Centerfin Collective Weekly

Weekly Update April 21, 2023

Apple goes to India, Fed officials hold the line, Credit showing signs of stress

Apple goes to India

Apple opened its first retail store in Mumbai this week, with Tim Cook personally attending the opening ceremonies. Given the iPhone’s relatively high price point, Apple has a very small footprint in India, with 95% of the country’s mobile devices running on Google’s Android operating system. Apple’s push comes as India’s market for high-end smartphones has shown signs of growth and comes at a time it is looking to diversify its manufacturing operations away from China.  Apple only manufactures 5% of its iPhones in India, but has a goal of 25%.

  • Apple manufactures the vast majority of its products in China
  • Given China’s changing role on the world stage, Apple has had to delicately diversify its manufacturing capacity
  • Over the last several years, Apple has shifted production to neighboring Vietnam and India
  • While the opening of its first retail stores was an important milestone, Tim Cook making an appearance was symbolic given their manufacturing ambitions

Fed officials hold the line

This week we heard from 10 officials at the Federal Reserve, with most re-iterating that interest rate hikes are still warranted. Given the bank failures last month have thus far been contained, Fed officials seem to have returned to inflation as their main focus. The market is now pricing in an 80% chance of another 0.25% hike in the first week of May to a target of 5-5.25%. In the second half of the year, while most Fed officials and economists expect rate levels to remain steady, the market is pricing in at least a 0.25% rate cut.

  • The Federal Reserve was late to raise interest rates as inflation began to show momentum in 2021
  • Given this left their credibility in question, the Fed has been steadfast in aggressively raising interest rates to address the situation
  • The rule of thumb in prior hiking cycles is that the Federal Reserve raises interest rates until “something breaks”
  • Many have argued that the failure of several banks last month warrants at least a pause in their hiking cycle
  • Given the lack of fallout from the several bank failures, the Fed seems intent on continuing their hiking cycle until we see inflation closer to target levels
  • As we have written about before, while inflation is clearly headed lower, it seems that the unintended consequences of further rate hikes outweigh the risks of inflation

Credit showing signs of stress

It has been five weeks since the failure of Silicon Valley Bank, and while we seem to have avoided a full-blown banking crisis, there are concerning signs of stress in the corporate credit markets. Even before the collapse of SVB, the number of bankruptcies among private companies with at least $10 million in assets rose to an average of 7.8 per week at the end of February, up from a pandemic peak of 4.5 per week in June 2020. The volume of corporate debt trading at distressed levels has surged 300% over the past year, and a net 9% of small businesses who borrow regularly found it harder to obtain financing in March than in the prior three months. This was the largest reading in over a decade.

  • Many businesses need to be able to borrow money (corporate credit) as part of their short and long-term financing needs
  • During economic downturns, credit conditions get tight, leading to pressure on businesses and sometimes bankruptcies
  • While we have not seen a cascade of bank failures following SVB, lending conditions are showing clear signs of tightening
  • While the stock market has been relatively strong since the start of the year, the cracks in credit markets are red flags that should not be ignored

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