MIDDAY MACRO - 5/21/2021
Daily Color on Markets, Policy, and Geo-Politics
MIDDAY MACRO - DAILY COLOR – 5/21/2021
PRICE MATRIX
OVERNIGHT/MORNING RECAP & MARKET WRAP
Narratives:
Equities were higher overnight but chopping around post-NY-open as today’s OpEx weighs on momentum
Treasuries reversed overnight gains following better than expected PMI data
WTI bouncing higher but still significantly down on the week
Price Action:
Equities continue to recover from weakness earlier in the week
Russell outperforming S&P/Nasdaq
Small-Cap, Value, High Dividend Yield factors outperforming
Industrials, Health Care, and Materials sectors outperforming
Tighter trading range expected on OpEx Friday as 25-20% of total gamma expiring (opening up the range next week), technical support is at 4140 and resistance is 4180
Major Asian indexes mixed: Japan +0.8%. Hong Kong +0.1%. China -0.6%. India +2%.
European bourses higher, at midday: London flat. Paris +0.5%. Frankfurt +0.2%.
Treasuries little changed and chopping sideways similar to equitieswith belly again underperforming
5yr = 0.83%,10yr = 1.63%, 30yr = 2.34%
Increased growth and inflationary pressures made abundantly clear in today’s PMI data continues this week’s curve flattening trend
WTI higher by 2% to $63.60
Despite weakening fundamentals, today's price action reflects a relief rally after significant weakness over the week
Besides the pressure “new” Iranian supply expectations are bringing to oil markets, there are also continued concerns about Asian oil demand as the COVID situation remains a concern
Copper lower by -1.7% to $4.49
Base metals are showing definite signs of cooling off, even having significant corrections in some cases.
Aggs weaker overnight but are bouncing slightly post-NY-open
DXY higher to 90.10, jumping on PMI data
Gold lower to $1873 after overnight strength
Bitcoin lower by -6% to $38k following more negative headlines out of China
Econ Data:
IHS Markit PMI: Private sector firms across the U.S. signaled an unprecedented expansion in business activity in May as the PMI Output Index increased to 68.1, up from 63.5 in April. Growth was driven by the fastest service sector upturn on record, with the increase in manufacturing output also accelerating. The rise in new orders quickened for the fifth month running in May. Improvements in demand stemmed from greater customer confidence, stockpiling, and higher exports. Increasing costs continued to be felt as the rate of input price inflation soared to a new survey record high. These cost increases are more fully feeding through, leading to the sharpest increase in output charges since data collection began in October 2009. Record rates of inflation are being registered for both goods and services as soaring demand boosted firms’ pricing power. Another data point showing robust reopening demand leading to increased inflationary pressures.
Policy Talk:
Dallas Fed Kaplan: Repeated his call for policymakers to begin a discussion of slowing their asset purchases a day after minutes of the Fed’s April meeting showed an increased interest in talking about tapering. “Maybe taking the foot gently off the accelerator would be a wise thing to do here so that we can manage this transition more effectively,” Kaplan said Thursday in response to questions during a virtual discussion hosted by the Borderplex Alliance. “That’s why I have encouraged sooner rather than later we begin a discussion of these purchases.” Kaplan’s Hawk Island looks to be growing and he won’t be alone with Wilson much longer.
Analysis:
Today’s PMI data reinforces our view that inflationary pressures are still growing and increasingly being passed down to the end consumer.
Growth expectations will begin to fall as we move through the second quarter, and markets continue to receive data points on how persistent current production problems and cost increases are.
We are currently at peak growth outlook exuberance:
LEI above pandemic high
CEO confidence at record levels
Consumer confidence coming back
Second-quarter earnings expectations continue to rise despite growing reports of capacity constraints and increased costs.
Switching gears, it is clear that the robust buying in parts of the commodity complex from China is on pause as authorities try to stem their own inflationary pressures.
This change is not only hitting metals and agricultural prices but also crypto due to crackdowns in energy usage by miners.
Crypto’s drop in some ways has become an unintended victim of the coal import bans from Australia as increased domestic thermal coal prices are becoming punitive to power consumption.
Although, clearly, the CCP is also anti-crypto or anti-anything decentralized for that matter.
Stepping back, as stated in yesterday's note, we look for a range-bound summer and are now watching for various parts of the commodity complex to cool and form the lower levels of forward ranges.
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Growth Outperforming on the Week
Chinese Iron Ore Future Price: Iron Ore Higher on the Week
5yr-30yr Treasury Spread: Curve is Flatter on the Week
EUR/JPY FX Cross: Euro Higher on the Week
HOUSE THEMES / ARTICLES
Digital Infrastructure Security and the “5th Dimension”
Ransomware: CNA Financial Paid $40 Million in Ransom After March Cyberattack - BBG
CNA Financial Corp., among the largest insurance companies in the U.S., paid $40 million in late March to regain control of its network after a ransomware attack. CNA, which offers cyber insurance, said its investigation concluded that the hackers were a group called Phoenix that isn’t subject to U.S. sanctions.
Ransomware attacks -- and particularly payments -- are rarely disclosed so it’s difficult to know what the biggest ransoms have been. The average payment in 2020 was $312,493, according to Palo Alto Networks, a 171% increase over the previous year. The $40 million payment is bigger than any previously disclosed payments to hackers, according to three people familiar with ransomware negotiations.
Electrification & Digitalization
Constellation: Europe making progress on sovereign LEO constellation as OneWeb and Starlink race ahead - SpaceNews
Europe’s new low Earth orbit (LEO) flagship program aims to provide secure connectivity for citizens, commercial enterprises, and public institutions, focusing on covering rural regions and areas without adequate communications services. The European Commission picked a group of European satellite makers, operators, service, and launch providers in December to study the feasibility of a European-owned space-based communications system. It will look to complement networks that European satellite operators are already providing in geostationary and medium Earth orbits (GEO and MEO).
Ensuring broadband can be available everywhere across the E.U. is a key priority and providing secure connectivity for government services is also increasingly crucial for European digital sovereignty. The race to create secure LEO-provided broadband has been highlighted by a growing list of countries as a national priority and we are still in the early innings of what is panning out to be the second age of the space race.
Dirty Crypto: Bitcoin Miners Are Giving New Life to Old Fossil-Fuel Power Plants – WSJ
The lofty price of bitcoin and other cryptocurrencies has investors pouring money into power generation and risking an environmentalist backlash. In upstate New York, an idled coal plant has been restarted, fueled by natural gas, to mine cryptocurrency. A once-struggling Montana coal plant is now scaling up to do the same.
A University of Cambridge index pegs the annual power consumption of bitcoin mining at around 130 terawatt-hours, more than three times higher than at the beginning of 2019. That would be more than the power consumption of Argentina. If crypto wants a future, it will need to balance how it consumes energy, or the growing ESG movement may make it taboo.
Fiscal Policy
The Treasury Department on Thursday announced that it is taking steps to crack down on cryptocurrency markets and transactions, and said it will require any transfer worth $10,000 or more to be reported to the Internal Revenue Service.
A growing number of Wall Street analysts have over the past month sounded the alarm that regulators at the Treasury and the Securities and Exchange Commission could soon take a more active role in cryptocurrency regulation.
SLTT: U.S. Infusion to States and Cities Already Totals $105 Billion - BBG
According to a statement from the Treasury Department Thursday, the federal government has handed out about 30% of the Coronavirus State and Local Fiscal Recovery Funds ($350 billion) to more than 1,500 entities since it was launched on May 10.
Treasury officials have been conducting outreach efforts with state and local government officials on the use of the funding. North Carolina Governor Roy Cooper said he’d like his state to use the funds to expand broadband access, provide college scholarships, and fix the state’s water and wastewater systems, among other uses. It doesn’t seem very Covid recovery-related but why not.
Climate: Biden Ordering Climate Risk Strategy for Financial Assets - BBG
In a four-page executive order that he signed Thursday, the president is asking Treasury Secretary Janet Yellen, in her role as head of the Financial Stability Oversight Council, to recommend steps to reduce climate risks to financial stability, according to the administration. That assessment, which would be provided within six months, would also detail plans financial regulators have for bolstering disclosures.
Regulators globally have already begun work in this area with the U.S. somewhat lagging European counterparties. The Fed has become more vocal on the matter and Kevin Stiroh has been moved from head of N.Y. Supervision to a climate risk-focused role at the Board. Further combining the National Economic Council, National Climate Adviser, Treasury, and the OMB shows that this is a real priority for the current administration, as advertised.
Commodity Cycle
Coal: China’s Australian coal ban distorts prices - Argus
The Chinese demand outlook for domestic coal remains firm, despite a steep decline in the Chinese futures market last week. Tight coal supplies are already disrupting power output. In south China's industrialized Guangdong province, authorities have started to stagger electricity at a time when power demand is increasing as temperatures rise.
China's coal imports slumped to a five-month low, a decline of 30% on the year, due to bans on Australian imports. Replacement sources such as coal from Indonesia, which is of poorer quality and delayed due to weather, have not been a reliable substitute. It is important to watch how the Chinese economy is negatively affected by geopolitical strife’s with resource providers, giving a gauge to how far China can weaponize demand from its domestic market verse the CCP’s international political goals.
Logistical Bottlenecks
Food: Food Supply Chains Are Stretched as Americans Head Back to Restaurants – WSJ
Suppliers and logistics providers say distributors are facing shortages of everyday products like chicken parts, as well as difficulty in finding workers and surging transportation costs. Restaurants, hotels, and institutional food-service operations are coping with big price swings on staple ingredients and erratic availability, according to food and beverage consulting firm JPG Resources LLC. Broader supply-chain upheaval is also hitting food distributors, delaying shipments of overseas products like tuna and olives and holding up delivery of corrugated cardboard and other packaging materials
The food sector is seeing a version of what supply-chain experts call the bullwhip effect, where companies that have pulled back their operations seek to rapidly scale up on signs of improving demand, leaving suppliers scrambling to keep up. Supply-chain executives say the lack of available workers may be the biggest strain on the sector since the impact cascades from the production facilities to trucking to distribution centers.
Auto Chips: Car Makers to Get No Special Treatment in Chip Shortage, Commerce Secretary Says – WSJ
Commerce Secretary Gina Raimondo held meetings Thursday with about three dozen stakeholders, including executives from Ford Motor and General Motors and technology companies and chip suppliers. She said in an interview that there are no easy solutions to the problem that has caused a major American industry to halt assembly lines.
The global chip shortage has forced automakers to put some of their production on hold, costing the industry an estimated $110 billion of lost revenue this year, according to the New York-based consulting firm AlixPartners. As we are fond of highlighting here at Midday Macro, growth is not being restrained by a lack of demand but instead, a lack of production hurt by rising input prices or shortages and a lack of qualified labor. It will take time for market forces to fix these problems and, as a result, bring into question the “transitory” nature of the price pressures being created.
China Macroprudential Policy
Commodity Markets: Steel prices fall on Beijing’s efforts to cool markets - Argus
Chinese steel markets sold off for a fifth day today after Beijing warned again against "unreasonable" price increases. China needs to take more steps to curb unreasonable price increases for bulk commodities to prevent those costs from being passed on to consumers and ensure supply, premier Li Keqiang said at a state council executive meeting late yesterday.
It looks like the Chinese have stopped stockpiling commodities due to rapid price increases stoking inflation fears. The excessive amount of resource purchases could be interpreted as a troubling sign and allude to the potential for increased geopolitical tensions that may reduce their market access. Or it could have been simply driven by returning growth that is now being tempered by rising costs.
Unipolar to Multipolar World
E.U. and China Relations: EU-China investment deal on hold as MEPs vote to halt talks -SCMP
The European Parliament has voted to stop discussions on an investment deal with China until Beijing removes the retaliatory sanctions it imposed on E.U. officials, diplomats, academics, and researchers in March. The vote on the motion on the CAI passed by a landslide, with 599 votes in favor, 30 votes against, and 58 abstentions. In the parlance of E.U. bureaucrats: the deal has been put in the freezer.
Two main things to watch here: Germany’s Green Party's gains leading into the general election increase the probability they could be part of a ruling coalition. If the CAI is not completed by then it will likely be less well received by any ruling coalition that includes the Green party. Second, Hungary’s use of veto power to block anti-Chinese legislation. China continues to increase its soft power efforts in Eastern European nations and if they are able to pick apart the E.U. from within they will only be further emboldened to continue this tactic.
Thank you for reading - Mike