MIDDAY MACRO - DAILY COLOR – 11/2/2021
OVERNIGHT-MORNING RECAP / MARKET WRAP
Narratives/Price Action:
Equities are higher, with the S&P pushing on ATHs despite a more cautious tone going into tomorrow's FOMC meeting results
Treasuries are higher, with the curve steeper despite continued bearish expectations due to Fed tapering and no new econ data today to alleviate growth/inflation concerns
WTI is lower, as traders are grabbling with the extreme backwardation in the futures curve, global demand back above 100 mbd, falling coal prices in Asia, and OPEC+’s upcoming meeting later this week
Analysis:
The S&P is again melting up to ATHs, with price action more muted as traders brace for tomorrow’s FOMC meeting results on what is otherwise a light data day domestically. Elsewhere, new lockdowns in China spooked markets there while European manufacturing PMIs were little changed. Treasuries are better bid than one would expect going into tomorrow’s tapering announcement.
The Nasdaq is outperforming the S&P and Russell with Growth, High Dividend Yield, and Low Volatility factors, and Technology, Health Care, and Financials, and Communication sectors all outperforming.
S&P optionality strike levels have the Zero-Gamma Level moved higher to 4530 while the Call Wall is at 4650. Implied volatility is dropping, helped by realized (VIX) consolidating towards lows of the year, both of which should further post FOMC meeting tomorrow, providing a further tailwind for the S&P to reach 4700 into November’s OPEX.
The technical levels have support at 4590, followed by 4575, and resistance at 4620, followed by 4660 for the S&P. A consolidation/cooling at the ATH currently would help a push higher post-FOMC tomorrow given the extended RSI.
Treasuries are higher, with the 5s30s curve steeper for a second day by 2 bps currently. Speculative bets against Treasuries are at their net shortest position of the year, most short for the 5yr, as traders have a highly negative outlook for Treasuries going into this week’s FOMC meeting.
*The S&P has been sticking to the historical seasonal pattern this year, with November typically being one of the best months averaging 2.2% over the last 20 years
*The end of QE tends to be a positive for longer-term treasuries, given growth expectations fall
*Corporate Capex has grown 23% YoY in Q3, increasing from 17% YoY in Q2, showing the continuation of supply-side disruptions is prompting further investments
*Indeed postings are 49.8% above pre-pandemic levels, with HR job postings up 102% as firms continue to need people who hire others
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Value is higher on the week but down on the day as lower yields are helping growth outperform
Chinese Iron Ore Future Price: Iron Ore futures are lower on the week, falling sharply again today as steel production curbs increase due to authorities wanting blue skies for the Olympics
5yr-30yr Treasury Spread: The curve is slightly steeper on the week, higher by almost 3bps today as the belly is better bid showing expectations for tomorrow’s FOMC meeting may have become less hawkish
EUR/JPY FX Cross: The cross is little changed on the week, with the Yen slightly stronger today despite better than expected manufacturing PMIs out of Europe
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
Real Supply-Side Constraints:
Empty Boxes: The real story behind a tech founder’s ‘tweetstorm that saves Christmas’ – LAT
Ryan Petersen, the founder, and chief executive of the freight forwarding startup Flexport, tweeted five concrete recommendations: end zoning restrictions on how high containers can stack in Long Beach and Los Angeles, call in the National Guard’s spare truck chassis, make a temporary 500-acre-or-larger storage yard within 100 miles of the port, force the railroads to run shuttles to this new yard, and call on a fleet of smaller boats to clear containers off the docks. The next thing he knew, the Mayor of LA and Governor of California were calling him. The article covers all the issues causing the backup at the LA ports.
Why it Matters:
The real problem seems to be too many empty containers taking up space and jamming up operations. So far, actions such as opening up the time windows for pickups, fees for idling containers, and relaxing height stacking rules are starting to help marginally. The real problem is ocean shipping companies are still not incentivized enough to pick up their empty containers even with these changes. As a result, it looks like it will still take months for the logjam of containers to work itself out.
What’s Next: U.S. toymaker looks beyond port logjams to the risk of gluts – Reuters:
A key danger in the current environment is that companies will order too many goods as they scramble to fill orders, especially in the run-up to the holidays, which could quickly lead to piles of unsold goods once the crisis eases. Nancy Lazar, head of economic research at Cornerstone Macro, believes spending on items like furniture and computers - which exploded during the pandemic - has already cooled and that demand for many consumer goods will lessen in 2022. This drop in demand will come as supply chain blockages ease, "both putting downward pressure on prices," she said.
Why it Matters:
Oversupply is now becoming a growing risk in 2022. Bottlenecks from China to last-mile shipping have created a frenzied restocking environment into what is expected to be a strong holiday season. However, as the economy finally fully re-opens next year and consumers change consumption preferences from goods to services again, retailers may find themselves overstocked.
China Macroprudential and Political Tightening:
No Mon: PBOC Has Limited Room to Ease Policy, Former Central Bank Adviser Says – Caixin
China’s fiscal policy will provide the primary support to economic growth next year while significant monetary easing is unlikely, according to a former adviser to China’s central bank. The PBOC will have to act if growth continues to slow, but the U.S. Federal Reserve’s plan to normalize policy will narrow the room for action, said Huang, currently a professor at Peking University’s National School of Development. The PBOC has refrained from cutting banks’ reserve requirement ratio since a reduction in July and has kept policy interest rates steady since early last year.
Why it Matters:
Huang said growth is likely to see a further slowdown in the coming months before it turns around. While long-term goals such as deleveraging the property sector and reducing carbon emissions have inflicted short-term pain on the economy, Huang said he isn’t “too worried” about growth as authorities are now fine-tuning policies in these areas. It's also worth noting that recent liquidity injections have been more in line with seasonal needs and not a sign of additional accommodation.
Stockpile?: China tells citizens to stockpile food as Covid controls are tightened – FT
China has warned families to store food and other essentials in case of emergencies as officials drastically tighten restrictions to control a small Covid-19 outbreak. Beijing’s already harsh “zero Covid” policies have grown even stricter as coronavirus cases climb in the country despite targeted lockdowns. Authorities reported 54 new locally transmitted cases on Monday.
Why it Matters:
At this point in the game, it seems like a zero-tolerance policy is self-defeating. Covid will likely always be with us. However, given the poor efficiency of China’s vaccine, it is still popular in Beijing and likely among the citizens. The draconian policies have had far-reaching implications for China’s interactions with the outside world, ranging from supply chain disruptions to a lack of international summits and sports tournaments.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
NSC on AI: This Group Pushed More AI in US Security—and Boosted Big Tech - Wired
The National Security Commission on AI was created by Congress and chaired by Eric Schmidt, previously CEO of Google. Its goal was to help the US “harness the transformative technology of AI to benefit the economy and national security interests.” NSCAI says 19 of its recommendations to Congress were included in the defense budget approved in December 2020. One directs the Pentagon to use an existing industry exchange program to bring in more AI talent from tech companies. Another promoted the director of the Pentagon’s Joint AI Center, which aims to expand military use of AI by tapping commercial AI providers, including Google, to report directly to the deputy secretary of defense. The article goes on to describe how big tech is directing the U.S. government regarding AI.
Why it Matters:
The NSCAI completed its three-year mission and shut down on October 1. But fans of the body say and critics fear its legacy will live on. Both point to how the group’s recommendations, some of which steer the Pentagon to work more closely with the tech industry, have already been written into law. The US has few laws concerned explicitly with AI, and the commission shaped a significant chunk of those on the books. We believe AI, coupled with quantum computing, is the ultimate national security asset and wanted to highlight the summary of the NSCAI program.
Electrification and Digitalization Policy:
Too Big To Fail: Biden Administration to Congress: Put Stablecoins Under Federal Supervision – Or We Will – Coindesk
In a highly anticipated report released Monday, a group of U.S. regulators urged lawmakers to subject stablecoin issuers to the same strict federal oversight as banks. The President's Working Group for Financial Markets said that Congress should also require custodial wallet providers to be regulated by a federal agency and limit stablecoin issuers’ interactions with non-financial companies such as tech or telecom providers. The article goes on to summarize the recommendation of regulation and the general stable coin backdrop.
Why it Matters:
Stablecoins have seen explosive growth over the last two years despite lingering questions about their backing. The report is part of an escalating effort by policymakers to rein in this $138 billion segment of the broader crypto market to mitigate the risks they believe stablecoins pose to consumers, markets, and the financial system. We don’t have a particular opinion but are suspicious of several actors in the space and believe regulation is coming, allowing greater acceptance and eventually usage growth.
Commodity Super Cycle Green.0:
Going Up: Chinese Electric Vehicle Battery Makers Hike Prices Amid Surge in Costs – Yuan Talks
Chinese automobile and battery maker BYD reportedly plans to raise prices of major battery products by at least 20% due to surging raw material costs. While BYD has declined to comment, its latest earnings report showed that cost pressure had squeezed its profit margin. Other leading battery makers in China are also under pressure. CATL, the world’s largest EV battery producer, reported its gross profit margin for the power battery business stood at 23% in the first half of the year, sliding 3.5 percentage points from a year earlier.
Why it Matters:
Prices of raw materials for battery production, such as lithium, nickel, and cobalt, as well as chemical products, have jumped this year. As carmakers have dominant positions in the whole supply chain, it’s difficult for battery makers to pass on high material costs, and the pressure has been chiefly shared between cathode material makers and battery makers, said a lithium battery industry insider. We believe the traditional cost transmission ratio will start to change, increasingly favoring battery producers as stronger demand for EVs will allow greater pass-through while growing economies of scale will reduce costs.
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