MIDDAY MACRO - 3/8/2022
Color on Markets, Economy, Policy, and Geopolitics
MIDDAY MACRO - DAILY COLOR – 3/8/2022
OVERNIGHT-MORNING RECAP / MARKET WRAP
Price Action and Headlines:
Equities are higher, after an overnight drop to near post-invasion lows reversed into the NY-open furthered by positive Ukrainian headlines that weren’t even new
Treasuries are lower, with the more risk-on tone putting additional pressure on the curve, which has now flattened back to near recent lows
WTI is higher, but off session highs with high levels of volatility continuing as the future of European energy sanctions, Iranian deal, and additional sources of supply remaining all uncertain
Narrative Analysis:
Equities are rising after a negative overnight session came close to retesting recent lows. Headlines, repeating an interview last night, that Ukraine would be open to agreeing not to join NATO seemed to be the catalyst for the move higher, but there is still a lot of noise flying around and stocks are already cooling from the initial push higher. Treasuries continue to weaken from Sunday-open’s highs while gold and precious metals contrast this with solid gains on the session despite the positive headline. Agriculture commodities also cooled as wheat was significantly lower for the first time since the invasion but has now shot higher towards the end of trading. Oil is slightly off its overnight highs but significantly elevated on the day. The dollar also continues to remain near recent highs, with the $DXY at 99. Given the crowded levels of positioning in war-related trades and the high level of optionality in markets, any positive headlines signaling a possible de-escalation are having massive effects on prices which is what today’s price action is showing. It also looks like these headlines have limited lasting power with the trend still generally negative for risk assets.
The Russell is outperforming the Nasdaq and S&P with Small-Cap, Growth, and Momentum factors, and Consumer Discretionary, Communication, and Technology sectors are all outperforming.
S&P optionality strike levels have the Zero-Gamma Level lower to 4419 while the Call Wall fell to 4400. There are two major strikes in the S&P currently, 4000 & 4300, and unless a real macro catalyst emerges, this is the new range markets may chop in for a while. Over 4300 positive gamma starts to marginally increase, which adds to resistance and a reduction in volatility. The 4000 area still stands as major support based on the large amount of open interests at that strike.
S&P technical levels have support at 4200, then 4135, and resistance is at 4260, then 4300. The 4260-80 range still remains the critical zone to retake for any meaningful rally to emerge, with markets now pushing back on that area. Until this level is retaken, it is likely these rallies will fail. Below the 4135 area, where the overnight bounce started, there is not much support till 4000.
Treasuries are lower, as this risk-off tone has the entire curve well bid. The 10yr yield is now at 1.88%, rising 8bps, while the 5s30s curve is flatter by 3.5bps to 44.7bps.
Econ Data:
The NFIB Small Business Optimism Index declined to 95.7 in February from 97.1 in the previous month. The net percent of owners raising average selling prices increased seven points to a net 68%, a 48-year record high reading. Owners expecting better business conditions over the next six months decreased two points to a net negative 35%. Forty-eight percent of owners reported job openings that could not be filled, an increase of one point from January. Inventory accumulation plans fell one percentage point, following a five-point decline in January, following the massive inventory build in Q4. Fifty-seven percent of owners reported capital outlays in the last six months, down one point from January. Twenty-seven percent of owners planning capital outlays in the next few months, down two points from January.
Why it Matters: This was the overall lowest NFIB Optimism Index reading since January of 2021. "Inflation continues to be a problem on Main Street, leading more owners to raise selling prices again in February. Supply chain disruptions and labor shortages also remain problems, leading to lower earnings and sales for many”, said NFIB Chief Economist Bill Dunkelberg. The bottom line is this report showed all the existing supply-side remain, with some worsening. Inflationary pressures persisted, qualified labor availability worsened, and sales expectations fell. There was a reduction in intention to increase compensation, but this was off a record-high reading in January. Further, Capex and inventory intentions were slightly lower, reinforcing the view that small businesses are beginning to worry about future demand.
*The individual components of the BFIB survey showed a slight worsening of the supply-side problems we have all come to know so well
Wholesale inventories rose 0.8% in January, following an upwardly revised 2.6% increase in December and matching a preliminary estimate. It was the 18th consecutive month of gains amid increases in inventories of both durable goods (0.8% vs. 3.1% in December) and nondurable ones (0.9% vs. 1.8%). Lumber and metal inventories surged over 4% each on the month, while auto inventories fell -2.2% MoM. On a yearly basis, wholesale inventories advanced 18.1% in January, above a preliminary reading of 17.8%. The inventories/sales ratio slid to 1.20x from 1.24x.
Why it Matters: There was a slower growth of inventory accumulation in January. However, this was mainly due to decreases in auto inventories, as manufacturing and supply chain disruptions continue to plague production there. Stocks of medical drugs also fell by -1.3%. Elsewhere there were broader gains in durables while nondurables were more mixed. The further weakening in the inventory to sales ratio shows firms on the aggregate still have significant restocking to do, as the I/S ratio for durables is at 1.6 while nondurables are at 0.9, both well below pre-pandemic norms. The more positive trend in durable restocking reversed in January.
*The positive trend of inventory accumulation slowed in January
*The total inventory to sales ratio weakened even further as both durable and nondurable I/S ratios fell
Consumer credit increased by 1.9% in January. Revolving credit was lower by -0.3% on the month, while Nonrevolving increased by 2.5%. The two-month lagged data specifically on new car loans, credit card plans, and personal loans increased 4.58%, 14.5%, and 9.09%, respectively.
Why it Matters: January's monthly growth in total credit was the lowest increase since January of 2021. Although January is seasonally a weak month, we highlight the development given the falling consumer confidence and specifically the weakening intent to purchase big-ticket items seen in the University of Michigan Survey. Even though high-frequency credit card data has shown an increase in service-orientated activity, we are beginning to see increasing signs that the consumer is becoming tapped out regarding good purchases. We will be watching closely to see if there is a further drop in total credit growth, specifically a decline in the use of revolving credit, to support the view that a weaker aggregate demand backdrop may be developing as energy and food inflation chip away at disposable income and consumer chose not to supplement that by weakening their household balance sheet by taking on more debt.
*Revolving credit is an essential bridge for consumption as real wages lag inflationary costs and saving levels are depleted. A reduction of its use is an ominous sign for aggregate demand.
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Growth is higher on the day and but Value is still up on 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 as supply concerns continue as well as increased expectations for further stimulus given the recently announced growth targets.
5yr-30yr Treasury Spread: The curve is flatter on the day and week, with a more positive tone weighing on the belly more than the long-end.
EUR/JPY FX Cross: The Euro is higher on the day and the week, recovering from its recent drop as emotions cool slightly
Other Charts:
Only 36.5% of S&P 500 companies currently have share prices above their 200-day moving average
Market implied inflation expectations keep rising
Goldman’s Financial Condition Index has significantly tightened since the invasion of Ukraine began
The level of job opening may be peaking
Even with median prices and mortgage rates higher, the average homebuilder cancellation rate fell in February, consistent with seasonality, indicating housing demand is staying strong
Renewables have a long way to go in replacing fossil fuels
ARTICLES BY MACRO THEMES
MEDIUM-TERM THEMES:
China Macroprudential and Political Loosening:
Stalling: China’s Export Boom Eases, Raising Pressure for Stimulus – WSJ
Exports in January and February rose 16.3% from a year earlier, according to data from the General Administration of Customs. While that beat expectation of a 15% gain, it still marked a slowdown from the 20.9% YoY increase in December. Imports grew 15.5% YoY, down from December’s 19.5% increase. The country’s trade surplus will likely shrink to around $480 billion this year as export growth continues to taper off and prices of commodities it imports such as grains and energy surge.
Why it Matters:
First, after expanding by 25% last year to reach a record $28.5 trillion, global trade growth is expected to slow during the first quarter of 2022, in part as more countries run down their pandemic stimulus packages, according to forecasts by the United Nations Conference on Trade and Development. Second, China’s weakening trade momentum adds pressure on Beijing to increase stimulus to boost domestic demand and hit this year’s growth target of 5.5%.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Lender of Last Resort: AIIB Statement on war in Ukraine – Asian Infrastructure Investment Bank
The Asian Infrastructure Investment Bank (AIIB) announced that all activities relating to Russia and Belarus are “on hold and under review.” They continued by saying they “stand ready to extend financing flexibly and quickly and support members who have been adversely impacted by the war, directly or indirectly.”
Why it Matters:
The AIIB is effectively China’s private IMF. It allows China to fund infrastructure projects worldwide to gain soft power indirectly. Although it is still unclear what the end result of any suspension of funds and review will mean, it is notable that the AIIB has taken this position. We highlight it because the AIIB is a national security asset for China, and with the Ukraine war further splitting the world in two, it is important to see what tools China does and doesn’t use to support Russia.
Electrification and Digitalization Policy:
Two Approaches: Coinbase Blocks Over 25,000 Addresses Linked to Illicit Russian Activity - Decrypt
Coinbase has said it has blocked over 25K addresses related to Russian individuals or entities believed to be engaged in illicit activity. The exchange added that these accounts were identified through its own "proactive investigations" and that the addresses have been shared with the U.S. government to "further support sanctions enforcement."
Why it Matters:
Digital assets have properties that naturally deter common approaches to sanctions evasion. Hence, crypto exchanges are facing tough choices these days. Either support the West’s goal of stopping Russia’s invasion of Ukraine or continue to provide a somewhat anonymous way to move and store “money.” The choice exchanges make will likely split the crypto community into those who believe it is a legitimate asset and those who use it for illegal means, given the migration that will occur as exchanges either agree or don’t agree to work with governments.
The Law: Biden to Sign Crypto Order as Firms Face Sanctions Pressure- Bloomberg
The executive order will direct federal agencies to examine potential regulatory changes, as well as the national security and economic impact of digital assets. The executive order, which has been in the works since last year, will require federal agencies across the government to report later this year what they’re doing regarding digital tokens. The White House’s directive is also expected to address the possibility of a U.S.-issued central bank digital currency, or CBDC, though it’ll likely hold off on taking a firm position because the Federal Reserve is still studying the issue.
Why it Matters:
The White House’s approach to crypto has attracted fresh attention in recent weeks after the U.S. and its allies levied sanctions on Russia, prompting concerns that organizations and individuals could use crypto to evade the restrictions. Him Das, acting director of Treasury’s Financial Crimes Enforcement Network, addressed the issue on Monday. “Although we have not seen widespread evasion of our sanctions using methods such as cryptocurrency, prompt reporting of suspicious activity contributes to our national security and our efforts to support Ukraine and its people,” he said in a news release.
Eavesdropping: 3 reasons Moscow isn't taking down Ukraine's cell networks - Politico
Cybersecurity experts expected Russian forces to take out at least some Ukrainian phone lines and internet services as part of a ground invasion. It hasn't happened even though Russia appears to be suffering from it. But cybersecurity and national security experts believe Russia has three good reasons to refrain from disabling phone and data networks:
Russian intelligence services can eavesdrop on phone calls and emails and also gather geolocation and other metadata.
The Russian army is using Ukrainian commercial networks to communicate.
Russian forces don't want to destroy the infrastructure that they will need if they succeed in conquering Ukraine.
Why it Matters:
Russian attempts to penetrate Ukrainian networks have been made easier because the countries use similar technologies in their networks. Even before the invasion, Russian surveillance of Ukrainian telephone networks was pervasive. Meanwhile, rather than sticking to more secure, military communications lines, the Russians themselves are using the local telecoms networks they do their operations. As the war drags on, we would expect Russia to stop using the telecom infrastructure and start destroying it as they realize how detrimental it is to them. We also highlight this because we found it interesting that the second-largest military in the world would rather use the local network than a secure military one.
Commodity Super Cycle Green.0:
Got a Nickel?: How Skyrocketing Nickel Prices May Impact the Clean Energy Drive - Bloomberg
Nickel, used in stainless steel and electric-vehicle batteries, roared past $100,000 a ton to an all-time high on the London Metal Exchange on Tuesday in an unprecedented bout of trading when prices surged around $40,000 in the space of just one hour. The exchange suspended trading. The massive gains came amid a historic short squeeze that’s embroiled a major Chinese bank and spurred unusual rule changes from the LME.
Why it Matters:
The supply-side for nickel was already very bad, down to a couple of weeks of supply even before the Ukraine invasion. However, the high nickel price probably won’t affect battery production with a 30% hike in nickel sulfate prices translating into only a 6% increase in cathode costs and 1-2% rise in total battery costs. It is also unlikely the high price on the LME is sustainable. Finally, lithium supply will dictate the amount of battery production this year as the lithium market is still in serious shortage. That is the main concern for battery makers, not nickel.
ESG Monetary and Fiscal Policy Expansion:
Now?: EPA Eyes Strict Emissions Rules for Heavy-Duty Trucks – Bloomberg
The U.S. Environmental Protection Agency proposed Monday to cut nitrogen oxide emissions from heavy-duty trucks by roughly 90% below current standards beginning in 2027. The proposed regulations have drawn pushback from the industry that says it is already facing a shortage of drivers and is rushing to unkink a supply-chain crunch, and is wary about anything that would drive up costs.
Why it Matters:
Biden is playing catch-up on regulating truck emissions. That’s due, in part, to the different nature of big rigs that haul tons of freight and have their own regulatory yardsticks. Congress authorized the regulation of car pollution since the 1970s, but the first standards for greenhouse gas emissions from trucks were issued in 2014. The EPA is also planning to update greenhouse-gas emission rules for trucks soon. The Biden administration hopes to synchronize the nitrogen oxide and greenhouse gas emission rules, with both rules taking effect in 2027.
Current Macro Theme Summaries:
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