MIDDAY MACRO - 5/17/2021
Daily Color on Markets, Policy, and Geo-Politics
MIDDAY MACRO - DAILY COLOR – 5/17/2021
PRICE MATRIX
OVERNIGHT/MORNING RECAP / MARKET WRAP
Narratives:
Equities weaker overnight and post-open but look to be bull flagging
Treasuries curve flattening with long-end buying at open.
Ag complex better bid after last week’s weakness
WTI higher after NY open buying
Price Action:
Equities melting higher on dip buying and dealer hedging
Russell/Nasdaq outperforming S&P
High Dividend Yield, Small-Cap, Value factors outperforming
Energy, Materials, and Healthcare sectors outperforming
Call wall is at 4200 with support at 4100, 4125 is technical support with resistance at 4160-70
Major Asian indexes mixed: Japan -0.92%. Hong Kong +0.47%. China +0.78%. India +1.6%.
European bourses lower from midday lows: London -0.36%. Paris -0.19%. Frankfurt +0.01%.
Treasuries mixed as long-end is outperforming
5yr = 0.83% and 10yr = 1.64%
WTI higher by 1% to $66
Copper higher by 1% to $4.70
Aggs higher but mixed as soy outperforming
DXY under pressure overnight to 90.25
Gold higher by 1.5% to $1865
Bitcoin had a rough weekend falling over 11% to $44.5K
Econ Data:
Empire State Manufacturing Survey: The headline general business conditions index was little changed at 24.3. New orders and shipments continued to expand strongly, and unfilled orders increased. Delivery times lengthened significantly, and inventories moved somewhat higher. Employment levels grew modestly, and the average workweek increased. Both input prices and selling prices rose at a record-setting pace. Looking ahead, firms remained optimistic that conditions would improve over the next six months and expected significant increases in employment and prices.
NY Fed’s Household Debt and Credit Report: Total household debt rose by $85 billion (0.6% increase) to reach $14.64 trillion in the first quarter of 2021. Mortgage balance rose by $117 billion, while auto and student loan balances increased by $8 billion and $29 billion, respectively. Credit card balances declined by $49 billion—the second-largest quarterly decline in the history of the series (which dates back to 1999).
Credit card balances are $157 billion lower than they had been at the end of 2019, consistent with both pay downs among borrowers and constrained consumption opportunities.
The idea that households have high savings needs to be complemented with the fact they also have a greater ability to take on debt via credit cards, improving the pent-up demand argument.
Policy Talk:
Clarida elaborates on how he extracts signals from the curvature of yield curves not only in Treasuries but other global rate markets in a speech given this morning.
“Conditional on neutral policy rates and longer-term inflation expectations, the Federal Reserve and other major central banks can be thought of as calibrating and conducting the transmission of policy—be it through rates, forward guidance, or LSAPs—primarily through the slopes of their yield curves and much less so via their levels.”
Analysis:
There is still a very favorable backdrop for risk-assets at the headline level, but things under the surface are beginning to signal caution is warranted moving forward due to increasing levels of inflation.
Positive:
Easier financial conditions are likely to continue for some time due to the Fed’s belief inflation will be transitory, and hard to reach an “equitable” maximum employment level.
A continuation of strong growth and earnings in the second quarter as the re-opening takes full stride, allowing pent-up demand backed by high savings and credit availability to be unleashed further.
A booming housing and stock market (as well as an improving job market) lift consumer sentiment higher.
Negative:
Factors holding down yields and supporting easier financial conditions weaken as Treasury buying by foreigners, real-value, and banks subside, spooking markets to de-risk as rates receive less support.
Growth and earnings forecasts are still “priced to perfection” while recent economic data and earning calls increasingly highlight that logistical and cost increases are persisting longer than expected, holding back output and profits.
Inflation expectations (surveyed from firms and consumers) are beginning to rise faster than expected, setting up the potential for a negative feedback loop as policy tightening expectations rise sooner than expected in the second half of the year.
We expect inflation to continue to increase over the year and its volatility to also rise as there is a greater stickiness to transitory factors while more structural ones accelerate.
This will drive yields higher and in turn, will drive risk-assets lower (more generally) as the market consensus view becomes one of a more sustained and stronger inflationary pulse.
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio:
Chinese Iron Ore Future Price:
5yr-30yr Treasury Spread:
EUR/JPY FX Cross:
HOUSE THEMES / ARTICLES
Digital infrastructure security and the “5th Dimension”
Privacy: WhatsApp Rivals See Nearly 1,200% Growth Ahead of Privacy Policy Deadline – Sensor Tower
Sensor Tower Store Intelligence data reveals that mobile users flocked to alternatives led by Telegram and Signal following the announcement by WhatsApp to accept a new privacy policy. In the first four months of 2021, Telegram’s installs climbed 98% YoY to more than 161 million, while Signal saw its first-time downloads surge 1,192% YoY 64.6 million.
As we emerge from the pandemic and work more remotely, we will likely continue to see changes to the way consumers message and the platforms they gravitate to. It is clear from what already occurred that people are less likely to trust a Facebook company and privacy concerns are still paramount for which messaging service many choose.
Electrification
NFTs: The Untold Story of the NFT Boom – NYT
NFTs are digital files created using blockchain computer code, much like the code that makes Bitcoin possible. NFTs contain data that points to a copy of a piece of art online and data about who currently owns the NFT. It is essentially impossible to duplicate. That means the NFT behaves — in the eyes of a new breed of collector, anyway — somewhat like a physical piece of art.
No one entirely agrees on what this demand for NFTs means. If you ask crypto supporters, NFTs presage the future of digital property. They’re a glimpse at a coming day when people spend their income on digital items they can trade, resell or hoard as an investment; when the government will lose its unique power to mint currency and protect property because people will instead trust the implacable math of blockchain networks. However, it is still in the early days and pricing is very volatile.
Environmental & Natural Resources
Battery: Natural Gas, America’s No. 1 Power Source, Already Has a New Challenger: Batteries - WSJ
Vistra Corp. owns 36 natural-gas power plants, one of America’s largest fleets. It doesn’t plan to buy or build anymore. Instead, Vistra intends to invest more than $1 billion in solar farms and battery storage units in Texas and California as it tries to transform its business to survive in an electricity industry being reshaped by new technology.
The combination of batteries and renewable energy is threatening to upend billions of dollars in natural-gas investments, raising concerns about whether power plants built in the past 10 years—financed with the expectation that they would run for decades—will become “stranded assets,” facilities that retire before they pay for themselves.
Monetary Policy
Green Policy: Central Banks Jump Into Climate-Change Policy Fray - WSJ
The central banks say climate change is a financial and economic risk. They believe rising sea levels, more wildfires, and bigger storms could cause shortages that spur inflation, the regulators’ traditional nemesis. Some central banks are also debating whether to require banks to set aside more capital for loans to fossil-fuel companies and less capital on loans to wind- or solar-power companies.
The Federal Reserve is proceeding cautiously, worried about financial risks but wary of expanding its mandate, which would put it in the middle of the partisan debate over climate change. Some central banks are moving more quickly than the Fed, setting rules that U.S. companies will have to follow in affected countries and creating possible examples for the Fed and others.
Fiscal Policy
Tariffs: U.S., EU Set to Reach Temporary Tariff Truce Over Metals - BBG
Under the agreement with the Biden administration, the EU will refrain from increasing those tariffs and both sides will engage in a dialog on steel overcapacity. The European Union had previously proposed to suspend all duties on each other’s products for six months while negotiations on a long-term solution continue.
President Joe Biden will participate in a U.S.-EU summit in Brussels next month during his first foreign trip as the nation’s leader. Biden and his European counterparts are set to discuss trade cooperation, the White House said.
Commodity Cycle
Lumber: Despite Lumber Boom, Few New Sawmills Coming – WSJ
Lumber companies say they are content to rake in cash rather than adding mills that can cost hundreds of millions of dollars and take two years to build. Sawmills are instead moving to bring more products to market by boosting efficiency and output at existing mills. Their caution in investing in new processing plants results from unusual volatility in commodities markets, in which companies make long-term plans based on expectations for relatively stable demand.
There is a common theme emerging across the commodity complex, weak past CAPEX, lower willingness to expand production, increasing demand. Past booms and bust cycles have left commodity producers overly risk-averse. Coupled with the negative pandemic experience of the last year and the increased cost of new capital investments has created a negative feedback loop where higher prices are begetting higher prices.
Coking Coal: India's coking coal imports rise in March - Argus
India's coking coal imports rose in March as Indian mills ramped up offtake of Australian coal because of its competitive prices. The purchases were also supported by robust steel margins and recovery in steel demand in India.
Two main takeaways; India is strategically taking advantage of the rift between China and Australia to stock up on discounted coking coal and India’s economy is still chugging along despite Covid troubles.
China Macroprudential Policy
Shoppers Missing: China’s Economic Recovery Slowed in April – WSJ
China’s industrial production in April was up 9.8% from a year earlier, slower than March’s 14.1% pace, while fixed-asset investment decelerated as well, to 19.9% in the January-April period from 25.6% in the first quarter. Retail sales, a key gauge of China’s domestic consumption, underwhelmed: April’s figure was up 17.7% from the pandemic-hit level a year earlier, well short of March’s 34.2% pace.
The retail sales miss was a particular disappointment for economists and policymakers, who have been watching for several months for signs of a tilt toward consumption-driven growth in the Chinese economy. For the Chinese economy as a whole, says Ding Shuang, an economist at Standard Chartered, “The problem is not the growth rate, but its unbalanced recovery. Some sectors, such as industrial activity, appeared to be too hot, while others, like service and consumption, haven’t yet recovered to pre-virus levels.”
Housing: China’s Home Market ‘Out of Control’ as Prices Climb Further – BBG
Buyer euphoria is persisting, with investors using real estate as a hedge against global inflation. That’s prompted authorities to issue a drumbeat of statements designed to cool down price expectations. Year-to-date residential sales have more than doubled from the same period in 2019 in a number of cities. Price growth was particularly acute in tier-two regional centers, given their relatively looser restrictions and higher demand under further relaxing of centuries-old “hukou” residential permits.
Xi in late April repeated his mantra that houses are “for living in, not for speculation” when chairing a meeting of China’s 25-member Politburo, the Communist Party’s top ruling body. Last week, policymakers signaled they may revive efforts to introduce a long-delayed national real estate tax via a trial.
Defining National Security Assets in a Dual Use Environment
Drug Manufacturing: India’s Covid-19 drug makers see Chinese raw material prices soar – SCMP
Ashok Kumar Madan, executive director of the Indian Drug Manufacturers’ Association, said the price of raw materials for drugs used to treat Covid-19, like ivermectin, had risen by as much as 300%. “India is importing almost 70% of our requirements from China, so when the impact comes, it’s coming with the APIs from China – it is an increase in the API prices, it’s an increase in the packing material prices, and there are issues that freight prices have gone up, both air and sea,” Madan said.
The article highlights the need for supply chain security and re-shoring of critical industries. China’s control of global PPE production and supply of raw materials for drug manufacturing gives them significant geopolitical leverage and soft power. As India and other nations emerge from the current crisis, they will likely incentivize domestic or local production of critical items through changes to legislation and taxes much like what we are seeing in Western nations.
Unipolar to Multipolar World
A US accounting oversight board proposed a draft rule to speed the implementation of a Trump-era law that would force publicly traded Chinese companies to delist from American bourses in three years if they do not share their audits for review. The original act was signed into law in December in the waning days of the Trump administration after receiving strong bipartisan support in the US and could force Chinese firms to leave American bourses in 2024.
Beijing previously denied permission for PCAOB to review the audits of US-listed mainland firms on national security grounds. A group of Chinese law professors said this month that the law is “obviously aimed” at Chinese companies and includes the “extremely unusual” requirement that companies disclose directors and executives who are members of the Chinese Communist Party.
WTO: China’s WTO reform aspirations take center stage at globalization seminar – SCMP
“The direction should be trade liberalization and facilitation,” said Yi Xiaozhun, elaborating on the Chinese principle of reforming the WTO after stepping down as deputy director-general of the trade body last month. “But we should stay alert to the intention to spread trade protectionism, and prevent globalization from being driven backward,” he said at a seminar hosted by the Centre for China and Globalization, a Beijing-based think tank.
The future of multilateral trade is now at a crossroads, and reforming the WTO is high on the agenda for Ngozi Okonjo-Iweala, who was sworn in as the trade body’s new chief in March. However, it is likely that Western nations will not see China’s reform suggestions as anything other than more empty rhetoric given their continual abuses.
Muji: Japan’s Muji Appeals to China by Advertising Use of Xinjiang Cotton – WSJ
The Japanese chain has publicly sided with the Chinese government while many Western and Japanese companies won’t. Muji says it uses cotton from the Xinjiang region. In China's online store, Muji includes the words “Xinjiang cotton” next to several items. The move was well-received by Chinese social network users, some of whom said on the Twitter-like Weibo platform that they recognized the company’s eagerness to stay on the country’s good side.
Last month, Muji’s parent compamny said it conducted an on-site audit at more than 12,000 acres of farms and other facilities in the Xinjiang region in 2020 and found no material human-rights violations. Greed and self-verification don’t often produce morally correct activity. Muji, emerging from bankruptcy protection, clearly is happy to take market share from companies like H&M in China even if inputs into their clothing are likely from questionable means.
Thank you for reading - Mike