MIDDAY MACRO - 10/14/2021
Daily Color on Markets, Policy, and Geo-Politics
MIDDAY MACRO - DAILY COLOR – 10/14/2021
OVERNIGHT/MORNING RECAP & MARKET ANALYSIS
Narratives/Price Action:
Equities are higher, with a broad rally underway after positive economic data reduced inflationary fears while 3qtr earnings begin to roll in, improving sentiment and uncapping technical and optionality resistance
Treasuries are higher, aligning with equities thanks to inflation fear reducing claims and PPI data following more robust demand for government bonds in Europe and elsewhere overnight
WTI is higher, given the more risk-on tone and despite both API and EIA inventory stocks coming in stronger than expected while governments vow to head off any potential winter shortages/further price increases
Analysis:
A temporary stabilization in energy prices, a slightly weaker dollar, and lower yields/flatter curve have created a more risk positive backdrop for equities, allowing the S&P to move above/out its post-September downtrend and now pushing on its 50 day-moving-average (currently 4428). Better claims data (reducing wage pressure expectations) and a weaker than expected Core PPI are helping Treasuries maintain this week’s rally as supply was well digested and inflation fears are reduced. Now on to Retail Sales tomorrow, with the street expecting a weaker print, something we think will be beaten (similar to August).
The Nasdaq is outperforming the S&P and Russell with Momentum, Growth and Value factors, and Materials, Technology, and Healthcare sectors all outperforming.
S&P optionality strike levels have the zero-gamma level moved lower to 4379 while the call wall is still 4500. An S&P level over 4400 (as it is currently) reduces the negative gamma pull. Given the level of puts expiring tomorrow, the current rally is leading dealers to buy back a lot of short hedges, which on top of the drop in implied vol, is setting up a more bullish optionality backdrop.
The technical levels have support at 4405, then 4365, and resistance at 4428 (50 dma), then 4460. The S&P has broken out of its multi-week down channel (confirmed bull flag) and is now backtesting its 50dma. RSI indicates an extreme overbought current condition which suggests a cooling/consolidation is needed before the 50dma can be potentially taken.
Treasuries are higher, with similar price action playing out all week following a reduction in inflation fears and the passage of yesterday's FOMC Minutes. The 5s30s curve is flatter by 1 bps, back at its flattest levels of the year, as fixed-income globally is generally well bid today.
*The health of the earning’s season may rest in the hands of a few mega-cap companies
*Value is still outperforming this month despite this week’s lower long-end yields helping the Nasdaq
*This outperformance by value may be due to the historical outperformance it has during periods of higher inflation
Econ Data:
Producer prices for final demand increased 0.5% MoM in September, the smallest monthly increase so far this year, and below market forecasts of 0.6%. This moved the annual producer inflation level to 8.6%, still the highest level since November of 2010. Core PPI (excluding foods and energy) increased 0.2% MoM, following a 0.6% gain in August and well below market expectations of a 0.5% rise. Year on year, core producer prices have increased 6.8%, the largest advance on record. Nearly 80% of the increase in the headline PPI for the month can be traced to a 1.3% rise in Prices for Final Demand Goods, the most significant rise since May, mainly due to gasoline increasing 3.9%. Prices for final demand services moved up 0.2% on the month, the smallest gain in three months, partly reflecting an almost 17% drop in prices for airline passenger services.
Why it Matters: At the headline level, this report reduces inflationary fears but underneath the hood reflects the price pressures from supply-side disruptions have yet to decline materially. A significant factor influencing the smaller than expected Core PPI increase was a decrease in prices for transportation of passengers, which fell 16.7% on the month. Thus, this report does not provide a significant easing in price pressures for manufactured goods. Instead, there is still an acceleration in Finished Good prices. Over the last year, Finished Goods increased 11.8%, while Core Finished Goods are up 5.2%. Over the last three months, these prices are have increased on an annualized basis to 13.2% and 8.1%, respectively. As a result, we do not yet see a meaningful change in the inflation story we all know so well now in this report.
*Core PPI came in lower than expected due to decreases in transportation costs
*Final Demand Prices for Goods continue to rise as manufacturers have yet to see cost pressures ease.
Policy Talk:
The Federal Reserve’s Committee on Supervision and Regulation doesn’t have a designated chair as Randal Quarles’ four-year term as Vice Chair for Supervision expired Wednesday. Instead, the committee, which consists of Quarles and Fed Governors Lael Brainard and Michelle Bowman, will meet “as necessary” and “on an unchaired basis,” a Fed spokesperson said. Under that new setup, any rule-writing or significant policy changes would need to have a “broad consensus” among the panel’s members before advancing to the entire board. This should lead to few changes given the ideological difference between Quarles and Brainard.
Governors Brainard and Bowman both gave speeches yesterday worth quickly highlighting. Keeping on her ESG only focus, Governor Brainard spoke at a Fed Listens event with Oklahoma Tribal Leaders on the importance of financial inclusion for the Native American community. She highlighted the economic role Tribal nations play in various regions across the country but noted significant impediments to financial access/inclusion to Native communities exist. Brainard went through the various areas of under-serviced/exposure, focusing specifically on the lack of homeownership and business creation due to poor credit accessibility. She cited the Fed’s desire to “build a strong, inclusive economy” through endeavors like the Community Reinvestment Act as a way to overcome these impairments. Finally, she elaborated on the changes occurring to the CRA and other institutions supporting Native Americans, such as Community Development Financial Institutions, MDIs, and data gathering efforts by the Minneapolis Feds Center for Indian Development. We highlight all this as just further examples of how the Fed continues to take an increasing role outside traditional monetary activities.
Governor Bowman summarized her economic outlook at a “Community Banking in the 21st Century” event in South Dakota. She highlighted her “on the ground” data gathering approach, noting the restarting of the Fed Listens process, has led her to believe employment won’t fully return to pre-pandemic levels any time soon due to reasons outside of the stance of monetary policy. She highlighted the known supply-side disruptions, even going as far as to say the current situation may entice more on-shoring to increase resilience. She highlighted other inflationary pressures (accurately) and notes that longer-term inflation expectations are at risk of becoming unanchored if trends persist (something we are increasingly hearing from Fed officials). Finally, she ends by supporting the assessment that “substantial further progress” has been made and the scaling back of asset purchases is warranted as early as the November meeting.
TECHNICALS / CHARTS
FOUR KEY MACRO HOUSE CHARTS:
Growth/Value Ratio: Growth is higher on the week, helped again today by a flatter Treasury curve and increasing growth concerns into year-end due to continued supply-side impairments
Chinese Iron Ore Future Price: Iron Ore futures are lower on the week, as increases PPI are a reminder that macro-policy support may be limited as Beijing prioritizes price control over growth targets
5yr-30yr Treasury Spread: The curve is flatter on the week, now back near its flattest levels of the year as increased rate hike expectations weigh heavier on the belly
EUR/JPY FX Cross: The euro is higher on the week, as traders continue to seek clarity on the new PM’s policies while energy import cost increases weigh on the current account
HOUSE THEMES / ARTICLES
MEDIUM-TERM THEMES:
Real Supply Side Constraints:
Round the Clock: Big US businesses pledge to extend working hours to ease supply chain backlogs - FT
The Biden administration has secured pledges from Walmart, UPS, and FedEx to extend their working hours to ease supply chain bottlenecks. According to a senior White House official, the three companies will announce a move towards an around-the-clock, seven-day-week model. This comes on top of the Port of Long Beach's steps towards operating on a 24/7 schedule about three weeks ago. At the same time, the neighboring Port of Los Angeles had decided to match that with the critical backing of the International Longshore and Warehouse Union.
Why it Matters:
Some analysts cautioned that the measures announced on Wednesday would not be sufficient. “What’s sitting in the ports today is taking 60 days to get out, so Christmas is gone,” Brian Whitlock, a Gartner research analyst specializing in logistics, said. “For sure, every little bit helps, but this is a drop in the ocean in terms of what needs to be done.” Whitlock further said that IHS Markit data measuring how fast ports process containers show North American ports are one-third as efficient as Asian ports.
Labor is Back: Thousands of John Deere workers strike over their contract. – NYT
Some 10,000 unionized workers at the agriculture equipment maker Deere & Company went on strike early Thursday after overwhelmingly rejecting a contract proposal worked out with the company by negotiators for the United Automobile Workers union. Workers rejected the tentative agreement from Deere & Company for insufficiently increasing wages, for denying a traditional pension to new employees, and for failing to substantially improve an incentive program.
Why it Matters:
The days of big labor could be coming back a little as the level of strikes in the U.S. is starting to pick up. Currently, thousands are already on strike, including 2,000 New York hospital workers, 700 Massachusetts nurses, and 1,400 Kellogg plant workers in Michigan, Nebraska, Pennsylvania, and Tennessee. We will continue to watch this trend but do not yet see it as likely becoming systemically disruptive (given the much lower level of unionized workers). It is, however, worth flagging as labor movements/strikes exacerbated inflation in the 60s and 70s and we have a very delicate butterfly of a supply chain situation currently.
China Macroprudential and Political Tightening:
Running Hot: China’s Producer Inflation at 26-Year High Adds to Global Risks - Bloomberg
China’s factory-gate prices grew at the fastest pace in almost 26 years in September. The producer price index climbed 10.7% from a year earlier, beating forecasts and reaching the highest since November 1995, as coal prices and other commodity costs soared, data from the National Bureau of Statistics showed Thursday.
Why it Matters:
There’s little evidence yet that producers are passing on higher input costs to customers, with consumer prices growing at a slower pace of 0.7% last month. The gap between China’s producer and consumer inflation increased in September to 10 percentage points from 8.7 points in August, the widest level since 1993. We don’t expect this to change, given the current “Common Prosperity” political climate of punishing profits. This margin compression will clearly reduce earnings, reduce expansion, and ultimately hurt employment, causing a deeper problem, but we are not there yet. The bottom line is China’s growth will be challenged until inflationary pressures subside, making it harder for a more optimistic global macro backdrop to form.
Dropping: China’s Credit Growth Slows on Weakening Corporate Demand – Caixin
China’s credit growth fell below analysts’ expectations in September, reflecting weakening corporate financing demand amid the ongoing property market turmoil. Aggregate financing was 2.9 trillion yuan, the PBOC reported down from 2.96 trillion yuan in August and 3.47 trillion yuan in September last year. China's outstanding total social financing, a broad measure of credit and liquidity in the economy, also fell and was 308 trillion yuan at the end of September, the lowest level this year. New loan issuance did grow.
Why it Matters:
The slower credit growth reflected China’s tightened control over financing in the property sector, which has been shaken by the China Evergrande Group debt crisis and spreading default risks. Housing sales in major cities weakened in September, leading to lower mortgage growth. Meanwhile, industrial companies have remained cautious about expanding investment, according to research by Bank of Communications. But analysts expect credit growth to accelerate in the fourth quarter helping the credit impulse become more favorable for risk-assets again.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Banding Together: Gas Crisis Prompts Fresh Proposals From EU – WSJ
The European Commission, the EU’s executive arm, laid out various actions on Wednesday that could be taken at the EU or national level to prevent energy price shocks, as political pressure builds on member governments to stem the higher costs. EU leaders are set to discuss the proposals at a meeting next week. The measures include emergency income support for families who can’t afford their energy needs, tax and levy cuts, industrywide support for companies, and efforts to work with international partners on gas supplies to ease price pressures. Officials are in discussions with Norway, Ukraine, and other countries on gas supplies already.
Why it Matters:
“The current situation is exceptional, and the internal energy market has served us well for the past 20 years. But we need to be sure that it continues to do so in the future,” said EU Energy Commissioner Kadri Simson. You don’t say? To be clear, there are a lot of potential measures on the table, including changing energy pricing regulation and targeting speculators in energy markets. We will be closely watching developments over the next few weeks here as the impending winter season is fast approaching and energy prices were again rising today in Europe.
Electrification and Digitalization Policy:
High-5G: Huawei, Ericsson or Nokia? Apple or Samsung? U.S. or China? Who’s Winning the 5G Races – WSJ
The long-held market positions of the major telecom equipment suppliers are shifting as the world’s communications carriers build out their 5G networks. China’s Huawei continues to lead the $90 billion-a-year market for telecommunications equipment, as it has for the past several years, but others are gaining ground, most notably Nokia and Ericsson. Apple has taken an early lead in the 5G smartphone race, but analysts say maintaining it may be a challenge in the ultra-competitive market. The article gives a comprehensive breakdown of recent trends regarding 5G hardware worth a read.
Why it Matters:
When it comes to which country is most reaping the benefits of 5G, China continues to pull ahead, though the U.S. and some of China’s Asian neighbors are making strides. As a reminder, the greater the availability of 5G, coupled with government incentives for all things 5G, the more adoption of 5G applications (and next-generation technologies designed to reap the benefits of superfast 5G connections) will occur. This is a strategic race that will further the electrification and digitalization of our world, prompting individual nations to increasingly invest/promote 5G capabilities to provide greater connectivity and increase growth/productivity and national security. Strap in, it’s going to be a wild ride.
Commodity Super Cycle Green.0:
4X: Battery-Grade Lithium Price Jumps More Than Fourfold to Hit New Record - Caixin
The price of lithium for use in electric-car batteries has more than quadrupled in China over the past 12 months, touching a record high after bouncing back from last year’s near-historic low. Lithium supply isn’t expected to expand meaningfully in the near future, keeping prices elevated until at least 2023, according to a Guotai Junan Securities analysis.
Why it Matters:
As a result of increased prices and shortage fears, many major Chinese firms are stepping up their efforts to secure their lithium supplies. In May, Ganfeng Lithium Co. bought miner Bacanora Lithium PLC in a deal valued at up to $264 million to get access to its Sonora project, which is among the world’s largest lithium clay sites. CATL, the world’s largest maker of electric-vehicle batteries, agreed to acquire Canada’s Millennial Lithium Corp. for $297.3 million. We expect more of this type of M&A activity globally as lithium security becomes a top priority for firms and nations.
ESG Monetary and Fiscal Policy Expansion:
Frozen: EU to seek ban on oil and gas exploration in the Arctic – Reuters
The European Union will seek a ban on tapping new oil, coal, and gas deposits in the Arctic to protect the region, according to a proposal for the bloc’s new Arctic strategy published on Wednesday. The European Commission proposal reflects the EU’s efforts to boost its role on the global stage, though it has limited influence in the Arctic. It is not a member of the Arctic Council, the regional coordinating body, though three member states (Denmark, Finland, and Sweden) are.
Why it Matters:
The EU aims under its new strategy to strengthen research into the effects of thawing permafrost that may put oil fields at risk and threaten to release greenhouse gases and dangerous germs locked in the frozen ground. EU research accompanying the proposal found that over 70% of arctic infrastructure and 45% of oil extraction fields are built on permafrost and at risk. This increases the energy insecurity (already occurring) in Europe as much of the energy is coming from permafrost-filled Russia.
VIEWS EXPRESSED IN "CONTENT" ON THIS WEBSITE OR POSTED IN SOCIAL MEDIA AND OTHER PLATFORMS (COLLECTIVELY, "CONTENT DISTRIBUTION OUTLETS") ARE MY OWN. THE POSTS ARE NOT DIRECTED TO ANY INVESTORS OR POTENTIAL INVESTORS, AND DO NOT CONSTITUTE AN OFFER TO SELL -- OR A SOLICITATION OF AN OFFER TO BUY -- ANY SECURITIES, AND MAY NOT BE USED OR RELIED UPON IN EVALUATING THE MERITS OF ANY INVESTMENT.
THE CONTENT SHOULD NOT BE CONSTRUED AS OR RELIED UPON IN ANY MANNER AS INVESTMENT, LEGAL, TAX, OR OTHER ADVICE. YOU SHOULD CONSULT YOUR OWN ADVISERS AS TO LEGAL, BUSINESS, TAX, AND OTHER RELATED MATTERS CONCERNING ANY INVESTMENT. ANY PROJECTIONS, ESTIMATES, FORECASTS, TARGETS, PROSPECTS AND/OR OPINIONS EXPRESSED IN THESE MATERIALS ARE SUBJECT TO CHANGE WITHOUT NOTICE AND MAY DIFFER OR BE CONTRARY TO OPINIONS EXPRESSED BY OTHERS. ANY CHARTS PROVIDED HERE ARE FOR INFORMATIONAL PURPOSES ONLY, AND SHOULD NOT BE RELIED UPON WHEN MAKING ANY INVESTMENT DECISION. CERTAIN INFORMATION CONTAINED IN HERE HAS BEEN OBTAINED FROM THIRD-PARTY SOURCES. WHILE TAKEN FROM SOURCES BELIEVED TO BE RELIABLE, I HAVE NOT INDEPENDENTLY VERIFIED SUCH INFORMATION AND MAKES NO REPRESENTATIONS ABOUT THE ENDURING ACCURACY OF THE INFORMATION OR ITS APPROPRIATENESS FOR A GIVEN SITUATION.