Midday Macro - Bi-weekly Color – 4/1/2022
Overnight and Morning Market Recap:
Price Action and Headlines:
Equities are lower, as selling, driven by quarter-end at the end of yesterday’s cash session has continued following a stronger overnight with a strong jobs report and higher inflation, as seen in today’s manufacturing PMI data, increasing Fed tightening expectations
Treasuries are lower, with the curve further flattening following today’s data ending the weekly relief rally, although yields are well off highs of the session
WTI is lower, with Biden’s planned SPR release size being the largest on record, while OPEC+ sticks to its script and continues to be “unenthusiastic” about adding barrels to the daily supply while little progress was “officially” made this week regarding an Iran negotiation
Narrative Analysis:
Equities are cooling with a sizeable amount of quarter-end selling materializing yesterday, breaking the S&P multi-day winning streak. Small-caps were the original benefactors of the inline/strong jobs report this morning but are now too under pressure with the S&P gravitating back towards its 200-dma. Markets are again questioning what a fast tightening Fed means for financial conditions and economic activity. As a result, Treasuries have resumed their curve flattening, indicating the belief that demand destruction can be avoided is waining as the post-March-FOMC rally in risk assets cools. WTI oil is back below $100, with the SPR release announcement yesterday helping to drive prices lower, although many questions remain on how it will lead to an extra million barrels a day in supply. The dollar received a bid following this morning's job data, with the $DXY moving back toward 99.
The Russell is outperforming the S&P and Nasdaq with Small-Cap, Low Volatility, and Value, and Real Estate, Energy, and Utilities sectors are outperforming.
S&P optionality strike levels have the Zero-Gamma Level is at 4561 while the Call Wall is 4650. The Vix increased over the week, with markets becoming more sensitive to moves in implied volatility as we are now in an area where the S&P is shifting from positive gamma to negative, with the Vol trigger being 5525.
S&P technical levels have support at 4500, then 4475, and resistance is at 4535, then 4565. The 200-dma is around 4475 and is key support for the current rally to stay intact, or 4400 could fast approach. The rapid drop in the RSI does indicate there could be a bounce into Friday’s close
Treasuries are lower with the 10yr yield at 2.36%, higher by around 3bps on the session, but off morning highs, while the 5s30s curve is lower by 10bps to -11bps
Deeper Dive:
We continue to keep our “Real Supply-Side Improvements” theme, although it has been tempting to throw in the towel here. We define an improving real supply-side as both the better availability of materials and labor, increasing the production capacity of the economy. While there are certainly signs that labor availability is improving, as seen again in today’s jobs report, the overall health of the global supply chain remains questionable. Although we believe improvements are occurring in supply chains, the persistence of inflationary forces coming from logistical costs or material shortages, as made evident again in today's ISM Manufacturing PMI report’s considerable price rise, continue to increase the odds that business and consumer inflation expectations become unanchored and hence increase the level of tightening the Fed will ultimately have to do.
Some of the positive signs that supply chains are improving are best seen with logistical costs peaking. Truck spot pricing and containership rates have fallen by -20% last month, while the backlog of ships off California is down by -60% from highs, although this is partly due to less coming from China due to disruptions from lockdowns there.
*At the peak of the supply constraints in October 2021, spot rates charged by ocean carriers had surged tenfold from a year earlier, but those have been edging down since then in line with weaker seasonal demand
However, even with costs currently dropping, the effects of last year's increases are still working their way to end consumers. According to research by the International Monetary Fund, “when freight rates double, inflation picks up by about 0.7 percentage point. Most importantly, the effects are quite persistent, peaking after a year and lasting up to 18 months. This implies that the increase in shipping costs observed in 2021 could increase inflation by about 1.5 percentage points in 2022.” We highlight this to reinforce the view that any drops in shipping costs/rates as being positive but currently less important in influencing policymakers' hawkish line of thinking.
*Studying data from 143 countries over the past 30 years, we find that shipping costs are an important driver of inflation around the world… - IMF
As a result and looking across a broad range of available data, it is clear that there has not been enough improvement in the logistical/supply-chain side of our theme to believe there will be a meaningful reduction in inflationary pressures in the medium term. The lag effects of what has already occurred and the continued problems from the Ukraine-conflict/Russian sanctions and China are too significant. As a result, the Fed will continue to pivot away from beliefs in “transitory” effects on inflation from supply-chain disruptions. They will also increasingly focus on the “tightness” of labor markets, emboldening the view that we are in a deeper cyclical inflationary pulse that warrants a greater policy response. This means the tail risk is increasingly growing that the Fed moves very quickly to tighten policy, again something we have failed to be ahead of, given our own views.
*“A heatmap of existing supply-side bottlenecks: supply issues have not eased over recent months, and are expected to continue over the year 2022 (e.g. disruptions to transportation and logistics), putting pressure on inflation.” - @heimbergecon
The bottom line, and bolstered by today’s jobs report and ISM Manufacturing survey, we believe the current thinking at the Fed will lead policy to a pace/level of tightening that will increasingly drive demand destruction into year-end. A falling unemployment rate coupled with continued broad/persistent price increases will only embolden faster and more aggressive action. Further, although Fed officials state inflation expectations are still anchored, surveys are beginning to show this to be untrue. As a result, we continue to believe that equities and risk assets are going to be range-bound for the remainder of the year until we see inflation expectations, as expressed through breakevens, and spot levels meaningfully falling, capping the end level of rate hikes, with the higher end of the risk-asset range being near current levels.
Econ Data:
Total nonfarm payrolls increased by 431K in March, below market forecasts of 490K. Figures for February were revised sharply higher to show a 750K job gain from 678K and the January number was also revised up by 23K to 504K. Job gains continued in leisure and hospitality (+112K), namely in food services and drinking places (+61K) and professional and business services (+102K). The unemployment rate declined to 3.6% from 3.8% in the previous month, the lowest since February 2020 and below market expectations of 3.7%. The U6 underemployment rate dropped to 6.9% from 7.2%. The labor force participation rate edged up to 62.4%, the highest level since March 2020. Average hourly earnings rose by 5.6% YoY, above market forecasts of a 5.5% gain, while the average workweek fell by 0.1 hours to 34.6 hours.
Why it Matters: A very solid jobs report, despite missing expectations; however when considering the upward revisions for February and January, the overall increase was higher than the expected consensus forecast. There are no signs that labor demand is slowing. Job growth averaged 562K per month in Q1 2022. Employment is now down by 1.6 million, or 1%, from its pre-pandemic level in February 2020. Despite a continued rise in labor force participation, job growth is outstripping these participation gains. The unemployment rate continues to fall and remains on track to drop below 3% this year. This means the Fed’s end-of-year projection of 3.5% will need to be revised lower, or they are projecting a deterioration in hiring during the second half of the year. Any revision lower may also show a growing comfort in raising the projected long-term neutral level for the Fed Funds rate, given the inflation backdrop.
*Leisure and Hospitality, along with Education and Health Services to a lesser extent, are still below their pre-pandemic employment levels, indicating further gains could be coming
*U3 and U6 are back at pre-pandemic levels while the participation rate continues to remain lower, although gradually improving
*The Black unemployment rate dipped to 6.2%, though it was on the back of a slight drop in the labor force (-11,000).
The ISM Manufacturing PMI fell to 57.1 in March from 58.6 in February, below market forecasts of 59 and indicating the slowest growth in factory activity since September of 2020. New order and Production growth slowed, with the sub-indexes falling by -7.9 pts and -4.0 pts to 53.8 and 54.5. The Backlog of Orders also fell by 5 points, although still at a high reading of 60. New Export Orders fell by -3.9 pts. There continue to be gains in Employment, rising 3.4 pts to 56.3. Supplier Deliveries time was little changed. Price growth accelerated further at 87.1, up 11.5 pts. Inventories increased, although Customer Inventories remain “too low.”
Why it Matters: The index remains comfortably in growth territory on the aggregate; however, more demand-specific sub-indexes are approaching contractionary readings. Instead, the Employment and Prices categories held up declines elsewhere. The large jump in the Prices sub-index was a significant reversal from the drop last month. The list of commodities “Up in Price” or “in Short Supply” remains stubbornly long. When combined with respondent comments, it is clear that there is still no material improvement in supply chain challenges and the resulting price pressures resulting from them.
*Indicators of demand decreased in March for manufacturers despite respondent comments being generally upbeat there
*Most of the positive contribution to the headline index for the month came from increases in Prices and Employment
*A somewhat mixed bag of comments that often contradicted what the data showed
Personal income increased by 0.5% in February, following a revised 0.1% increase in January and matching market expectations. Wage & salary income rose 0.8%, while government social benefits fell by -0.3%. Disposable personal income increased by 0.4%, and personal consumption expenditures increased by 0.2%. Personal consumption expenditures increased by 0.2% in February, below market forecasts of a 0.5% rise, while January was revised higher to 2.7%. Personal saving was $1.15 trillion in February, and the personal saving rate is at 6.3%.
Why it Matters: Inflation-adjusted consumer spending declined by -0.4% in February, potentially showing higher prices weighed more on end demand, especially for goods than in January. February’s data also confirmed what higher frequency data had been showing. Now that Omicron worries have fallen, consumers are increasingly spending a more historically normal amount for services, namely food and accommodation services. Spending on total services increased 0.9%, the most in seven months, after rising 0.7% in January. But spending on goods dropped by -1.0% after surging 6.5% in the prior month, with durable goods leading driving the decline by falling by -2.5%. Finally, real disposable personal income has declined consistently every month since August last year, dropping by -0.2% in February.
*The increases in personal income were driven by wages and salaries, with government transfers falling while personal consumption gains were driven by spending on services verse a decline in demand for goods
*We continue to see too much emphasis put on savings levels given the uneven distribution it has among income/wealth cohorts, but nevertheless, and zooming out, the national savings rate is back at pre-pandemic levels
The personal consumption expenditure (PCE) price index rose to 6.4% on an annual basis in February, quickening from a 6.0% increase in January. It was the steepest rise since February of 1982, reflecting stronger gains in prices of goods (9.6% vs. 8.8% in January on an annualized basis), while services rose at the same 4.6% pace as in January. Energy prices jumped 25.7%, while food prices were up 8.0%. Annual core PCE inflation rose 5.4% from a year ago, the highest since April of 1983 but slightly below market expectations of 5.5%.
Why it Matters: There was no reprieve from inflationary increases in the Fed’s favorite gauge, with Core PCE managing to increase 0.4% in February verse 0.5% in the prior month. We expect to see declines in the rate of price increases for durable goods, with consumer spending data showing a decrease in demand for furnishings, autos, clothing, and footwear. However, this will likely be countered by increases in service, energy, and food costs, keeping pressure on headlines while the rate of change in core cools.
*Demand for services are back to pre-pandemic levels, indicating inflationary pressures should remain stronger there while demand for goods falls
*No matter how you look at it, inflation is rising, although PPI may be plateauing if energy prices have peaked and gains in average wages are stabilizing
The Challenger Job Cuts report showed companies announced plans to cut 21,387 jobs from their payrolls in March, the most in five months. Most cuts were due to store, unit, or plant closing (5,301) and vaccine refusal (3,278). By sector, for the fourth consecutive month, Health Care/Products announced the most job cuts (4,995). In Q1, employers announced 55,696 cuts, down 62% year-on-year, and the lowest quarterly total since Q3 2021, when 52,560 cuts were recorded.
Why it Matters: The number of Americans being “cut” reached a five-month high in March but is still historically very low. For comparison, in March 2020, as Covid began to take hold, there were 222,288 job cut announcements, and in the five years prior to 2020, layoff announcements in March averaged 49K. “There appears to be a return of a healthier churn in the labor market. Some U.S. Employers report hiring is getting easier, particularly with the incentives many companies put in place to attract and retain talent. Meanwhile, inflation impacts and war concerns are causing workers who were depending on savings or investments to seek out paid employment", said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.
*Still very low, it was interesting to see cuts in transportation, warehousing, and retail given these were some of the areas most in need of workers not too long ago
Technical and Charts:
Four Key Macro House Charts:
Growth/Value Ratio: Value is higher on the day and lower on the week. Mid-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 the week as expectations for increased levels of stimulus is trumping expectations for a further slowdown in economic activity
5yr-30yr Treasury Spread: The curve is flatter on the day and the week, with a big move today following the jobs report and higher inflationary pressures out of the manufacturing PMI report
EUR/JPY FX Cross: The Euro is higher on the day and the week with higher levels of inflation reported in the EZ area this week, increasing policy tightening expectations
Other Charts:
Recent rises in the ten year Treasury yields have it almost 1% higher than the S&P dividend yield,
Since supply chain issues emerged in the middle of last year, Goldman Sachs’ thematic "offshore" basket of stocks started to drastically underperform an "onshore" basket. The offshore basket includes companies like Whirlpool, Cisco Systems, and Apple, which are reliant on a global manufacturing system. The onshore basket includes companies like steelmaker Cleveland Cliffs, chipmaker Intel and equipment maker Caterpillar, which have significant or growing manufacturing bases in the U.S.
B of A’s private clients continue to reduce their debt holding levels as a percent of their portfolio
Risk parity funds are finding correlation and volatility (leverage) conditions hard to justify raising their exposure
Yesterday’s consumer income data continues to show that real disposable income is declining as the strong level of inflation persists
Article by Macro Themes:
Medium-term Themes:
China Macroprudential and Political Loosening:
Opening the Books: China Weighs Giving U.S. Full Access to Audits of Most Firms – Bloomberg
Chinese authorities are preparing to give U.S. regulators full access to auditing reports of the majority of the 200-plus companies listed in New York as soon as the middle of this year, making a rare concession. The China Securities Regulatory Commission and other national regulators are in the process of drafting a framework that will allow most Chinese firms to keep their listings.
Why it Matters:
The framework is expected to provide clarity on what data may trigger national security concerns, said the people. Regulators are debating whether companies that deal with consumer information, such as Alibaba Group Holding Ltd, would automatically fall into that category. Some state-owned enterprises and private companies that hold sensitive data will be delisted. As a reminder, China unveiled sweeping regulations governing overseas share sales by its firms in December, taking one of its biggest steps to tighten scrutiny on international debuts, so concessions here are an interesting turn of events from Beijing.
Longer-term Themes:
Electrification and Digitalization Policy:
Know Your: EU Parliament Passes Privacy-Busting Crypto Rules Despite Industry Criticism - Coindesk
European Union lawmakers voted today in favor of measures to outlaw anonymous crypto transactions. The proposals are intended to extend anti-money laundering to the crypto sector. They scrap the floor for crypto payments, so payers and recipients of even the smallest crypto transactions would need to be identified, including for transactions with unhosted or self-hosted wallets. Further measures under discussion could see unregulated crypto exchanges cut off from the conventional financial system.
Why it Matters:
The Thursday vote came in spite of objections from major industry participants, such as Coinbase, and from legal experts who warned that overly heavy-handed privacy violations could face legal challenges in EU courts. The industry also said the new rules would stifle innovation and invade privacy. We see other countries following this example.
Commodity Super Cycle Green.0:
More Beans: War-Related Fertilizer Shortage Leads to Slump in U.S. Corn Planting – WSJ
In its annual Prospective Planting report, the U.S. Department of Agriculture forecasts that farmers would plant 89.5 million acres of corn in the 2022 planting season, down from 93.4 million acres last year and down from the average estimate of 92 million acres from analysts surveyed by The Wall Street Journal. It would be the first time since 2018 that soybean acreage has exceeded corn, and only the third time the USDA has estimated higher soybean acreage than corn.
Why it Matters:
Farmers globally are struggling with a surge in fertilizer prices over the last year, with research firm DTN forecasting multiple types of fertilizers at record-high prices as of late March. Corn is more fertilizer-intensive than other crops. Other rising costs, such as seeds and farming equipment, are further squeezing profit margins for farmers who would otherwise enjoy nearly record-high prices for grains. We highlight this to point out the effects the war in Ukraine will have on biofuels (ethanol) and food security more generally.
ESG Monetary and Fiscal Policy Expansion:
AntiTrust: Biden’s New Antitrust Cop Threatens to Slam Brakes on Mergers – Bloomberg
In bringing back the trustbusting tenor of the early 20th century, the Justice Department’s new antitrust chief, Jonathan Kanter, is carrying out a key part of President Joe Biden’s economic agenda, which aims to increase competition across the economy after decades of consolidation. The antitrust division is now juggling five merger challenges and a monopoly lawsuit that accuses Alphabet’s Google of abusing its power in internet search.
Why it Matters:
Kanter and Lina Khan, his counterpart at the Federal Trade Commission, which also enforces competition laws, are trying to halt concentration amid a merger avalanche. The agencies reviewed some 3,500 transactions in the fiscal year that ended in September, a record. As a result, the Biden administration is proposing steep jumps in funding for both antitrust agencies in its proposed fiscal 2023 budget as part of its push to make markets more competitive.
Current Macro Theme Summaries:
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