MIDDAY MACRO - 2/10/2022
Daily Color on Markets, Policy, and Geopolitics
MIDDAY MACRO - DAILY COLOR – 2/10/2022
OVERNIGHT-MORNING RECAP / MARKET WRAP
Price Action and Headlines:
Equities are mixed, with small-caps leading the way after an overnight rally dropped post-CPI only to see dip-buyers come in quickly. However, now hawkish Fed comments are resuming pressure on indices
Treasuries are lower, with large moves higher in yields across the curve, but a significant flattening occurring, made worse by comments from Bullard after significant selling post-CPI
WTI is higher, supported by a more significant drawdown of inventory levels than expected seen in yesterday’s IEA weekly data and mixed reviews on a call between Biden and Saudi King
Narrative Analysis:
Equities are again chopping around today after a pre-CPI rally yesterday has now retraced somewhat. However, indices continue to generally climb the wall of worries as hotter than expected inflation data failed to move the S&P into a lower range. Treasury yields continue to significantly move higher today, initially rising after the CPI data but now under increased pressure from very hawkish interview comments from St. Louis Fed President Bullard. Oil is higher, but giving up gains as a more risk-off tone is developing. The dollar is also correcting earlier weakness given the move in rates.
The Russell is outperforming the S&P and Nasdaq with Small-Cap, Momentum, and Value factors, and Materials, Energy, and Financials sectors are all outperforming.
S&P optionality strike levels have the Zero-Gamma Level higher to 4641 while the Call Wall has fallen to 4700. There continues to be large optional support at 4520, with resistance remaining at 4600 and 4620. Expectations are now with the passage of the CPI event-risk that implied vol should continue to fall, causing vanna flows and gamma hedging to drive the S&P above 4600 into the end of the week.
S&P technical levels have support at 4530, then 4465, and resistance is at 4605, then 4650. 4530 was key support, and it was held after a brief dip below that level post-CPI. There continues to be a more range-bound choppy trading environment with the negative macro backdrop due to higher inflation and Fed fears verse a positive earnings season and better seasonals.
Treasuries are lower, with the 10yr yield now at 2.04%, rising 10bps today, while the 5s30s curve flatter to 0.38 bps. The 30yr auction was not as well-received as yesterday’s 10yr auction, which given the increased volatility and headline risk today, makes sense.
Econ Data:
The Headline and Core Consumer Price Index increased 0.6% MoM in January, the same as an upwardly revised 0.6% rise in December for Headline and higher than market expectations of 0.5% MoM. This moves the annual Headline rate to 7.5% and Core to 6%. The food index rose 0.9% MoM, following a 0.5% increase in December. The energy index also increased 0.9% over the month, with an increase in the electricity index being partially offset by declines in the gasoline index and the natural gas index.
Why it Matters: A somewhat mixed but clearly stronger than expected report showing no slowing in inflationary pressure. The January report includes a once-a-year revision that affects seasonally adjusted data for the past five years. The Labor Department also updated the list of goods included in the calculation, known as a spending basket, to reflect consumer habits in 2019 and 2020. The breadth of “items” increasing is still significantly higher than those declining. Restaurant prices rose by the most since the early 1980s, pushed up by an 8% jump in fast-food prices from a year earlier. Grocery prices increased 7.4%, as meat and egg prices climbed at double-digit annual rates. Shelter overall did slow to 0.3%, but rent increases stayed high at 0.5%. Energy prices rose 27%, easing from November’s peak of 33.3%. But the jump in electricity costs was particularly sharp compared with historical trends, with prices up 10.7% from a year ago and 4.2% from December. The latter was the sharpest one-month rise since 2006. Used Cars prices rose 1.5% even though the Manheim Survey showed a 0% increase for January, showing the early January CPI survey period didn’t capture the late month declines picked up in the Manheim survey. The rise in health costs troubled us the most, given this is a more structural worry given the current demographics of the country and the importance D.C. policy plays there. We will need to see if this continues as the end of the pandemic increases medical use. Our call that inflation was peaking in December was incorrect, as this month's CPI showed no meaningful slowdown, but survey data elsewhere is showing slowing demand which should increasingly weigh on end-consumer price increases.
*A 0.6% increase in Headline CPI means peak inflation did not occur in December as we suspected, with views for February now more mixed
*Numerous “items” increased, but commodities, vehicles (new and used), and shelter’s monthly changes did decrease while there was a notable pick up in medical-related costs.
Policy Talk:
Atlanta Fed President Ralph Bostic said he anticipates hiking interest rates three or four times this year in an interview on CNBC yesterday. He highlighted that the actual trajectory of inflation was more important than the absolute level. His forecast is for a 3% PCE inflation rate by year-end still. He noted that “every option is on the table” regarding whether the Fed should raise 25 or 50 basis points but currently believes 25bps is likely warranted at max four times this year. He is in favor of not waiting long to start balance sheet reduction as he believes that the high level of excess liquidity won’t mean an immediate tightening of financial conditions would occur. As a result, a lot of tightening would need to occur in his view for the Fed to meaningfully slow real growth.
*Bostic won’t be an FOMC voter until 2024, but his views represent a more moderately hawkish view increasingly being adopted by Fed officials
Separately, Cleveland Fed President Loretta Mester gave a published speech at the European Economics and Financial Centre’s Distinguished Speakers Seminar series. She is clearly expecting a 25bp rate hike in March, though she did not commit to the pace at which she’d be comfortable with following that. She indicates that patience was still warranted but noted that if inflation did not meaningly fall by the middle of the year, the Fed would need to tighten/move faster. Until then, the Fed should be careful with balance sheet reduction to not overly tighten financial conditions. “Just as demand and supply need rebalancing, so does monetary policy. Inflation has been running well above our 2 percent goal for some time, labor markets are very strong, and solid momentum in underlying demand is expected to continue,” she said in her prepared remarks. Mester is a current voter, and these comments were leaning more dovish due to her continuing belief the pandemic is primarily responsible for the current inflationary pressures. She is not in favor of a 50bp hike in March and would likely not support balance sheet reduction starting before the summer and primarily wants to sell their MBS holdings.
The Federal Reserve Bank of Boston today announced that Dr. Susan M. Collins would be its next president. Ms. Collins, who is of Jamaican descent and became a U.S. citizen in 1997, will become the Fed’s first Black female regional bank president and its second Black regional leader. Ms. Collins has a Ph.D. in economics from the Massachusetts Institute of Technology and an undergraduate degree from Harvard University. Ms. Collins is no stranger to the Federal Reserve system. She served until last year on the Federal Reserve Bank of Chicago’s board of directors for nearly a decade and has been a moderator at the Kansas City Fed’s research conference in Jackson Hole, Wyo. The Boston Fed will not be a voter until 2025, so there will be plenty of time to see her evolution of policy views.
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Value is higher on the day and the week. Small-Cap Growth is the best performing size/factor on the day.
Chinese Iron Ore Future Price: Iron Ore futures are higher on the day and week. Beijing increased the time period the steel sector will be required to reach a more carbon-neutral status.
5yr-30yr Treasury Spread: The curve is flatter on the day and week, with the front-end and belly increasingly selling off on more hawkish Fed expectations following the stronger than expected CPI report.
EUR/JPY FX Cross: The Euro is higher on the day and lower on the week, with the BoJ reinforcing its expectations to keep QE going for some time despite the global hawkish central bank pivot
Other Charts:
The current earnings season is showing growing margin pressure as although earnings are beating expectations so far, margin ratio results are not
The shorting since the start of the year has been the biggest on record. Goldman: "On a trailing 5-week basis the cumulative $ short flow since 12/31 is the largest in more than 10 years (10Y Z-score of -4.0)
NFIB survey showed that business is good even if good labor is hard to find and inflation concerns are rising
Evercore ISI Retailers Sales Survey has stabilized after its end of year Omicron drop
Omicron has peaked in the U.S. and Europe but will now increasingly be a drag on Asia and likely renew production and logistical disruptions across the region
Despite Omicron (either growing or peaking), an increasing number of countries are showing improving leading economic indicators, implying growth is accelerating globally
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
Real Supply-Side Improvements:
Growing Cap: Container fleet soars above 50m teu in response to supply chain congestion – The Load Star
A record 14% shipping capacity by tonnage was added to the global container equipment fleet last year, taking it to 50.5m teu. This was driven by demand from ocean carriers, logistics operators, and BCOs trying to protect their supply chains. According to John Fossey, senior analyst for container equipment at Drewry Shipping Consultants, equipment production will fall to between 4.5m and 4.8m teu this year, but this will still rank as the second-highest annual increase on record.
Why it Matters:
There is still the big issue of availability and the overall productivity of containers. It is taking much longer for boxes to complete their journeys and be returned to the areas of demand. As a result, the increase in the production/supply of containers and support equipment to accommodate their movement continuing in 2022 makes perfect sense. It also means as demand begins to return to a more normal level, there will be overcapacity in the system, driving pricing down likely in 2023.
Slowing: Congestion to ease with US imports forecast to slow down – Splash247.com
U.S. imports are expected to grow modestly during the first half of 2022, according to the monthly Global Port Tracker report released on February 9 by the National Retail Federation and Hackett Associates. “With Lunar New Year factory closings in Asia this month and the consequent drop in export production, North American terminals will have an opportunity to reduce existing congestion,” Ben Hackett, founder of Hackett Associates, said. The number of ships waiting to berth at the ports of Los Angeles and Long Beach has dropped, for the first time since November, below 80, from a high a month ago of 109.
Why it Matters:
However, notes Hackett, “Backups cannot be erased quickly as long as terminals continue to face a lack of space brought on by the supply chain’s inability to efficiently transfer cargo out of the terminals to its end destinations. A shortage of equipment, worker availability, and storage space at distribution centers and warehouses across the country remains problematic, as does the export of empty containers back to Asia.” However, we highlight the expected shift back to a more historic goods/service relationship with the hopeful final reopening of the economy as reducing imports back to manageable levels.
China Macroprudential and Political Loosening:
Pushing Out: China's steelmakers get 5 more years to reach peak carbon output – NikkieAsia
The steel sector, the country's second-largest industrial carbon emitter, will now have until 2030 to reach peak emissions, now five years later than originally planned. The Monday guidelines also drop other stipulations from the older draft, such as the call for the "top five steelmakers to account for 40% of the country's total steel output, and the top 10 steelmakers to account for 60%." Instead, it has the general goal of concentration in the industry being "greatly boosted." China has been pushing consolidation in the steel industry to tackle a series of problems, including overcapacity and pollution.
Why it Matters:
Last year, China's annual crude steel output fell for the first time in six years, slipping 3% to 1.03 billion tons, but the industry still made record profits. Chinese steelmakers are meanwhile working on meeting the government's call for "ultralow" emissions in a range of other pollutants, namely particulate matter, sulfur dioxide and nitrogen oxide. We highlight this development to show a slight easing of longer-term environmental goals over short-term growth goals.
Healing: Evergrande chair breaks silence to rule out asset fire sale - FT
Evergrande’s shares rose after its chair ruled out asset fire sales and pledged to complete half its remaining projects over the rest of the year, as the world’s most indebted developer battled to deliver units to homebuyers. The developer and the government have prioritized the completion of hundreds of real estate projects on the mainland, another sign that Beijing's stance on the property sector is becoming more supportive.
Why it Matters:
Evergrande first began missing bond payments in September and defaulted on its debts at the end of last year as it entered the biggest restructuring process in China’s history. With more than $300bn in liabilities, the group has become a test case for the vast borrowings underpinning China’s real estate sector, which has for decades anchored the country’s economic growth. The fact that asset sales are not in the cards and interests between shareholders (not bondholders) and Beijing are becoming more aligned is a positive, but we are still in the early innings for the move back to a more normally functioning property sector
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Strategic Theft: ASML Warns Chinese Rival May Be Infringing its Trade Secrets - Bloomberg
ASML Holding NV has warned that an affiliate of a China company it previously accused of stealing its trade secrets has begun marketing products that could infringe on its intellectual property rights. ASML has requested certain customers not to aid the associated firm Dongfang Jingyuan Electron Ltd., a corporation that has received Beijing’s stamp of approval under a program known as “little giants.”
Why it Matters:
ASML occupies a pivotal role in the global chip supply chain. It has a monopoly on advanced extreme ultraviolet, or EUV, lithography systems that are indispensable to producing the most cutting-edge chips in the world. As China's semiconductor production/industry advances and push up on patent-protected technologies, they will ignore international law to advance further and continue to enact state-sponsored IP theft. This will dilute the IP value and market cap of leading international semiconductor producing/designing companies.
Leverage: Russia’s Military, Natural Gas Make Japan Cautious About U.S.-Led Sanctions – WSJ
Russia is pressuring Japan not to join potential Western sanctions in the event of an invasion of Ukraine. It is conducting military drills on islands seized by Soviet forces from Japan in 1945, after deploying troops and missile bases there in recent years. Moscow said Monday that it had sent more than 20 warships to the seas near the islands and earlier this month informed Japan of plans for live-fire exercises in the region.
Why it Matters:
Japan’s wariness about angering Russia stems from its economic and energy ties to Moscow, which are less extensive than those of another hesitant U.S. ally, Germany, but still significant. Japan relies on imported natural gas for electricity, and nearly one-tenth of those imports come from Russia. Despite Japan’s dependency on energy imports, Tokyo said Wednesday it would provide a small amount of its supply of liquefied natural gas to Europe as an emergency measure following a request from the U.S. and European Union. We highlight this as another example of Russia using its energy relationships as a national security asset.
Electrification and Digitalization Policy:
Too Much: NASA outlines concerns about Starlink next-generation constellation in FCC letter – Space News
NASA says that SpaceX’s proposal for a second-generation Starlink constellation with 30,000 satellites could lead to a “significant increase” in potential collisions in low Earth orbit and interfere with the agency’s launches and scientific activities. “NASA wants to ensure that the deployment of the Starlink Gen 2 system is conducted prudently, in a manner that supports spaceflight safety and the long-term sustainability of the space environment,”said Samantha Fonder, NASA’s representative to the Commercial Space Transportation Interagency Group.
Why it Matters:
NASA did not state in the letter it was opposed to an FCC license for Starlink Gen 2, instead highlighting areas SpaceX needs to address. They highlighted that it would increase the amount of tracked objects in low orbit by five times. It also questioned the ability of the constellation's satellites to maneuver and avoid collisions, given what SpaceX has provided. We highlight this because things will only get more crowded as major countries and corporations increase their space assets.
Retrieved: How the Feds Tracked Down $3.6 Billion in Stolen Bitcoin – WSJ
The Justice Department said that it executed a search warrant last week and seized 94.6K bitcoins from the online wallets of two alleged money launderers. The seized bitcoin allegedly comprised the bulk of about 120,000 bitcoins stolen in 2016 from the crypto exchange Bitfinex in a hack. According to the federal government’s complaint, the couple moved the stolen funds through sites such as AlphaBay, which exist in what is called the dark web—a part of the internet accessible only through special browsers designed to hide identities—and services called mixers used to break up crypto transactions to make them harder to track.
Why it Matters:
Over the past decade, the U.S. government has built up its infrastructure to track down crypto thefts, supplementing its traditional investigative methods with those aimed at the unregulated digital-asset market.The federal government has contracts with analytics firms including Chainalysis Inc. and Elliptic to build software programs designed to track illicit funds across the blockchain. As a result, the benefits of using crypto to hide your tracks are diminished.
Commodity Super Cycle Green.0:
Changing Course: Duke Energy Boosts Renewable Spending After State Law on Carbon Cuts - Bloomberg
Duke, one of the largest U.S. electric utilities, raised its five-year capital spending plan about 7% to $63 billion, it said in a fourth-quarter earnings statement Thursday. The increase is mainly on new renewable generation and was driven by the North Carolina law, Chief Financial Officer Steve Young said in an interview. The 2021 measure “requires the retirement of coal and the building of lower-carbon-producing assets,” said Young. “That drove a large portion of the $4 billion increase.”
Why it Matters:
The announcement comes a day after Duke said it plans to drop energy generated from coal by 2035. The company will spend about $15 billion over the next five years on regulated investments in renewables, nuclear, battery storage, and hydropower, as well as commercial spending in wind and solar. The rest of the $63 billion will include spending on grid investments to improve reliability and resiliency. When one steps back, it is clear there is a real transition from fossil fuel to renewables driven by both government policy and private sector shareholders.
ESG Monetary and Fiscal Policy Expansion:
Back to Reality: U.S. Foreclosures Surge in January After End of Pandemic Freeze – Bloomberg
Foreclosure filings such as default notices, scheduled auctions, or bank repossessions jumped 29% from a month earlier and more than doubled compared with January 2021, the report said. Lenders repossessed 4,784 properties in the month and started the process on another 11,854 homes. This first month of post-pandemic regulation shows the pandemic policy's effects on keeping individuals in their homes were somewhat significant, and future months of foreclosure data will be important to watch.
Why it Matters:
“It’s very important to keep these numbers in context,” said Rick Sharga, executive vice president of RealtyTrac, a unit of real estate research firm Attom Data Solutions. “Foreclosure completions are still far below normal levels -– less than half as many as in January of 2020 before the pandemic was declared. Nevertheless, we will continue to watch developments here as marginally increased foreclosures will increase supply/inventory and may marginally reduce price pressure.
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.