Fog of Inflation - MIDDAY MACRO - 10/12/2022
Midday Macro – 10/12/2022
Overnight and Morning Recap / Market Wrap:
Price Action and Headlines:
Equities are higher, although only marginally, as this morning's PPI data showed no deceleration in pipeline inflationary pressures while whispers of whispers that the BoE may still support their markets circulated, supporting risk appetite
Treasuries are higher, now helped by inline September FOMC minutes just released, but traders await tomorrow’s CPI to see if the ten-year will meaningfully break through 4% or move back to 3.5%
WTI is lower, with the recent rallying cooling prices back to an $87 handle as OPEC+ actual production is still below their new lower production target, while Russian price caps, sustainability of SPR draws, and rising diesel prices skew the overall supply/demand picture this week
Narrative Analysis:
Equities continue to consolidate after last week’s sell-off took us back to near the lows of the year, with today's PPI data and Sept FOMC minutes failing to move the S&P out of its recent range. The macro backdrop continues to be problematic, with good data still being seen as bad as well a hypersensitivity to any policy headlines, although the Fed’s unified message of “more to do” is starting to be so ingrained that the pendulum is swinging and more dovish speeches, such as the one given by Brainard earlier in the week, get significantly more attention. On the geopolitical front, there continues to be little hope for a de-escalation in either Ukraine or Chinese-U.S. relations. Treasury yields are back near recent highs, with the curve inversion continuing to indicate a recession is coming, a view encouraged by numerous official bodies coming out and urging the Fed to slow their tightening path. Past Fed officials who recently received shiny medals are also echoing other more concerned mainstream economists in expressing concern at the pace of hikes. However, as seen in last week’s Service PMI and employment report, the economy continues to power through the multitude of headwinds facing it, keeping the Fed funds terminal rate expectations and real rates rising. Oil has given up recent gains after a multi-week rally saw WTI move into the low 90s again, with so many nuanced variables at play in that market that it's hard to get a true sense of where supply and demand is going. The agg market continues to generally trend higher, although today’s WASDE report saw some relief to wheat prices while beans rose. The dollar is flat on the day, with the $DXY a little above 113, as the Pound is higher, Euro is flat, and Yen is weaker.
The Nasdaq is outperforming the S&P and Russell with High Dividend Yield, Growth, and Momentum factors, and Energy, Consumer Staples, and FInancials sectors all outperforming on the day. There continues to be a divergence between outperforming sectors and factors (Energy and Consumer Staples vs. Small Cap & Momentum) over the last week, with sectors split between cyclical and defensive while momentum continues to do exceptionally well and small-caps likely reflecting a U.S. sales bias.
@KoyfinCharts
S&P optionality strike levels have the Zero-Gamma Level at 3914 while the Call Wall is 4100. The 3800 Vol Trigger level remains a strong resistance line overhead while support fell to the 3500 Put Wall. Markets are not “oversold” until/unless we break 3500. Headlines matter more in large negative gamma regimes, which we are in and as seen yesterday by the BoE’s announcement, due to algos sparking an initial reaction that is reinforced by options hedging flows. Tomorrow’s CPI is being marked with elevated implied volatility (IV). However, there is not a large expiration until 10/21. Therefore tomorrow's CPI will spark either a massive spike in IV or a large drop in IV. This will invoke Vanna hedging flows, which will further drive the underlying index price.
@spotgamma
S&P technical levels have support at 3575, then 3545, with resistance at 3625, then 3655. The market is building a clear, broad two-week+ base with 3575 as support and has generally spent most of this week stuck between 3575 and 3630. This multi-week base is building after the September meltdown to set up the next clean trend leg. Tomorrow’s CPI is likely the breakout catalyst, either higher or lower.
@AdamMancini4
Treasuries are lower, with the 10yr yield at 3.89%, higher by 6 bps on the session, while the 5s30s curve is steeper by 3 bps, moving to -21 bps.
Deeper Dive:
The term “Fog of War” refers to the uncertainty in situational awareness experienced by participants in military operations. In recent weeks, the Russian military is becoming increasingly familiar with this state of uncertainty after Ukrainian forces commenced a “thunder run” through the Kharkiv region, recapturing lost land, enemy equipment, and further demoralizing Russian troops. Unfortunately, the current state of inflation is also experiencing a “Fog of War” moment, with various leading and lagging indicators painting a conflicting picture. To put it differently, we have more confidence in our ability to tell you where core PCE will be in a year verse where it will be next month. Of course, this isn’t helpful, given the current inflation-driven tactical trading environment. As a result, there continues to be little reason to stick one's neck out, as technicals and optionality indicate a continuation in the bear market. Juxtaposing this against harder economic data that has held up better than expected and softer data, such as consumer and business confidence, which has improved/stabilized, and the overall picture becomes more muddled. With equity valuations becoming increasingly attractive, assuming an earnings outlook that does not incorporate a brutal recession, it is possible to build a case that the bottom is close. However, given the increased geopolitical risks, no sign of real rates and financial conditions peaking due to a Fed still being laser-focused on getting policy well into restrictive territory (before pausing for an undetermined amount of time), and the risk-reward skew still favors patience and caution. As a result, we have no updates to our portfolio, still cautiously positioned for a more positive Q4 but closely watching policymaker's resolve and the geopolitical backdrop.
With all eyes on tomorrow's CPI data, which has been beating forecasts since the pandemic began, two things are clear through the “fog” regarding the macro forces moving markets. First, the Fed is staying on message, with the herd of recent speakers expressing a strong alignment in views at least until year-end, indicating the Fed funds range will likely be 4% to 4.25% given no significant deterioration in financial stability. It seems increasingly unlikely there could be a meaningful enough decrease in inflation at this point to change the course. However, given the growing, if not feverish, recessionary fears, primarily driven by how long the Fed will maintain policy in an overly restrictive stance, any data pertaining to inflation, business activity, and labor markets are seeing historically outsized reactions from the market, indicating that rate and equity volatility will remain elevated for some time and this will continue to reduce risk ownership and market participation/depth.
*Predicting CPI has become increasingly hard, with the forecasters continually underestimating monthly gains since the onset of the pandemic
*As a result of this continual underestimation of CPI data, the market has become increasingly negative in its response to misses
*Finally, and as only one data point among many indicating a demand for safe-haven assets, demand for T-bills is again at extreme levels as investors increasingly move into cash
Secondly, the recent battlefield success by Ukrainians increases the geopolitical risk premium risk assets should reflect. The war is now moving quickly into its next phase, which will increasingly lead Russia to different/desperate measures, as seen by recent attacks on physical and cyber infrastructure (globally) and increased atrocities on civilian populations. As a result, energy and food security will continually be questioned even if supply/prices improve, which we believe will happen given the demand destruction and source/fuel conversations occurring in energy markets and the likelihood that Russia will export grains itself soon, needing the revenue. Many more things at play in both those markets and something we hopefully can elaborate on soon in a separate writing. However, the bottom line is that the tail risks have grown for either a regime change in Moscow or a significant escalation in the war that may more directly encompass parties outside of Ukraine.
*Ukrainian forces have taken an area of land back from Russia that is around the size of Delaware, turning blame in Russia to military leadership as “partial” conscription looks to be getting off to a rough start in support of this “special operation.”
*With hundreds of thousands of primary-aged men being conscripted and hundreds of thousands fleeing the country (as seen above at the Georgia border), an already demographically challenged Russian economy is about to get a very rude awakening to the realities of its situation
Clearly, other macro and micro factors are weighing on sentiment, changing inflationary pressures (up and down), and moving financial markets, but we highlighted the above two as being the most front and center recently. On the aggregate, global monetary policy will continue to be tightened until inflation has shown at least a meaningful quarter or two of decline. We still see the current inflationary pulse as a global affair that needs a global policy response, which is precisely what is occurring. This means, at least for the foreseeable future, there is not much to be done other than wait in cash and be tactically nimble with either long or short trades based on more technical and optionality-driven rallies or sell-offs. We certainly see the slowdown in economic activity increasing in 2023 but remain more optimistic than most regarding U.S. growth. However, global growth is already falling well below trend and will be more uneven and problematic based on the internal economic composition of individual nations and the burden inflation and subsequent policy tightening have on their consumers and firms.
*The weight of inflation, which acts as a tax on consumption and weakens sentiment, has rippled across the globe, while war, drought, and poor covid policy have only made things worse in specific regions/countries
*The amount of central banks hiking has likely never been so high, and given the lag effect that a tighter policy has on the real economy, it is still very unclear how much weight that will have on economic growth
As a final thought, we do take comfort in knowing that by the end of the first quarter of next year (two more quarters away), the Fed will be at some terminal level, and the next policy move will likely be rate cuts, given our conviction that inflation will return back to target in 2023 (faster than forecasted) and continual QT will reduce the need to leave rates in an overly restrictive territory for too long. We also take comfort in knowing that one year from now, the level of GDP, UER, PCE inflation, and the Fed funds rate will not be where the Fed currently projects it. It never is, and this time is not going to be different.
*Until real rates stop rising, risk asset’s volatility will remain elevated, and no meaningful rally will develop
*Absolutely crazy that a year ago, the Fed was predicting the above, and when coupled with recent papers stating the Fed has little ability to predict inflation, it leads us to believe that current SEP PCE projections for ’23 & ’24 are too high
*“Now, most of you have been playin' this game for ten years. And you got two more quarters, and after that, most of you will never play this game again as long as you live.” – Coach Gaines on Being Perfect and hopefully us next summer talking about deflationary forces (and never 8-9% inflation ever again)
*Recent pullback in risk dropped the mock portfolio to -2.7% since inception, with a tighter stop on our SPY long likely to hit if CPI comes in hotter than expected tomorrow.
Econ Data:
The Producer Price Index increased by 0.4% in September, the first increase in three months and twice the market expectation of a 0.2% rise. This moved the annual PPI rate to 8.5% from 8.7%. Core PPI rose 0.3% MoM, the same as in the previous two months and in line with market estimates, driving annual core PPI to 7.2%, unchanged. The final demand for both goods and services rose by 0.4%. The cost of services was driven by traveler accommodation services (6.4% MoM), food and alcohol retailing (2.6%), portfolio management (2.1%), and machinery and vehicle wholesaling (1.5%). The cost of goods was driven by food prices rising 1.2%, namely fresh and dry vegetables (15.7%). Prices for diesel fuel (9.1%), residential natural gas (2.6%), chicken eggs (16.7%), home heating oil (10.7%), and pork (5.5%) also moved higher. Conversely, the index for gasoline fell by - 2%. Intermediate processed goods prices rose 0.1% but were down by -0.6%, excluding food and energy. Unprocessed goods prices increased by 0.3% and were up 0.6%, excluding food and energy.
Why it Matters: Not a great report, and on balance, the PPI data showed more inflation pressures than expected. The annual levels fell due to higher comparisons, as last winter was when PPI generally began to rise. Over a quarter of the increase in the final demand for services can be traced to rises in traveler accommodation services. We are doubtful that demand will stay robust enough there to allow such price gains to continue. Further, a major factor in the September increase in prices for final demand goods was a 15.7% increase in fresh and dry vegetables. This series, as well as many other food subcategories, have become confusingly volatile. After two months of notable declines, the rise in diesel is also not a good sign given the effect fuel costs can have on overall inflation psychology, although gasoline fell for a third month. Elsewhere, transportation and warehousing continue to fall, boding well for goods prices falling. Interestingly, export prices for fuels and foods, as well as government-purchased energy and goods, were all much higher than similar items being consumed privately domestically.
*The higher-than-expected headline PPI and inline core PPI were driven by food and supported by travel, with end good and service inflation being the same at 0.4%
*Export prices for food and energy came in very strong, with government-purchased energy and goods also contributing to the higher-than-expected monthly increase.
*As China struggles to reopen due to zero-Covid, has the traditional relationship between PPI there and in the U.S. become more detached?
The NFIB Small Business Optimism Index rose to a four-month high of 92.1 in September from 91.8 in August.
30% reported that inflation was their single most important issue in operating their business, up one point from August. 10% of owners cited labor costs as their top business problem, and 22% said that labor quality was their top problem.
46% of owners reported job openings they could not fill last month, down three points from August.
A net negative 5% of all owners reported higher nominal sales in the past three months, up three points from August. The net percent of owners expecting higher real sales volumes improved by nine points to a net negative 10%. Meanwhile, owners expect better business conditions over the next six months fell to a net negative 44%.
The net percentage of owners raising average selling prices decreased two points from August to a net 51%. A net 31% of owners plan price hikes.
The frequency of reports of positive profit trends was a net negative 31%, up two points from August. Among owners reporting lower profits, 42% blamed the rise in the cost of materials, 21% blamed weaker sales, and 12% cited labor costs. For owners reporting higher profits, 44% credited sales volumes, 24% cited usual seasonal change, and 18% cited higher prices.
56% of owners reported capital outlays in the last six months, up four points. 24% plan capital outlays in the next few months, down one point.
A net 45% of owners reported raising compensation, down one point from August. A net 23% of owners plan to raise compensation in the next three months, down three points from August but historically still very high.
Why it Matters: We are big fans of the NFIB Small Business survey and why it takes up a good amount of real estate in today’s Econ Data section. The report paints a realistic take on the current challenges and can be seen as marginally more positive than last month. “Inflation and worker shortages continue to be the hardest challenges facing small business owners,” said NFIB Chief Economist Bill Dunkelberg. “Even with these challenges, owners are still seeking opportunities to grow their business in the current period.” Current and expected sales and profitability improved, all be it slightly, while inventory levels were seen as more appropriate. As reported in NFIB’s monthly jobs report, owners’ plans to fill open positions remain elevated, with a net 23% of planning to create new jobs in the next three months. Finally, there were no signs that future investment activities are notably falling or access to capital/credit is impaired, things we would expect during a more severe economic downturn.
*Small business owners continue to highlight the known problems of higher costs due to inflation and trouble finding qualified workers, but hiring intentions continue to be positive as sales expectations are rebounding off summer lows
*Future inflationary pressures from rising wages or higher-end prices fell further in September
The New York Fed’s Survey of Consumer Expectations showed that inflation expectations for the year ahead declined for a third consecutive month to 5.4% in September from 5.7% in August. Median home price growth expectations declined to 2%, its lowest reading since June 2020, and the cost of medical care slowed slightly. On the other hand, consumers expect prices to rise faster for gas (+0.4 percentage point to 0.5%), food (+1 percentage point to 6.9%), and rent (+0.1 percentage point to 9.7%). Meanwhile, three-year-ahead inflation expectations rose slightly to 2.9% from 2.8%. On the labor front, expectations for earnings growth fell by 0.1 percentage points to 2.9%, and unemployment expectations also fell by 0.9 percentage points to 39.1%. Household spending was seen rising 6%, well below the 7.8% level in August, and the biggest drop since the series’ inception in June 2013.
Why it Matters: Despite a slight tick higher in longer-term inflation expectations, Fed officials can take some comfort from the third month in a row of declining one-year-ahead inflation expectations. The labor side also showed a very slight reduction in expectations for wage increases, although the majority of labor indicators were little changed. Finally, there was a historic drop in spending intentions. When mosaiced with other respondent results in the survey, it is clear inflation expectations, and spending intentions are falling despite a more confident outlook on labor markets, which bodes well for a softer landing outlook.
*One-year-ahead inflation expectations continue to fall, as seen in other consumer surveys and in line with the drop in gas prices since the early summer highs
*Interestingly, despite a slight decrease in compensation expectations, worries over losing one's job decreased, although both moved very slightly.
Policy Talk:
Vice Chair Lael Brainard gave a speech titled “Restoring Price Stability in an Uncertain Economic Environment” at "Shocks and Aftershocks: Finding Balance in an Unstable World" 64th National Association for Business Economics Annual Meeting in Chicago. After being relatively quiet over the past few months, Brainard has now given two important speeches focusing on the policy cycle, global cross currents, and the inflation outlook. Her speech at the NABE conference this week signaled a further belief that the Fed should begin to be more careful given what she sees across markets, inflation, and the economy, as well as the uncertainty of the lag effects of that already implemented tightening may have. This indicates her preference for some type of pause in the Fed’s hiking cycle. Brainard has not recently been a big part of the Fed’s policy communique (at least in speeches). The marquee speeches have come from Powell, Waller, and regional Fed presidents such as Mester, Kashkari, and Bullard, who have all had prominent voices as the Fed escalated its tightening measures.
“Higher interest rates are working to temper demand and bring it into better alignment with supply, which is still constrained. Output has decelerated so far this year by more than anticipated, suggesting that policy tightening is having some effect…”
Recent revisions to national income and product accounts data imply that the current stock of excess savings held by households is lower and has been drawn down more rapidly in recent quarters than had been previously estimated… the stock of excess savings held by households is about 25 percent lower, which may imply a more subdued pace of consumer spending going forward than had been projected.”
“This supply-demand imbalance in the labor market is reflected in strong wage growth. The employment cost index increased by an annual rate of 6.3 percent over the second quarter—its highest level in decades. A more-timely data source, average hourly earnings, decelerated slightly to a 4.4 percent annual rate over the third quarter, down from 4.6 percent annual growth in the second quarter. Although it is well above levels consistent with 2 percent inflation, wage growth has been running below current inflation.”
“So the surprise in the August inflation data was the large contribution of core goods inflation to overall inflation at a point in the post-pandemic recovery when many forecasts anticipated this contribution would continue moderating.”
“The return of retail margins to more normal levels could meaningfully help reduce inflationary pressures in some consumer goods… there is ample room for margin recompression to help reduce goods inflation as demand cools, supply constraints ease, and inventories increase.”
“Currently, there is a greater dispersion than usual of views about future inflation in survey responses. Previously this reflected a rise in expectations for significantly above-target inflation, but now that dispersion also reflects expectations on the part of one-quarter of respondents that prices are likely to be the same or below their current level 5 to 10 years in the future.”
“The combined effect of concurrent global tightening is larger than the sum of its parts. The Federal Reserve takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies into the United States, as well as in the reverse direction... In this environment, a sharp decrease in risk sentiment or other risk events that may be difficult to anticipate could be amplified, especially given fragile liquidity in core financial markets. In some countries, the realization of these risks could pose challenging tradeoffs for policy.”
Cleveland Fed President Loretta Mester gave an interview on Bloomberg Tuesday reiterating her view the Fed still has more to do to fight inflation. Despite a more hawkish tilt, Mester did highlight that once the fund's rate was at a positive real rates level, the Fed would need to be more attuned to how the real economy was doing, relying on not only backward-looking data but more a sense of how “Main Street” is doing. This somewhat negates comments from her last week that the Fed would not cut rates in 2023.
“This is the assessment process that were going through to the end of this year and into next year… So if you remember the dot plot and the median SEP in September, we are very aligned in where we think policy needs to get to.”
“Labor markets continue to be very strong, we have seen some moderation there. We have seen some moderation in the products side of the economy.
“Right now, the funds rate is just approaching a neutral funds rate, and we need to get it above neutral for a time if we want to get inflation on a downward path.”
“So when I’m thinking about how far above neutral rate do we have to go? And I do think we are going to have to be in restrictive territory. Remember, as inflation comes down, we are becoming more restrictive.
San Francisco Fed President Mary Daly gave an interview on Bloomberg reiterating concerns that markets are confusing the Fed’s eventual slowing of hikes by the end of the year with a policy pivot, and said she and her colleagues were committed to cooling demand to sufficiently slow inflation which could mean keeping policy overly restrictive for some time.
“We’re consistently data dependent. When the data show what we need to see, then we will downshift.”
“I see us as raising to a level we see as restrictive enough to bring inflation down and then holding it there until we see inflation truly get close to 2 percent and demonstrate that price stability is restored.”
“We must be prepared for inflation to be more persistent than we anticipate.”
Atlanta Fed President Raphael Bostic gave rather lengthy prepared remarks last Wednesday to Northwestern University’s Institute for Policy Research on the appropriate policy to handle the current high level of inflation. He noted that some signs seem to show inflation peaking but that “we are still decidedly in the inflationary woods.” He highlighted that the channels of monetary policy first affect real economic growth, with inflation usually the last area to “material shift.” As a result, he stressed that the FOMC should not overreact if inflation does not quickly fall back into the 2 percent range, even if economic activity slows. Because of the lag dynamics of monetary policy, he believes this would guarantee an overshoot and a deep recession. As every Fed official is doing, Bostic stressed that he is “firmly committed to the fight against inflation and will remain purposeful and resolute until the job is done.”
“Importantly, services prices may continue to rise at a fast clip. I continue to hear of very strong demand for in-person services like restaurant meals. Leaders of medical service providers are paying much higher wages for healthcare workers. Prices for housing services like rent are still climbing.”
“These are particularly uncertain times, and the view beyond the next few quarters is unusually murky. So I would encourage you to avoid anchoring to any specific number; precision isn't the point here.”
“…some evidence suggests that the Committee's policy tightening may have already sapped momentum from soaring housing prices. This could help bring supply and demand more in alignment in an important sector of the economy.”
“At the grassroots, even our business contacts who voice concern about the direction of the economy are, nearly to a person, quick to add that their own business is healthy. Business leaders tell me they are not worried so much about whether they can sell products in the short term. Their bigger concerns involve supply-side issues like labor availability and the sustainability of demand months out.”
Technicals and Charts:
Four Key Macro House Charts:
Growth/Value Ratio: Growth is slightly higher on the day but lower on the week but generally little changed. Small-Cap Value is the best-performing size/factor on the day.
Chinese Iron Ore Future Price: Iron Ore futures are lower on the day and on the week. With lockdowns back in the news and no actual transition mechanism for stimulus to move through due to that, any hopes that the property sector may be stabilizing into year-end are fading
5yr-30yr Treasury Spread: The curve is steeper on the day and the week despite PPI being stronger than expected, with tomorrow's CPI likely setting the tone for where the trend goes from here
EUR/JPY FX Cross: The Euro is stronger on the day and the week as ECB officials continue to indicate a desire to raise rates and end QE despite the increasingly weakening economic outlook for the Eurozone. BoJ = Crickets
Other Charts:
It's getting harder to make the case that equities are expensive even when further discounting the earnings side of the equation…
This is because cuts to Q3 earnings estimates have been some of the largest in a decade.
However, post-earnings price action will be driven primarily by guidance with expectations that firms will use the quarter to set the bar extremely low moving forward
However, seasonals still favor a Q4 rally, especially with the midterm likely creating a split Congress
But until the ultimate Fed funds terminal level is known and real rates settle, it is unlikely any risk-asset rally can be sustainable.
Historically, bear markets only end when the Fed cuts rates
This time may be even more challenging due to QT, as excess liquidity in the system has certainly been a large factor in equity performance.
So far, there has only been a marginal uptick in bankruptcy filings this year
Diesel prices are again rising, likely leading gasoline higher, as refiners have little spare capacity.
Article by Macro Themes:
Medium-term Themes:
Real Supply-Side Situation:
Slowing: WTO Slashes Forecast for Merchandise Trade Growth in 2023 – Bloomberg
World Trade Organization said it expects trade growth to fall sharply in 2023 to 1%, compared with its previous forecast of 3.4%, according to a report released Wednesday. The WTO also raised its projection for growth in merchandise trade this year to 3.5%, up from its previous projection of 3%. The WTO’s forecasts, which are in line with IMF and OECD projections, mark a major deceleration from last year’s 9.7% growth in global trade.
Why it Matters:
“We’re looking at a situation in which a global slowdown is going to squeeze households, even more, squeeze businesses, and we may be edging into a recession,” WTO Director-General Ngozi Okonjo-Iweala said in an interview with Bloomberg Television. “It’s looking quite grim -- a little grimmer than we had thought.” She cautioned against a retrenchment in global supply chains, saying such moves will only worsen inflationary pressures and slow economic growth. However, shippers are already expecting a slowdown in demand next year. The world’s largest container carrier, Geneva-based Mediterranean Shipping, last week announced the suspension of a transpacific service and cited “significantly reduced demand for shipments into the US West Coast during the past weeks.”
China Macroprudential and Political Situation:
Super Cereal: China Turns to Controversial Loan Tool for Policy Bank Funding - Bloomberg
The People’s Bank of China added a net 108.2 billion yuan ($15.2 billion) in Pledged Supplemental Lending last month for the China Development Bank, Agricultural Development Bank of China, and Export-Import Bank of China. That marked the first monthly increase in the tool since February 2020 and took the outstanding value of PSL to 2.65 trillion yuan. The consensus is that the PSL injection going forward would be much more limited compared with 2015-17 and used only as a tool to complement the already announced stimulus - 800bn new policy bank lending, 600bn development financial instruments, and 200bn special property loans.
Why it Matters:
Similar to Xi’s nod on removing homebuying restrictions outside of Tier 1 cities, the restart of the PSL is also a critical signal suggesting a stronger willingness of Beijing to stabilize the economy. The PBOC created the PSL in 2014 to provide cash for policy banks to finance the shantytown renovation program, which helped turn around a property market downturn back then but was heavily criticized later for inflating the real estate bubble in lower-tier cities. Investors should not rule out a scenario where policymakers are forced to go big, and the PSL lending again becomes a real game changer. Once revived, policymakers can always add more quota if the economic condition requires
Longer-term Themes:
National Security Assets in a Multipolar World:
Red or Blue Pill?: Chinese Tech Threatens Future Global Security, U.K. Spy Chief Warns – WSJ
Beijing’s efforts to exert control over technology both internationally and within China’s borders threaten future global security and freedom, Jeremy Fleming said, the chief of the U.K.’s electronic intelligence agency. Beijing is aiming to use an array of existing and emerging technological means, including digital currency and satellites, to control markets and people, extend surveillance and censorship, and export its authoritarian system around the world.
Why it Matters:
Calling it “the national security issue that will define our future,” Mr. Fleming said the Chinese Communist Party leadership has “deliberately and patiently set out to gain strategic advantage by shaping the world’s technology ecosystems.” He said Beijing has effectively broadened the definition of national security such that technology was a battleground for control, values, and influence, with Beijing seeking to create “client economies and governments” through exporting technologies around the globe.
FX Channels: World Currency Reserves Shrink by $1 Trillion in Record Drawdown - Bloomberg
Global foreign-currency reserves are falling at the fastest pace on record as central banks globally intervene to support their currencies. Reserves have declined by about $1 trillion, or 7.8%, this year to $12 trillion, the biggest drop since Bloomberg started to compile the data in 2003. Part of the decline was due to valuation changes. As the dollar jumped to two-decade highs against other reserve currencies, like the euro and yen, it reduced the dollar value of the holdings of these currencies. But the dwindling reserves also reflect the stress in the currency market that is forcing a growing number of central banks to dip into their war chests to fend off the depreciation.
Why it Matters:
We are starting to see clear winners and losers regarding who is able to keep their currency from depreciating to the point that will cause increasing economic damage to their nation. Most central banks still have enough firepower to keep interventions going if they choose to. Foreign reserves in India are still roughly 49% higher than early 2017 levels and enough to pay for nine months of imports. But for others, they are quickly depleting. After declining 42% this year, Pakistan’s $14 billion of reserves aren’t enough to cover three months of imports. In the end, the perceived value of a country's currency is a vital national security asset.
Electrification and Digitalization Policy:
ST Gains: Portugal to Tax Crypto Gains in Next Year’s Budget Plan - Bloomberg
Portugal is planning to start taxing digital-currency gains on purchases held for less than a year in a major policy shift for one of Europe’s most crypto-friendly nations. Portugal currently does not tax crypto gains unless they come from professional or business activities. But that’s about to change. A provision in the country’s proposed 2023 budget would tax gains on crypto holdings held for less than one year at a rate of 28%, according to the plan submitted to parliament on Monday. Crypto assets held for longer than 365 days will continue to be exempt from taxes.
Why it Matters:
The draft budget, which still needs to be approved in parliament, would also consider the issuance of new cryptocurrencies and mining operations as taxable income. The government also will introduce a 10% tax on the free transfer of cryptocurrencies and a 4% rate on commissions charged by brokers on cryptocurrency operations, according to the draft budget. Portugal said the new rules are in line with crypto legislation in other European countries, including Germany, where investors pay no taxes if they hold cryptocurrencies for more than a year.
Commodity Super Cycle Green.0:
Wind And Solar Top 10% of Global Power Generation For First Time - Bloomberg
With nearly 3,000 terawatt-hours of electricity produced, wind and solar accounted for a combined 10.5% of global 2021 generation, BNEF found in its annual Power Transition Trends report. Wind’s contribution to the global total rose to 6.8% while solar climbed to 3.7%. A decade ago, these two technologies combined accounted for well under 1% of total electricity production. In all, 39% of all power produced globally in 2021 was carbon-free. Hydro and nuclear projects met just over one-quarter of the world’s electricity needs.
Why it Matters:
Every year since 2017, wind and solar have accounted for the majority of new power-generating capacity added to global grids. In 2021, they hit a record three-quarter of the 364 gigawatts of new capacity built. Including hydro, nuclear and others, zero-carbon power accounted for 85% of all new capacity added. “Renewables are now the default choice for most countries looking to add or even replace power-generating capacity,” said Luiza Demôro, head of energy transitions at BloombergNEF. “This is no longer due to mandates or subsidies, but simply because these technologies are more often the most cost-competitive.”
No Energy, No Food: Some Dutch Greenhouses Fear Bankruptcy as Energy Crisis Deepens – Bloomberg
An industry group survey showed that Dutch greenhouses are cutting their output of food and flowers due to Europe’s energy crisis. The recent survey by Glastuinbouw Nederland is one of the latest signs of how the region’s energy crunch is making it more expensive to produce goods and commodities. A quarter of the Netherlands’ cultivation area has been cut, and 8% of greenhouse businesses predict filing for bankruptcy this year.
Why it Matters:
The country is the top flower exporter and one of Europe’s largest fresh fruit and vegetable producers. Its greenhouses are particularly vulnerable due to the cost of lighting and heating the massive glass structures that cover an area equivalent to 17,000 soccer fields. Dutch growers are just one of Europe’s key sectors being forced to cut back output. The region’s fertilizer and vegetable oil output have been hit, while metals smelters have also been shuttered or curtailed due to rising costs.
ESG Monetary and Fiscal Policy Expansion:
Rights: Biden Proposal Could Lead to Employee Status for Gig Workers - NYT
The Labor Department on Tuesday unveiled a proposal that would make it more likely for millions of janitors, home-care and construction workers, and gig drivers to be classified as employees rather than independent contractors. Companies are required to provide certain benefits and protections to employees but not to contractors, such as paying a minimum wage, overtime, a portion of a worker’s Social Security taxes, and contributions to unemployment insurance.
Why it Matters:
The proposal would apply only to laws the department enforced, such as the federal minimum wage. States and other federal agencies, like the Internal Revenue Service, set their own criteria for employment status. But many employers and regulators in other jurisdictions are likely to consider the department’s interpretation when making decisions about worker classification, and many judges are likely to use it as a guide. As a result, the proposal is a potential blow to gig companies and other service providers that argue their workers are contractors, though it would not immediately affect the status of those workers.
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Current Macro Theme Summaries:
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