Midday Macro - Bi-weekly Color – 4/14/2022
Overnight and Morning Market Recap:
Price Action and Headlines:
Equities are lower, reversing much of yesterday’s rally as slightly weaker than expected retail sales increased growth concerns despite consumer confidence data improving on an early OPEX day due to the holiday weekend
Treasuries are lower, with overnight strength reversing pre-NY open and negating gains over the last two days as the 10yr yield reapproaches recent highs and the curve flattens slightly
WTI is higher, with EIA’s weekly data showing another large build in oil inventory yesterday, while gasoline and distillates saw drawdowns as traders now turn to Brussels with expectations of energy sanctions to be announced soon
Narrative Analysis:
Equities are lower, with yesterday’s rally looking like a dead cat bounce as traders were unimpressed with this morning's data dump of retail sales, export/import prices, inventories, and Univ of Michigan’s consumer confidence and continue to look for further sanctions on Russia disrupting global growth while there’s been little improvement regarding China’s covid lockdowns. A somewhat large OPEX day is also potentially furthering selling pressures despite the VIX staying well contained. Reports that the EU is finalizing energy sanctions have oil higher, helping Treasury yields rise as the recent rally there quickly reversed this AM. Elsewhere commodities, especially in the agriculture space, continue to grind higher, increasing inflationary worries. The dollar is higher as the ECB reconfirmed they would stay the gradual course today, moving the Euro below 1.08 temporarily.
The S&P is outperforming the Russell and Nasdaq with High Dividend Yield, Value, and Low Volatility, and Consumer Staples, Materials, and Industrials sectors all outperforming.
S&P optionality strike levels have the Zero-Gamma Level at 4509 while the Call Wall dropping notably to 4450. Around 25% of SPX/SPY/QQQ (predominantly negative) gamma is rolling off in today’s OPEX. Optionality-wise, S&P is in “no man's land” at current levels, with the next big OPEX being 5/20, and positioning being very neutral following the expiration of mainly puts today, with the gamma flip being near current levels.
@spotgamma
S&P technical levels have support at 4405, then 4385, and resistance at 4445, then 4480 area. Yesterday’s rally is looking like a dead cat bounce, occurring off the 50% retracement level of the entire March rally. Reclaiming 4545 is critical for bulls today, though there are still three significant resistance levels overhead (the 200dma at 4480-85, 4500, then 4520-25ish -the downtrend line from the March high). If bulls are unable to reclaim that level then it is likely that 4300 area is retested first.
@AdamMancini4
Treasuries are lower with the 10yr yield at 2.80%, higher by around 10bps on the session, while the 5s30s curve is flatter by 2bps to 14bps.
Deeper Dive:
It is time for the real economy to stand up or shut up, and it’s increasingly looking like we will get the latter entering the second half of the year despite the alleged strength of the consumer and corporate/business balance sheet. We are increasingly worried we will see a core inflation deceleration head fake as the significant rise in PPI and import prices in March does not comfort us that the most substantial part of the current inflationary pulse is behind us, as originally thought. Increasing materials and commodity prices will continue to work their way through the production pipeline to the end consumer if there isn’t a notable correction in price levels or outright demand destruction, reducing pricing power and hence contracting profit margins of producers/wholesalers/retailers.
As we stand, the macro backdrop is a mosaic of negativity. The war in Ukraine is further feeding a strong inflationary pulse. Chinese lockdowns are slowing economic activity (globally) and reducing the availability of goods through decreases in production and impairments to logistics. Elsewhere, there are growing signs that improvements in supply chains have stalled more generally. Europe looks to be entering a recession as it struggles with increased energy costs and uncertainty. Meanwhile, the Federal Reserve and numerous other central banks are tightening policy at historic rates driving bond yields higher globally. Further, to add icing to the cake, a new wave of Covid is building. All in all, we are in extraordinarily challenging times.
*The move higher in yields during Q1 has been historical and broad-based as the G7 10yr average yield is fast approaching 2%
To echo research recently put out by the mother ship, the negative macro backdrop continues to drive inflationary pressures, leaving us with a “triple shock” with the world’s growth, trade, and financial channels simultaneously under pressure. In the end, the drivers of these shocks are due to poor policy, whether in response to the pandemic or longer-term in nature, as the global rule-based system is increasingly challenged. This leaves most market participants in unfamiliar waters as they fail to understand the tectonic shifts occurring in the global order as we move from a unipolar world back to a bipolar one.
*The IMF and other international organization are increasingly highlighting the risks that regionalization pose to global growth, with the World Economic Forum even putting out a pro-Global Governance dashboard
The nature of the authoritarian governments in China and Russia are currently not allowing a course correction as admitting to failure opens the door to regime change. Hence the growth shock primarily emanating from China’s zero-covid policy and the trade shock occurring due to Putin’s failed “special operation” have further cemented the regionalization push/trend that the pandemic already had started. Coupled with the financial shock increasingly occurring as the Fed seeks to regain credibility and we have a perfect storm brewing.
*Heavy is the head that wears the crown, as Xi and Putin increasingly realize as of late. Of course, this doesn’t mean we should expect any changes in behavior/course from China or Russia
*Financial conditions continue to be historically loose in developed markets, but globally they continue to tighten, and the change is occurring fast
As a result, and turning back to the negative macro factors highlighted above, it does not leave us with much hope for a quick remedy, hence the reason for our growing worries that inflationary forces, although still not structural, will continue for much longer than consumer and business anticipate. As a result, we increasingly believe the weakening consumer and business sentiment occurring (globally) will increasingly weigh on real economic activity until these three shocks are meaningfully subsiding.
*We need to see a reversal in the growth of +4% CPI components as a percent of the total to take comfort that inflation is meaningfully changing course
*A recent Harris poll shows that inflation is increasingly affecting U.S. consumer activity, with eating out and impulse purchases the heaviest hit
So what does it mean? We continue to believe in being defensive, favoring being overweight cash. Any longs should be tactical in sectors that outperform in the latter part of the cycle. We are certainly sympathetic to longs in the energy and material sectors but would not go chasing anything here given the growing uncertainty regarding end demand in the second half of the year. Basically, we see no meaningful reason for a reversal in current trends/themes. What is working should continue to work until inflation falls and Fed policy reaches the mythical “neutral level.” Unfortunately, it is our belief that the tax of inflation will increasingly drive real consumer and business behavior negatively, and something will break, driving markets much lower, before the Fed ever reaches its target/goal. We understand this to be a growing consensus view, giving us pause, but it's likely a more favorable macro risk asset backdrop doesn’t emerge until 2023.
*Global recessionary fears are growing, as are ones regarding inflation, according to a recent BofA Global Fund Manager Survey
*Global stock market shave held in batter than we would have expected, but growing pessimism may continue to lead to outflows of funds
ADMINISTRATION NOTE = There will be no Midday Macro next week. We will be doing some on the ground surveying of economic conditions in the pubs of Ireland before the next wave of the pandemic prevents us
Econ Data:
Retail sales increased 0.5% in March, below an upwardly revised 0.8% rise in February, and market forecasts of 0.6%. Sales at gasoline stations recorded the biggest increase (8.9%), but excluding those receipts, overall sales fell 0.3%. Sales at non-store retailers, which includes e-commerce, fell -6.4%, while general merchandise sales rose 5.4%, showing in-person activity continues to recover. Sales at eating and drinking establishments increased by 1.0%. Motor vehicle and parts dealers saw further weakness, with sales decreasing by -1.9%.
Why it Matters: March’s report reflected an increase in spending due to a surge in prices for energy, food and other goods and services (retail sales aren’t adjusted for inflation). From November to March, nominal retail sales averaged a 0.9% monthly pace of increases, but real retail sales averaged a drop of -0.4% MoM. On a YoY basis, retail sales were up 6.8% but down -7.4% when adjusted for inflation. Retail sales excluding autos, building materials, and gasoline, the component of this report that feeds into the calculation of non-auto consumer goods spending within GDP, slipped by -0.1% in March. Though this is modestly lower than forecasts, these core sales were revised higher for January and February.
*Ex-gas sales, retail sales fell -0.3% MoM, up 4.4% YoY, and that doesn’t account for inflation which has driven real retail sales into negative territory
*Strong gains in General Merchandise sales in March show a more mobile consumer
The price index for imports jumped 2.6% from a month earlier in March, the most since April 2011, following a revised 1.6% increase in February and above market expectations of 2.3%. Annual increases in import prices are now higher by 12.5%. Fuel imports rose 14.6% MoM while non-fuel imports increasing by 1.2% MoM. Export prices rose 4.5% MoM, accelerating from the 3% increase in February and well above market estimates of a 2.2% increase. It was the largest monthly rise since one-month percent changes were first published in January of 1989. The annual increase in exports prices is now 18.8%. The price of agricultural exports rose 4.7% MoM, while prices excluding agriculture rose 4.5%, as a broad array of items increased in price.
Why it Matters: You have to go back a long time to find monthly increases as high as what we are currently seeing, with both import and export price increases significantly beating expectations. Looking at imports, we take some comfort that there was a stabilization or deceleration in capital goods, auto, and consumer goods inflation. However, when juxtaposed against increases in industrial supplies and materials, which rose 8.2% on the month, and the energy price increase, we still see strong inflationary pressures coming through the import channel even as the dollar strengthens.
*Exports excluding agriculture advanced 4.5% in March, lifted by nonagricultural industrial supplies and materials, capital goods, consumer goods, and automotive vehicles
*Prices for import fuel advanced 14.6 percent in March, the largest one-month advance since July 2020, driven by higher petroleum prices
The University of Michigan consumer sentiment unexpectedly jumped to 65.7 in April from an eleven-year low of 59.4 in March, beating market expectations of 59. The Expectations Index rose by 18% to 64.1, while the Current Economic Conditions Index increased to 68.1 from 67.2. Meanwhile, inflation expectations were unchanged for both the year-ahead (5.4%) and the five-year outlook (3%). Surprisingly, consumers anticipated a year-ahead increase in gas prices of just 0.4 cents in April, completely reversing March's surge to 49.6 cents.
Why it Matters: Consumer Sentiment jumped by a surprising 10.6% due to improvements in the Expectation Index. However, it remained below January's reading and lower than any prior month in the past decade. Respondents cited expectations for further wage increases and the economy improving as reasons to be more upbeat about their finances. They also see a smaller rise in gas prices, supporting anticipation of improved inflation-adjusted incomes. Healthy employment gains helped bolster wage expectations among respondents younger than age 45. Households expect income gains to rise 2.7%, the biggest increase since 2006.
*All three indexes are still negative over 20% on an annual basis despite the significant jump in expectations in the preliminary reading for April
*The jump in expectations was the largest monthly increase since 2006
Producer prices increased 1.4% in March, the biggest increase since at least December 2009 and above market forecasts of 1.1%. Core PPI rose 1% on the month. Compared to March 2021, headline producer prices were up 11.2%, the biggest increase since January 1981, while the core rate was higher by 9.2%.
Prices of goods increased 2.3%, with foods higher by 2.4% and energy higher by 5.7%
Prices of services increased 0.9%, mainly due to a 1.2% rise for trade services
Prices for final demand transportation and warehousing services increased 5.5%
Excluding trade, transportation, and warehousing, services were higher by 0.3%.
Why it Matters: PPI came in much higher than expected and showed a broad inflationary pulse. This gives us pause in calling peak inflationary gains, given the deceleration in core CPI seen earlier in the weak. Annualized Three-month gains in the headline and core PPI continue to outpace their 12-month gains materially. Pipeline prices (processed and unprocessed intermediate goods) surged in March. Core unprocessed goods prices, for example, have risen 50.2% at an annual rate over the last three months. This is an ugly inflation report that shows there are still significant manufactured goods price pressures coming. The question is will the end consumer continue to be price takers or push back and reduce demand, leaving wholesalers/retailers with growing inventory and reduced margins?
*Price gains were broad in March and show that even with demand for goods falling to more historic norms as a percentage of spending, there should still be significant increases there.
Policy Talk:
New York Fed President John Williams again said a 50bp rate hike at the next FOMC meeting could be “a reasonable option for us because the federal funds rate is very low,” in an interview on Bloomberg TV this morning. He cited the need to move policy back to a more neutral level to bring inflation down to the Fed’s 2% longer-run goal as the committee's chief focus currently, “and to do that over the next few years.” He remained confident the Fed could orchestrate the current tightening plan without derailing economic growth, pushing back on his predecessor Bill Dudley’s views that a restrictive tightening in financial conditions was the only way to stop inflation. “I think the economy can withstand real interest rates at neutral or a bit above,” Williams said. “We’ve seen a dramatic, significant movement in yields and financial conditions over the past several months, and that’s already positioning policy well to get supply and demand back into balance.”
*There is a long way to go to get the Fed Funds real rate positive
Technicals and Charts:
Four Key Macro House Charts:
Growth/Value Ratio: Value is higher on the day and the week. Mid-Cap Value is the best performing size/factor on the day.
Chinese Iron Ore Future Price: Iron Ore futures are higher on the day and flat on the week as Beijing vows to boost consumption and encourage auto sales while the PBOC signals reserve ratio cuts are coming
5yr-30yr Treasury Spread: The curve is flatter on the day but steeper on the week with significant pressure on Treasuries more generally as the last two-day rally has almost entirely reversed
EUR/JPY FX Cross: The Euro is lower on the day but higher on the week as the ECB continued to say they will be gradual in removing accommodation despite increasing inflationary pressures
Other Charts:
Index P/E is being held high by the top ten stocks and is 150%+ over historic norms
BofA Global Fund Manager Survey has profit growth expectations near multi-decade lows
The NFIB business sentiment index is highly correlated with the stock market, and it is falling
Oil supply deficits may continue throughout the year until reversing in 2023
The gasoline price increases, although minimal as a percent of aggregate spending in the U.S., will continue to weigh on economic activity nonetheless due to psychological factors
The spread between the two should grow as long as commodity prices stabilize, as consumers shift away from goods and generally have reduced purchasing power
Rents are rising faster than normal but are below last year’s levels
China’s logistical and freight activity is dropping fast
Respondents to Evercore ISI’s Inventory Survey still generally said inventory levels remained too low with expectations moving forward to 1H ’23 for a normalization
Foreign investors are withdrawing funds across the board from China
Article by Macro Themes:
Medium-term Themes:
Real Supply-Side Improvements:
Step Back: Texas relents on some Mexico vehicle checks amid border backlogs - FT
Texas governor Greg Abbott backed down on extra inspections for vehicles from part of Mexico on Wednesday as a domestic U.S. clash over immigration policy created delays threatening billions of dollars in international trade. The additional checks introduced by Abbott last week, which he said were meant to reduce crime and increase vehicle safety, added hours to usual crossing times and led to long backlogs at important ports of entry along Texas’s more than 1,200-mile border with Mexico.
Why it Matters:
Texas shares more than two dozen border crossings with the Mexican states of Tamaulipas, Nuevo Leon, Coahuila, and Chihuahua. In addition to Pharr, Abbott’s inspection stations are impacting commercial truck traffic in the Texas border cities of Laredo and El Paso. Miller, who, like Abbott, is a Republican, said the governor’s six-day-old program of heightened vehicle inspections at Texas-Mexico border crossings is strangling commerce and doing nothing to curb undocumented migrations.
China Macroprudential and Political Loosening:
No Change: Shanghai: Xi makes clear dynamic zero-COVID not going away; Decoupling talk; Translation struggles - Sinocism
There were several official articles overnight declaring that there will be no deviation from dynamic zero-COVID, and the final paragraph of the long CCTV Evening News report on Xi’s inspection tour of Hainan laid out the case for keeping policy the same. Xi’s comments focused on staying the course and protecting lives, and he called for discipline and evolving control measures to combat the new variant.
Why it Matters:
The message to Shanghai and everyone else is clear-suck it up for the good of the country, the policy is not going to change in any fundamental way, and we are going to grind through the pandemic and anything or person that gets in the way. We believe the mRNA vaccine will be ready by September and hopefully quickly deployed as global growth and risk sentiment will depend on it. Until then, there will be an evolution in the policy but no dynamic change as seen recently in Shanghai opening certain areas based on case count activity.
Longer-term Themes:
National Security Assets in a Multipolar World:
Simple Things: Ukraine War Drives Shortage in Pig Iron, Pushing Steel Prices Higher – WSJ
Pig iron, a raw form of the metal used in steel production, has grown scarce in the weeks following Russia’s invasion of Ukraine, industry executives said. Two-thirds of the 6 million metric tons of pig iron imported by the U.S. last year came from those two countries, according to the U.S. Census Bureau, but the fighting brought Ukrainian shipments to a halt, and importers have stopped ordering from Russia, steel executives said.
Why it Matters:
Russia and Ukraine are the world’s largest sellers of pig iron, and in most years, the U.S. steel industry has been the world’s biggest buyer. Since January, the price of pig iron in the U.S. has increased by 74% to $940 a metric ton, according to S&P Global Commodity Insights. About 70% of the steel produced in the U.S. is made in electric furnaces, making the U.S. particularly reliant on scrap steel and pig iron. We are not implying that pig irons are a national security asset, just that a nation's dependence on imports can lead it to have reduced capacities if trade is disrupted. The shortage of pig irons and rise in steel prices will be occurring just as Biden’s infrastructure bill ramps up spending.
Dependence: Supply-Chain Woes Won’t Be Solved by ‘Reshoring,’ Report Says – WSJ
Efforts by the U.S. and other countries to fix supply-chain problems by boosting domestic production aren’t likely to be effective, according to a report from the International Monetary Fund, which says diversifying sourcing is a better solution.“Policy proposals to reduce dependence on foreign suppliers, especially in strategic sectors, have gained prominence, including in major markets such as Europe and the United States,” IMF economists wrote in a recent report, but went on to say they are “likely misguided.”.
Why it Matters:
The Biden administration wants to boost domestic production and encourage the so-called reshoring of industries that have moved overseas, saying it will both create U.S. jobs and better insulate the nation against shortages from goods imported from other countries, such as semiconductors. However, this won't be easy to do and will likely take decades. However, we believe the trend is now in place, and although it may provide less of an employment positive than thought, it will, over time, reduce inflationary pressures. However, the current FAI needs are doing the opposite. Finally, we find it predictable an organization that benefits from global order and trade would be against reshoring and regionalization of production.
Securing Assets: China's oil champion prepares Western retreat over sanctions fear - Reuters
China's top offshore oil and gas producer CNOOC is preparing to exit its operations in Britain, Canada, and the United States because of concerns in Beijing the assets could become subject to Western sanctions. The exit being prepared would take place less than a decade after state-owned CNOOC entered the three countries via a $15 billion acquisition of Canada's Nexen, a deal that transformed the Chinese champion into a leading global producer.
Why it Matters:
The assets, which include stakes in major fields in the North Sea, the Gulf of Mexico, and large Canadian oil sand projects, produce around 220,000 barrels of oil per day. Last month, Reuters reported CNOOC had hired Bank of America to prepare for the sale of its North Sea assets, which include a stake in one of the basin's largest fields. This should be seen as a negative sign for future relations between China and the West, to say it simply. Any divestment by China from commodity-orientated business is a severe sign of relationship deterioration, given how critical those investments are to Beijing.
Electrification and Digitalization Policy:
Total War: In Ukraine, a ‘Full-Scale Cyberwar’ Emerges – WSJ
Ukrainian and Western intelligence officials feared Moscow’s elite corps of state-sponsored hackers would launch crippling cyberattacks to complement its invasion of Ukraine. Instead, the cyberwar has been something closer to Internet trench warfare: a grinding conflict of relentless, if sometimes unsophisticated, attacks that have taken casualties but had limited impact on the course of the fight.
Why it Matters:
While cybersecurity analysts and intelligence officials are working to understand why the scale of the Russian cyber-offenses has been so much more limited than feared, several theories have emerged. First, Russia assumed the war would be over quickly, a “special operation” that never materialized. Russian assets are busy at home, too, reducing capacity. Finally, Russia, as seen elsewhere, may have overestimated its capabilities and underestimated Western countermoves and Ukraine’s daily resistance.
ESG Monetary and Fiscal Policy Expansion:
Feed Me: Yellen Plans Global Food-Crisis Summit as IMF, UN Urge Action – Bloomberg
U.S. Treasury Secretary Janet Yellen will convene a meeting of top international financial officials next week to address a global food-security crisis, with the heads of international institutions, including the IMF, urging action to address the dire consequences of record price surges caused by Russia’s invasion of Ukraine. “With over 275 million people facing acute food insecurity, I am deeply concerned about the impact of Russia’s war on food prices and supply, particularly on poor populations,” Yellen said in a speech to the Atlantic Council think tank in Washington.
Why it Matter:
Soaring food prices will contribute to sending more than a quarter-billion more people around the world into poverty this year, charity group Oxfam International warned earlier this week. This will be a serious destabilizing factor to global growth and the general stability of governments in the Middle East and Africa. “The threat is highest for the poorest countries with a large share of consumption from food imports, but vulnerability is increasing rapidly in middle-income countries, which host the majority of the world’s poor,” said Yellen in her remarks.
Current Macro Theme Summaries:
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