MIDDAY MACRO - 5/24/2021
Daily Color on Markets, Policy, and Geo-Politics
MIDDAY MACRO - DAILY COLOR – 5/24/2021
PRICE MATRIX
OVERNIGHT/MORNING RECAP & MARKET WRAP
Narratives:
Equities, higher overnight, with gains accelerating post-NY-open
Treasuries also marginally higher with long-end outperforming
WTI has recovered most of last week’s losses as Friday's rally continues
Price Action:
Equities are attempting to break out of last week’s range
Nasdaq outperforming S&P/Russell
Momentum and Growth factors outperforming
Technology, Consumer Discretionary, and Communications sectors outperforming
Gamma resistance at 4200 with support at 4150, technical support is at 4180 and resistance is 4220
Major Asian indexes higher: Japan +0.2%. Hong Kong flat. China +0.3%. India +0.2%.
European bourses higher, at midday: London +0.2%. Paris +0.1%. Frankfurt +0.4%
Treasuries higher with the curve is bull flattening as long-end continues to outperform
5yr = 0.81%,10yr = 1.61%, 30yr = 2.30%
WTI higher by 2.7% to $65.30
Many banks, including Goldman Sachs and Citi, have raised their upside targets on oil even with increased Iranian crude exports now being a possibility
Copper higher by 1% to $4.53
Chinese regulators drove base metals sharply lower at the start of the Asia session, but losses have been pared back since then
Aggs weaker across the board
DXY slightly weaker to 89.84
Gold higher by 0.4% to $1885
Bitcoin higher by 4.75% to $37.9K
Econ Data:
Chicago Fed National Activity Index: The CFNAI declined to +0.24 in April from +1.71 in March. Three of the four broad categories of indicators used to construct the index made positive contributions in April, but three categories deteriorated from March. Production-related indicators slowed while contributions from sales, orders, and inventory categories marginally improved. The personal consumption and housing category broadly deteriorated from March. The contribution of the employment, unemployment, and hours category also decreased notably. The CFNAI simply summarizes what we have seen in the recent data, an economy with production problems but still high levels of demand.
Policy Talk:
Philadelphia Fed President Harker: The Federal Reserve should get a conversation going on tapering its bond-purchase program “sooner rather than later,” Harker said, adding his voice to a growing minority of U.S. Fed officials signaling the process should begin sometime soon. “We need to follow the playbook we had after the Great Recession,” Harker said. “That is, we start to taper the bond purchases, to slowly remove accommodation -- carefully, methodically, I would even argue boringly -- so that we don’t surprise the market, we don’t surprise anyone.” It is our view that employment will continue to improve into the fall while inflation continues to run above target, allowing taper talks to properly “start” at the September FOMC, although they have already begun.
Analysis:
“Green on the Screen” across assets today as markets likely continue melt-up until new inflation information is received from PCE data on Thursday.
Low level of Fed speakers and high Case-Shiller Home Price expectations (supported by +19.2% YoY increase in existing housing prices) are the only notable events until then, leaving little to sway sentiment.
More activity from Chinese regulators over the weekend as they continue to fret over the inflationary pressures commodity speculators are creating.
Much of this pressure has been in the form of aggressive verbal warnings, first rolled out last week.
They continued into the weekend after market regulators held an unusual Sunday meeting with metal companies on Sunday and warned them to maintain "normal market order."
What that means is that companies should not "collude with each other to manipulate market prices ... hoard goods and drive-up prices" or engage in speculation, a regulatory statement noted.
This may also be weighing on the agricultural commodity space as hoarding activity certainly seems to have occurred there.
Finally, a quick look at some of the recent warning signs equities have been flashing as we continue to believe that upside remains limited until we get further clarity on the negative effects of the inflationary pressures we have been seeing:
Margin debt’s YoY percentage change is two standard deviations above its mean.
The S&P real earnings and real dividend yield are both in negative territory.
The correlation between equities and bonds is now above 0.5.
First-quarter equity offerings were massive.
Global stock market value to GDP is two standard deviations above mean.
The list goes on, but these are a few we wanted to highlight today.
TECHNICALS / CHARTS
Four Key Macro House Charts:
Growth/Value Ratio: Growth Outperforming on the Week
Chinese Iron Ore Future Price: Iron Ore Lower on the Week
5yr-30yr Treasury Spread: Curve is Flatter on the Week
EUR/JPY FX Cross: Euro Higher on the Week
Nasdaq:
On a day where momentum, growth, and technology factors are leading the rally it is worth taking a larger look at the technical setup for the Nasdaq.
There is now a clear breakout from the mid-April downtrend channel.
The up-trending support line from November has been tested and held twice in the last two weeks.
However, the hourly RSI is now entering overbought territory, and a consolidation or bull flag pattern will be needed before a further push above 14,000 is possible.
Finally, and not seen, Gamma is now at a more neutral level, supporting the likelihood of consolidation until positioning in options change.
The technicals coupled with the fundamental belief that earnings growth is at risk of slowing sooner than expected give us caution that an immediate move to new highs may be slow to come but support the view that growth may continue to outperform value over the summer.
HOUSE THEMES / ARTICLES
Digital Infrastructure Security and the “5th Dimension”
Interconnected: How to Understand the Russia Hack Fallout - Wired
As the SolarWinds revelations continue to pile up and new targets are discovered by the day, it is hard to get a handle on what exactly happened and what it all means. Not all of the victims of this attack were affected in the same way. In some cases, Russia planted a backdoor but didn't go any further; in others, it moved deep within their networks for surveillance and data exfiltration.
The news about the hacking spree will likely continue for weeks as more organizations identify where they fit in the rubric of potential targets. Microsoft president Brad Smith wrote on Thursday that the company had notified more than 40 customers about signs of deep intrusion on their networks. The articles highlight how the SolarWinds hack affected various parties, eluding at the type of attacks to expect moving forward.
Narrative Control: India asks social media firms to remove reference to 'Indian variant' of coronavirus - Reuters
India's information technology (I.T.) ministry has written to all social media companies asking them to take down any content that refers to an "Indian variant" of the coronavirus. A senior Indian government source told Reuters the notice was issued to send a message "loud and clear" that such mentions of "Indian variant" spread miscommunication and hurt the country's image.
Around the world, coronavirus variants have generically been referred to by doctors and health experts based on where they are identified. This includes South Africa and Brazil variants. A social media executive said it would be difficult to take down all content using the word as there would be hundreds of thousands of such posts, adding that "such a move would lead to keyword-based censorship in the future."
Electrification & Digitalization
Apple Car: Apple and the End of the Car as We Know It - WSJ
As automakers move to electric motors, elaborate entertainment systems, and adaptive cruise control, cars will need central computers to control all these things. Apple has been focused on trying to make inroads into autos at every level. However, nobody knows if what Apple creates will be a car or a tech platform, or a mobility service.
The auto industry is shifting its emphasis to software and hiring like crazy to do it. In the past year, almost every major automotive company has advertised that it would like to hire many more software developers. This is where Apple may have an advantage and be the creator of a central operating system, but entry into the market is complicated. The article further elaborates on all the various efforts and competitions going on in the space.
Commodities
Slow Down: First Warning Sign in Global Commodity Boom Flashes in China - BBG
With global commodities rising to record highs, Chinese government officials are trying to temper prices and reduce some speculative froth that’s driven markets. Economic data for April suggest that both China’s economic expansion and its credit impulse, new credit as a percentage of GDP, may already have crested, putting the commodities rally on a precarious footing.
“Credit is a major driver for commodity prices, and we reckon prices peak when credit peaks,” said Alison Li, co-head of base metals research at Mysteel in Shanghai. “That refers to global credit, but Chinese credit accounts for a big part of it, especially when it comes to infrastructure and property investment.” But the impact of China’s credit pullback could ripple far and wide, threatening the rally in global oil prices and even crop markets, something we may be already seeing.
Monetary Policy
Congressional Oversight: Republican Senator Presses Regional Fed Banks on Race-Related Work – WSJ
Sen. Pat Toomey (R., Pa.) wrote to the leaders of the Atlanta, Boston, and Minneapolis Federal Reserve banks. The latest letters follow one sent in March to the San Francisco Fed on its climate change and social focus, which he also deemed at odds with the central bank’s mission.
Much like the San Francisco letter, the senator wrote to the three banks on their work on what he called “politically charged social causes,” which he deemed as “wholly unrelated to the Federal Reserve’s statutory mandate.” We expect the Fed to continue to “mission creep’, as they focus more on an “equitable” recovery, their loosely defined full employment mandate, and the risk climate change poses to financial stability. Any congressional attention and pushback here are worth watching.
Fed Chair: Raphael Bostic is ready for the chair – Axios
The possibility of Bostic stepping into the Fed’s Chairman role has become a talking point in economics circles and Washington. Since he took over as president of the Atlanta Fed in 2017, Bostic says the central bank already has changed as he has promoted things not usually heard before. Many of those ideas are based on how discrimination has historically disadvantaged certain Americans, particularly Black, low-income, and rural Americans, and ways to counter that discrimination.
As with the previous article, the Fed is at risk of becoming unhinged from its more neutral economic shepherds’ role. A sitting chair pushing for reparations could be a shock to Wall Street.
Fiscal Policy
Under Pressure: Progressives Pressure Top Democrats on Israel Arms Deal, Policing - WSJ
After essentially standing with the party at the start of the administration, progressives have asserted themselves, spurred by the fighting between Israel and Hamas and the continued national debate over race and policing. The recent narrow passage (passed by 213-212) of a bill of Capitol security shows the importance the Progressive Wing has on passing key legislation.
As the debate over infrastructure begins to heat up, the Biden Administration’s desire to have partisan support will run headlong into the Progressive Wings lofty wish list of social and environmental priorities. With only an eight-seat majority in the House, there is very little room for error, and as always, the clock is ticking, given 2022 midterms could easily see the GOP take control back.
Infrastructure
Common Ground: Biden Trims Infrastructure Plan to $1.7 Trillion; GOP Wants More Cut – WSJ
The White House lowered its proposed spending on highways and broadband and shifted some programs into other legislation in its new offer. Those changes put the overall price tag at $1.7 trillion, down from roughly $2.3 trillion in the initial White House plan but still well above the Republican lawmakers’ $568 billion offer. The White House proposed pursuing $480 billion in funding for research, development, and manufacturing initiatives in other legislation.
After months of meetings on infrastructure, including a flurry of negotiations in the past week between the White House and Senate Republicans, the two sides have made next to no progress on the central topics in the negotiations, prompting frustration from administration officials and lawmakers. Some Democrats have been prodding the White House to cut off the negotiations with Republicans and begin moving forward with a broader package along party lines.
Commodity Cycle
Cali Drought: Drought Imperils Economy in California’s Farm Country - WSJ
California is gripped in a severe drought just four years after emerging from the last one, forcing many farmers to scramble to find enough water. The U.S. Bureau of Reclamation has cut the water allocations for many to zero this year, forcing farmers to pay four times as much for water in the private market. Meteorologists attribute the drought to factors including a warming climate and a La Niña weather pattern, during which a cooler eastern Pacific often results in storms being diverted north of California.
Drought is afflicting 88% of the American West, up from 40% a year ago, according to the U.S. Drought Monitor. In California, the mountain snowpack is at 4% of normal, mainly due to one of the lowest statewide precipitation totals on record and an unusual spring warm-up. Most of the big reservoirs in California have sunk below half of their capacities. There will need to be more focus on water security in future infrastructure efforts.
China Macroprudential Policy
PBOC: PBOC Says It Will Maintain Exchange Rate ‘Basically Stable’ - BBG
The future trend of the exchange rate will be decided by supply and demand, as well as changes in international financial markets, Liu Guoqiang, vice governor at the People’s Bank of China, said in a Q&A segment posted on the bank’s website. The yuan will be kept at reasonable and balanced levels, he said.
His comments came after a PBOC official said the country should let the yuan appreciate to offset rising costs of commodity imports. China is hurt by a rally in global commodity prices, according to central bank researcher Lyu Jinzhong, in an article published Friday in PBOC magazine China Finance.
Unipolar to Multipolar World
Vaccine Soft Power: China Is Winning the Race to Vaccinate the World, for Now - BBG
China has shipped about 265 million Covid vaccine doses, more than all other nations combined, with commitments to provide an impressive 440 million more. In comparison, the U.S. has promised to donate 80 million overseas by the end of June, significantly lower than the 118 million European Union has donated so far. Even India, meanwhile, had exported almost 69 million doses to nearly 100 countries until it suffered the world’s worst outbreak and halted further deliveries.
The WHO authorization of the Sinovac vaccine, a de facto approval for regulators in poorer countries, could help further unleash hundreds of millions of doses of Chinese shots. The impact of the country’s contributions will also be magnified by the absence of India, making this “the best time for China to practice vaccine diplomacy and to make more use of its first-mover advantage,” says Yanzhong Huang, a senior fellow for global health at the Council on Foreign Relations. The U.S. will need to step up efforts significantly or lose out on an opportunity to grow soft power diplomacy.
African Soft Power: U.S.-China Tech Fight Opens New Front in Ethiopia - WSJ
A U.S.-backed consortium beat out one financed by China in a closely watched telecommunications auction in Ethiopia. The East African country said Saturday it tapped a group of telecommunications companies led by the U.K.’s Vodafone Group PLC to build a nationwide 5G-capable wireless network. The group had won financial backing for the multibillion-dollar project from a newly created U.S. foreign-aid agency.
In the past two decades, Ethiopia has developed commercial bonds with Beijing, signing loan agreements with Chinese lenders that total $13.7 billion between 2000 and 2018. The choice to select Vodafone over the Chinese financed back South African company MTN Group shows a willingness by the Ethiopian government to play both sides, a tactic often used by African nations during the Cold War. Further, Ethiopia used questionable tactics last year against an opposition political party, showing the U.S. is willing to overlook human rights abuses to take on China.
China and Russian Relations: China’s top diplomat heads to Russia as ties reach ‘best level in history’ - FT
Yang Jiechi, who leads China’s central committee for foreign affairs, will be in Russia until Wednesday for a strategic and security consultation, the Ministry of Foreign Affairs said on Sunday. Yang will also visit Croatia and Slovenia before returning to China. Last year, in a phone call with Putin, Xi highlighted the need for closer relations with Russia, given the “turbulence” caused by the pandemic, and said the 2001 treaty had established a new type of international relations.
Yang’s visit to other Eastern European countries should be seen as important as his visit to Russia. The fact that China and Russia’s relations have reached “the best level in history” should surprise no one given the pressure the U.S. and, to a lesser extent, others have put on the two nations, forcing a closer economic and geopolitical integration. More importantly, to watch are the satellite states that buffer Europe from Russia and ultimately China.
Thank you for reading - Mike