MIDDAY MACRO - DAILY COLOR – 11/18/2021
OVERNIGHT-MORNING RECAP / MARKET WRAP
Narratives/Price Action:
Equities are mixed, with the Nasdaq and growth beating the Russell and value for a third day as dip-buying emerged after a quick NY-open drop
Treasuries are higher, with the curve little changed as data and Fed rhetoric continued inflationary focus while traders continue to await Biden’s Fed picks
WTI is higher, recovering after yesterday’s losses continued overnight as an effort by the Biden administration to get numerous nations to release reserves looks to be working
Analysis:
The S&P continues to consolidate in its recent range while the Nasdaq is making new all-time highs as a more hawkish tone from Fed officials and regional data showing no abatement in pricing pressures continue policy tightening concerns. Both the growth/value and Nasdaq/Russell ratio have broken out of recent up channels (making our view that small-caps will outperform into year-end look increasingly wrong). Elsewhere, Treasuries continue to rebound, with the long-end well bid while the dollar is cooling, mainly due to Euro strength.
The Nasdaq is outperforming the S&P and Russell with Growth and Momentum factors, and Consumer Discretionary and Technology sectors all outperforming.
S&P optionality strike levels have the Zero-Gamma Level moved lower to 4649 while the Call Wall moved lower to 4725. Gamma for the S&P remains positive, with 4700 still having significant gravity. However, the Put Wall shifted back down to 4400, -10% lower than current levels, implying the market is underhedged.
The technical levels have support at 4670, then 4650, and resistance at 4700, then 4740 for the S&P. The 4670 area was again tested this morning and held, and the current bounce continues the consolidation and likely set-up for a move higher.
Treasuries are higher, with the 5s30s curve little changed at 75bps, helped by more hawkish remarks from NY Fed President Williams.
*Nasdaq has impressively outperformed the Russell in the last week as increasing Covid concerns and key sector-specific stories have driven the IWM/QQQ ratio out of a tactical up-channel trend
*The Conference Board Leading Economic Index grew 0.9% MoM in Oct following a 0.1% MoM increases in September.
*Fund managers believing inflation is more “transitory” increased in November despite the hotter than expected CPI print
*According to an Evercore ISI survey, Asset Managers are overweight Health Care, Industrials and Materials compared to historical averages while Hedge Funds are overweight Consumer Discretionary, Industrials, Materials, and Communication Services.
Unfortunately, we need to highlight the growing level of Delta/Covid cases globally as it is clearly affecting sector/factor rotations and FX markets these last few days.
Cases are up in most European countries, with Germany, Belgium, Netherlands, and Ireland instructing companies to allow workers (who can) to again work from home while other nations are only recommending it. New measures are also being introduced across the region to restrict access to unvaccinated people to public venues.
*Eastern Europe has seen the largest increases in cases recently, with Russia also being particularly hit hard
Cases in the U.S. have risen by 20% over the last two weeks, increasing more rapidly in the Upper Midwest and New England. This is not to be ignored, but the good thing is most higher-risk people are vaccinated while 31.5 million of them have received boosters, likely keeping hospitalization rates from exponentially growing. However, to be clear, almost two years into this, the 7-day MA for deaths is close to 1,500, something we find unbelievable.
*Cold weather may be increasing the spread of Delta, or possibly early vaccination uptake is now leaving people less protected as effectiveness falls
With 2/3 of Americans planning a pre-pandemic-styled gathering for Thanksgiving, the recent rise could quickly increase in the coming weeks. As it stands, 59% of Americans are fully vaccinated, but the effectiveness may be dropping given how few have yet to get boosters. The bottom line is that this is a growing threat to the reopening, and although we do not believe there will be drastic federal or local policy changes that will become a drag on growth, we are watching closely with the critical point being Mid-December when cases from T-Day gatherings will start to meaningfully materialize.
*7-day moving average has picked up to 96K as the never-ending story goes on and on and on
Econ Data:
The Philadelphia Fed Manufacturing Index increased to 39 in November from 23.8 in October and beat market forecasts of 24. Nearly 42% of the firms reported increases in current activity this month, with New Orders increasing 17 points to a reading of 47.4 and Unfilled Orders doubled. Delivery Times grew (35.7 vs. 32.2) while Inventories fell (13.5 vs. 18.8). The employment index was little changed. Price indexes indicate more widespread price increases, with both Prices Paid and Received moving up about the same amount. The future indexes improved in a similar fashion to the current indexes, with firms expecting better growth over the next six months. Capital expenditure expectations were stable.
Why it Matters: The reading pointed to the strongest growth in factory activity in Philadelphia since April. Expectations for prices to increase as well as Delivery times in six months have stabilized. However, in the monthly special questions, firms were asked to forecast increases in their own prices verse the overall inflation rate. Firms expected their own price increases to exceed the national inflation rate. The firms expect their employee compensation costs (wages plus benefits on a per-employee basis) to rise 4.8% over the next year, an increase from 4% in August.
*Increases in Current Activity outpaced Future Activity, with the latter now stabilizing after falling significantly from summer highs
*Firms expect to raise their prices by 5.3% while the general inflation rate will be 5%, growing profit margins?
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 and the day with analysts now expecting annual infrastructure investment to be lower than 1%
5yr-30yr Treasury Spread: The curve is steeper on the week and little changed today with an abundance of Fed speakers and Biden’s Fed picks keeping traders cautious
EUR/JPY FX Cross: The Yen is stronger on the week but the Euro is higher by 0.5% today as a relief bounce looks to be occurring
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
Real Supply-Side Constraints:
Full Shelves: Target, TJX Post Strong Sales, Say They Have Plenty in Stock for Black Friday – WSJ
Retail chains Target and TJX said they were able to sidestep supply-chain snarls to post strong sales in the most recent quarter and stock up with goods for Black Friday and the holiday season. Target said inventory for the quarter rose 17.6% compared with the same period last year. “We are in an excellent inventory position, with most of the product needed for the holiday season either on hand or scheduled to arrive at our stores and online in time for the holidays,” said Ernie Herrman. CEO of TJX.
Why it Matters:
Profit margins for the two big retailers came under greater pressure than expected, and when coupled with Walmart, which reported earlier in the week, shows that supply-side problems are hitting the bottom line. However, overall sales volumes and inventory levels grew. More generally, retailers have pulled forward shipments of goods and chartered their own vessels to counteract transportation disruptions heading into the holiday season.
China Macroprudential and Political Tightening:
Not So Shadow: China’s $6 Trillion Hidden Debt Gets Stress-Tested in Downturn – Bloomberg
Beijing, Shanghai, and Guangdong provinces are planning trials to eliminate the off-balance-sheet borrowing that local authorities used in the past and are now becoming harder to finance due to the problems in the property market sector. The IMF estimates local government financing vehicles (LGFV) amounted to 39 trillion yuan ($6 trillion) in 2020. The article goes on to explain the ways various regions could/are handling the problem.
Why it Matters:
The LGFV problem is becoming thornier with the property slump. On the one hand, LGFV bonds have become popular among investors seeking shelter in state-backed assets, following a sell-off in private developers’ bonds. On the other hand, many LGFVs count land as their main assets, and declining land sales could hurt their ability to repay debt. Beijing is getting more serious about tackling financial risks associated with the debt, which was labeled a “national security” issue earlier this year.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Vaccine Soft Power: The U.S. aims to lift Covid vaccine manufacturing to create a billion doses a year. – NYT
The White House, under pressure to increase the supply of coronavirus vaccines to developing nations, plans to invest billions of dollars to expand U.S. manufacturing capacity, with the goal of producing at least one billion doses a year beginning in the second half of 2022. This comes alongside plans to purchase Pfizer’s new Covid pill treatment and expand the availability of rapid over-the-counter testing.
Why it Matters:
Whether the new Biden plan will satisfy the administration’s critics is unclear. Many activists have demanded that the administration build up manufacturing capacity overseas, particularly in Africa, but the Biden plan is focused on building capacity among domestic vaccine makers. “This effort is specifically aimed at building U.S. domestic capacity,” Dr. Kessler said. “But that capacity is important not only for the U.S. supply but for global supply.” The availability of American-made vaccines/pills will help increase America’s soft power abroad, something China’s less effective vaccine was unable to do for them.
Electrification and Digitalization Policy:
Negotiations?: Officials warn that Iran-backed hackers are targeting critical U.S. sectors - Axios
Hackers linked to the Iranian government are reportedly involved in an ongoing campaign targeting "a broad range of victims" across the United States, an advisory released Wednesday found. The agencies noted that Iranian Government-sponsored hackers exploited computer vulnerabilities and targeted "multiple U.S. critical infrastructure sectors," namely the transportation and health care sectors.
Why it Matters:
Although Iranian cyber aggression is not particularly breaking news, we highlight it given the renewed focus on U.S.-Iranian negotiations. With the JCPOA 2.0 negotiations set to pick up again at the end of November and the U.S. likely to do the deal given energy inflation concerns, it is important to watch for any egregious activities by Iran that could derail the current path. As a reminder, Iran could add an additional 1.5 mbpd and release significant amounts from stored inventory. Although not a game-changer, it would certainly help reduce international oil price pressure.
Commodity Super Cycle Green.0:
Nickel Needed: Indonesia's electric car dreams at odds with deforestation pledge – NikkeiAsia
Global electric vehicle makers have set their sights on Indonesia, attracted by its abundant reserves of key EV battery ingredient nickel, government backing for the industry, and the market potential of the world's fourth most populous nation. But Southeast Asia's largest economy faces an uphill battle in turning its EV production and consumption dreams into reality. Already, environmental concerns have the government vowing to fight deforestation, which could hinder its mining of the world's most extensive nickel reserves, analysts warn.
Why it Matters:
EV companies are particularly interested in Indonesia for its rich nickel reserves, indispensable to batteries. Indonesia led the globe in nickel production in 2020, producing an estimated 760,000 tons of the metal. It has a further 21 million tons of reserves, according to the U.S. Geological Survey, more than anywhere else in the world. Moving forward, Indonesia will be an interesting test between the need for critical “green” resources by global interests, domestic desire to develop an EV industry, and maintaining pledges to protect forests.
ESG Monetary and Fiscal Policy Expansion:
Other Voting Rights: SEC Rule Change Could Ease Path for Activist Investors to Gain Seats on Corporate Boards – WSJ
Revisions to corporate-ballot rules the SEC finalized on Wednesday require companies to give shareholders who are voting their proxy electronically or by mail a “universal ballot,” a single ballot listing all candidates in a contested board election. Under outgoing rules, shareholders must attend a company’s annual meeting in person to vote for candidates on both slates.
Why it Matters:
Universal ballots, which the SEC proposed in 2016 at the end of the Obama administration, can make it more likely a company will lose some board seats to dissidents, such as activist hedge funds, but less likely they will lose a majority of seats. While universal ballots have long been pushed by activists, they also have gained favor from investor advocates and some companies, which have argued that universal ballots could improve shareholder democracy.
Current Macro Theme Summaries:
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.