MIDDAY MACRO - 1/18/2022
Daily Color on Markets, Policy, and Geopolitics
MIDDAY MACRO - DAILY COLOR – 1/18/2022
OVERNIGHT-MORNING RECAP / MARKET WRAP
Price Action and Headlines:
Equities are lower, with all sectors down today as rising oil prices increased inflationary and Fed tightening fears, causing a sell-off in rates globally which is correspondingly putting pressure on equities
Treasuries are lower, with today’s weaker domestic economic data failing to material change the trend of higher yields as key resistant levels have been broken
WTI is higher, as terrorist attacks in Abu Dhabi increased the geopolitical risk premium while fundamentals still support a higher price more generally
Narrative Analysis:
Equities are under significant pressure again, with the S&P now below previous January lows as dip buyers have failed to materialize while institutional money managers continue to reduce exposure or turn outright bearish (CTAs). Despite the significant negative sentiment, the put/call ratio is not yet flashing panic, but technicals and optionality are indicating the bears are in charge. Today’s Empire State Manufacturing Survey entered negative territory for the first time since March 2020 as Omicron clearly weighed on activity. However, markets took little notice as a flight to safety did not materialize, and Treasuries continued to sell-off as traders saw increasing inflationary pressures from the rise in oil due to terrorist attacks in the Middle East. The dollar is rising as the jump in U.S. real rates could no longer be ignored, with the $DXY now reentering its December range.
The S&P is outperforming the Nasdaq and Russell with Low Volatility, High Dividend Yield, and Value factors, and Energy, Communications, and Real Estate sectors all outperforming.
S&P optionality strike levels have the Zero-Gamma Level at 4703 while the Call Wall remains at 4800. The market is in a negative gamma environment, with a more supportive gamma backdrop only beginning around 4700, and strong support at current levels around 4575 due to (put) positioning. However, if implied volatility increases and the VIX term structure inverts due to increased hedging demand, then the S&P should meaningfully drop to new lows.
S&P technical levels have support at 4560, then 4525, and resistance is at 4615, then 4640. The move below 4610 lost the core multi-month trendline support after the loss of the 50dma overnight. Bears are in control until 4615 is recaptured, with technicals now significantly more negative.
Treasuries are lower, as today’s weaker Empire State data did little to stop the overnight selling pressure as the 10yr yield is now above key resistant levels while the curve is little changed with the 5s30s moving to 0.535 bps.
Measures of supply-side pressures have come off peaks seen last fall but are again rising due to Omicron-caused absenteeism, as growth continues to be constrained by supply chain disruptions and labor shortages. We believe the effects of Omicron will be short-lived, and firms will continue to find ways to work through (slowly improving) supply-side impairments, increasing production capacity, becoming more cost-sensitive as end demand falls, helping reduce the current inflationary pressures caused by the pandemic.
December’s Industrial Production fell -0.1%, below expectations of a rise of +0.2%, with one of the biggest negative factors again being a decline in motor vehicle production (-1.3%), as Omicron-caused absentees forced the shutdown of plants and factories while shortages of parts continued, although at a less impaired level.
*After recovering from fall lows, auto production decreased in December again
However, recent ISM PMI surveys, regional Fed business surveys, and the Beige Book indicate supply constraints are continuing to ease as prices paid, supplier delivery times, and order backlogs decline. At the same time, inventory levels and employee measures show reduced trouble hiring and continued progress restocking.
*Alpine Macro’s in-house Supply Disruption Index has rolled over, indicating inflationary pressures from supply-side impairments should have peaked
*Although Inventory-to-Sales ratios for retailers and wholesalers remain near historic lows, the passing of the holiday period should reduce the urgency of inventory restocking and reduce cost increases as the elasticity of demand changes
This leads us to continue to believe that despite recent Omicron-absentees renewing disruptions, we have seen peak supply-side inflationary pressures. The current bout of disruptions will be shorter-lived than past ones, and decreasing end demand will reduce pricing pressures throughout the supply chain as firms are more selective in what cost increases they accept while finding new logistical and production capacity solutions. And although we still see 2022 being a year of significant impairments, with the impact of Omicron in China still a large unknown, we believe markets are overly pessimistic towards supply-chain issues continuing, and the persistence of inflationary pressures they cause.
*Firms surveyed by ISM Evercore have moved out how long they believe supply chain issues will continue, but the overall impact should continue to fall throughout 2022
Markets have not yet gravitated to this supply-chain improvement narrative and continue to price a prolonged inflationary pulse that will require the Fed to tighten policy aggressively. As a result, financial conditions should continue to tighten as expectations for future fed fund levels increase, continuing pressure on risk assets and keeping volatility elevated. We will need to see more survey data and company commentary in the current earnings season confirming the improvement before markets reduce inflationary fears and Fed tightening expectations.
*MS sees a significant tightening of financial conditions coming due to expectations the Fed will raise Fed Funds more aggressively as well as engage in some form of QT. We expect the backdrop to become less compelling for tightening as growth and inflation slow throughout 2022.
The bottom line is it is appropriate to be defensive currently, but (with the goal of providing commentary/analysis that helps readers skate to where the puck will be) we believe the current sell-off and increased volatility based on Fed tightening fears are overdone, and risk-assets will be better supported as seasonal improve in February and slowing growth alongside weaker inflationary data allows the Fed to become more dovishly postured into the March FOMC meeting.
Econ Data:
The New York Fed’s Empire State Manufacturing Index plunged to -0.7 in January from 31.9 in December, well below market forecasts of 25, ending 18 straight months of expansion. New Orders declined significantly to negative territory (-5 vs. 27.1 in December) while Shipments fell to a flat level (1 vs. 27.1). Delivery times improved slightly (21.6 vs. 23.1), and Unfilled Orders fell but remained historically high (12.1 vs. 19). Labor market indicators pointed to continued increases in employment (16.1 vs. 21.4) and a longer average workweek (10.3 vs. 12.1). Both price indexes moved lower (-3.5 to 76.7 for Prices Paid and -7.5 to 37.1 for Prices Received). Plans for capital and technology spending were strong. Looking ahead, firms remained optimistic that conditions would improve over the next six months, with the General Business Condition Index only falling -1.3 points to 35.1.
Why it Matters: January’s report showed the first contraction in NY manufacturing activity since the second quarter of 2020, as demand for goods declined due to Omicron. However, hiring intentions continued to be positive. When coupled with increasing Capex plans and the general future outlook being still historically positive, we question whether this drop will be sustained moving forward. Instead, it is likely to bounce back sharply and correlate with the improving Omicron picture in the tri-state area. Improvements in delivery times, mildly decreased price pressures, and continued hiring intentions showed the supply-side picture continues to improve slowly. However, it is worth noting that expectations for prices paid and received in the future did increase, tempering any positive sentiment that things are getting better.
*22% of respondents said business conditions had worsened over the month as Omicron reduced demand and impaired production
*Capital expenditure intentions for both IT and FAI continue to rise, showing confidence in future business conditions
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Value is higher on the day and week, with the value factor slightly higher today as the rotation out of tech/growth continues. Large-Cap Value is the best performing size/factor on the day.
Chinese Iron Ore Future Price: Iron Ore futures are higher on the day and week as hopes for further stimulus both on the monetary and fiscal front continue to keep industrial metals well bid in China
5yr-30yr Treasury Spread: The curve is little changed on the day butter flatter on the week as with higher energy costs keeping Fed tightening fears alive and well
EUR/JPY FX Cross: The Euro is weaker on the day and the week as a more risk-off tone is supporting the Yen
Other Charts:
According to Goldman, sentiment is becoming very negative with positioning close to “Extremely Light” conditions
CTA funds are bearish equities, while hedge funds have their lowest net exposure in two years
The negative view on equities correlates with the market now pricing in more than four rate hikes in 2022
However, most fund managers still expect only three rate increases but are being cautious with their allocation/positioning choices
December’s Retail Sales dropped by more than expected, with online sales significantly decreasing, however on the year, retail sales were higher by 19.6%
This strong consumer demand allowed most S&P 500 companies to increase profit margins over the year. Will this continue as higher prices may finally be weakening end demand?
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
China Macroprudential and Political Loosening:
Dropping: China Cuts Interest Rate as Growth Risks Worsen With Omicron - Bloomberg
The People’s Bank of China lowered the rate at which it provides one-year loans to banks by ten basis points, the first reduction since April 2020. The move suggests banks will quote a lower one-year Loan Prime Rate at Thursday’s fixing for a second month in a row, providing more support for a slowing economy.
Why it Matters:
China’s relatively stable prices mean policymakers have shifted to boosting growth. Official data Monday showed gross domestic product rose 4% last quarter from a year earlier, the weakest since early 2020. Economists expect more policy action from the PBOC in the coming months. Goldman Sachs said there’s a possibility the PBOC will allow banks to lower the five-year loan prime rate, a reference rate for mortgages.
Easing: China's producer and consumer inflation eased in December - NikkieAsia
China's inflationary pressure eased further in December, thanks to lower food and commodity prices. December's producer price index decreased to 10.3% from a year earlier, down from the 13.5% record reached in October. The consumer price index for December fell back to October's level of 1.5% on lower food items and gasoline prices. The drop in inflationary pressure was primarily aligned with economists' expectations, following policy support to ease supply disruptions and stabilize growth.
Why it Matters:
Domestic equity markets in China rallied on the data due to the growing expectations falling inflationary pressures can open room for further policy accommodation. However, China's zero-tolerance policy toward COVID will further pressure economic growth and inflation. The current wave, which began in early December in Shanxi Province, has spread to Tianjin, a city of 14 million adjacent to Beijing. Currently, authorities have confined nearly 20 million residents in three cities to home quarantine to curb the outbreak.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Improper: Chinese Investment in U.S. Plane Maker Draws FBI, National-Security Reviews – WSJ
The Committee on Foreign Investment in the U.S. (CFIUS is an interagency panel that can recommend that the president block or unwind deals on national-security grounds) began a review of a Chinese government-backed investment company’s nearly 47% stake (the largest of any shareholder) in Icon Aircraft Inc., a California-based maker of small recreational, amphibious planes at the urging of American shareholders. The FBI has also initiated a separate probe into possible criminal violations related to the deal and the alleged transfer of technology.
Why it Matters:
A lawyer for Icon said its aircraft don’t have military applications, and the company doesn’t see the Chinese investment as a national-security concern. However, other shareholders say it could have military applications. The Chinese company began installing board members and executives, pressuring others, and laying plans to transfer Icon’s technology to China. We see this as an interesting test for CFIUS intervention in cross-border Chinese-American deals, given the greater political backdrop between the two nations.
Electrification and Digitalization Policy:
Breaches: FCC proposes stricter requirements for reporting data breaches – Engadget
FCC Commission Chairwoman Jessica Rosenworcel has shared a rulemaking proposal that would introduce stricter requirements for data breach reporting. Most notably, the new rules would require notifications for customers affected by "inadvertent" breaches — companies that leave data exposed would have to be just as communicative as victims of cyberattacks. The requirements would also scrap a mandatory one-week waiting period, while carriers would have to disclose reportable breaches to the FCC in addition to the FBI and Secret Service.
Why it Matters:
The FCC didn't say when the proposal might come up for a vote, although the FCC's next open meeting is slated for January 27th. There's no guarantee the Commission will greenlight the new requirements. It won't be surprising if the rulemaking moves forward, however. While companies are now more likely to disclose breaches, there have been multiple high-profile incidents where those firms took too long to alert customers or didn't notify them at all.
Consumer spending on mobile apps reached $170 billion in 2021, rising 19%, according to App Annie’s newly released “State of Mobile 2022″ report, which offers a comprehensive look at the app economy across iOS, Google Play and third-party Android app stores in China. Growth in app downloads, however, dipped a bit more. Though today’s consumers are installing more apps than ever (230 billion were downloaded in 2021, setting another record), the growth rate itself is slowing to 5%.
Why it Matters:
Consumers are spending more time using apps, even topping the time they spend watching TV in some cases. The report noted the average American watches 3.1 hours of TV per day, for example, but over the course of the past year, they spent 4.1 hours on their mobile device. And they’re not even the world’s heaviest mobile users. In markets like Brazil, Indonesia, and South Korea, users surpassed 5 hours per day in mobile apps in 2021. Much of this time was spent in social, photo, and video apps, which accounted for 7 out of every 10 minutes spent on mobile in the past year.
Do More: An open letter to YouTube’s CEO from the world’s fact-checkers - Poynter
The international network of fact-checking organizations identifies YouTube as one of the major conduits of online disinformation and misinformation worldwide. They say YouTube allows its platform to be weaponized by unscrupulous actors to manipulate and exploit others and organize and fundraise themselves. They call for stronger policy to deal with the problem as current measures prove insufficient.
Why it Matters:
The group goes on to recommend a number of changes/solutions. Given that Youtube is now more watched than regular TV, the likelihood of regulatory costs/burden increasing for Alphabet is growing. If they don’t take a more proactive stance here, they will be lumped in with the likes of Meta(Facebook) and have increasing headwinds to profitability due to growing compliance costs.
ESG Monetary and Fiscal Policy Expansion:
Surfs Up: Big Tech Braces for a Wave of Regulation – WSJ
New laws under consideration in Europe, Asia, and the U.S. could put sharp limits on how big tech companies can treat smaller competitors and restrict their use of artificial intelligence like facial recognition. Some proposals could ban common practices, such as companies giving their own products a boost in their own rankings. At the same time, regulators globally are advancing dozens of investigations related to competition and privacy that could lead to more than just speeding tickets for tech giants.
Why it Matters:
“There’s definitely a sense of there being a new momentum” for regulation, says Sinead McSweeney, Twitter Inc.’s global vice president for public policy, noting that in recent weeks the company has had to implement new legislative requirements in at least six countries. “It’s on a whole new level.” The bottom line is on top of higher real rates, Big Tech is also facing growing regulatory headwinds to profitability due to more socially focused governments.
Current Macro Theme Summaries:
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