MIDDAY MACRO - 2/8/2022
Daily Color on Markets, Policy, and Geopolitics
MIDDAY MACRO - DAILY COLOR – 2/8/2022
OVERNIGHT-MORNING RECAP / MARKET WRAP
Price Action and Headlines:
Equities are higher, with small-caps and cyclical (except energy) leading the gains but indexes generally remain rangebound as traders await Thursday’s inflation data
Treasuries are lower, as overnight pressure continued post-NY-open with global yields on the rise due to concerns over the hawkish central bank pivot continuing to worry duration holders
WTI is lower, cooling off recent highs as JCPOA 2.0 negotiations get increased attention and geopolitical risk premiums from Russia/Ukraine are marginally falling
Narrative Analysis:
Equities continue to chop around, higher on the day currently but within their recent range with a more risk-off tone overnight reversing after Beijing came in to support its domestic markets following further U.S. restrictions. Technicals and optionality generally remain negative, with the macro backdrop continuing to be driven by central banks tightening fears. Oil is lower today, cooling from its recent run due to more positive rhetoric around Iran negotiations and Macron over-optimistically representing his meeting with Putin. The $DXY is slightly stronger, while Treasuries are weaker as traders set up for coming supply and await Thursday’s CPI print.
The Russell is outperforming the Nasdaq and S&P with Small-Cap, Growth, and Value factors, and Materials, Financials, and Industrials sectors all outperforming.
S&P optionality strike levels have the Zero-Gamma Level at 4557 while the Call Wall has fallen to 4700. There is a lot of both call & put gamma tied to that 4500 S&P level. As a result, it will take a significant bullish development, moving the S&P above 4600, to escape the current range developing due to the gamma gravity.
S&P technical levels have support at 4450, then 4395, and resistance is at 4530, then 4560. The market continues to base/consolidate today. The longer this occurs, the more explosive the breakout will likely be, with Thursday's CPI data likely being the catalyst.
Treasuries are lower, with the 10yr yield now at 1.96%, rising 4bps today, while the 5s30s curve is little changed at 0.45 bps. There is a 3yr Auction today followed by 10yr and 30yr tomorrow and Thursday.
Econ Data:
The NFIB Small Business Optimism Index fell to an 11-month low of 97.1 in January, compared to 98.9 in December. Inflation remains a problem for small businesses as 22% of owners reported that inflation was their single most important business problem, unchanged from December when it reached the highest level since 1981. The net percent of owners raising average selling prices increased four points to a net 61% SA, the highest reading since the fourth quarter of 1974. Owners’ plans to fill open positions remain at record high levels, with a seasonally adjusted net 26% planning to create new jobs in the next three months, down two points from December and just six points below the highest reading in the 48-year history of the survey set in August. Fifty-eight percent of small business owners reported capital outlays in the last six months, up one point from December.
Why it Matters: There is always a lot of information in the NFIB Small Business Survey, but the general takeaway is that the persistence of inflation is increasingly weighing on their confidence. There was a slight retracement in the unfilled job openings showing less urgency to hire. However, actual wage increases currently occurring moved to an all-time high while plans to raise wages have only slightly decreased since December. We take some comfort that there were signs small businesses were able to grow inventories, which should reduce pricing pressures moving forward. Capex investment intentions/activity continued to be strong, which in the long run should increase productivity and reduce labor demand. "More small business owners started the New Year raising prices in an attempt to pass on higher inventory, supplies, and labor costs. Supply-chain disruptions and labor shortages will limit the ability of many firms to meet the increased demand of their products and services," NFIB Chief Economist Bill Dunkelberg said. We agree with Bill but continue to believe the worst is behind us as demand begins to normalize away from goods back to services and we move away from the holiday season and further reopen.
*Weakest headline number for NFIB in almost a year, but the underlying data showed some signs that labor shortages, although continuing to be the biggest problem, were stabilizing
*Will a decrease in the number of firms reporting “Job Openings Hard to Fill” continue, and will it lead to wage pressures falling?
Exports from the United States increased by 1.5% from the previous month to $228.1 billion in December, the highest since the series began in 1950. Exports of goods were mainly driven by consumer goods, such as pharmaceutical preparations, aircraft engines, passenger cars, and nonmonetary gold. Also, exports of services increased by $1.4 billion to $69.9 billion. Imports increased 1.6 from the previous month to a new record high of USD 308.9 billion in December. Purchases of goods were up $5.2 billion due to imports of cell phones, toys, games, sporting goods, and household appliances. Also, imports grew for automotive vehicles, parts, engines, and capital goods.
Why it Matters: The increases in December exports and imports suggest global supply chain problems are easing, said Andrew Hunter, senior U.S. economist for Capital Economics. “Trade in both directions appears to have benefited from easing congestion at U.S. ports towards the end of last year,” he wrote in a research note Tuesday. He noted that the widening deficit will continue to push down the overall economic growth rate during the first quarter of this year. The trade deficit with China grew 14.5% for the full year in 2021 to $355.3 billion, as U.S. demand for Chinese goods surged amid the post-pandemic economic recovery. The level was still well below the record trade deficit of $418.2 billion the U.S. set with China in 2018.
*Trade deficit reached record highs in 2021, although the deficit with China specifically was below 2018 highs
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Growth is slightly higher on the day but weaker on the week. Mid-Cap Value is the best performing size/factor on the day.
Chinese Iron Ore Future Price: Iron Ore futures are weaker on the day and week. However, Chinese infrastructure companies have staged a strong rally on the week showing FAI expectations continue to increase
5yr-30yr Treasury Spread: The curve is steeper on the day and week, with the ratio pushing on the top of its recent downtrend channel after reaching recent lows following the jobs report Friday
EUR/JPY FX Cross: The Euro is higher on the day and lower on the week with a slight give back following the massive appreciation the Euro saw following the ECB’s hawkish pivot last week
Other Charts:
Liquidity in the S&P futures market is as bad as it has been since March 2020
Buybacks picked up during the recent sell-off before the quarterly earnings season blackout window started
The U.S. High Yield ETF, $JNK, reported its biggest weekly withdrawals since March 202, with $7.4 billion in outflows on the week, however other junk bond ETF saw inflows
The Manheim Used Vehicle Index failed to rise in January for the first time since taking off in early 2021. Auto has contributed around 20% of the overall inflation increases in 2021 and could now become a growing drag
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
Real Supply-Side Improvements:
Capacity: Logistics Hiring Surge Outlasts Holiday Busy Season – WSJ
Trucking, parcel-delivery, and warehousing companies added a combined 42,100 jobs in January. The January figures show companies that stepped up hiring for the holidays held on to those seasonal workers in a tight U.S. labor market, said Nick Bunker, an economist at job-search platform Indeed. “Employers are having a harder time than they used to adding new workers,” so it makes sense to keep existing ones, he said.
Why it Matters:
January hiring is often more muted for logistics companies as seasonal workers are let go. This January’s payrolls were bolstered in part by the need for more people to handle delayed holiday merchandise arriving at clogged U.S. ports, as well as a large volume of post-holiday returns, said Cathy Roberson, head of research and consulting firm Logistics Trends & Insights LLC. We see this additional hiring and retention of labor as a positive for further easing supply-side impairments.
China Macroprudential and Political Loosening:
Limits: Explosive ‘Fight Club’ Ending Restored in China After Public Ire – Bloomberg
Tencent Video subscribers in China can now watch the unabridged version of 1999’s “Fight Club,” after a social media furor erupted over a censored version that replaced its original ending of Tyler Durden destroying financial records with a line of on-screen text declaring all criminals were brought to justice. You can’t make this stuff up.
Why it Matters:
We highlight this to show there are limits to how much censorship the Chinese people will stand. It may seem funny in this case, but it is essential to recognize that the wealthier or more advanced China’s economy/society becomes, the harder it will be for Beijing to censor and manipulate them, even with the tools to do so constantly improving.
Slow Start: China’s Services Growth Off to Slow Start in 2022, Caixin PMI Shows - Caixin
The Caixin China General Service Business Activity Index, which gives an independent snapshot of operating conditions in the sector, fell 51.4 in January from 53.1 in December. 'Activity in China's services sector in January expanded at the slowest pace in five months, as a surge in local COVID-19 cases and containment measures hit new business and consumer sentiment while employment fell.
Why it Matters:
While good (economic data) is bad in the West due to hawkish central bank concerns, the opposite is now true in China with the recent/ongoing slowdown increasing expectations for more Beijing-driven fiscal and monetary stimulus. There is much talk about the zero-tolerance policy needing to end, but we see the conclusion of the Olympics as a more significant milestone for the introduction of further stimulus and stealth reopening of heavier industries.
Chinese local governments issued much more bonds in January than last year as top policymakers called for front-loaded efforts to boost investment and stabilize economic growth. The local governments issued 698.9 billion yuan of bonds in January, increasing by 336.5 billion yuan from the same period last year, according to data from Wind Information. That included 583.7 billion yuan of new bonds
Why it Matters:
Beijing continues to walk the fine line of punishing and disincentivizing excess profiting and speculation in various sectors while maintaining economic momentum during a consumer-dragged/driven period of weaker growth due to the continuation of the pandemic. This dualism is currently leading to a lack of commitment to engage in anything more than neutral to slightly supportive fiscal and monetary policy, which continues to be two steps forward, one step back. We continue to believe that Beijing will become marginally more supportive throughout the first half of this year, and investors will become more risk asset supportive domestically but it has been painful to watch the dualism.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Look East: Russia’s Gazprom Hails New 30-Year Gas Deal With China as Sign of Strengthening Ties - Caixin
Russian energy giant Gazprom has announced a 30-year supply deal with China. In a statement, Gazprom, which is majority-owned by the Russian government, said that the deal would allow it to annually deliver 10 billion cubic meters of gas to China National Petroleum Corp. via the Far Eastern Pipeline, increasing the firms’ total piped gas sales to China to 48 billion cubic meters a year at maturity.
Why it Matters:
The gas agreement comes at an interesting time given the current battle being fought between Europe/U.S. and Russia over gas and political/NATO ambitions. China is giving Russia a secondary market that is as large as Europe, which likely signals a longer-term shift back to a more Cold War allied international trading regime. However, with all things China, it will now be more beholden over Russia given its increased revenue-generating status for Moscow.
Electrification and Digitalization Policy:
If Meta is not given the option to transfer, store and process data from its European users on US-based servers, Facebook and Instagram may be shut down across Europe, the social media giants’ owner reportedly warned in its annual report. The key issue for Meta is transatlantic data transfers, regulated via the so-called Privacy Shield and other model agreements that Meta uses or used to store data from European users on American servers.
Why it Matters:
Sharing data between countries and regions is crucial for providing its services and targeted advertising, Meta claims. It is also essential that safe and secure international data transfers be allowed more generally. However, regulators are currently weighing security and privacy concerns of users verse operational business needs, with the users winning the battle. In the end, clear rules will eventually come forth, but currently, there still is a great deal of uncertainty, and past abuses by Facebook are not helping their case.
Commodity Super Cycle Green.0:
Carbon is a Commodity: Projects to Capture Carbon Emissions Get New Boost Despite Dismal Record - WSJ
More than 80% of proposed commercial carbon-capture efforts around the world have failed, primarily because the technology didn’t work as expected or the projects proved too expensive to operate, according to a 2020 study. The U.S. has spent $1.1 billion on carbon-capture demonstration projects since 2009, with uneven results, according to a December report from the Government Accountability Office. None of the eight coal projects selected for $684 million of the funding during that time is operating, the researchers found. Projects to capture carbon from heavy industries met with some success.
Why it Matters:
While some early projects have demonstrated that it is technologically possible to collect carbon from power plants and industrial sites, or even directly out of the air, they have generally been very expensive. Many face a fundamental problem: there is no economic use for the carbon they capture. Currently, the only large-scale use for captured carbon is for pushing more oil and gas out of declining reservoirs, which in turn leads to additional emissions when fossil fuels are burned for energy. Hence, expect government subsidization to see any further meaningful developments here.
ESG Monetary and Fiscal Policy Expansion:
EU lawmakers plan last-ditch effort to reject Brussels’ green investment rules - FT
EU legislators are preparing a cross-party bid to vote down Brussels’ new rules on green investments over the inclusion of nuclear power and natural gas as sustainable energy sources. “The biggest chance of rejecting the taxonomy is within the parliament. It is going to be an uphill battle, but there is a widespread annoyance at how MEPs have been ignored during the consultation,” said Bas Eickhout, a Dutch Green MEP.
Why it Matters:
The rules have been contentious because an alliance of countries that rely heavily on gas and nuclear energy pressured the commission to ensure the taxonomy did not punish natural gas and nuclear energy sources. A veto from the parliament would embarrass the commission, which had hailed the taxonomy as a “green gold standard” for international investors to follow. It will also give a fillip to rival jurisdictions, such as UK and US, which are devising their own green finance rules. We will be watching closely.
Current Macro Theme Summaries:
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