MIDDAY MACRO - 10/13/2021
Daily Color on Markets, Policy, and Geo-Politics
MIDDAY MACRO - DAILY COLOR – 10/13/2021
OVERNIGHT/MORNING RECAP & MARKET ANALYSIS
Narratives/Price Action:
Equities are higher, with Nasdaq/Growth the primary beneficiary of the CPI data as technicals and optionality continue to corral an uninspired market
Treasuries are higher, with the curve again notably flatter as higher than expected headline CPI and continued supply has failed to reverse the two-day rally in the long-end
WTI is flat, continuing to consolidate in a new range despite comments from Putin that Brent could reach $100 a barrel as traders await tomorrow inventory data (which has been rising)
Analysis:
The S&P is again chopping around today, still within its two-week range (4420-4270) as a slight beat in headline CPI failed to elicit a significant price reaction. At the same time, after some initial confusion, the long-end of the Treasury curve is better bid, although now off highs. A weaker dollar, more stable energy complex, and lower yields have yet to entice meaningful dip-buying in equities as persistent volatility and changing correlations as well as a messy macro backdrop continue to keep risk-parity and discretionary buyers sidelined.
The Nasdaq is outperforming the S&P and Russell with Low Volatility, Growth, and Momentum factors, and Materials, Utilities, and Communication sectors all outperforming.
S&P optionality strike levels have the zero gamma level moved lower to 4361 while the call wall is 4500. Put demand has ticked up, with SpotGamma’s vanna model showing a sharp left skew, forecasting higher volatility, and when coupled with other indicators, paints a more negative picture.
The technical levels have support at 4320, then 4300, and resistance at 4360, then 4400. The S&P continues to be in choppy waters with the continuation of a bearish hourly pennant formation within a daily bull flag formation. A break below 4300-zone would open up the potential for new lows before resistance at 4230.
Treasuries are higher in the long-end with the belly flat, as the 5s30s curve is flatter by 4.6 bps, reapproaching its flattest levels of the year, as yesterday’s 10yr auction was well received.
*Investors are becoming more bearish on equity returns into year-end
*Small-caps have reversed their recent underperformance
Econ Data:
The headline CPI inflation rate increased to 5.4% in September (a 13-year high) from 5.3% in August and above market expectations of 5.3%. On a monthly basis, headline CPI advanced 0.4%, above forecasts of 0.3%. The core index increased 0.2% MoM and 4% YoY, the same as in August and in line with forecasts. Food and Shelter contributed more than half of the monthly increases to headline. On an annualized basis, the sub-index increases were highest in the cost of shelter (3.2% vs. 2.8% in August), food (4.6% vs. 3.7%, the highest since December of 2011 and namely in food at home (4.5% vs. 3%)), new vehicles (8.7% vs. 7.6%) and energy (24.8% vs. 25%). On the other hand, prices eased for used cars and trucks (24.4% percent vs. 31.9%), transportation services (4.4% vs. 4.6%), apparel (3.4% vs. 4.2%), and medical care services (0.9% vs. 1%).
Why it Matters: The CPI data continues to show the massive herd-like consumer behavior that has been occurring since the start of the pandemic. This has caused a rolling series of supply/demand imbalances which have progressively occurred with the shutting and reopening of the economy. We are now moving from the initial transitory factors to more stable factors, but given the uptick in Delta into late summer, reopening components continued to cool last month. Instead, the bulk of the headline increase this month came from food and energy (+0.87% MoM), with Food at Home running at a 15% annualized rate. The Fed should, in theory, look through this (when deciding appropriate policy). Still, rising prices in food and energy will increase consumer inflation expectations (which we are already seeing), potentially unanchoring longer-term expectations, something the Fed does watch closely. Finally, Shelter’s acceleration is more problematic as rents will continue to catch up to home price appreciation for some time. The supply/demand imbalances in housing will generally push CPI higher in a multi-year timeframe as shortages will take a long time to work through (unlike other current material shortages elsewhere).
*notable uptick in Rent and All Others while Reopening components continue to be a drag
*although the month-on-month rate of increase in Core CPI was stable in September, there are signs that a longer-lasting pulse is building
*Home price appreciation tends to lead OER/Rent, indicating Shelter prices are likely to increase further for sometime
*Finally, the breadth of CPI subcomponents rising continues to increase.
Policy Talk:
Speeches by Fed Vice-Chair Clarida and Atlanta Fed President Bostic yesterday are worth quickly reviewing. Clarida presented an upbeat view on his economic outlook and said the conditions needed to start tapering have “all but been met.” He continues to “believe that the underlying rate of inflation in the U.S. economy is hovering close to our 2 percent longer-run objective,” and the surge in inflation this year would reverse once “bottlenecks have unclogged.” He did say the risks to inflation were to the upside, and he is particularly focused on measures of inflation expectations. With that in mind, it is not a particularly great sign that the NY Fed’s Consumer Inflation Expectations increased to record highs for short (5.3%) and medium (4.2%) -term outlooks. Of course, maybe Clarida was talking about the 5-year ahead outlook, which is still well anchored according to a wonky recent blog post from the NY Fed.
Atlanta Fed President Bostic took a different tone when speaking to the Peterson Institute on inflation. He distinguished a difference between pandemic-induced “episodic” price swings verse what is traditionally viewed as “transitory.” He pointed out that it is clear the intense and widespread supply chain disruptions that have animated price pressures will not be brief. Bostic believes the real danger is that the longer the supply bottlenecks and attendant price pressures last, the more likely they will shape the expectations of consumers and businesspeople, shifting their views on pricing and wages in particular. He noted that this is beginning to occur with the Atlanta Fed's one-year ahead Business Inflation Expectations measure hitting the highest level in the survey's 10-year history. Bostic concludes by noting inflation is above the Committee’s 2% objective, and monetary policy is meant to correct past inflation shortfalls, which it has now done.
TECHNICALS / CHARTS
FOUR KEY MACRO HOUSE CHARTS:
Growth/Value Ratio: Growth is higher on the week, helped by a notable outperformance today as a slight beat in headline CPI failed to lift yields
Chinese Iron Ore Future Price: Iron Ore futures are lower on the week, down over -3% today as continued energy shortages are increasingly weighing on steel production and expectation for iron ore demand
5yr-30yr Treasury Spread: The curve is flatter on the week, moving down another 4.7 bps today as last week’s inflation fears are increasingly turning into growth fears
EUR/JPY FX Cross: The euro is higher on the week, continuing its outperformance as the Yen continues to be under pressure, hurt further by the new PM Kishida’s “new type of capitalism” campaign
HOUSE THEMES / ARTICLES
MEDIUM-TERM THEMES:
Real Supply Side Constraints:
Them Apples?: Apple Finally Falls Victim to Never-Ending Supply Chain Crisis – Bloomberg
Apple is now likely to slash its projected iPhone 13 production targets for 2021 by as many as 10 million units. Apple had expected to produce 90 million new iPhone models this year but is now telling manufacturing partners that the total will be lower because Broadcom Inc. and Texas Instruments Inc. are struggling to deliver enough components. The timing couldn’t be worse. The year-end quarter was expected to be Apple’s biggest yet, generating an expected $120 billion in revenue (7% from a year earlier).
Why it Matters:
The shortage of semiconductors stems mainly from years of under-investment coupled with a failure to gauge the explosion in demand for connected devices. Add in a pandemic that created massive supply-side impairments, and you have a real problem. As a result, the amount of time that companies need to wait for chip orders to get filled has set records for nine straight months, signaling that semiconductor shortages will continue to plague businesses well into 2022. However, there are signs that the shortages caused by the uptick of Delta in Asia are dissipating. Now, if only China could keep the lights on.
China Macroprudential and Political Tightening:
Need More: China Raises Coal and Gas Imports to Counter Energy Crisis – Bloomberg
Coal imports rose 17% on the month, the highest total this year, according to the customs administration on Wednesday, although the tally for the first nine months still lags last year’s pace. Gas purchases could only increase by 1.8% due to high prices and shortages in international markets. However, imports of the cleaner-burning fuel are still running 22% ahead of last year.
Why it Matters:
China’s import prospects and policies, including its yearlong ban on Australian coal, will doubtless be a hot topic when the government briefs on the energy crisis later Wednesday in Beijing. The event includes officials from the National Development and Reform Commission, China’s top planning agency, and the National Energy Administration and State Grid Corp. Elsewhere, China released some Australian coal trapped in storage, but we don’t see any change in foreign relations there. Xi continues to be willing to suffer economic pain for political purposes.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Largest Buyer: Sino-U.S. Natural Gas Deal Offers Fuel for a Thaw in Relations - Caixin
The privately-owned ENN Natural Gas, a major player in China’s natural gas market, will purchase approximately 900k tons of LNG per annum from Cheniere Energy Inc. for the next 13 years, starting July 2022. This is the first major deal in natural gas between China and the U.S. since the beginning of the trade war.
Why it Matters:
China’s ambitions to cut emissions and make an energy transition have boosted its demand for LNG, pushing the country to surpass Japan this year as the world’s largest buyer. This is during a time when the Japan-Korea Marker, North Asia’s benchmark for tracking LNG shipments, jumped to $34.47 per million British thermal units on Sept. 30, the highest on record since 2009.
Best AI: China Isn't the AI Juggernaut the West Fears – Bloomberg
On paper, the U.S. and China appear neck and neck in artificial intelligence. China leads in the share of journal citations while the U.S. is far ahead in the more qualitative metric, according to a recent report compiled by Stanford University. China excels in computer vision and facial recognition, but practical applications are limited to surveillance. The U.S. has much broader expertise. As a result, the two aren’t as close as believed.
Why it Matters:
China’s expertise is somewhat limited in scope. Artificial intelligence encompasses many sub-fields, including machine learning, robotics, natural language processing, and computer vision. The U.S. has a broad toolkit that’s deployed across each of these disciplines and used around the world. China, by contrast, excels mostly in computer vision, an area that helps Beijing build out its surveillance state. By miscalculating the others’ abilities, both superpowers risk overestimating their adversary’s strengths and overcompensating in a way that could further lead to a Cold War-style AI arms race (which is already occurring).
Electrification and Digitalization Policy:
Blocklist: Revealed: Facebook’s Secret Blacklist of “Dangerous Individuals and Organizations”
To ward off accusations that it helps terrorists spread propaganda, Facebook has for many years barred users from speaking freely about people and groups it says promote violence. What’s known as the Dangerous Individuals and Organizations policy, a sweeping set of restrictions on what Facebook’s nearly 3 billion users can say about an enormous and ever-growing roster of entities. But as with other attempts to limit personal freedoms in the name of counterterrorism, Facebook’s DIO policy has become an unaccountable system that disproportionately punishes certain communities, critics say.
Why it Matters:
Critics point out that the DIO policy and blacklist places far looser prohibitions on commentary about predominately white anti-government militias than on groups and individuals listed as terrorists, who are predominately Middle Eastern, South Asian, and Muslim, or those said to be part of violent criminal enterprises, who are predominantly Black and Latino. However, Facebook takes most of the names in the terrorism category directly from the U.S. government. The bottom line is that Facebook has an extremely tough job when it comes to moderating content, and this will continue to be a contentious PR issue for the company, likely leading to further regulatory scrutiny.
Commodity Super Cycle Green.0:
Going Big: China’s New Renewable Project Rivals All Wind and Solar in India – Bloomberg
China has started building a massive renewable energy project comprising 400 gigawatts of wind and solar when finished, with half the capacity to be constructed by 2025. That’s more than the entire wind and solar capacity installed in India, according to BloombergNEF, and it would be able to generate four times as much power as the Three Gorges Dam.
Why it Matters:
Details are scant about the project, including exactly where it is and how spread out the installations will be. However, the likely location is in western China, where existing and planned power lines already link renewables projects to the main demand centers in the east. The announcement by Xi at United Nations Biodiversity Conference in Kunming came on the heels of comments from Chinese Premier Li Keqiang that called into question the pace of the nation’s energy transition. This project will likely increase the global shortage of polysilicon, fast becoming one of the most critical green commodities.
Too Slow: IEA downbeat on pace of energy transition – Argus
The world's progress on low-carbon energy is "far too slow to put global emissions into sustained decline towards net-zero," the IEA said today to mark the launch of its World Energy Outlook 2021. "The world's hugely encouraging clean energy-momentum is running up against the stubborn incumbency of fossil fuels in our energy systems," IEA executive director Fatih Birol said. Birol calls on governments to resolve the problem at next month's UN Cop 26 climate conference by giving a clear signal that they are committed to rapidly scaling up the clean technologies of the future.
Why it Matters:
The WEO examines three scenarios, each outlining potential paths for energy supply and demand over the next 30 years. In all three, peak oil demand arrives at various points before 2050. "For the first time in a WEO, oil demand goes into eventual decline in all the scenarios examined, although the timing and speed of the drop vary widely," the IEA said. We are doubtful about the ability to forecast the future demand for fossil fuels properly. Recent energy shortages will only increase the reluctance of governments/society to move away from fossil fuel energy sources, at least in a backup capacity. Big big picture, until the climate stabilizes, which seems to mean a reduced carbon footprint, there will continue to be extreme weather events.
ESG Monetary and Fiscal Policy Expansion:
Big Bump: Social Security Benefits to Increase 5.9% for 2022 – WSJ
Social Security benefits in 2022 will see the largest increase in their payments in four decades with next year’s cost-of-living adjustment, or COLA, increasing 5.9%, the Social Security Administration said Wednesday. The increase will translate to an addition of $92 to retirees’ average monthly benefit next year, bringing the amount to $1,657, the agency estimates.
Why it Matters:
If price rises turn out to be fleeting and reflect temporary supply shocks and they subsequently show much more modest rises in 2022 this would be quite positive for those that got that windfall cost-of-living adjustment. The Social Security Administration also said the maximum amount of earnings subject to the Social Security tax will increase to $147,000 in 2022 from $142,800 this year, a 2.9% increase.
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