The bankruptcy ‘rude awakening’ that Elon Musk warned has not yet happened: Morning Brief – Yahoo Finance | Vette Leader

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Wednesday 10 August 2022

Today’s newsletter is here brian cheung, a moderator and reporter covering the Fed, the economy and banks for Yahoo Finance. You can follow him on Twitter @bcheungz.

Elon Musk in May tweeted that a recession was imminent and that “some bankruptcies are bound to happen”.

But that “rude awakening” that the billionaire warned about is yet to come in corporate America.

Despite high inflation and an ugly stock market eroding wage growth, corporate America has yet to see a significant spike in bankruptcies, according to recent data from S&P Global Market Intelligence.

In a report released earlier this month, S&P counted just 212 US bankruptcy filings from the beginning of the year through July 31. This was the lowest number of bankruptcy filings in the first seven months of a year since at least 2010.

Data from S&P Global Market Intelligence shows filings for bankruptcy protection are at a more than 10-year low, surpassing an already sluggish 2021. (Source: S&P Global Market Intelligence)

Loan investors don’t seem concerned about widespread defaults going forward.

A recent survey by Bank of America Global Research showed that credit investors’ expectations for corporate default rates over the next year have increased. However, at 3.1%, the expected corporate default rate is well below expectations during the pandemic, which were about twice as high.

BofA surveyed US credit investors and found that default rates are expected to increase over the next 12 months.  (Source: Bank of America US Credit Investor Survey)

BofA surveyed US credit investors and found that default rates are expected to increase 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 to curb inflation, causing longer-term interest rates to double. The resulting rise in interest rates increases the burden on highly indebted companies.

The Fed’s anti-inflation firefight will require more rate hikes from here, but interestingly, longer-term rates – which are more market-driven – appear to have eased off the June highs.

Nonetheless, the acceleration in borrowing costs means Musk’s argument is well understood — companies could buckle under pressure as the U.S. economy has contracted for two straight quarters and profit margins may be at risk.

And indeed, a number of companies have gone under. Among the bigger casualties this year: beauty products maker Revlon and chemicals maker TPC Group. The crypto winter has also led to the high-profile demise of several crypto firms.

But the aggregate stats show a corporate America far from Musk’s prophecy, likely due to heavy fundraising during the pandemic.

Up until this year, the Fed maintained its post-pandemic policy of near-zero short-term interest rates. In the depths of the crisis, the Fed also turned to buying corporate bonds, directly and indirectly, stimulating the market, which large companies used to strengthen their balance sheets.

Although the Fed’s corporate lending facility is now closed, the boost from cheap and available credit appears to have had a lasting impact in the early stages of this year’s economic slowdown.

The same story broadly applies to American homes as well, as pointed out by TKer’s Sam Ro. Stimulus checks and other measures taken during the pandemic have largely been channeled into paying down debt (credit cards, mortgages, car loans).

And while the debt balance defined as past due isn’t shrinking, New York Fed data shows the number of repayments defined as “heavily downgraded” hasn’t increased — in fact, it’s decreased.

The New York Fed's Household Debt and Credit Report showed defined arrears.  how

The New York Fed’s Household Debt and Credit report showed that arrears, which were defined as “heavily depreciating,” declined in the second quarter of the year. (Source: Federal Reserve Bank of New York Credit Panel/Equifax)

The picture of both corporate and household debt could change if the recessionary story continues.

But to date, the combination of economic slowdown and aggressive Fed action hasn’t been enough to reverse pandemic-era policies that still seem to stave off the worst of corporate results.

What to see today

economic calendar

  • 7:00 p.m. ET: MBA Mortgage ApplicationsWeek ending August 5 (1.2% in previous week)

  • 8:30 a.m. ET: consumer price indexMoM, July (0.2% expected, 1.3% mom)

  • 8:30 a.m. ET: CPI excluding food and energyMoM, July (0.5% expected, 0.7% mom)

  • 8:30 a.m. ET: CPI YoYJuly (8.7% expected, 9.1% mom)

  • 8:30 a.m. ET: CPI excluding food and energy YoYJuly (6.1% expected, 5.9% mom)

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

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

  • 8:30 a.m. ET: Real average hourly wageYoY, July (-3.6% MoM, revised to -3.4%)

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

  • 10:00 a.m. ET: wholesale inventorys, MoM, June final (-1.9% expected, 1.9% mom)

  • 10:00 a.m. ET: wholesale salesMoM, June (0.5% expected, 0.5% mom)

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



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

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