MIDDAY MACRO - DAILY COLOR – 11/10/2021
OVERNIGHT-MORNING RECAP / MARKET WRAP
Narratives/Price Action:
Equities are lower, consolidating as further worries over China overnight and a higher-than-expected CPI print are bouncing indexes around in their recent ranges
Treasuries are lower, as selling overnight picked up pace following the CPI print, causing the curve to bear flatten further
WTI is lower, as the EIA weekly inventory data reversed yesterday’s gains following a separate report by them which reduced expectations for strategic petroleum reserve releases
Analysis:
Equities are lower with key support levels now being tested as the stronger than expected monthly increase in both headline and core inflation is sending Treasury yields significantly higher. Expectations for the Fed to tighten sooner than expected are increasing, dimming the future growth outlook, and souring risk sentiment despite the historically easy current financial conditions.
The S&P is outperforming the Russell and Nasdaq with High Dividend Yield, Low Volatility, and Value factors, and Consumer Discretionary, Utilities, and Health Care sectors all outperforming.
S&P optionality strike levels have the Zero-Gamma Level moved higher to 4628 while the Call Wall is at 4700. A decent amount of S&P gamma expires this week and into next week’s OPEX, implying dealer support at current S&P levels will erode, but overall, the S&P above 4650 is bullish.
The technical levels have support at 4655, and resistance at 4690, followed by 4750 for the S&P. The S&P continues to consolidate in an hourly bull flag formation and aligned with optionality if it holds the 4650 area it still has bullish technicals.
Treasuries are lower, with the 5s30s curve flatter by -4.6bps as traders again gravitate to the idea that higher inflation will force the Fed to tighten faster than expected. 30yr auction is now cooling long-end selling.
*Q3 results were able to continue this year’s impressive positive earnings surprise trend
*Holdings of equities by BofA’s private clients are at record highs
*10yr Breakevens are on the rise again today following the hotter than expected CPI print, but 5yr5yr forwards are down, showing expectations are not coming unhinged yet
Econ Data:
CPI increased 0.9% in October, bringing the annualized increase to 6.2%, the highest since November of 1990 and above forecasts of 5.8%. Core inflation rose 0.6% MoM, leading to an annualized rate of 4.6%. Increases were broad-based, with energy costs seeing the largest increases (4.8% MoM vs. 1.3% in Sept), namely gasoline (6.1% MoM). Inflation rose at a notable clip again for shelter (0.5% MoM vs. 0.4% in Sept). Food rose at the same high rate (0.9% MoM) for a second month, giving it an annualized increase of 5.3%, the highest since January of 2009, thanks to increases in food at home (1% MoM vs. 1.2% in Sept) staying elevated. As expected, both new vehicles (1.4% vs. 1.3% in Sept) and used cars and trucks (2.5% MoM vs. -0.7% in Sept) increased as shortages persisted. Elsewhere, Airfares fell -0.7%, and apparel prices were flat, but gains were reported in medical care (0.5%), vehicle rental (3.1%), household furnishings & supplies (0.8%).
Why it Matters: CPI exceeded expectation in October, with increases in sub-components becoming more broad-based. The year-over-year headline inflation rate excluding Powell’s “handful” of reopening items (new and used vehicles, car rentals, airfares, and hotels) rose to 5.3% in October from 4.5% in September, and the core on the same basis rose 3.2% over the last 12 months compared to 2.8% in September. It is clear inflation is still rising at an increasing rate, something we thought might change, but again were caught off guard by the rise in energy and vehicle prices. It will now be interesting to see if holiday activities continue to put pressure on the core while energy and food do not meaningful decrease, driving headline inflation higher. The Fed continues to be in a worsening situation.
*Broad-based contribution to the higher-than-expected monthly gain in CPI, but energy was the main driver
*Annual levels are now approaching recent historical highs
*More detailed look at what contributed to this month’s gains in CPI
Wholesale inventories rose 1.4% MoM in September, leading to a 13.1% annual increase. It was the 14th consecutive month of gains, amid increases in both durable goods (1.3% the same pace as in August) and non-durable goods inventories (1.6% vs 1.3%). Increases in durable goods were driven by metals (3.5% MoM) and electrical (3.6% MoM). Auto inventories continued to fall, down -1.8% MoM. Sales of merchant wholesalers rose 1.1%, higher by 22% YoY. The inventory-to-sales ratio was little changed at 1.23 months.
Why it Matters: Although wholesale inventories saw a nice gain in September from companies stocking up for the holidays, growth on an annual basis still sees sales continuing to outpace inventory builds. The inventory-to-sales ratio of 1.23 months reflects how long it would take a company to sell all the goods sitting in a warehouse. The continual low readings show both how long-lasting the supply-side disruptions have been and how strong demand is.
*This ratio will likely take time to normalize given the known supply chain issues and strong holiday demand
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Value is higher on the week and outperforming today as rising yields are hurting growth
Chinese Iron Ore Future Price: Iron Ore futures are lower on the week, but flat today, with steel prices continuing to drop due to weakening demand expectations
5yr-30yr Treasury Spread: The curve is flatter on the week, again falling further today as the belly is under greater pressure from increasing expectations the Fed will have to tighten sooner and faster
EUR/JPY FX Cross: The Euro is stronger on the week and the day
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
Real Supply-Side Constraints:
Gobble-less: Thanksgiving Dinner Staples Are Low in Stock Thanks to Supply-Chain Issues – WSJ
Supplies of food and household items are 4% to 11% lower than normal as of Oct. 31, according to data from market-research firm IRI. That figure isn’t far from the bare shelves of March 2020, when supplies were down 13%. Essential ingredients might not be the only things absent from Thanksgiving dinner this year. Guests traveling will be faced with car rental and gas prices the highest they have been in seven years.
Why it Matters:
Although U.S. supermarket operators started purchasing holiday items early, aiming to avoid shortages, many holiday essentials are already in short supply. This holiday’s shortage and inflation experience will be key in cementing future inflation expectations, something already on the rise. If consumers come into the first half of the year increasingly expecting and accepting inflation, then the Fed will be in a tougher position even if the “transitory” factors begin to fall.
No Vacancy: Snarled Supply Chain Is Making U.S. Warehouse Shortage Worse – Bloomberg
The global supply-chain crisis that’s clogging U.S. ports is also pushing warehouses to capacity and forcing logistics managers to scramble for space. And it’s making already scarce warehouse space even more valuable. Major warehouse owners like Blackstone Inc. are the winners in this logistical logjam, with rents that are skyrocketing more than 30% in some of the hottest U.S. markets. Vacancies of 1% or less aren’t unheard of in gateways such as Southern California.
Why it Matters:
Developers can’t build fast enough. Every $1 billion increase in online sales equates to a need for an additional 1 million square feet of warehouse space, CBRE Group Inc. estimates. And U.S. suppliers will need 800 million square feet more to store backup inventory in case critical parts for autos and other products run short, according to Prologis. As a result, expect warehousing costs to continue to stay high until excess demand for goods start to fade or new capacity comes online.
China Macroprudential and Political Tightening:
Reunited: Biden-Xi Virtual Summit Set for Next Week, With Date to Come – Bloomberg
The exact date of the summit is still being negotiated. White House spokeswoman Karine Jean-Pierre reiterated Monday that there was “an agreement in principle” for a virtual meeting “before the end of the year.” This virtual summit follows two phone calls between Biden and Xi and various lower-level engagements that the U.S. said were disappointing and lacked serious engagement from Chinese officials.
Why it Matters:
Next week’s long-distance summit comes as ties between the world’s two largest economies have quietly improved in recent months. Xi said in a letter written to mark the National Committee on U.S.-China Relations’ gala dinner Tuesday in New York that China was willing to deepen cooperation, manage disagreements and put ties back on the right track. Biden wrote to the same event that the relationship had global significance. Leading into the Olympics it is Beijing will likely continue to ease its Wolf Warrior posturing, although we have yet to meaningfully see this regarding Taiwan specifically.
No End: China’s Inflation Risks Build as Producers Pass on Costs – Bloomberg
The producer price index climbed 13.5% from a year earlier, the fastest pace in 26 years and above economists’ median forecast for a 12.3% gain, data from the National Bureau of Statistics showed Wednesday. The consumer price index rose 1.5%, the highest since September 2020, exceeding the projected 1.4% gain.
Why it Matters:
Consumer inflation finally started to pick up as weather-related supply problems pushed up food prices while manufacturers increasingly passed on higher costs to retailers. We believe there will continue to be a substantial gap between PPI and CPI, forcing producers to accept weaker margins as Beijing continues its war on profitability. The PBoC will also continue to be limited in its response given the higher inflation verse weaker growth dynamics and its relationship to the Fed.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Business of War: Google Wants to Work With the Pentagon Again, Despite Employee Concerns - NYT
A new military initiative, which aims to modernize the Pentagon’s cloud technology and support the use of artificial intelligence to gain an advantage on the battlefield, is a replacement for a contract with Microsoft that was canceled this summer amid a lengthy legal battle with Amazon. The Pentagon’s restart of its cloud computing project has given Google a chance to jump back into the bidding, with Google saying it is “firmly committed to serving our public sector customers,” including the Defense Department, and that it “will evaluate any future bid opportunities accordingly.”
Why it Matters:
In 2018, thousands of Google employees signed a letter protesting the company’s involvement in Project Maven, a military program that uses artificial intelligence to interpret video images and could be used to refine the targeting of drone strikes. The outcry led Google to create guidelines for the ethical use of artificial intelligence, which prohibits the use of its technology for weapons or surveillance and hastened a shake-up of its cloud computing business. Will Google employees again revolt against supporting projects they deem unethical, denying our Defense Department access to critical national security asset technologies such as AI.
Electrification and Digitalization Policy:
Trust-busting: Google Loses Appeal of $2.8 Billion EU Shopping-Ads Fine – WSJ
The EU’s General Court in Luxembourg on Wednesday gave its endorsement to a 2017 antitrust finding by EU competition regulators that the Alphabet search engine had broken antitrust laws by directing users toward its own comparison-shopping ads at the expense of rival services. In a minor victory for Google, the court struck down one element of the EU’s case, saying that regulators hadn’t proven Google’s conduct distorted competition among general search engines.
Why it Matters:
The Google shopping decision was Ms. Vestager’s first antitrust salvo against the U.S. Big Tech companies and the first in a trio that levied more than $9 billion in fines against the search-engine giant. Google has appealed the other two cases as well. Under pressure from the EU and following complaints from rivals, Google has made changes to the system, changing the format for the ads in a way that is aimed at sending more traffic directly to the websites of shopping-comparison sites. We increasingly believe that regulatory headwinds will reduce earnings growth for Big Tech.
Slow Down: Facebook says it can’t keep pace with its own Oversight Board – Protocol
Facebook said it's struggling to keep up with the Oversight Board's pace of recommendations being dished out. The board has issued 78 recommendations since January. Under its agreement with the board, Facebook is supposed to respond to each of those recommendations, which are non-binding, within 30 days. But Facebook hasn't made substantive progress on lots of those recommendations, in part because, the company said, that the 30-day deadline is too tight.
Why it Matters:
Depending on who you ask, Facebook's Oversight Board is either a massive PR stunt to deflect blame away from the company or an ambitious and thoughtful experiment in social media governance. Out of the 69 recommendations the board made during the past two quarters of this year, Facebook has fully implemented just 12 of them. The bottom line is that Facebook is taking a cautious approach to implementing changes and still prioritizing profits over social responsibility.
Commodity Super Cycle Green.0:
Grey, Blue, and Green: Q&A: Linde on the costs of clean hydrogen – Argus
The cost of producing grey hydrogen created from natural gas is $1.50-2/kg. Green hydrogen is almost triple that at around $4/kg or more. The current cost level is making it difficult to convince consumers to switch, especially without support. This makes it likely blue hydrogen will be more widely adopted given it is not much more expensive than grey, helping it become a transitional method to full green. However, significant infrastructure is still needed, and further adoptions of technologies to make large-scale production of blue hydrogen viable.
Why it Matters:
The interview with global chemical and industrial gas firm Linde's vice-president of clean hydrogen for Asia-Pacific Wen-Bin Qian sheds light on the state of hydrogen in the clean energy transition. There is a need for government support both in subsidizing the needed infrastructure build that is coming and also in setting standards for low carbon hydrogen.
Current Macro Theme Summaries:
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