The ‘rude awakening’ to bankruptcies that Elon Musk warned about hasn’t happened yet

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Wednesday, August 10, 2022

Today’s newsletter is from Brian Cheung, a newscaster and reporter covering the Fed, economics and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

In May, Elon Musk tweeted that a recession was approaching and that “some bankruptcies were to occur”.

But this “rude awakening” the billionaire warned of has yet to surface in Corporate America.

Despite the erosion of wage gains by high inflation and a lousy stock market, Corporate America has yet to show a substantial increase in bankruptcies, according to recent data from S&P Global Market Intelligence.

In a report released earlier this monthS&P has had just 212 U.S. bankruptcy filings year-to-date through July 31. It was the lowest number of bankruptcy filings in the first seven months of any year since at least 2010.

Data from S&P Global Market Intelligence shows bankruptcy protection filings over 10 years ahead, beating an already low year of volume in 2021. (Source: S&P Global Market Intelligence)

Credit investors also don’t seem to be worried about widespread defaults in the future.

A recent Bank of America Global Research survey showed a rise in credit investor expectations for the rate of corporate defaults over the next year. But at 3.1%, the expected corporate default rate is well below expectations during the pandemic, which were roughly double that level.

BofA polled US credit investors and found that expectations are for a higher incline in default rates over the next 12 months.  (Source: Bank of America US Credit Investor Survey)

BofA polled US credit investors and found that expectations are for a higher incline in default rates over the next 12 months. (Source: Bank of America US Credit Investor Survey)

These are remarkable statistics considering how financial conditions have tightened amid the Federal Reserve’s aggressive rate hikes aimed at taming inflation, which have caused long-term interest rates to double. This resulting rise in rates increases the burden on heavily indebted companies.

The Fed’s inflation fight will require further interest rate hikes from here, but interestingly longer-term rates – which are more market-oriented – appear to have retreated. June highs.

Still, accelerating borrowing costs mean Musk’s point is well understood – companies could buckle under pressure as the US economy has contracted for two straight quarters and profit margins could be at risk. .

And, indeed, a number of companies have gone bankrupt. Among the biggest victims this year: a beauty products company Revlon and chemical manufacturer PTC Group. The crypto winter also led to the highly publicized demise of several crypto companies.

But the overall statistics show a corporate America far from Musk’s prophecy, likely due to strong fundraising during the pandemic.

Until this year, the Fed maintained its post-pandemic policy of near-zero short-term interest rates. At the height of the crisis, the Fed also decided to buy directly and indirectly corporate bonds, which had the effect of supporting the market used by large companies to strengthen their balance sheets.

Although the Fed’s corporate credit facility is now closed, the impulse of cheap and available credit appears to have had lasting effects at the onset of this year’s economic downturn.

The same story also applies to American households, as TKer’s Sam Ro said. underline. Stimulus checks and other measures taken during the pandemic have largely been channeled into debt repayment (credit cards, mortgages, auto loans).

And although the balance of the debt defined as overdue does not decrease, New York Fed data shows that the number of refunds defined as “very derogatory” has not increased – in fact, it has actually fallen.

The New York Fed's Household Debt and Credit report showed definite defaults.  as

The New York Fed’s Household Debt and Credit report showed delinquencies defined as “severely derogatory” fell in the second quarter of the year. (Source: Federal Reserve Bank of New York Credit Group/Equifax)

The picture of corporate and household debt could change as the recessionary story continues to unfold.

But so far, the combination of the economic slowdown and aggressive Fed action has not been enough to undo the pandemic-era measures that always seem to head off the worst corporate outcomes.

What to watch today

Economic Calendar

  • 7:00 a.m. ET: MBA Mortgage Applicationsweek ended August 5 (1.2% over the previous week)

  • 8:30 a.m. ET: Consumer price indexmonth-over-month, July (0.2% expected, 1.3% in prior month)

  • 8:30 a.m. ET: CPI excluding food and energymonth-over-month, July (0.5% expected, 0.7% in prior month)

  • 8:30 a.m. ET: CPI year over yearJuly (8.7% expected, 9.1% in previous month)

  • 8:30 a.m. ET: CPI excluding food and energy year-over-yearJuly (6.1% expected, 5.9% in previous month)

  • 8:30 a.m. ET: NSA CPI IndexMarch (296,740 expected, 296,311 in previous month)

  • 8:30 a.m. ET: IPC Core Index AGJuly (295,835 expected, 294,354 in previous month)

  • 8:30 a.m. ET: Actual average hourly earningsyear-over-year, July (-3.6% in previous month, revised to -3.4%)

  • 8:30 a.m. ET: Real Average Weekly Earningsyear-on-year, July (-4.4% in previous month, revised to -4.0%)

  • 10:00 a.m. ET: Wholesale inventorys, month over month, June final (-1.9% expected, 1.9% in previous month)

  • 10:00 a.m. ET: Wholesale Salesmonth-over-month, June (0.5% expected, 0.5% in prior month)

  • 2:00 p.m. ET: Monthly budget statement (-$175.0 billion expected, -$302.1 billion in prior month)

Earnings

Pre-marketing

  • Fox Corp. (FOXA), Jack in the Box (JACK), Sonos (SONO), Wendy’s (WEN), Wolverine World Wide (WWW)

Post-marketing

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