MIDDAY MACRO - DAILY COLOR – 11/12/2021
OVERNIGHT-MORNING RECAP / MARKET WRAP
Narratives/Price Action:
Equities are higher, with a significant bounce in tech/growth occurring after the NY-open with the morning's data increasing inflationary concerns/risks
Treasuries are mixed, with the belly better bid while pressure on the long-end is steepening the curve
WTI is lower, with not much new news driving price action other than an OPEC report downgrading demand by 300k bpd for Q4
Analysis:
Equities bounced higher following some choppiness at the NY-open as flows favored large-cap growth helped by increased inflationary concerns from persistently high job opening and quit rates as well as a further deterioration in consumer sentiment (due to inflation). Long-end Treasuries are bucking the traditional dance with equities with yields breaking higher from their recent down channel while the dollar continues to consolidate following its post-CPI gains.
The Nasdaq is outperforming the S&P and Russell with Growth, Low Volatility, and Value factors, and Communication, Technology, and Industrials sectors all outperforming.
S&P optionality strike levels have the Zero-Gamma Level moved lower to 4609 while the Call Wall is at 4700. There is a material drawdown in SPY & QQQ gamma with today’s OPEX, implying volatility should increase next week with a slightly more negative gamma position developing.
The technical levels have support at 4640 and resistance at 4690 for the S&P. Again, seasonality and optionality suggest more volatility next week. However, the technicals are still bullish with 4690 being the next key resistance before new ATHs.
Treasuries are mixed, with the 30yr under pressure, causing the 5s30s curve to steepen 5 bps. 10yr and 30yr yields are pushing on the top of their recent downtrend, potentially signaling a change in trend
*The “reopening” basket is outperforming this month
*The belly of the Treasury curve was hit hardest following the higher than expected CPI print
*Inventory builds are slowly gaining traction
*Central Bank rate hikes are picking up pace globally
Econ Data:
The number of job openings decreased by 191K from a month earlier to 10.4 million in September, while markets had expected a decrease to 10.3 million. Hires and total separations were little changed at 6.5 million and 6.2 million, respectively. Within separations, the quits level and rate increased to a series high of 4.4 million and 3%, respectively. The number of layoffs and discharges was little changed at 1.4 million.
Why it Matters: It is increasingly looking like it will take longer than expected for the glut in open positions to be filled. Employers continue to raise wages and offering more benefits such as training and signing bonuses to attract workers. Workers, meanwhile, have demonstrated heightened bargaining power by quitting jobs at historic rates. New openings were not overly driven by seasonal needs, however, this is certainly helping keep the rate of openings high.
*Workers quitting their job reached a historically high level
The University of Michigan's consumer sentiment fell to 66.8 in November from 71.7 in October and below market expectations of 72.4. It was the lowest reading since November 2011 due to an escalating inflation rate and the growing belief among consumers that surging inflation would continue. The gauge of current conditions dropped to 73.2 from 77.7 while the expectations subindex went down to 62.8 from 67.9. Meanwhile, inflation expectations for the year-ahead edged up to 4.9% from 4.8% while the 5-year outlook was unchanged at 2.9%.
Why it Matters: One-in-four consumers cited inflationary reductions in their living standards in November, with lower-income and older consumers voicing the greatest impact. Nominal income gains were widely reported but when asked about inflation-adjusted gains, half of all families anticipated reduced real incomes next year. Rising prices for homes, vehicles, and durables were reported more frequently than any other time in more than half a century. Respondents aligned with the Democrat party (and Independent) continue to have a significantly more positive outlook than Republicans. Differences between respondents based on political identification continue to be significantly larger than differences across income, age, and education.
*All three indexes are down on the year with overall sentiment down 6.7% MoM in November and -13.1% YoY
*The world is a dire place if you are a Republican while views by Independents actually improved in November
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Growth is higher on the week thanks to a surge in semis and tech more generally today
Chinese Iron Ore Future Price: Iron Ore futures are lower on the week, but higher again today as markets look to be basing due to increasing beliefs that the property sector may be stabilizing
5yr-30yr Treasury Spread: The curve is flatter on the week, but higher today as the long-end of the curve is pushing to post-CPI print lows
EUR/JPY FX Cross: The Yen is stronger on the week and the day even as EZ IP fell less than expected and concerns over Kishida’s “new capitalism” is weighing on equities there
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
Real Supply-Side Constraints:
Still More to Come: Apple supplier Foxconn cautious on 2022 revenue outlook – Reuters
Apple supplier Foxconn forecast on Friday that a global chip shortage would run into the second half of 2022, and its fourth-quarter revenue for electronics, including smartphones, could fall more than 15%. Chairman Liu Young-way said during a conference call that Foxconn was cautious about its 2022 revenue outlook, citing uncertainties surrounding the coronavirus pandemic, inflation, geopolitical tensions, and supply chains.
Why it Matters:
The more negative outlook came after a solid third quarter, in which revenue rose 9% on the year, helped by strong smartphone demand that remained stable despite the supply problems. Foxconn said it expected supply shortages in Southeast Asia to ease this month and the next. Again and again, the reoccurring theme since this summer is strong demand and not enough supply. With Delta subsiding in Asia and holiday inventory build near completion, supply chains will increasingly come under less pressure helping supply catch up to demand.
China Macroprudential and Political Tightening:
Not Dead Yet: After $500 Billion Rout, Optimism Grows for China: Tech Watch – Bloomberg
Having buckled under the weight of government crackdowns for much of the year, the Nasdaq Golden Dragon China Index has risen 16% in little more than a month. It’s still down 45% since hitting a record in February, a move that wiped out $500 billion in market value.“The worst is likely behind us in terms of the regulation intensity and the corresponding shocks to the market,” Goldman Sachs Group Inc. strategist Kinger Lau wrote in a note after conversations with clients.
Why it Matters:
Last month, a top regulator said that they expect to achieve significant progress in crackdowns against fintech firms before the end of the year. And a mandate for President Xi Jinping to potentially rule for life may mean policy continuity and fewer regulatory surprises. As we have stated before, we believe pressures from regulatory changes will subside and the market will begin to build momentum in the first half of next year.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Locational-Asset: Belarus Threatens EU Gas as Merkel Pushes Putin in Migrant Spat – Bloomberg
Belarusian President Lukashenko threatened to shut down a key pipeline carrying Russian gas to the European Union, escalating a dispute flaring over migrants seeking to cross from his country into the EU. About 20% of Russia’s EU gas flows crossed Belarus this year. Together with the U.K. and U.S., the EZ bloc is planning more sanctions on the Lukashenko.
Why it Matters:
Neither the Kremlin nor Russian gas giant Gazprom commented on Lukashenko’s latest ultimatum Thursday and it wasn’t clear whether he had the legal authority to do it. Since tensions with the West spiked last year in the wake of his crackdown on critics after presidential elections, Lukashenko has threatened a wide range of retaliatory moves but followed through on only a few. The bottom line, things continue to be volatile regarding Belarus while the U.S. warned the EZ about the increased possibility of Russia further invading Ukraine yesterday.
3X: China chipmaker SMIC keeps expansion on track amid US crackdown – NikkeiAsia
Top China chipmaker Semiconductor Manufacturing International Co. says it is on track to triple production capacity in the next few years despite a U.S. blacklisting. The company aims to capture rapidly growing domestic demand. Nearly 67% of SMIC's revenue came from China-based customers in the July-September quarter. That figure was closer to 50% before the U.S. crackdown on Huawei and other Chinese tech players but has risen rapidly as China raced to build up its domestic supply chain in recent years.
Why it Matters:
SMIC co-CEO Zhao Haijun said the Chinese national chip champion has benefited significantly from an industrywide trend of Chinese customers wanting to "localize at least a certain ratio" of production. At the same time, new foreign customers also reached out to SMIC for more production, given the ongoing global crunch. His comments indicate the Chinese chipmaker has shaken off concerns that non-Chinese customers would switch orders away from SMIC due to the U.S. blacklisting.
Electrification and Digitalization Policy:
Replacing Labor: Companies Order Record Number of Robots Amid Labor Shortage – WSJ
Total robotics sales for the first nine months of the year were $1.48 billion, topping a previous record of $1.47 billion set over the same period in 2017, according to the Association for Advancing Automation, or A3. Growth in non-automotive orders rose faster than in automotive-related orders, according to the association.
Why it Matters:
“With labor shortages throughout manufacturing, logistics, and virtually every industry, companies of all sizes are increasingly turning to robotics and automation to stay productive and competitive,” A3 President Jeff Burnstein said. Capitalism finds answers to problems, and with automation increasing, labor will continue to become bifurcated with those with in-demand skills becoming more productive and maintaining wage bargaining power. In contrast, those without needed skills will be replaced. This longer-term dynamic is why we are not as worried about a wage-spiral inflationary pulse getting too strong.
Commodity Super Cycle Green.0:
Grasshopper and Ant: Farmers Take on ‘Post-Apocalyptic’ Food Crisis – Bloomberg
Across the globe, farmers are using new seeds, adding irrigation, and swapping crops in the race against climate change. Meanwhile, companies are developing new varieties for vegetables like cabbages that are more resistant to extreme weather. “We’ve got to adapt,” Jody Brown, a rancher in Australia said. She’s exploring alternatives to traditional grazing methods that don’t push the land as hard, like grouping livestock into tighter, more compact groups and rotating them quickly across paddocks.
Why it Matters:
According to United Nations ' estimates, global crop yields could fall about 30% because of climate change, while food demand is expected to jump 50% in the coming decades. Fisheries and water supplies are increasingly threatened, too. The bottom line is that this is happening faster than expected and the world is still in denial because the problem is so great that it’s hard to wrap one's head around. However, as always, we believe capitalism is properly incentivizing innovation, and the agriculture industry will increasingly find solutions. But it will take time and volatility in agriculture/food markets will increase.
Current Portfolio Performance:
Current Macro Theme Summaries:
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