Five interesting things that Hodges Capital research analysts discovered this week...

#1 TURNING TIDE: China’s National Health Commission (NHC) has reported that the country had 9.58M births in 2022, down 9.6% y/y and the lowest number of births ever recorded since records began in 1949. China’s population also reportedly declined by 830K, which is the first decrease in over 60 years. In 2021, China lifted the birth limit to three children, but since such a small share of all women are mothers of two children to begin with, small changes in the share who decide to have three children have a negligible effect on the overall births.

#2 STRONG INTEREST: As the post-2021 rising rate regime shifts into second gear, with the 10-year Treasury yield up some 75 basis points since the end of August, anomalous activity pervades across the bond market. Meanwhile, capital continues to pour into the iShares 20+ Year Treasury Bond ETF (ticker: TLT) at a torrential rate, as net inflows stand at some $17 billion during the year-to-date, equivalent to nearly half of total assets. Though the fund has logged six consecutive weekly losses to bring its post-2020 drawdown to nearly 50%, uncowed bond bulls do their best to make sure they don’t miss any rebound. Open interest for bullish call options on the TLT topped 3.5 million contracts this week per data from Bloomberg, easily marking a record high and representing a near seven-fold increase from the start of last year. (Grant’s Interest Rate Observer)

#3 POSITIVE VIBES: If expectations break their 3-quarter run of being far too positive, then the Bank Lending Survey is consistent with growth continuing to stagnate but potentially to be bottoming out. If we see another quarter where banks are too optimistic, then growth is more vulnerable to negative prints. Next stop, the Fed SLOOS in early November to see if there are any improvements there and whether it matters as much if not given the higher capital market (more termed out fixed debt) weighting to lending. Today flash US PMIs remain okay for now and continue to outperform Europe's. (Deutsch Bank)

#4 BLACK GOLD: We are expecting oil prices to rise in the next few months. For one, oil freight prices are up 50% but prices haven’t followed suit. Furthermore, the US already chose to drain the reserve and will now have to replenish it. Finally, the conflict in the Middle East will put strain on the supplies. (Deutsch Bank)

#5 CASH IS KING: With the recent bond sell-off there is now no fixed income asset that has outperformed USD cash amongst the main assets we (DB) use in our monthly performance review. The last holdout was US High Yield and with the bond sell-off, the return of the iBoxx US HY index has dipped below the return of US T-bills YTD. US HY has been seen to be a strong performer this year, but it shows how difficult it is for any duration to perform in a sell-off, especially in a heavily inverted curve environment where carry is negative for government bonds relative to cash. The good news is that yields are higher across the board, so positive returns from here should get easier in fixed income. However, with credit spreads still very tight, spreads would likely widen more than government bonds rally in a recession so you still have to have a soft landing to get maximum benefit. (Deutsch Bank)

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