in a country or economic area. It tends to be used as the bottom line indicator of economic performance. • Annualized rate is the percent growth that would be recorded over a year if the current rate of growth is sustained. 6. Eurozone inflation rate fell to 2.9% YoY, better than expected (Exp. 3.1%, Prev. 4.3%) as energy prices retreated heavily by 11.2%. Core inflation (excluding food and energy) fell to 4.2% from 4.5% (Exp.4.2%). • Services inflation fell to 4.6% from 4.7% while food, alcohol and tobacco fell to 7.4% from 8.8% YoY in the month prior. • 24/27 countries in the Eurozone remain above the European Central Bank target of 2% with only Denmark, Belgium, Netherlands and Italy below this. However, the rate of disinflation is convincing and it seems very likely the ECB hiking cycle is done. 7. The National Association of Homebuilders (NAHB) Housing Market Index (HMI) came in at 34 below exp. of 40. • Since July 2023 the HMI has fallen from 56 down to 34 after a bounce in the lead up to summer, likely driven by low resale volume of houses forcing the demand gap to be filled by newly built properties. • The HMI made an all-time high of 90 in Nov 2020 and has been in decline since. • The HMI is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey suggests that currently the building of single family homes is in significant decline. The survey does not include multi-family housing. 8. U.S. Housing Starts came in at 1,372k (higher than exp. 1,350k) while building permits came in at 1,487K (higher than exp. 1,450K). • U.S Housing Starts have been in decline since April 2022 so whilst these reports are better than expected the trend remains to the downside. The bounce in housing starts was driven by a bounce in multi-family builds beginning. • U.S. Housing Starts is supplied monthly by the U.S. Census Bureau from a survey of how many homes in the US officially had construction commence and is considered a key indicator of the overall housing sector. It includes multi-family housing, units and apartment complexes. 9. UK Retail sales came in worse then expected by volume at -2.7% (Exp. -1.5%, Prev. -1.3%) and month over month data came in at -0.3% (Exp. -0.3%, Prev. -1.1% which was revised further from ,-0.9%). Excluding fuel came in at -0.1% MoM • by volume retail sales fell by 1.1% in the 3 months to October compared to the prior 3 months, by volume • food stores -0.3% (Prev. 0%), non food -0.2% (Prev. -2.1%), non-store (mostly online) grew by 0.8% (Prev. -2.4%) • Data is collected for retail sales in the Monthly Business Survey Retail Sales Inquiry by the Office for National Statistics by asking businesses about the value and volume of sales. Sample size is approx 5000 businesses in the UK. • retail sales are a barometer of consumer spending, which accounts for over 60% of GDP generation in the UK. Changes in retail sales volumes are used to observe consumer spending behaviour. • UK retail sales volumes have been steadily drifting downwards while value has been drifting upwards, displaying that UK consumers are spending more to get less due to inflation. In real terms (inflation adjusted) UK consumers are spending less. 10. Eurozone industrial production came in worse than expected at -6.9% YoY (Exp. -6.3%, Prev. -5.1%) and -1.1% MoM (Exp. -1%, Prev. +0.6%) 11. US Retail sales came in better than expected but fell -0.1% MoM in October (Exp. -0.3%, Prev. +0.9%). On a year-over-year basis is retail sales are up 2.5%(Prev. 4.1%) • ex-gas and autos retail sales climbed MoM 0.1% (Prev. 0.8%) • generally this year US consumer spending has been markedly robust with even Jerome Powell admitting the Federal Reserve underestimated the strength of household balance sheets and this month's data doesn't provide much to suggest this has drastically changed course. How long this can be sustained given tightening credit conditions and a loosening labor market remains another question to be answered. - Inflation in the UK fell rapidly but core still remains well above Bank of England target. With the evidence of slow down in the UK economy, including weaker PMIs, retail sales and GDP, further pauses remain the most likely outcome, rather than further rate hikes in the country. With inflation moderating markets are now pricing in a 100% (yes you read thet correctly) of a Fed pause at their December meeting, according to CME Fedwatch. They also are pricing in rate cuts earlier and as soon as May 2025.

THE WEEK AHEAD ⚠️ Monday: 1. NY Empire State Mfg. Index (May) Tuesday: 2. UK Unemployment Rate (Mar) 3. UK Claimant Count Change (Apr) 4. ZEW Economic Sentiment (May) 5. US Retail Sales (Apr) 6. US Industrial Production (Apr) Wednesday: 7. Japan GDP (Q1) 8. Eurozone CPI & HICP inflation (Apr) 9. US Housing Starts (Apr) 10. US Building Permits (Apr) Thursday: 11. Philly Fed Mfg. Index (May) 12. US Jobless Claims (Weekly) 13. US Existing Home Sales (Apr) 14. CB Leading Indicator Index (Apr) Friday: 15. GfK Consumer Confidence (May) 16. Japanese CPI (Apr) 17. Powell speaks On top of all the above we have Fed speakers on every day that ends in the letter 'y' $MACRO 💊

THIS WEEK'S HIGHLIGHTS ⚠️ 1. The Federal Reserve kept Federal Funds Rate unchanged at 5.25% to 5.5%. The vote was unanimous. Rate of QT left unchanged. Powell speech TL:DR Inflation making good progress with 6 months of good data but want more confidence before cuts at some point later this year. Powell feels it is unlikely to see rate cuts in March. Fed no longer thinks unemployment has to rise and economic growth has to slow for them to meet their inflation goal but they still do expect a slowdown. The Fed plan on discussing QT taper in depth at next meeting. 2. Labor market week came around once again, showing a stronger than expected US jobs market Nonfarm payrolls Nonfarm payrolls headline came in at a staggering 353K for January, wiping out all expectations (Exp. 185K, Prev. 333K). Furthermore, revisions to previous months meant that in November and December combined the number of jobs added to the US economy was actually 126,000 jobs higher. Nonfarm payrolls revisions for 2023 were released and showed stronger than previously reported job growth (total net upward revisions of 359K). Average hourly earnings accelerated to 0.6% MoM (Exp. 0.3%, Prev. 0.4%), significantly above expectations. Wage growth reaccelerating is not something the Federal Reserve want to see but they be comforted by the fact that the Employment Cost Index (ECI), a Fed favored measure of wage inflation, came in softer than expected for Q4. Employment cost index The employment cost index tracks the rate of benefits and wage growth in the US and reported a quarterly increase of 0.9% (Exp. 1%, Prev. 1.1%). Employment cost index Source: BLS Unemployment rate The unemployment rate in the US remained at 3.7% (Exp. 3.8%, Prev. 3.7%) for the third consecutive month. JOLTS (Job Openings and Labor Turnover Survey) Job openings in the JOLTS survey increased on the prior month to 9.026 million (Exp. 8.75M, Prev, 8.925M). This is the highest reading in 3 months. However, general trend is still very much downward from post pandemic highs. The JOLTS quits rate remained at 2.2% (Prev. 2.3%) but the number of quits fell to the lowest in almost three years. Quits have fallen substantially since the post-pandemic labor rush mania and has now cooled substantially and beyond pre-pandemic levels. However, historically speaking, quits is still above the 2% median since 2000. Hires rate picked up to 3.6% (Prev. 3.5%) but remained unchanged at 3.9% in the private sector. The hires rate has cooled off markedly; the rate at which companies are hiring is now below the mean seen since 2000 of 3.7%. JOLTS Hires Layoffs (people being fired) remain low at 1% (Prev. 1%). On the flipside from the strong jobs data this week, jobless claims came in above expectations and the Challenger Job Cuts report recorded the most job losses in ten months. Jobless claims Jobless claims surprised to the upside, coming in at 224K (Exp. 212K, Prev. 215K) while continued claims came in at 1898K (Exp. 1840K, Prev. 1828K) Challenger job cuts Challenger job cuts came in at 82.3K (Prev. 34.8K), a 136% increase on the prior month. Finance, tech and food industries lead the way with the most layoffs. On top of this, companies reported the lowest hiring plans of any January since the Challenger report began recording. Simply explained Nonfarm Payrolls (Establishment) Nonfarm payrolls reports on how many jobs were added in the US each month as well as hours and earnings. Data is gathered by through what is called the Establishment Survey (aka Current Employment Statistics (CES)). This is a survey of businesses. It excludes farm workers. The survey samples around 122,000 businesses and government agencies, representing approximately 666,000 individual worksites. People with multiple jobs are counted for each job they have. Current Population Survey (Household) The unemployment rate is calculated through a different survey. This is called the Current Population Survey or the Household Survey. It surveys around 60,000 households. It is collected by the Census Bureau for the Bureau of Labor Statistics. In the Household Survey people that have multiple jobs are only counted once. Employment Cost Index The ECI essentially measures the change in hourly labor cost in the US via the National Compensation Survey of businesses Jobless claims Initial jobless claims tracks those that are filing for unemployment benefits for their first week whereas continuing claims includes those that are filing after previously already having done so. Thus, initial claims gives an idea of how many people are newly becoming unemployed (current layoffs) whereas continuing claims provides insight into how long people are remaining unemployed once they have lost their job (how hard it is to get a new job). JOLTS Released monthly, the Job Openings and Labor Turnover Survey (JOLTS) is a collation of responses to a random sample of approximately 21,000 nonfarm business and government establishments in the United States, enquiring about current employment conditions in the US. It gives vital insight into the supply and demand dynamics of the US labor market. However, it is backwards looking as the release looks back at the prior month. The JOLTS quits rate is significant because it tracks the proportion of people leaving their job voluntarily. People tend to leave of their own accord when they have a better offer/another job lined up. Decreasing quits suggest that people are finding it harder to find new/better jobs or are less confident of finding one if they were to leave their current post. The JOLTS hires rate records the % of hires relative to current number of employees in any given month. The JOLTS survey now only has around a 30% response rate, which has plummeted from pre-pandemic and is a significant limitation of the release. 3. Dallas Fed Manufacturing index came in much lower than anticipated at -27.4 (Prev. -10.4) Simply explained Published by Dallas Federal Reserve monthly, the index is based on collated responses to a survey of around 100 manufacturing business executives in the state of Texas. Texas produces around 10% of manufacturing output in the US so is a key indicator of manufacturing activity but nonetheless the sample size is small. The index subtracts the % of respondents that see a decrease in business activity from those with a positive outlook. So a negative index number means more business representatives have a poor outlook on business conditions and vice versa. A reading of 0 means there is equilibrium between positive and negative outlooks. 4. Bank Term Funding Program usage declined for the first time in 2 months Borrowing via the Bank Term Funding Program (BTFP) DECREASED by $2.53 billion and now stands at $165.24 billion. Bank Term Funding Program Deeper dive This is the first decline in the Bank Term Funding Program use in two months which, completely unsurprisingly, has occurred in the first week in which banks were no longer able to take advantage of the risk-free arbitrage that has been inflating its usage in the last few months. Up until the Fed announced that it was changing the BTFP borrowing rate to that equal to the Fed’s interest on reserve balances (IORB) rate financial institutions were taking advantage of the arbitrage between what interest rates banks could take out BTFP loans at and the interest they could earn on the loan if they just leave it at the Fed, accruing the IORB. Banks were borrowing money and leaving it in their account they have at the Fed. The amount of interest the Fed would pay them was greater than the cost of borrowing the money and thus they could make profit on the difference between them (arbitrage).The Bank Term Funding Program will be closing its doors on March 11th. Simply explained The Discount Window and the BTFP are both means by which financial institutions can borrow 'emergency liquidity' from the Fed. The DW has been around since 1914 while the BTFP was created in response to the banking crisis in March this year. The DW offers shorter term lending (up to 90 days) than the BTFP (up to 1 year); on top of this, the BTFP is more generous in than the DW, banks can post collateral (usually in the form of US treasury bonds, agency MBS, etc) at the Fed at par value, essentially meaning price fluctuations in bank assets used as collateral are ignored by the Fed when being used as collateral. This was designed so that banks aren’t forced to sell asset portfolios at heavy losses, they can lend against them to meet immediate obligations and continue to hold. To top it off, interest on lending through the BTFP was done at 1 year overnight index swap (OIS) rate + 0.1 but has now been changed to be less generous and is now done at the interest on reserve balances rate offered by the Fed. 5. ISM Manufacturing PMI suggests US manufacturing could be starting to rebound after a 15 month period of contraction January Headline 49.1 (Exp. 47.2, Prev. 47.1) Prices 52.9 (Exp. 46.9, Prev. 45.2) New Orders 52.5 (Exp. 48.2, Prev. 47.0) Employment 47.1 (Exp. 47.0, Prev. 48.5) ISM Manufacturing Source: Trading Economics Deeper dive Headline was markedly better then consensus and saw a notable bounce on the month prior. Manufacturing as a whole remains in slight contraction. Nonetheless, this was the best reading since October 2022 and could signal the makings of a rebound in US manufacturing. Prices (inflation) accelerated for manufacturers, and crossed threshold into expansion. Manufacturers continued to reduce their workforce numbers and at a faster pace while new orders (barometer of current demand) improved markedly and is now in reasonable expansion. This is the 2nd time in 20 months it has expanded. Supplier deliveries increased to 49.1 (Exp. 47), suggesting delivery times are not declining as quickly. In times of high demand, supplier delivery times tend to increase as it is takes longer to fulfil more orders. Overseas demand deteriorated further with new export orders contracting at a brisk and increased pace, coming it at 45.7 (Prev. 49.9%). So while new orders increased, demand from abroad weakened. Simply explained Purchasing manager indexes (PMIs) are indexes which are based on survey responses from businesses. The surveys ask questions about whether businesses are seeing increasing business activity, no change or a decline. Multiple topics are enquired about such as general business activity, production, new orders (demand), delivery times, price changes etc. PMIs give a timely snapshot of business outlook. A reading below 50 = contraction A reading above 50 = expansion A reading of 50 = stagnation 6. US CB consumer confidence increased markedly to its highest since December 2021, the third consecutive monthly increase. Headline confidence printed slightly below consensus expectations at 114.8 (Exp.115 Prev. 108). Deeper dive Consumers’ assessment of their current situation and expectations for the near term both improved. However, plans to make big purchases fell. The improvement was broad-based. In terms of income groups, only those earning $125K or more became more pessimistic. The % of consumers reporting jobs to be plentiful rose to 45.5% (Prev. 40.4%), the number reporting jobs to be hard to get fell to 9.8% (Prev. 13.1%), not signalling that the labor market in the US is particularly tight. Simply explained Monthly release from the Conference Board a non-profit and independent research firm. The index tracks consumer confidence in the US. Consumer confidence indexes are closely watched as it takes the pulse on the outlook of American consumer, whose spending is the main driver of GDP growth. If consumers are pessimistic their behaviour may change and they may spend less. The converse is also true. 7. The Case-Shiller National Home Price Index showed home prices continue to rise in the US on a seasonally adjusted basis October to November home prices rose 0.2% when seasonally adjusted. Deeper dive On a non-seasonally adjusted rate they fell 0.2% (-0.18%) month over month from their all-time high. This is the first monthly decline since Jan 2023. On a year-to-date basis (to November) house prices in the US were up 6%. On the other hand, house prices measured by the FHFA US house price index rose 0.3% (Exp. 0.3%, Prev. 0.3%). 12 out of 20 of the metropolitan areas in the 20 city S&P Case-Shiller index reported month over month price declines. Simply explained The S&P Case-Shiller national home price index tracks the price changes in single family homes in the US. It only tracks the prices of homes that have previously been sold, so does not include new home prices. The Case Shiller national index forms a composite index by also incorporating data from the FHFA on top of use of public property records in which it uses to calculate single family home prices. The FHFA US house price index measures price changes in homes with mortgages backed by Fannie Mae and Freddie Mac. Includes different types of houses, unlikely the Case-Shiller which only includes single family homes. 8. The Bank of England kept interest rates unchanged at the latest Monetary Policy Committee meeting Rates remain at 5.25% Deeper dive The BOE removed their bias towards further tightening of policy in their statement but interestingly, there was more of a split in opinions than expected amongst Bank of England members. 6 voted to keep rates unchanged, 2 voted to RAISE 0.25% and 1 voted to cut 0.25%. Despite removing some of their tightening bias the BOE emphasised that they want to see more evidence of inflation cooling to target sustainably prior to considering rate cuts. 9. The Eurozone unexpectedly avoided technical recession at the end of 2023 but showed ongoing weakness in the latest GDP release. The German economy contracted in the fourth quarter. 🇪🇺Eurozone GDP QoQ 0% (Exp. -0.1%, Prev. -0.1%) GDP YoY 0.1% (Exp. 0%, Prev. 0%) 🇩🇪Germany GDP QoQ -0.3% (Exp. -0.3%, Prev. 0.0%) GDP YoY -0.2% (Exp. -0.3%, Prev. -0.2%) 🇫🇷 France GDP QoQ 0% (Exp. 0%, Prev. 0%) GDP YoY 0.7% (Prev. 0.6%) Simply explained GDP is the estimated value of goods and services produced in a given period of time within a country or economic area and is widely considered the bottom-line measure of a country’s economic growth. A technical recession is classified as two consecutive quarters of negative GDP growth. Germany is the biggest economy in the Eurozone responsible for 25-30% of GDP generation in the economic area. France comes in at a distant second. 10. German Retail Sales added to the tally of recent woeful German economic data releases Retail sales -1.6% MoM (Exp. 0.7%, Prev. -2.5%) -1.7% YoY (Exp. -2%, Prev. -2.4%) Simply explained Released monthly by Destatis, retail sales measure the value of goods sold in retail in Germany, both online and instore. It is used as a barometer of consumer spending, which is the biggest driver of GDP growth. They are inflation adjusted and seasonally adjusted figures. 11. UK house prices climbed at a robust pace in January, according to the Nationwide House Price index The Nationwide HPI came in at +0.7% MoM for January; on a year over year basis home prices are down 0.2%. Simply explained Nationwide are one of the biggest mortgage lenders in the UK and their data is based off of their own mortgage lending data. The index is the longest running index of its type in the UK, with data back to the 50s. 12. The Chinese real estate saga continues Evergrande, one of the biggest real estate developers in China was given a liquidation order by a court in Hong Kong after debt restructuring deals couldn't be agreed upon. Evergrande stock plummeted following the news and trading was suspended. It remains to be seen if Chinese mainland courts will recognise the ruling. There is still significant uncertainty surrounding the outcome. This will likely worsen sentiment in the already limping Chinese economy as the ongoing domestic weakness as a result is proving difficult to shake. The Chinese central bank (People’s Bank of China) have been injecting liquidity into markets through various means to try and increase economic activity and encourage bank lending. Government fiscal stimulus is also likely to escalate in the coming months. The Evergrande story has been an ongoing saga since the real estate giant first defaulted on its debt in 2021. The real estate giant has >$300 billion in liabilities and the process of liquidation for such a behemoth would be complex, long winded and have unpredictable consequences for the broader Chinese economy. The Chinese real estate sector is the second largest on the planet. - Weakness in the Eurozone continues, seemingly concentrated for the most part in the two biggest economies in the economic area, Germany and France. Markets are pushing back their bets on March rate cuts from the Federal Reserve after Powell explicitly said he didn’t expect them this soon and Nonfarm Payrolls suggested that US labor market has been stronger than anticipated. Markets are now pricing in an 80% chance of a further hold by the Fed in March with the first cut expected to come in May, priced in at around a 71% chance.

US JOLTS Quick Summary ⚠️ 1. US job openings come in at 9.582 million (Exp. 9.61, Prev. 9.616). • This is the lowest level since April 2021, continuing the downward trend. 2. Quits rate down to 2.4% (Prev. 2.6%) • This is the number of people who are leaving their job voluntarily. Decreasing quits suggest that people may be finding it harder to find jobs as people tend to leave of their own accord when they have a better offer/another job lined up. 3. Layoffs remain stagnant at 1% 4. Hires rate 3.8% (Prev. 4%) • This is the lowest hires rate since April 2020, suggesting new hiring is slowing down. - The report signals softening of a still very tight labor market in the US. MACRO 💊

FOMC MINUTES SUMMARY⚠️ 1. No further confidence of inflation returning to 2% in recent months: ‘Participants noted disappointing readings on inflation over the first quarter …and assessed that it would take longer than previously anticipated’ 2. Some noted January’s hot PCE inflation could be due to seasonal factors and many noted more volatile components have contributed recently. However, some noted that inflation increases have been relatively broadband and shouldn’t be discounted. 3. 'Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.’ 4. Despite participants feeling monetary policy is restrictive at present there was debate about whether financial conditions were tight enough; a number of participants noted it was unclear whether they were restrictive enough to bring down demand and inflation. 5. Some noted that financial conditions looked only favorable for wealthier individuals due to rising asset prices. Members pointed out low to moderate-income households appear to be coming under pressure, pointing out the increase in buy now pay later as well as increasing delinquencies on some types of consumer loans. 6. Participants considering that financial conditions may not be restrictive enough mentioned that high interest rates may be having smaller effects than in the past. 7. Almost every participant agreed with decision to slow QT. A few stated they could have supported less of a decline in the pace of QT or delaying the start of the slowing. 8. QT Treasurys cap reduced from $60 billion to $25 billion, agency debt and MBS cap remained at $35 billon. 9. The reason given for slowing QT is to reach ‘ample’ reserves from ‘abundant’ reserves in as smooth a way as possible. The Fed felt that continuing previous pace of QT could have inflicted stress on money markets which may have stopped them reaching their balance sheet run off longer term goal. 10. Economic activity continued at solid pace, consumer spending remained firm. GDP moderated but a favored metric within GDP, Private Domestic Final Purchases, was still robust. GDP is, however, expected to slow from last year. 11. Several participants commented that growth of aggregate demand would likely have to slow from its strong pace in recent quarters for inflation to move sustainably toward the Committee's goal.