Midday Macro - Semi-weekly Color – 6/22/2022
Market Recap:
Price Action and Headlines:
Equities are higher, with an overnight pullback initially negating most of yesterday’s rally now reversing as Powell’s testimony and more constructive rhetoric from other Fed officials, as well as a lack of any new (negative) economic data today, helped reverse the drop and now sees equities moving meaningfully higher
Treasuries are higher, rallying overnight due to the more risk-off tone but also finding additional support from Powell and company after the NY open, with the 10yr yields now close to 3.15%
WTI is lower, but is bouncing off overnight lows, remaining volatile, now $5 off its overnight low, as worries regarding falling demand abated at the NY open while Biden increasingly zeros in on a gas tax holiday and chastising oil executives.
Narrative Analysis:
Equities have recovered overnight losses, which saw gains made in yesterday’s rally/bounce evaporate, and indexes are now pushing higher led by more defensive sectors following a more neutral tone from Powell at today's Congressional hearing and other Fed officials elsewhere. There is also a lack of new economic data today, giving pause to the “recession” narrative, which has increasingly become gospel. The real action continues to be in rates markets, with Treasuries meaningfully rallying thanks to a more risk-off tone overnight and falling energy prices generally. As we will discuss in our “Deeper Dive” section, the price of gas is increasingly driving market sentiment, and signs it may be declining have helped reduce Fed tightening fears, with policy increasingly driven by worries over “de-anchoring” consumer inflation expectations. It also looks like Russian oil is flowing just fine to places like China and India, reducing global shortage worries. Industrial metals continue to be under pressure with risk sentiment in China mixed. The agg complex is better bid, after recent declines, given Russia’s insistence on targeting Ukraine’s grain infrastructure. Finally, the dollar is lower, with the $DXY falling to 104, mainly due to the strength of the Euro.
The Nasdaq is outperforming the S&P and Russell with Low Volatility, Growth, and Value factors, and Real Estate, Health Care, and Utility sectors are outperforming on the day.
@KoyfinCharts
S&P optionality strike levels have the Zero-Gamma Level at 4103 while the Call Wall is 3810. Yesterday's rally saw traders selling calls and buying puts as the markets traded higher. Today is seeing something similar, as the negative delta level indicates. There also is still an absence of meaningful vol selling, with implied vol as seen through the VIX back at yesterday's lows despite the S&P a touch higher. However, demand for OTM puts is still muted, skewing the VIX lower. Finally, the high level in the MOVE index means there is still a great deal of rate uncertainty, making it hard for equities to rally.
@spotgamma
S&P technical levels have support at 3755, then 3705, and resistance at 3800, then 3820. There is a very organized rally underway, and this is healthy to see for bulls with basing now occurring under the 3800 resistance level, as the RSI needs to cool. The official “bear market level” is 3855 and will be the next critical area of resistance.
@AdamMancini4
Treasuries are higher, with the 10yr yield at 3.15%, lower by around 13 bps on the session, while the 5s30s curve is steeper by 4.2 bps, sitting at 1.7 bps
Deeper Dive:
It looks like D.C. has a new favorite game, bashing Chairman Powell about inflation and what the appropriate policy should be to tackle it. We will do a deeper analysis of the main takeaways from the hearings in Friday’s newsletter, incorporating what is always an even more chaotic Q&A before the House tomorrow (one of the most painful things to watch given the partisan line of questioning). However, stepping back, we are encouraged by the price action currently underway across assets, as his prepared remarks and Q&A comments were less hawkish than feared. More importantly, drops in oil and gas, which have occurred over the last few days, are helping Treasuries recover, with yields dropping notably across the curve and a relief rally in equities continuing after overnight weakness. We see the price at the pump as a critical Fed policy gauge currently, given the real reason for the 75 bps hike was the FOMC’s growing fear that inflation expectations were becoming increasingly unanchored. Research shows there is a strong relationship between gas prices and consumer inflation expectations. As a result, for better or worse, Fed policy is being increasingly driven by the price we pay at the pump. With that said, we will use today’s deeper dive to review the effects “recessions” have had on assets and why now is a little different and look at what the Fed needs to see to take comfort that their policy is working, reducing the need to restrictively tighten in 2023 and orchestrate a deeper recession.
Unfortunately, the “recession” word is pretty meaningless given the varying ways a negative growth period can materialize, how long it can last, and the overall effects it has on the consumer and financial markets. It is, however, a favorite thing for market pundits and financial media to discuss, given the drama it brings. With that said, prominent forecasters and economists continue to raise recession probabilities due to the persistent inflation pulse increasing Fed policy tightening expectations. However, and most importantly, the front-loading of rate hikes into year-end has tightened financial conditions faster than expected (after already significantly tightening throughout the year so far) and will have a greater drag on actual economic activity sooner than expected, meaning the “recession” is likely already starting and still looks likely to be shallow due to the strong structural position household, firms, and labor markets are currently in.
*New Fed research points to elevated recession risk, with one model showing a 50% probability of a large increase in the unemployment rate over the next four quarters, and a separate model shows a 67% probability of a large increase in unemployment over the next two years
*The GS Research team now sees a 30% probability of entering a recession over the next year, up from 15% previously, and a 25% conditional probability of entering a recession in the second year if one is avoided in the first. That implies a 48% cumulative probability in the next two years versus 35% previously.
Assuming the pullback in growth is shallow and short, what is the appropriate discount risk assets should reflect? This is where views vary, but it's an important question given the drawdown in asset prices that has occurred so far. According to Goldman, the median pullback in the S&P during a recession is -24%. But this time may be different as there has been a structural change in one important area that affects financial markets. The Fed’s and overall global central bank’s balance sheets are significantly larger, making historical comparisons tougher. The growth in the global monetary base and hence the overall money supply (which is ultimately fungible across borders at a price) means that although global financial conditions have tightened to pre-pandemic levels, the overall level of liquidity in the system is still significantly higher. Even with global excess liquidity dropping fast due to monetary policies changing, the amount of capital, available leverage, and hence appropriate earnings multiples for equities and spreads for credit should be higher than pre-pandemic times (all else equal).
*The current environment is being compared to the 1990 recession, which saw a -20% decline, right where we are now in the S&P’s drawdown from highs in January
*Although a month old now, Variant Perceptions’s Global Excess Liquidity measures show that global stocks will continue to be under pressure, but we question if this measure goes negative given how central banks are being more methodical with QT than raising rates
*Research done by Pictet Asset Management points out that global equities are trading cheap to where they should be given global liquidity levels
Although we believe that risk assets should reflect a more expensive historical tilt given the structural change/increase in central bank balance sheets, the point is mute until inflation pressures, and hence monetary policy can stabilize to a more neutral level. The current/increasing slowdown in demand certainly will help here, but until we have consecutive monthly decreases in actual inflationary prints and consumer expectations for future inflation stabilize/fall, the Fed will continue to support their forward guidance with actual action. However, the Fed will reduce the needed “monthly” periods of decline if other economic indicators are also cooling. Hence it is worth highlighting that although sentiment indicators, as seen through consumer confidence reports and business surveys, are dropping fast, real demand readings and labor market gauges have yet to turn lower meaningfully (but are starting to).
*Morgan Stanley summarized a list of key economic indicators the FOMC is looking at. It shows that labor and growth are still healthy, as often stated by Fed officials in speeches. This will need to change for policy tightening expectations to peak
In summary, today’s “Deeper Dive” wanted to make two main points. First, there has been a structural change in global liquidity levels, and hence the effects of a slowdown in growth should have a reduced negative effect on risk assets compared to past episodes. Since we still don’t know how deep the current slowdown will be, this is not overly helpful but something we believe is worth highlighting. This is because we continue to believe that the second half of this year will increasingly see a reduction in inflationary pressures occurring faster than expected (due to the faster-occurring slowdown than expected), and hence a more defined terminal/max level for monetary policy and financial condition tightening will materialize. Eventually, markets, which price forward, should build a more positive narrative for 2023-24 if the “recession” which was expected then moves forward to now (given our belief it will be shallow and short).
*The drawdown in bonds has been more severe than stocks, but in aggregate, the amount is historically huge, begging the question, where will this capital/leverage availability ultimately go? We believe once inflation begins to settle and policy uncertainty is reduced, it will come flooding back into both equities and bonds
Second, if inflation begins to meaningfully drop in the second half of this year, as is our view, the number of months it takes the Fed to change their now overly hawkish stance will depend not only on the rate of monthly declines in inflation readings but also be highly dependent on how labor markets and aggregate consumption is changing. Meaning it is now not just based on cost-push inflationary improvements as they have increasingly committed to lowering demand-pull pressures. The institution is clearly shaken and embarrassed that they allowed this situation to materialize due to the overly ESG tilt (we have long warned about) causing a prioritization of labor conditions over price stability in the second half of 2021. The market should see a decline in JOLTs/hiring activity and lower retail sales and housing activity reducing the ultimate level of needed tightening, and hence, a good thing. It won’t, as future earning expectations are still too high and there will be plenty of volatility around key economic data prints, but it is what is needed for the Fed to eventually declare victory, and get its policy back to a neutral level (after an overshoot), allowing markets to base and begin to build a more organic inflation-free earnings growth narrative into the second half of 2023.
Econ Data:
The Chicago Fed National Activity Index went down to an eight-month low of +0.01 in May from a +0.40 in the previous month. Production-related indicators contributed -0.01, down from +0.29 in April, while the contribution of the personal consumption and housing category fell to -0.11 from 0.10. Meanwhile, employment-related indicators contributed +0.08, down from +0.07, while the contribution of the sales, orders, and inventories category moved up to +0.05 from -0.07. The index’s three-month moving average, CFNAI-MA3, decreased to +0.27 in May from +0.39 in April.
Why it Matters: Although not new information, May’s Chicago Fed’s Activity Index summed up the cooling in the aggregate of economic data we have individually highlighted here, showing a notable cooling in two of the four categories. The biggest drop came in production and income-related economic data, which was flat on the month but fell -0.30 from a strong April reading. The drop in personal consumption and housing indicator reflected the weaker retail sales and housing starts data we saw in May. The employment-related and sales and inventories indicators rose on the month, buffering drops in the prior two. Given expectations of a further overall slowdown, the CFNAI will likely move into negative territory over the coming months. For those wishing to see further details, the total list of economic indicators captured is here.
*Big drops in “Production and Income” and to a lesser extent “Personal Consumption and Housing” drove the overall index to an eight-month low
Existing home sales declined by -3.4% to 5.41 million SAR in May, the fourth month of declines and the lowest since June of 2020, broadly in line with estimates.The inventory of unsold existing homes rose to 1.16 million, an increase of 12.6% or the equivalent of 2.6 months at the current monthly sales pace. The median existing-home price for all housing types was $407,600, up 14.8% from one year ago. Properties typically remained on the market for 16 days in May, down from 17 days in April and 17 days in May 2021. Eighty-eight percent of homes sold in May 2022 were on the market for less than a month.
Why it Matters: With the average commitment rate for a 30-year, conventional, fixed-rate mortgage was 5.23% in May, up from an average rate of 3% in 2021, it's not surprising to see housing sales decline for the fourth month off high levels. First-time buyers, as well as all-cash and individual investors buyers, fell marginally. "Home sales have essentially returned to the levels seen in 2019 – prior to the pandemic – after two years of gangbuster performance," said NAR Chief Economist Lawrence Yun. "Also, the market movements of single-family and condominium sales are nearly equal, possibly implying that the preference towards suburban living over city life that had been present over the past two years is fading with a return to pre-pandemic conditions," said Lawrence Yun, NAR's chief economist.
*Pandemic-induced buying is gone, and existing home sales is in line with a level last seen in 2015
*"Further sales declines should be expected in the upcoming months given housing affordability challenges from the sharp rise in mortgage rates this year," said Lawrence Yun, NAR's chief economist.
Policy Talk:
Philadelphia Fed President Patrick Harker, in an interview with Yahoo Finance on Wednesday that the central bank should get to the neutral interest rate of 2.5% "quickly," adding that "we should be above 3% by the end of the year." Harker noted that the Fed is starting to see signs of softening demand, “which is exactly what we want.” He acknowledged that the economy could see “a couple of negative quarters.” But the situation we’re in right now is “unprecedented.” As a result, he doesn't see historical comparisons given the tightness of the labor market. Harker said he was not yet ready to make a final decision between a 75 or 50 basis point hike at the next meeting, waiting on what the data will show over the next few weeks.
"75 bps rate hike helps us get to a neutral stance, but if demand softens quicker than I expect, 50 bps hike for July may be good."
"We don't want it to crash. We want to bring the economy into a safe position and in balance with supply and demand."
“We still have very tight labor markets. So the historical examples that you would rely on in this situation don't quite fit. This is unique, so I think we have to recognize that and execute policy based on what we're seeing, not based on some historical example."
"I think we've been very clear that we need to move to a restrictive stance. How we get, there is dependent on the data. So we can't be that precise, with what we're going to be doing in September or December right now. I mean, the data will dictate that."
*"We don't want it to crash. We want to bring the economy into a safe position and in balance with supply and demand." - Harker
St. Louis Fed President James Bullard gave a presentation titled “The First Steps toward Disinflation” for a second time (the first time was June 1) this last Monday, where he outlined why the current policy is appropriate and where things should go. He reviewed the current inflation levels, comparing them to the 1970s, while predicting inflation expectations may still rise due to the historical relationship they have with current inflation. Bullard said markets have priced in a lot of Fed’s tightening, and now it is up to the central bank to deliver on the guidance that drove markets to those levels. He highlighted pre-pandemic levels of growth, inflation, and yields as a good benchmark for where things should settle once the current “overshoot” of policy finishes. He does not expect the economy to enter a severe downturn, citing that the Kansas City Fed’s Labor Market Conditions Index is at strong levels not seen since the late 90s. There was little new notable information on his general views with the exception that he expressed a belief that the Fed did not have as far to go with balance sheet reduction (QT) “as it might seem.”
“U.S. labor markets remain robust, and output is expected to continue to expand through 2022, but risks remain substantial and stem from uncertainty around the Russia-Ukraine war and the possibility of a sharp slowdown in China.”
“The Fed still has to follow through to ratify the forward guidance previously given, but the effects on the economy and on inflation are already taking hold.”
*Bullard doesn’t see the pandemic as structurally altering growth, inflation, and hence Treasury yield levels
*The KC Fed’s Labor Market Condition Index is continually being cited by Fed officials and now looks to be their go-to gauge for labor markets
Governor Waller spoke last Saturday at a panel titled “Monetary Policy at a Crossroads,” hosted by the Dallas Society for Computational Economics, reviewing how the Fed found itself so far behind the curve. Waller highlighted that some of the criteria the Fed had put in place before it began scaling back its monetary stimulus were too “restrictive.” Instead of reducing monetary accommodation “later and faster,” Waller said the Fed may have been able to do so “sooner and gradually.” He believes that changes to the Fed's long-run goals did not play a part in why the FOMC waited too long. He concluded by saying the Fed has learned a valuable lesson from the whole pandemic experience.
“Through explicit language in FOMC statements, we told the public the necessary conditions that needed to be met before we would adjust these two policies.”
“…policymakers had to evaluate "substantial further progress" and "for some time." The phrases, admittedly, are not concrete in their meaning. Inflation averaging doesn't define how much above 2 percent is moderate and how long some value of elevated inflation should be tolerated. In addition, for assessing progress on the health of the labor market, different policymakers will prefer different measures that may not provide the exact same signal.
“If the data comes in as I expect, I will support a similar-sized move at our July meeting.”
“Consequently, if the state of the economy is telling you to be at neutral and you are at zero, then any Taylor rule would say the policy rate needs to rise much faster than was typically done in the past.”
*“We now have the additional insight that only experience can bring. I hope that this latest experience will help us approach the future with a more complete understanding of the policy choices and tradeoffs” - Waller
Cleveland Fed President Loretta Mester gave prepared remarks to Philadelphia Council for Business Economics on her views on the policy and economy. She highlighted that growth was expected to slow, noting that Q1GDP had turned negative from declines in net exports, government spending, and slower inventory accumulation. However, “demand momentum remained strong,” with consumers continuing to spend despite the higher prices. She recapped the well-known supply and demand imbalance caused by the pandemic, now made worse by the War in Ukraine, and the zero-Covid policy in China was keeping inflation elevated. Mester sees the labor markets as tight, with labor force participation remaining below its pre-pandemic level. She reviewed the high level of inflation and increased rises in wages, completing a general review of the well-known economic situation. Mester went on to summarize where policy is, highlighting the real Fed funds rate level was still very negative, and it would be appropriate to raise rates more based on that alone. She, however, went on to say that future policy was far from set as the FOMC “cannot make that call today because it will depend on how much demand moderates and what happens on the supply side of the economy.” She concluded her remarks by calling for caution in declaring that “inflation is on a sustainable downward path because the inflation risks are to the upside and because the longer inflation runs above our goal, the higher the risk that longer-term inflation expectations will become unanchored.”
“With demand out of balance with supply in both product and labor markets, prices and wages have moved up significantly. When costs first started to rise, firms told us they were reluctant to pass on these higher costs to customers. But as costs have continued to rise, firms have been passing higher costs on in the form of higher prices and finding little resistance.”
“Indeed, price pressures have broadened to a wide set of goods and services. One way to see this is to look at the 44 components that are used to construct the Cleveland Fed’s median CPI inflation measure. Measured year-over-year, median CPI rose at a 5.2 percent rate in April, with 64 percent of components having year-over-year inflation rates of 5 percent or more and 82 percent of components having inflation rates of 3 percent or more.”
“With both demand-side and supply-side factors contributing to high inflation, and because inflation tends to be persistent, it will likely take some time for inflation to reach our longer-run goal of 2 percent. I will be looking for compelling evidence that inflation is on a downward trajectory toward our 2 percent goal, and before I conclude that inflation has peaked, I will need to see several months of sustained downward monthly readings of inflation.”
*“This will take fortitude. There will be bumps along the road. Financial markets could remain very volatile as financial conditions tighten further; growth could slow somewhat more than expected for a couple of quarters, and the unemployment rate could temporarily move above estimates of its longer-run level.” - Mester
The San Francisco Fed released an FRBSF Letter titled “How Much Do Supply and Demand Drive Inflation?” done by their economic research group. Their research divides the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories. It reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. We highlight this research to support our own view that this is still a majority cost-push-driven inflation pulse. It also means the Fed recognizes that slowing demand through tighter policy will have only a limited effect on the current inflation situation.
“The large impact of supply factors implies that inflationary pressures will not completely subside until labor shortages, production constraints, and shipping delays are resolved. Although supply disruptions are widely expected to ease this year, this outcome is highly uncertain.”
*Supply-driven contributions to annualized monthly changes in inflation should continue to fall while demand-driven may turn negative in Q3
*“These results showing that factors other than demand account for about two-thirds of recent elevated inflation highlight some risks for the economy.” – Adam Shapiro, FRBSF Researcher
Technicals and Charts:
Four Key Macro House Charts:
Growth/Value Ratio: Growth is higher on the day and the week. Large-Cap Growth is the best performing size/factor on the day
Chinese Iron Ore Future Price: Iron Ore futures are lower on the day and on the week. Although the risk tone for markets in China is mixed, with property developers rallying, the demand/outlook for industrial metals continues to be weaker
5yr-30yr Treasury Spread: The curve is steeper on the day and the week, with the rally in Treasuries being across the curve, but obviously, the long-end is outperforming
EUR/JPY FX Cross: The Euro is higher on the day and week as the BoJ continues to remain committed to its current dovish policy path
Other Charts:
“MOVE Index aka Bond VIX is back to highs. Doesn't mean that VIX has to spike, but it does suggest it'll be tough for equities to rally.” - @spotgamma
Implied volatility for stocks and bonds is now above the level seen at the beginning of the pandemic in 2020
“Here is our DeltaTilt, which reads put delta vs. call delta. You can see that it rivals March '20 & Dec '18, and the metric should jump higher as OPEX rolls off. We generally associate this with market rallies.” - @spotgamma
One-month realized correlation among S&P 500 stocks is rising again as there are few places to hide but will this also support a relief rally as more stocks/sectors participate?
Speaking of few places to hide, the historical rise in yields and sell-off in equities throughout the second quarter led to one of the worst performances of the 60/40 portfolio many use for their retirement accounts.
Despite negative returns, equity fund flows for the year remain positive, showing no market capitulation, with ETF net flows continuing to grow on the year, an almost shadow dip-buying now occurring
Turning to the economy, the re-opening excitement to go out and do things is starting to fade due to the increased costs, with Memorial Day likely being the peak in travel and leisure demand for some time, in our opinion.
In the first full week of June, the amount of gasoline sold at U.S. stations was down -8.2% from a year earlier, the 14th consecutive down week, according to surveys by energy-data provider OPIS. However, until recently, the higher prices were not heavily weighing miles driven.
Bloomberg columnist Joe Weisenthal (@TheStalwart) points out that there continues to be a disconnect between sentiment indicators and actual activity both regarding consumers and businesses. The recent NFIB small business survey was a prime example, with both hiring intentions and plans to raise prices rising while overall optimism and expected future sales fell.
Article by Macro Themes:
Medium-term Themes:
Real Supply-Side Situation:
Structural Change: Retailers’ Inventories Pile Up as Lead Times Grow - WSJ
One culprit for the inventory piling up at many retailers is long lead times that are getting even longer. Production cycles, typically the time it takes to design products such as apparel and footwear and have them hit shelves, are stretching to over a year, up from about eight months before the pandemic, according to industry executives and analysts. As a result, consumers' recent shift in buying habits occurred faster than retailers could adapt. Shoppers started snapping dressier garments and spending more on travel and dining out instead of the casual clothes and home items they bought earlier in the pandemic. “The longer the lead time, the less accurate you are going to be,” said Lena Phoenix, president of Xero Shoes, which sells sandals, shoes, and boots on its website and through other retailers.
Why it Matters:
While some companies say they are looking at moving production to the Western Hemisphere, they are finding it hard to break up with their Asian factories. Central American production costs are higher than in Asia, where decades of experience in garment and other types of production remain a huge draw. However, those with manufacturing operations closer to end sales have been able to keep up with consumer changes better. Lee and Wrangler jeans parent Kontoor Brands was able to react faster to demand swings because it produces one-third of its goods in the Western Hemisphere, mainly Mexico, where lead times are about half those in Asia.
Longer-term Themes:
National Security Assets in a Multipolar World:
Still Flowing: Western Move to Choke Russia’s Oil Exports Boomerangs, for Now - NYT
China and India, the world’s most populous countries, have swooped in to buy roughly the same volume of Russian oil that would have gone to the West. Oil prices are so high that Russia is making even more money now from sales than it did before the war began four months ago. It remains unclear whether Asia will buy all the Russian oil once destined for Europe, as the European Union works to wean itself from dependence on the Kremlin’s energy exports. But for now, the shift has enabled Moscow to maintain oil production levels and confound expectations that its output would plunge.
Why it Matters:
Whether Mr. Putin will now feel financially emboldened to prosecute the war indefinitely is an open question. China’s purchases, in particular, have underscored the support Mr. Putin enjoys from his Chinese counterpart, Xi Jinping, who has pledged to deepen cooperation with Moscow, whatever his qualms about the war in Ukraine. The combination of discounted Russian crude and higher prices at the pump also means that Indian refiners are profiting doubly, according to analysts. Some of the oil products exported by India have been shipped to the United States, Britain, France, and Italy, according to the Finnish-based Center for Research on Energy and Clean Air.
Dual Circulation: U.S. Sanctions Help China Supercharge Its Chipmaking Industry - Bloomberg
Nineteen of the world’s 20 fastest-growing chip industry firms over the past four quarters, on average, hail from China, according to data compiled by Bloomberg. That compared with just eight at the same point last year. Those China-based suppliers of design software, processors, and gear vital to chipmaking are expanding revenue at several times the likes of global leaders Taiwan Semiconductor Manufacturing Co. or ASML Holding NV. Total sales from Chinese-based chipmakers and designers jumped 18% in 2021 to a record of more than 1 trillion yuan ($150 billion), according to the China Semiconductor Industry Association.
Why it Matters:
That supercharged growth underscores how tensions between Washington and Beijing are transforming the global $550 billion semiconductor industry. Beijing is expected to orchestrate billions of dollars of investment in the sector under ambitious programs such as its “Little Giants” blueprint to endorse and bankroll national tech champions and encourage “buy China” tactics to sidestep U.S. sanctions. “America is on the verge of losing the chip competition,” international relations scholar Graham Allison and former Google chief Eric Schmidt warned in a Wall Street Journal column. “If Beijing develops durable advantages across the semiconductor supply chain, it would generate breakthroughs in foundational technologies that the U.S. cannot match.”
Falling Leverage: Nearly One in Four European Firms Consider Shifting Out of China - Bloomberg
Nearly one in four European companies in China are considering shifting their investments out of the country as the ongoing Covid outbreaks and lockdowns dim the outlook for the world’s second-largest economy, a survey showed. Some 23% of the businesses that responded to the survey are thinking of moving their current or planned investments away from China, according to a report released Monday by the European Union Chamber of Commerce in China. The number of European firms reassessing their options in China was the highest proportion in a decade in the survey and also more than double the 11% recorded in a February poll.
Why it Matters:
Of the firms considering a shift in investment, 16% said they were looking at relocating to Southeast Asia, while 18% said they were looking elsewhere in the Asia-Pacific region. Some 19% said Europe, 12% said North America, and 11% said South Asia. Stepping back, historically, China has taken a carrot and stick approach to courting multi-national firms, with cost/reliability and gaining access to domestic markets the ultimate deciders. Since zero-Covid, and even before (given the slowing in growth), not only has the reliability of business been severely hampered, but the allure of the domestic consumer has been diminished. Coupled with growing nationalism at home and generally increased prioritization of reliability over cost (with cost not as attractive due to rising wages), other parts of the world are increasingly looking like a better option.
Commodity Super Cycle Green.0:
Not Spending: Mining Firms' Cautious Spending Threatens Shift to Green Energy- WSJ
According to figures compiled by Bank of America Corp, project spending by ten large mining companies, including Rio Tinto, BHP Group, and Glencore, is expected to stay at roughly $40 billion this year. The bank's figures show that capital expenditures would be well below a 2012 peak close to $80 billion. Total global mining capital expenditures, which include smaller firms and state-owned enterprises, averaged about $100 billion annually over the past decade. Analysts at Bank of America say mining companies need to spend $160 billion yearly to accelerate the energy transition away from fossil fuels enough to limit the impact of global warming.
Why it Matters:
Metals prices are up, but mining companies aren't spending. Their restraint could keep supplies tight and magnify shortages of raw materials such as copper and zinc, which are critical for the transition from fossil fuels. Much like the oil industry, mining companies are responding to pressure from investors to give priority to dividends and share buybacks, rather than heavy spending. A recent push to limit the sector’s environmental damage also pinched spending. Environmental concerns are stalling many projects that are supported by governments. Serbia earlier this year revoked Rio Tinto’s licenses tied to a roughly $2 billion lithium investment after protests about possible environmental damage. Materials startups in the U.S., from North Carolina to Minnesota, are struggling to receive the necessary permits and backing to move projects forward.
ESG Monetary and Fiscal Policy Expansion:
Not so E: Biden to Call for Three-Month Federal Gasoline Tax Suspension – WSJ
President Biden is planning to call for a three-month suspension of the federal gasoline and diesel taxes, according to senior administration officials. A suspension of the 18.4-cents-a-gallon federal gasoline tax and 24.4-cents-a-gallon diesel tax through September would require congressional approval, so a move by Mr. Biden to throw his support behind the effort would be largely symbolic. Lawmakers of both parties have expressed resistance to suspending the gas tax, a move that would likely need bipartisan support to become law.
Why it Matters:
Mr. Biden, who has said inflation is his top economic priority, has taken several steps in recent months to address high gas prices, with limited success. The administration tapped oil supplies from the Strategic Petroleum Reserve, and the Environmental Protection Agency issued an emergency waiver in April allowing gas stations to sell high ethanol content gasoline this summer, despite environmental concerns. Last week Mr. Biden urged U.S. oil refiners to expand capacity and accused the companies of profiteering as the public pays record prices at the pump.
Current Macro Theme Summaries:
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