MIDDAY MACRO - DAILY COLOR – 11/9/2021
OVERNIGHT-MORNING RECAP / MARKET WRAP
Narratives/Price Action:
Equities are lower, sharply dropping at the NY-open after a more positive overnight as drops in heavier weighted stocks weighed on overall sentiment
Treasuries are higher, with rumors that Governor Brainard may be the next Fed chair pushing yields lower and flattening the curve
WTI is higher, as traders await further signs the U.S. may tap its strategic petroleum reserves while Vitol’s CEO gives bullish comments more generally
Analysis:
Equities lost overnight gains following the NY-open thanks to market-cap heavy Tesla coming under significant pressure, souring sentiment which was further damped by more bearish economic data. Treasuries markets continue to watch the White House for Fed pick clues while D.C. more generally now moves on to the social infrastructure bill negotiations.
The Nasdaq and S&P are outperforming the Russell with Low Volatility, High Dividend Yield, and Growth factors, and Real Estate, Materials, and Utilities sectors all outperforming.
S&P optionality strike levels have the Zero-Gamma Level moved higher to 4614 while the Call Wall is at 4700. Gamma continues to build but there is a growing divergence between realized vol and implied vol as the euphoric buying off calls recently has slowed.
The technical levels have support at 4655, and resistance at 4710, followed by 4750 for the S&P. After six days of new ATHs, there is finally red on the screen with 4655 major support that needs to hold for a meaningful basing and push above 4710.
Treasuries are higher, with the 5s30s curve flatter by -3.6 bps currently. We further eloborate on our Fed pick views below.
*Although overall indexes continue to make new all-time-highs, the breadth of the market is still weaker than expected
*Households withdrew $63 billion in equity from their properties in Q2, the largest amount since mid-2007
We continue to believe that Powell is going to be renominated, and Brainard will take Quarel's role as Vice-Chair for Supervision. However, as we have highlighted for some time, we see a longer-term, more ESG focused cultural shift occurring at the Fed, something the Biden administration will now be able to further enable with additional board picks.
As a result of the recent focus on Fed picks, we want to re-share a presentation we put out at the end of last year focused on the cultural and structural changes occurring at the Fed that will create a more ESG focused monetary policy.
Econ Data:
Producer prices increased 0.6% MoM in October, in line with forecasts and following a 0.5% rise in September. Over 60% of the increase is due to a 1.2% surge in prices for goods, namely gasoline (6.7%), while food prices edged down 0.1%. Cost of services moved up 0.2%, mainly due to margins for automobiles and automobile parts retailing (8.9%). Within the Final Demand Service Index, transportation and warehousing costs rose 1.7%, and without this, the index would have fallen by 0.1%. Year-on-year, producer inflation remained at a record 8.6%, the same as in the previous month but below forecasts of 8.7%. Core PPI was also unchanged at 6.8% YoY.
Why it Matters: There were no surprises in the PPI print. A few areas disproportionately impacted the larger index and subindexes, all of which were expected given the continuation of supply-side disruptions and rise in energy prices. Tomorrow CPI will show how effective producers have been at passing on prices. We believe they have had success and expect the consensus forecast of a 0.6% MoM change to be correct given the rises in used cars and energy.
*There was at least some stabilization in the rate of change in today's PPI data
The NFIB Small Business Optimism Index fell for the second consecutive month to 98.2 points in October, the lowest in 7 months, from 99.1 points in September. Expectations for business conditions over the next six months deteriorated, with the subindex falling four points. The number of firms reporting positive profit trends decreased three points, mainly due to rising cost of materials and around 49% of firms reported job openings that couldn't be filled. The net percent of owners raising average selling prices increased seven points to a net 53%. Despite the more negative tone in many sub-indexes, the NFIB Uncertainty Index decreased seven points to 67. Also, Fifty-six percent of owners reported capital outlays in the last six months, up three points from September.
Why it Matters: The continued supply-chain disruptions, bringing higher input costs, are increasingly weighing on business outlook while finding qualified workers has yet to materially improve. It's no longer about the rate of change regarding supply-side disruptions, but now the duration they are expected to stay. "Small business owners are attempting to take advantage of current economic growth but remain pessimistic about business conditions in the near future. One of the biggest problems for small businesses is the lack of workers for unfilled positions and inventory shortages, which will continue to be a problem during the holiday season" NFIB chief economist Bill Dunkelberg said.
*Despite the overall index falling, the outlook for expansion has been stable throughout Q3
Policy Talk:
There were a lot of Fed speakers yesterday, with Powell, Clarida, Williams, Bowman, Harker, and Evans all speaking at various events.
Powell gave introductory remarks at the Gender and the Economy Conference in D.C. He quickly reiterated why the pandemic widened existing inequities in the economy in his intro remarks.
Clarida reviewed his outlook, putting his projections closer to the September SEP medians and continuing to believe that most of the inflation overshoot will be transitory. He believes that if those projections are met, the Fed will raise rates by year-end 2022.
Governor Bowman stuck to her wheelhouse and spoke about risks in the housing market at a Women in Housing luncheon. She came across as less worried about housing due to the stronger standards and capital backing the mortgage markets.
Philly Fed President Bullard provided a more optimistic view on the labor market, believing the unemployment rate could have a “3 handle” by the first quarter of next year due to the current strong economic growth. He did spend time talking about the current challenges many homeowners face and the inequalities occurring there more generally.
Finally, Chicago Fed President Evans stressed the pandemic was still heavily weighing on the data and the cause of current inflation. He also reiterated the familiar chorus that tapering and rate hikes were not attached, with the latter having a more “stringent test,” which presumably, in his view, is not yet close to being met.
Separately, Vice Chair Quarles officially tendered his resignation, effective at the end of December. This gives the Biden Administration one more open seat to fill, taking the total openings currently to two, but with Clarida’s term expiring soon, it will eventually be three. Quarles’s resignation makes it more likely Biden will reappoint Powell and move Brainard to head of supervision, in our opinion. The historical precedent has been for new administrations to keep current Fed Chairs in place, something Trump did not do, but we believe Biden will. However, if this does not happen, things could get very interesting in fixed income markets, something we are already observing in the front-end and belly with Brainard’s recent trips to the Whitehouse.
Finally, The Fed’s Financial Stability Report continued to highlight the pandemic as a main underlying risk to the economy but noted four specific vulnerabilities; asset valuations, borrowing by households and businesses, leverage in the financial sector, and funding access. Risk appetites had risen to elevated levels, and as a result, risk asset valuations were near historic highs, increasingly detached from fundamentals. Overall debt levels were within norms; however, specific business sectors and households remained under “considerable strain” due to the pandemic. The FSR also highlighted risks emanating from the buy-side and leverage levels there, calling for more granular, higher frequency reporting by the sector. The Fed also highlighted that the pandemic showed funding risks remain during periods of duress, despite generally being sound otherwise. Upon closer review, the bottom line is that the risk identified seemed minor when viewed against historical issues identified in other reports.
*Leverage levels are not overly problematic, although recent events with Archegos Capital worried regulators
*Although Forward P/E is elevated, measures of equity premium are still near long-term averages.
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Growth is higher on the week and higher on the day as lower yields despite a persistently high PPI are helping it outperform
Chinese Iron Ore Future Price: Iron Ore futures are lower on the week, falling sharply again as there has been no stabilization in policy or outlook for end demand
5yr-30yr Treasury Spread: The curve is flatter on the week, falling today another 3.6bps as Fed pick expectations are moving traders to believe we will stay low for long
EUR/JPY FX Cross: The Yen is stronger on the week, with the cross moving into the middle of its recent range as Asian growth continues to pick up
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
Real Supply-Side Constraints:
Old Machines: What’s Harder to Find Than Microchips? The Equipment That Makes Them – WSJ
Older types of chips use more mature technology to create is what mainly goes into cameras and other sensors in our phones and cars; power-handling electronics; the logic controllers of factory equipment; the chips that enable wireless communication. A shortage of these chips is at the root of shutdowns of automobile manufacturing and Apple’s inability to meet the demand for the latest iPhone, alike. The article explains how besides shutdowns of factories related to Covid, semiconductor production for older but needed chips has been on a longer-term decline.
Why it Matters:
We typically associate microchips with the latest and greatest technology, but it turns out that most of the chips that go into the products we use are made with older manufacturing techniques. No one knows what proportion of the world’s microchips are made on used equipment, but Mr. Howe, the owner of SDI Fabsurplus, estimates it might be as much as a third. More than half the global semiconductor industry’s revenue comes from these older types of chips too. As a result, the lack of investment, or maintenance of existing capacity, quickly caused shortages when demand increased.
China Macroprudential and Political Tightening:
Limited Upside: China Tightens Oversight of $3.7 Trillion Mutual Fund Market - Bloomberg
Mutual fund firms without an advisory license will be prohibited from giving fund recommendations or publishing performance numbers, according to a notice from the China Securities Regulatory Commission’s Beijing. The move cracks down on widespread recommendations by unregulated bloggers and agencies seeking to tap growing demand for mutual funds even as authorities limit licenses to a handful of firms.
Why it Matters:
Over the years, regulators have cracked down on opaque shadow-banking products, brought more rigor to stock investing by introducing registration-based initial share sales, and opened up to global fund houses from Vanguard Group to BlackRock Inc. This further crack-down simply continues the existing trend of reducing the risk to retail investors while giving room to foreign firms to operate.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Joint Venture: TSMC says it will build first Japan chip plant with Sony – NikkeiAsia
Taiwan Semiconductor Manufacturing Co. will start producing chips in Japan by 2024 in a joint venture with Sony after the two companies signed a deal for a $7 billion plant on Tuesday. A joint venture company, Japan Advanced Semiconductor Manufacturing, will be set up with Sony Group to operate the the plant, with mass production scheduled to begin by the end of 2024.
Why it Matters:
The semiconductor supply chain has become a national security issue for many countries due to the unprecedented global crunch that has hit a swath of industries, from smartphones and PCs to automobiles. The Japanese government had been attempting to woo TSMC to its shores in recent years, as the Taiwanese company boasts the world's most advanced chip manufacturing technologies. It looks likes those efforts have now paid off.
Electrification and Digitalization Policy:
What is it?: The Metaverse Is Simply Big Tech, but Bigger - Wired
The metaverse describes the next stage of the internet’s consolidation, a marketing spin on Big Tech’s increasing reach and power. Right now, the metaverse lives in the space between existing service environments and their owners’ corporate blogs. It’s an invitation to work under, not with, tech giants’ services. The article describes the original vision of what a metaverse could be and how it is now likely to form.
Why it Matters:
The closest property to a real metaverse currently is Roblox, a billion-dollar platform and game development toolkit. Players use Roblox to build a game about adopting pets or a virtual re-creation of their local church, and 48 million daily users can join them. Roblox hubs together those worlds through a proprietary browser-based search system. However, moving forward, there will be many metaverses sponsored by individual Big Tech companies geared to making money.
Commodity Super Cycle Green.0:
Food Bottlenecks: U.S., Japan Join Nations Urging Delay to China Food Import Rules – Bloomberg
Several countries, including Japan, the U.K., and the U.S., are urging Chinese customs officials to pause the rollout of regulations on food imports, arguing the measures risk further disrupting global supply chains. They object to a pair of decrees handed down in April that require food importers to meet sweeping new registration, inspection, and labeling requirements by Jan. 1.
Why it Matters:
While President Xi Jinping’s government expressed its own concern this month about ensuring food supplies through winter, there’s so far been no indication that it intends to suspend or soften the import measures. As a result, this is one more thing that could lead to higher PPI prices in China and end food inflation for their consumers. We will continue to watch this as it seems unlikely these decrees go through, given the stress already being placed on household wallets.
Current Macro Theme Summaries:
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