MIDDAY MACRO - DAILY COLOR – 11/17/2021
OVERNIGHT-MORNING RECAP / MARKET WRAP
Narratives/Price Action:
Equities are mixed, with the Nasdaq higher while the Russell is notably weaker with covid concerns on the rise again
Treasuries are higher, with the long-end continuing to consolidate after recent losses
WTI is lower, approaching $78 as larger than expected EIA reported inventory drawdowns on the week failed to reverse overnight/morning weakness
Analysis:
In a repeat of yesterday’s price action, Large-Cap growth is again outperforming today, with Small-Caps under considerable pressure as increasing Covid case counts come back into attention. Treasury markets continue to tread water near their recent lows although better bid currently, with today’s housing data showing supply-side drags continue. The dollar is off recent highs reached overnight thanks to the Euro retracing sharp losses, but the trend indicates further strength.
The Nasdaq is outperforming the S&P and Russell with Growth, Low Volatility, and High Dividend Yield factors, and Consumer Discretionary, Health Care and Technology sectors all outperforming.
S&P optionality strike levels have the Zero-Gamma Level moved higher to 4652 while the Call Wall moved higher to 4750. Despite the Call Wall moving higher, there is still a lot of strength/gravity at 4700. However, this could change following Friday’s OPEX given the large size/amount of positions expiring.
The technical levels have support at 4675, and resistance at 4700, then 4740 for the S&P. The 4670-75 level has been key support all week and this morning’s bounce off of that zone was a bullish sign.
Treasuries are slightly higher, continuing to base with the belly better bid in the NY morning. The 5s30s curve is very steeper by 2bps to 78.1 bps, breaking out of its expediated tactical downtrend since early October.
*Growth and Value valuations are historically very far apart.
*A significant amount of 4700 strikes will expire this Friday, increasing the trading range and potential for higher levels of volatility
*Retailers pricing power continues to improve due to surging demand/sales
*As we continue to highlight, growth expectations became too low and the risk/reward skew favors a stronger than expected 4th qtr, given whats riced in
Econ Data:
Housing starts fell -0.7% to 1.52 million units in October, below market expectations. Starts for the single-unit segment declined 3.9% to 1.039 million, while those for the multi-family one jumped 6.8% to 0.47 million. Starts were down in the West, South, Northeast but increased in the Midwest. Building permits rose 4% to 1.650 million in October, above market expectations. Permits for buildings with five units or more jumped 6.5%, while single-family authorizations rose 2.7%. Permits were up in all four regions. Housing completions were flat on the month.
Why it Matters: Starts fell for a second consecutive month to the lowest in 6 months, as high costs for building materials, especially lumber and copper, supply constraints more generally, and labor shortages continue to weigh on builders' ability to act. However, demand is not notably weakening, as seen with continued increases in permits. Permits for multi-unit projects were robust in October. Completions look to be slowing, as it is taking longer to complete builds, and we will be watching for improvements here to indicate if supply-side impairments are improving, but see none yet.
*Permits picked up in October while Starts and Completions cooled
*There is still no meaningful improvement in supply-side impairments and the Average time from “Start to Finish” continues to rise
Policy Talk:
There has been a lot of Fed speakers again this week, and we don’t have the bandwidth here to cover them all we will highlight recent speeches by NY Fed president Williams and San Fransico President Daly.
Williams’s speech focused on the need to continue Treasury market reform, appropriately given at the U.S. Treasury Market Conference. He highlighted that severe disruptions to markets are rare but noted three instances in the last decade that were notable learning experiences: the flash rally of October 2014, the repo market distress in September 2019, and finally, the extraordinary dislocations at the onset of the COVID-19 pandemic in March of 2020. There were two main lessons learned from these events. First unforeseen things will happen in Treasury markets, and they will affect the broader market. Second, the market was unable to recover on its own and needed official intervention. Regarding the response to the pandemic, he highlighted the large size needed for the Fed’s repo facility to provide liquidity. However, that alone was still not enough, leading the Fed to follow through with LSAPs. We highlight this speech to support our belief that the Fed is increasingly taking ownership of the Treasury market. Treasuries will continue to be a big part of a balance sheet that will likely never meaningfully shrink. Finally, we believe that supporting financial conditions will eventually be codified into the Statement of Long-Run Goals as a lessor mandate to AIT and maximum employment.
President Daly gave a more traditional outlook speech where she focused on the continued uncertainties of the recovery is creating for monetary policy. She discounted the current inflationary pulse as “actually not that mysterious,” highlighting how the pandemic structurally changed “resilient” demand towards goods. Opposingly, the supply chain has been less “resilient” in keeping up with this increased demand. She believes there will be a moderation in price pressure as demand returns to a more normal blend while supply-chains should eventually “catch up.” She went on to discount labor markets being overly tight, pointing out that six million workers were still missing, and Covid continues to deter their reentry. She concludes by saying due to the uncertainty, policy needs to remain patient. According to her, inflation expectations are still “well-anchored,” and any policy tightening would reduce demand 12 to 18 months out, a period when inflation should be back to normal, in her view. Again we highlight Daly’s views as the base case for the dovish side of the debate.
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Growth is higher on the week and again today as Large-Cap Growth continues to outperform all other Size/Value factors on the day
Chinese Iron Ore Future Price: Iron Ore futures are lower on the week but higher on the day with new construction starts falling over 30% on year in October
5yr-30yr Treasury Spread: The curve is steeper on the week and higher by 2.3 bps today as the belly is better bid while supply in the long-end (20yr auction) needs to be absorbed
EUR/JPY FX Cross: The Yen is stronger on the week and ay as the Euro continues to be under increasing pressure due to rising Covid cases there
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
Real Supply-Side Constraints:
No Peak Yet: U.S. Trucking Freight Rates Rise Most in Decades – Bloomberg
A proxy for U.S. trucking freight rates jumped in October by more than 36% from a year earlier, the biggest annual increase in data back to the early 1990s, according to the latest figures from Cass Information Systems. The most recent government report on producer prices showed freight transportation by rail is also costing shippers more. There was a 7.3% increase in October from the same month last year, the second-largest 12-month advance since 2012.
Why it Matters:
There are signs ocean shipping costs have peaked, but that has not yet occurred for land logistical costs. This part of the supply chain will take time to improve as trucking supply will be constrained beyond historical norms from restocking, economic recovery, and limited driver availability. Trains transportation is also facing similar constraints. However, there are signs that congestion at the L.A. port is slowly alleviating, which would be the first domino to reduce inland transportation demand.
China Macroprudential and Political Tightening:
Send Check: China Can’t Develop Isolated From the World, Xi’s No. 2 Says – Bloomberg
China and the world must work together to boost global economic growth, Vice President Wang Qishan said, vowing that Beijing will continue opening more to foreign investment. “China can not develop in isolation of the world and nor can the world develop without China,” Wang said Wednesday at the Bloomberg New Economy Forum in Singapore. “China will not waiver in its resolve to deepen reform and expand opening up.”
Why it Matters:
Wang, technically second-in-charge to President Xi Jinping, spoke a day after the Chinese leader held a virtual summit with U.S. President Joe Biden. The outcome was generally positive, with both sides agreeing to continue talking on various topics even as they continue to spar over issues like Taiwan. Stepping back, China still clearly wants to continue reforms and grow its role in international financial markets.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Beefcake: Australia to Beef Up High-Tech Prowess After Security Pact With U.S. – WSJ
Australia will invest the equivalent of about $81 million in quantum technology, including for a hub that will foster strategic partnerships with like-minded countries to commercialize Australia’s quantum research, officials said. It’s just one of many critical technologies, including ultra-advanced 6G communications, genetic engineering, and alternative fuel, that Australia plans to focus on in the coming years.
Why it Matters:
The unveiling of Australia’s critical-technology plan comes shortly after Australia, the U.S., and the U.K. agreed to a new security partnership, known as AUKUS, to strengthen cooperation in the Indo-Pacific region. “AUKUS is about much more than nuclear submarines,” Australian Prime Minister Scott Morrison said at an event Wednesday hosted by the Australian Strategic Policy Institute. Mr. Morrison said officials from the three nations are developing an AUKUS work plan to facilitate the partnership.
Commodity Super Cycle Green.0:
Conversion Factor: MSC and Wärtsilä to trial alternative fuels conversion for two-stroke engines – Splash247
Finnish marine technology firm Wärtsilä in partnership with MSC Shipmanagement, is set to commercially launch its two-stroke future fuels conversion platform during the first quarter of 2022. The engine combustion technology platform will initially enable the conversion of two-stroke, electronically controlled, main engines to operate on currently available liquified natural gas (LNG) and allow for the adoption of alternative green fuels or fuel blends when they become commercially available.
Why it Matters:
We flag this as a potentially notable development for the future of ocean shipping fuel demand. It looks to improve the versatility of a cargo vessel's energy portfolio. Among the other benefits is complying with upcoming environmental regulations and providing assets with an extended operational life.
Unwanted Auction: U.S. offshore oil auction begins under court order, in the shadow of climate deal - Reuters
Biden administration on Wednesday will auction oil drilling rights to 80 million acres in the U.S. Gulf of Mexico. The sale by the Department of Interior will be the first under President Joe Biden, whose administration paused drilling sales under a promise to end development on federal properties. But Biden lost a court fight to oil-producing states that sued to reinstate the sales.
Why it Matters:
This will be the first opportunity to test the oil and gas industry's demand for Gulf acreage with energy prices at multi-year highs. The Trump administration's final Gulf sale, held last November, generated a modest $121 million in high bids. But oil companies Royal Dutch Shell, BP, and Chevron are seizing on the higher prices to advance offshore projects. It will also test the power of the current administration to use other means to deter interest.
ESG Monetary and Fiscal Policy Expansion:
Out of Sync: What’s Wrong With ESG Investing as Explained Through the Medium of Ohio – Bloomberg
Say what you will about regular credit ratings, but they are remarkably consistent. Yet study after study has shown that ESG ratings on offer from the new ESG assessment industry vary wildly. Until the market agrees on a uniform set of consistent disclosures, it is hard to see how ESG ratings can become more objective. The article elaborates on how the financial industry varies in its approach to ESG ratings and what the path forward may look like.
Why it Matters:
It’s unclear what the ultimate goal of a reliable ESG framework would be for investors armed with this information. Should they shun a company in favor of others that score better? Or should investors engage with lower-scoring companies to try to encourage them to improve their ESG metrics? Where is the threshold between good enough and too bad? We highlight this as it will likely take regulatory oversight to create a greater level of standardization and adoption, one that will have real capital allocation implications. Until then this is a feel-good exercise.
Frictions: Lina Khan Sees Turbulent Start as Head of Federal Trade Commission – WSJ
Lina Khan, the new Federal Trade Commission chairwoman aims to challenge more corporate mergers and allegedly monopolistic practices, as well as adopt regulations to head off what she sees as unfair business tactics. Those plans have sparked policy disagreements with Republican commissioners and produced discontent among career officials who have felt like an afterthought in her agenda. The article goes on to talk about how Ms. Khan is responding to criticisms and her plans more broadly.
Why it Matters:
Ms. Khan and fellow Democrats adopted several early moves to crack down on mergers, including a policy that would give the commission veto power over a company’s future transactions once it attempts an allegedly anticompetitive merger or acquisition. FTC Democrats separately took steps that could make it easier to adopt new business regulations and rescinded a 2015 policy that they said unduly limited the FTC’s ability to challenge certain types of business practices as unfair methods of competition. It is important to watch this closely given how concentrated certain industries have become.
Sizing Up: Fannie Mae, Freddie Mac to Back Home Loans of Nearly $1 Million as Prices Soar – WSJ
The maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac are expected to jump sharply in 2022, a reflection of the rapid appreciation in home prices nationally over the past year. Currently, the government-controlled mortgage companies can back single-family mortgages that have balances as high as $548,250 in most parts of the country and up to $822,375 in expensive housing markets, including parts of California and New York. Those limits are expected to jump to a baseline level of about $650,000 in most jurisdictions and just under $1 million in high-cost markets.
Why it Matters:
Mortgage bankers and real-estate agents say the new limits should keep pace with the double-digit rise in home prices. But some housing experts say the expected jump in loan limits raises questions about the appropriate role of the government in housing and whether taxpayers should effectively backstop sky-high housing prices when Fannie and Freddie’s market share is already rising. The increase in acceptable loan size will increase the debate around whether the GSEs should still be in conservatorship. We believe they will continue to stay right where they are for some time.
Current Macro Theme Summaries:
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