MIDDAY MACRO - 5/5/2021
Daily Color on Markets, Policy, and Geo-Politics
MIDDAY MACRO - DAILY COLOR – 5/5/2021
PRICE MATRIX
OVERNIGHT/MORNING RECAP / MARKET WRAP
Narratives:
S&P is at the bottom of its recent range and gaining after recovering from yesterday morning’s dip
Treasuries recovered from overnight lows after ADP and ISM service data missed expectations, still below yesterday’s highs, which hit key levels
Agg complex taking a breather but consolidating near highs
WTI continues to move higher and was unaffected by yesterday’s risk-off sentiment
Price Action:
Positive price action in equities
Nasdaq outperforming S&P/Russell
Momentum and Large-Cap Growth factors outperforming
Energy, Technology, and Materials sectors outperforming
Largest gamma strike now at 4150 with call wall falling to 4200, 4130-40 new technical support and new resistance at 4190
Major Asian indexes mixed: Japan closed. Hong Kong -0.4%. China closed. India +0.9%.
European bourses higher, at midday: London +1.1%. Paris +0.8%. Frankfurt +1.4%.
Treasuries slightly higher after overnight selling subsided post-U.S. data
5yr = 0.81% and 10yr = 1.59%
WTI higher around 1.2% to $66.50, continuing multi-day rally
Copper hitting new highs in the overnight but gave up some gains in NY open
Aggs mixed but consolidating near recent highs
DXY at 91.25
Gold slightly higher to $1,783 after a volatile day yesterday
Bitcoin rallying over 5% to $57.4k
Analysis:
The absence of selling in commodities yesterday shows that multi-asset correlations may be changing as inflationary winners and losers become more of a focus for markets.
Today’s ISM Service data coupled with Monday’s manufacturing data show that the biggest obstacle to profitability is not a lack of final demand but growing impediments to the production process itself.
This further enforces our view that large-cap firms will outperform in lieu of their stronger pricing power but also due to their superior logistical clout and operational efficiencies.
Margin protection (to defend and grow earnings) as well as capital dispersion (through buy-backs and dividend increases) will be key drivers of multiple expansions and returns moving forward.
We ultimately believe that we are entering a more stagflationary period next year where the effects of stimulus and pent-up demand subside and growth falls to a more structurally appropriate level in line with our demographic and productivity levels.
WORTH A LOOK
Econ Data:
ISM Non-Manufacturing: Similarly to the ISM Manufacturing data earlier in the week, ISM Services data came in lower than expected, although still at a strong reading of 62.7. The ISM noted: “Respondents’ comments indicate that pent-up demand is continuing. Production-capacity constraints, material shortages, weather, and challenges in logistics and human resources continue to affect deliveries, which has resulted in a reduction of inventories. The long list of disruptions is capping the rate at which firms can operate, not end-demand.
Policy Makers Rhetoric and Key Events:
Fed governor, Tom Barkin, a voting member of the FOMC, said yesterday that he would consider it to be “substantial progress” towards the Fed’s economic goals if the employment-to-population ratio were to reach 60% again. It is currently at around 57% and was at 61% plus change pre-COVID.
Define “Maximum Employment” will be a trickier task for markets than understanding AIT’s upper bound.
Treasury Secretary Janet Yellen said that she expects interest rates to head higher at some point so that the US economy does not "overheat". Not surprisingly the statement was walked back later.
TECHNICALS / CHARTS
Fed rate hike expectations have come down in the past few weeks. This time last month, Eurodollar futures contracts reflected expectations for at least one Fed hike by the end of next year, and possibly four by the end of 2023. That’s versus the central bank’s own projections that Fed Funds are likely to stay near zero over that whole period. Traders have scaled back their hawkish positioning over the past month even with no notable slowdown in the economy or inflation, showing Powell and company have done a good job talking down the market.
OFF THE RADAR
Higher Wages Needed:
There may be less of a labor shortage than being currently reported according to a piece out by Heidi Shierholz
There are always some firms who claim they can’t find the employees they need.
Sometimes that chorus is louder, sometimes softer, but it’s always there.
One reason is that in a system as large and complex as the U.S. labor market there will always be pockets of real labor shortages at any given time.
But a more common reason is employers simply don’t want to raise wages high enough to attract workers.
A job opening when the labor market is weak often does not mean the same thing as a job opening when the labor market is strong.
Research shows that recruitment intensity is cyclical. This means that when a job opening goes unfilled when the labor market is weak, as it is today, employers are even more likely than in normal times to be holding out for an overly qualified candidate at a very cheap price.
Another piece of evidence against widespread labor shortages is the fact that the labor market added more than 900,000 jobs in March, the seventh-highest percent increase in jobs in the last half-century.
It is difficult to imagine that labor shortages were creating a large impediment to hiring when hiring was happening at such a scale.
One question people raise is whether the expanded pandemic unemployment benefits keep workers from taking jobs.
Some very low-wage workers—like many restaurant workers—may receive more in unemployment benefits than they would at a job but the majority did not even with the extra $600, which is now $300.
There were several rigorous papers that looked at this question, and they all found extremely limited labor supply effects of that additional weekly benefit.
HOUSE THEMES / ARTICLES
Digital infrastructure security and the “5th Dimension”
Modernizing: The Technology Modernization Fund
The U.S. Technology Modernization Fund, a $1 billion pool for federal agencies to use to upgrade tech systems, is prioritizing cybersecurity projects, along with those focused on enabling remote access to government services during the pandemic. Congress allocated the funds in part to help federal bodies to respond to the SolarWinds hack and to function more smoothly during the Covid-19 outbreak. The fund is part of the $1.9 trillion American Rescue Plan Act, which President Biden signed into law in March.
The U.S. government seems to be unevenly protected in cyberspace given the mosaic of stories about intrusions. The Biden administration looks to be prioritizing this problem, but it is likely there will be a continual battle between government bureaucracy and the need for speedy cyber protection solutions.
ENREA – Environment / Natural Resources / and Energy Advisory
Wind to Hydrogen: Belgium probes North Sea energy island by 2025 - Argus
"We are going to build a multifunctional energy island in the North Sea which will interconnect our wind turbines … but at the same time, it will also allow the storage and production of green hydrogen," Belgian energy minister Tinne Van der Straeten said last week.
The drawback to hydrogen is that it is expensive and energy-intensive to extract and purify so Belgium’s plan would be a more environmentally friendly approach worth watching.
Monetary Policy
Lender of Last Resort: The Last Resort in a Changing Landscape – FRBSF Econ Letters
SF President Daly calls for a renewed focus on crafting more resilient policies, particularly by addressing Treasury market vulnerabilities and providing greater prudential oversight given the Fed’s frequency and scale of interventions following disruptions like the GFC or Covid.
The letter speaks to the challenges the zero lower bound brings to traditional policy tools as well as the importance Treasuries markets play and the need for the Fed to support these markets during periods of stress. Daly goes on to make suggestions on ways Treasury market activities and oversight can be changed to better implement policy goals.
Negative Rates: Negative Rates Push Cautious Germans Into the Stock Market – WSJ
More Germans entered the stock market for the first time during the pandemic than in any stretch since the dot-com boom, many motivated by negative savings rates. Still, less than 18% of Germans hold shares, equity funds, or exchange-traded funds. In the U.S., 53% of families hold stocks directly or indirectly.
The portfolio rebalancing into riskier assets is one of the sought-after effects central banks hope for with low/negative interest rate policy, however, punishing savers and forcing individuals to take more risk than is appropriate for them (especially as they near retirement) generally doesn’t end well.
Fiscal Policy
EU Debt: EU Members Shunning Offer of Cheap Loans With Strings Attached - BBG
Out of the 14 EU members that have submitted fiscal spending plans so far, only four include requests to make use of the loans available through the so-called Recovery and Resilience Facility (RRF). Around half of the 800 billion-euros RRF package consists of subsidized loans, which will involve the European Commission raising debt in capital markets to finance lending to member states.
The favorable level most EU countries are receiving in capital markets currently are disincentivizing members from using the RRF, which has more stringent terms. This may slow the EU’s first meaningful entry into bond markets which is meant to boost integration in the region and promote a stronger international role for the common currency.
Commodity Cycle
Iron Ore: Record iron ore receipts lift Australian export revenue - Argus
Combined export receipts from iron ore, LNG thermal, and coking coal rose to a record high of A$22.7bn ($17.5bn) in March.
More than half of Australia’s metal and energy exports went to China, showing that although relations are at lows, China’s need for commodities outweighs geopolitical posturing.
Logistical Bottlenecks
Transitory? Maersk boss warns over global supply chain and freight rates – FT
Global supply chains will remain unreliable and container shipping prices and profits high for the rest of the year, according to the chief executive of AP Moller-Maersk. “The supply and demand balance is out of the normal range. Because of all the delays around the world, basically, every ship is deployed. So if demand goes up, there are no more ships to bring in”, CEO Skou said.
Logistical service providers across the board have consistently said expectations are for continued supply-chain disruptions and increased costs to their customers in recent earnings calls and other statements. Clearly, this continued inflationary pressure (alongside other pressures) will put global central banks in a tougher situation to remain accommodative.
China Macroprudential Policy
Derivatives: Major Chinese State Firms Told to Keep a Closer Eye on Their Derivative Trading – Caixin
The State Council’s SOE Assets Supervision Commission said Friday that some of the SOEs had not performed thorough enough examinations before approving the financial derivatives trading activities of their subsidiaries. This lax oversight left these companies in violation of rules released last year and the SOEs have to conduct a self-inspection and bar ineligible subsidiaries from trading in the financial instruments.
The primary concern over China’s financial stability often focuses on the wealth management product (WMP) area, where high levels of leverage and asset-liability duration mismatch raise red flags, however, as history has shown recent financial crises all had some derivative component to exacerbate the problem so the regulation of this activity warrants attention.
Defining National Security Assets in a Dual Use Environment
Battery Materials: IEA Says Governments Should Consider Stockpiling Battery Metals - BBG
Unlike oil, a relatively ubiquitous commodity, production, and processing of minerals such as lithium, cobalt and some rare earth elements are highly concentrated, with the top three producers accounting for more than 75% of global supply. Stockpiling programs could provide a valuable buffer as leading industrial nations look to develop reliable supplies of metals and minerals that will play a critical role in a decarbonizing world, the IEA said in a report on Wednesday.
Also tying into our “electrification” theme the real scramble will be for securing supplies of key minerals that allow the ongoing transition away from fossil fuels and modernization of all things. This makes resource security a high priority for every government and explains China’s continual endeavors in Africa and other BRI recipient nations.
European Semiconductors: EU’s Breton Says Time to Fix ‘Naive’ Approach to Chip Supply – BBG
The European Commission laid out plans Wednesday to diversify supply chains and carry out regular sector reviews to tackle its lack of industrial independence in strategic areas including semiconductors. The EU’s response would focus on clawing back design and production of semiconductors that power data processing, communication, infrastructure, and artificial intelligence.
Domestic reshoring of key production and securing supply chains is happening, albeit at a slow pace due to the size of the problem and the need for private-public cooperation. This will create redundancy in global production capacity and initial FAI cost pressures.
Unipolar to Multipolar World
U.S. and Russia Relations: Biden Says He Expects to Meet Putin During June Europe Trip - BBG
The Biden administration has imposed additional sanctions on Russia in retaliation for the SolarWinds Corp. hack and the treatment of dissident Alexey Navalny. But Biden has said that while the U.S. and Russia have their differences, he wants to work with Moscow on a range of issues, including nuclear arms reduction and climate change.
U.S. and Russian relations will have growing importance to counter the rise of China but currently, Secretary of State Blinken used his G-7 sideline chats to pressure Berlin again to halt the Nord Stream II gas pipeline project from Russia into Germany before he travels on to Ukraine amid tensions over Moscow’s recent buildup of troops (the largest troop movement since WW2) on the border.
Africa: US welcomes China’s peacekeepers in Africa but wary of Beijing’s military inroads – SCMP
Analysts say that while the US has always welcomed China’s support for UN peacekeeping operations and anti-piracy efforts in Africa, it is concerned China plans to expand its rights to set up bases, using them to extend its military reach and grow arms sales to African countries.
The importance of Africa is only going to grow in the 21st century and the ability to secure resources or influence political outcomes on the continent will continue to prompt U.S. and Chinese to have a growing physical presence.
Propaganda: US-China infowar escalates as America deploys task force in battle for power and influence- SCMP
An information war over the Indo-Pacific region is expected to intensify with the US military’s decision to set up a task force aimed at stifling China’s influence and information operations. Military and security analysts said the creation of the task force meant the United States was integrating military and non-military instruments of warfare to counter China.
Joan of Arc famously said “all battles are first won or lost in the mind.” and clearly propaganda and deliberate spreading of miss-information has always been an important tool in effecting political outcomes so it is not surprising the U.S. is countering China’s considerable efforts with their own in the region.
Thank you for reading - Mike