MIDDAY MACRO - DAILY COLOR – 11/15/2021
OVERNIGHT-MORNING RECAP / MARKET WRAP
Narratives/Price Action:
Equities are lower, as an overnight rally faded at the NY-open with selling now accelerating despite better data out of China and domestically
Treasuries are lower, with continued inflationary concerns dominating sentiment as breakeven rates continue to rise to record levels
WTI is lower, with the OPEC+ v.s. Biden Administration saga seeing no relief and expectations for an SPR release is growing, meanwhile, U.S. thermal coal prices are at a 12-year high thanks to strong overnight demand
Analysis:
Better than expected data out of China (retail sales and industrial production) set a more risk-on tone overnight, helped further by a surprise jump higher in the NY Fed’s regional survey; however, equities and Treasuries are under increasing pressure following the NY-open as parts of Europe reenter Covid lock-down, and inflationary fears continue to grow more generally while the $DXY is at highs for the year.
The S&P is outperforming the Nasdaq and Russell with Value, High Dividend Yield, and Low Volatility factors, and Utilities, Consumer Staples, and Communication sectors all outperforming.
S&P optionality strike levels have the Zero-Gamma Level moved lower to 4603 while the Call Wall is at 4700. The late-day rally Friday built gamma and reduced implied volatility, tightening the daily trading range and keeping significant gravity at 4700 until opex this Friday.
The technical levels have support at 4675, then 4650, and resistance at 4690, then 4735 for the S&P. S&P is basing currently after a pre-NY-open rally faded right around the key psychological level of 4700.
Treasuries are lower with the long-end under pressure again, as the 10yr yield is above 1.6% and 30yr is above 2% taking the 5s30s curve steeper by 4.5 bps.
*Tech saw a good level of outflow in November
*Morgan Stanley expects inventory builds to continue throughout 2022, helping GDP growth average around 5% on the year
*Goldman’s economic team is getting some attention today, calling for the current build in inventories to eventually cause a deflationary pulse towards the end of next year
*Despite recent regulatory crackdowns and increased geopolitical tensions, the world is increasingly investing in China
Econ Data:
The New York Empire State Manufacturing Index jumped to 30.9 in November from 19.8 in October, beating forecasts of 21.2. New orders (28.8 vs. 24.3 in October) and Shipments (28.2 vs. 8.9) posted increases. Delivery times decreased off record highs in October (32.2 vs. 38). Employment grew at its fastest pace on record (26 vs. 17.1) while the average workweek increased (23.1 vs. 15.3). The Prices Paid approached its record level (83 vs. 78.7), and the Prices Received index reached a new high (50.8 vs. 43.5). Looking ahead, firms were less optimistic about the general business conditions they would face in six months. Finally, firms increased spending expectations for capital and technology investments.
Why it Matters: The report showed some signs of supply-side disruptions alleviating. Delivery times fell, and the employment picture picked up further (indicating the hiring situation is improving). However, inflationary pressures increased, with firms having greater success passing costs on, while prices paid moved back to near highs. There is still no loss of demand due to the increase in prices, as seen in the increase in New Orders. However, the continued price increases due to shortages of materials and labor are increasingly wearing on future outlook with a big drop in the General Business Condition outlook, all be it still safely in positive area and Capex expectations increased.
*Employment and Prices Received both hit record levels in November
*The regional Fed survey’s look to be improving after the late-summer slowdown
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Value is higher but generally little changed on the week with value higher by 0.25% today
Chinese Iron Ore Future Price: Iron Ore futures are lower on the week, with steel futures prices falling -30% in October
5yr-30yr Treasury Spread: The curve is steeper on the week, higher today as the expediated downward trend of recent is beginning to fade
EUR/JPY FX Cross: The Yen is stronger on the week and the day as a weaker GDP print in Japan raises the expectation for further fiscal stimulus there while lock-downs in the EZ weigh on sentiment there
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
Real Supply-Side Constraints:
Outbound: Crunch at Ports May Mean Crisis for American Farms - NYT
The same congestion at U.S. ports and shortage of truck drivers that have brought the flow of some goods to a halt have also left farmers struggling to get their cargo abroad and fulfill contracts before food supplies go bad. Agriculture accounts for about one-tenth of America’s goods exports and roughly 20% of what U.S. farmers and ranchers produce is sent abroad. Strong global demand for food and soaring commodities prices have lifted the value of U.S. agricultural exports by more than 20% over last year.
Why it Matters:
Exporters say they are leaving significant amounts of money on the table due to supply chain problems. And many farmers are now struggling to keep up with soaring costs for materials like fertilizer, air filters, pallets, and packaging, as well as find farmhands and drivers to move their goods. The National Milk Producers Federation estimates that shipping disruptions have cost the U.S. dairy industry nearly $1 billion in the first half of the year in terms of higher shipping and inventory costs, lost export volume, and price deterioration.
China Macroprudential and Political Tightening:
Stalled: What’s Driving Xi Jinping’s Economic Revamp? China’s Social Mobility Has Stalled – WSJ
Academic research and data show that as China’s economy matures, more of the best opportunities have been accruing to the children of wealthy and politically connected elites. Children from poorer or rural families are finding it harder to get ahead. Economists from the World Bank reached similar conclusions, with mobility in China falling, especially among women and in poorer regions.
Why it Matters:
Overall incomes and standards of living have continued to rise in China. However. as relative mobility has declined, inequality has worsened. In 1978, China’s top 10% of earners and bottom 50% each took home about a quarter of the country’s total income. By 2018, the top 10% made more than 40% of total income in China, while the bottom half got less than 15%, according to World Bank data. Researchers, including Harvard University sociologist Ya-Wen Lei in a study published last year, have found growing intolerance of inequality among Chinese people as their economic expectations increase.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
EZ Soft Power: EU to rival China's Belt and Road with overseas infrastructure plan – NikkeiAsia
The "Global Gateway" will emphasize sustainability and the EU's values to strengthen ties with partners. Specifically, in the Indo-Pacific area, the framework focuses on digital connectivity as the bloc looks to increase engagement with the region. The framework will focus on five areas: digital transition, clean energy transition, transport, people-to-people connections, and trade and resilient supply chains.
Why it Matters:
The initiative comes as the EU pushes to implement its recently announced Indo-Pacific strategy, which underscores deepening engagement with like-minded partners in the region for the bloc's security and prosperity, including ensuring robust supply chains for semiconductors. The EU made a thinly veiled expression of skepticism toward Beijing's overseas infrastructure investment model, and the bloc's intention to offer an alternative option for sustainable development.
Not So Secret: China Bought Italian Military-Drone Maker Without Authorities’ Knowledge – WSJ
Italian authorities are investigating the 2018 takeover of Alpi Aviation Srl by a Hong Kong-registered company that they say is a front for the Chinese state and was in the process of transferring the company’s technical and intellectual property to a new production site in China. The takeover fits a pattern, analysts say, of Chinese state firms using ostensibly private shell companies as fronts to snap up firms with specific technologies that they then shift to new facilities in China.
Why it Matters:
Europe is strengthening controls over investments following a wave of Chinese acquisitions. In 2018, the European Union established a new framework for screening. But ultimate responsibility lies with national governments, which must balance their desire for investment against security concerns and are unable to monitor deals at every company.
Electrification and Digitalization Policy:
So Complex: Exclusive: IBM achieves quantum computing breakthrough – Axios
IBM says its new Eagle processor can handle 127 qubits, a measure of quantum computing power. In topping 100 qubits, IBM says it has reached a milestone that allows quantum to surpass the power of a traditional computer. "It is impossible to simulate it on something else, which implies it's more powerful than anything else," CEO Arvind Krishna told "Axios on HBO."
Why it MatterS:
The arrival of quantum computing poses a unique problem. Much of modern cryptography is based on hiding data in a way that it would take modern computers too long to crack. But, with their different approach, quantum computers will be able to break many of today's encryption systems. As a result, we are closely watching developments here given advancements would alter geopolitical and societal power dynamics.
ESG Monetary and Fiscal Policy Expansion:
Something: COP26 Seals Breakthrough Climate Deal After Major Compromises - Bloomberg
After two weeks of often, delegates agreed to reduce the use of coal, end “inefficient” fossil-fuel subsidies, and boost their climate targets sooner. The Glasgow Climate Pact puts the world on a path to limit the rise in global temperatures to 1.5 degrees Celsius from pre-industrial times, the stretch goal of the Paris Agreement and the level scientists say is needed to avoid catastrophic warming. Delegates also approved the framework for trading carbon credits, breaking six years of deadlock, and emissions-reporting guidelines to increase scrutiny of climate pledges.
Why it Matters:
The accord came despite last-minute objections from China and India, two of the world’s largest emitters, who wanted the language on coal to be watered down. The accord was also criticized for not doing enough to raise financial support from rich countries to help developing nations transition to clean energy and prepare for more extreme weather. Experts also warned that concessions on carbon market rules could set back efforts to cut emissions of planet-warming greenhouse gases.
Current Macro Theme Summaries:
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