MIDDAY MACRO - DAILY COLOR – 6/8/2021
PRICE MATRIX
OVERNIGHT/MORNING RECAP & MARKET WRAP
Narratives:
Equities are mixed, with internet outages and selling at the NY-open capping gains
Treasuries higher, as what looked to be overseas buying prompted short covering in the NY AM
WTI is higher, recovering overnight losses at the NY open
Price Action:
Equities continue to generally chop sideways, with Russell and Nasdaq trending slightly higher since Sunday’s open
Russell outperforming S&P/Nasdaq
Small-Cap, Growth, and Low Volatility factors outperforming
Consumer Discretionary, Technology, and Real Estate sectors outperforming
Zero Gamma Level is 4188 while Call Wall is 4250, technical levels remain the same with support at 4205 while resistance is at 4230, 4270
Major Asian indexes are lower: Japan -0.2%. Hong Kong -0.1%. China -0.5%. India -0.1%.
European bourses are higher, at midday, London +0.3%. Paris +0.3%. Frankfurt +0.1%.
Treasuries higher with the curve flatter
5yr = 0.77%,10yr = 1.53%, 30yr = 2.22%
Foreign buying pre-open likely set off a bit of a short squeeze (as key levels in 10s and 30s broke) that has now slightly reversed.
WTI higher by 0.5% to $69.60
Copper lower by -0.75%to $4.46
Peruvian elections results are not known yet but the winner will likely be dealing with a low level of support minimizing the likelihood of extreme legislation passing.
Aggs are higher across the complex
USDA reports crop conditions below forecast
DXY higher to 90.10
Gold lower by 0.2% to $1895
Bitcoin lower by -10.5% to $36K
Econ Data:
NFIB Small Business Survey: Optimism Index stood at 99.6 in May 2021, slightly down from the previous month's five-month high and well below pre-pandemic levels. Both the net share of firms planning to increase employment and the percentage of firms with job openings they cannot fill were at record highs in May (on data back to 1973). “Owners are offering higher wages to try to remedy the labor shortage problem. Ultimately, higher labor costs are being passed on to customers in higher selling prices,” said NFIB Chief Economist Bill Dunkelberg. The net share of firms currently raising average selling prices rose to the highest level since April 1981 and, looking ahead, in the 48-year history of the survey, there have only been two months when the share of firms planning to raise prices in the next three months was higher--both of those higher readings were in the late 1970s
Why it Matters: 93% of small business owners reported finding qualified workers continues to be a problem. That is a big problem in itself, likely more than just a worker/wage mismatch stimulus check story. Post-pandemic, workers have been asked to do more with less, expanding their needed skill sets. We are now seeing that idled labor can’t simply step in at the expected higher level of productivity.
JOLTS: The number of job openings in the U.S. rose by almost 1.0 million from the previous month to a new record high of 9.286 million in April 2021, easily beating market expectations of 8.3 million. Meanwhile, the number of hires rose by 69 thousand to 6.075 million, while total separations including quits, layoffs and discharges, and other separations increased by 324 thousand to 5.760 million.
Why it Matters: The evidence continues to build that the labor market is more constrained by the hesitancy of potential workers to take up employment rather than by weakness in labor demand. Labor demand is clearly strong.
Analysis:
Equities are flat while Treasuries are trading with more of a technical feel to them verse any reflection of today's economic data.
Weaker data from Germany may have enticed foreign buying, which drove yields below recent range levels, prompting short covering from buy-side actors.
Today’s data continues to reinforce our views that inflationary pressure will be more significant and longer-lasting than policymakers expect.
Hiring intentions, trouble finding qualified workers, and raising average selling prices reported in the NFIB Small Business Survey are all at 1970’s-early 80’s levels.
There are more job openings than post-pandemic job losses, showing this is a job-seekers market, and they know it.
Global central bankers (ECB recently) continue to toe the line that this is transitory, and it is not yet time to change policy.
The risk remains that inflationary pressures and continuations of production disruptions lead to a stagflationary environment next year.
The assets that outperform in a stagflationary environment are Real Assets, Precious Metals, and TIPs.
TECHNICALS / CHARTS
FOUR KEY MACRO HOUSE CHARTS:
Growth/Value Ratio: Value Outperforming on the Week
Chinese Iron Ore Future Price: Iron Ore Higher on the Week
5yr-30yr Treasury Spread: Curve is Steeper on the Week
EUR/JPY FX Cross: Euro Lower on the Week
REITs:
The Vanguard Real Estate ETF, an ETF tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index, is breaking out higher from its tactical uptrend, signaling real assets may be beginning to further outperform as inflation concerns take center stage.
Daily RSI is currently in overbought conditions, however, the MACD gap is still widening, indicating that momentum should continue at a slower pace
Currently, the ETF is yielding 3.5%, which may be the primary driver, as investors are bidding up REITs and MLPs to grab yield.
Confirmed by the outperformance of High Dividend Yield factor YTD (18.7% $VYM vs. 14.4% SPY)
$VNQ’s YTD returns have been 23% (without dividend considerations).
There is a lot to say about commercial real estate (with the future of office life verse work from home still being uncertain), and we will not go further into that here.
It is, however, clear that there is a demand for yield, preferably from assets that can keep pace with higher inflation, which residential and housing properties traditionally have done.
HOUSE THEMES / ARTICLES
MEDIUM-TERM THEMES:
China Macroprudential and Political Tightening:
Local Land: China Moves to Take Collection of Land Sales Income Out of Local Government Hands - Caixin
All local governments will be required to transfer the power for collecting land sales revenue from their natural resources departments to tax authorities, which are chiefly overseen by the central government’s State Taxation Administration. The overhaul of land sales revenue can help the central government keep better track of the money and help stop local governments from illegally shoring up their financing vehicles with the funds.
Why it Matters:
Under the new mechanism, local governments will find it more difficult to use land transfer revenue at their own discretion and reduce land sales as a source of revenue more generally. This helps curb misconduct but also hurts debt repayment ability and the credit of LGFVs. It will ultimately add to the growing pool of NFPs that Beijing continues to grapple with. It also further centralized control in the country towards Beijing.
Govie Yields: China Bond-Selloff Fears Grow as Liquidity Begins to Tighten - BBG
The amount of cash in the banking system has been shrinking, while local government debt sales are set to double this week, hoovering up more funds. As a result, the overnight interbank interest rate jumped to 2.31% Monday, implying the most inverted funding curve since February.
Why it Matters:
More expensive short-term liquidity reduces the attractiveness of borrowing money to invest in government bonds. At the same time, municipal authorities are expected to significantly increase debt issuance. This coupled with marginal changes made by Beijing (such as new restrictions on land sales as revenue sources) continues to expand our theme that higher levels of NPLs are coming in China.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Rare Earth: U.S. targets China rare earth magnets for possible tariffs - FT
The administration will decide whether to investigate the national security implications of neodymium magnet imports under Section 232 of a 1962 trade law. “In the case of neodymium magnets, those tariffs would be directed squarely at China, which dominates their manufacture,” said Martijn Rasser, a technology expert at the Center for a New American Security in Washington. “If the tariffs are high enough, that could provide financial incentives to build up a US domestic industry.”
Why it Matters:
Washington has grown increasingly concerned about China’s dominance in rare earths. The Financial Times reported in February that China was considering limiting the export of rare earths used to produce F-35 fighter jets. The main problem will be squaring the national security needs/concerns with the negative environmental impact that mining and refining rare earth brings.
Critical Space: House bill would designate space as critical infrastructure - SpaceNews
The Space Infrastructure Act would add space systems to the 16 sectors currently classified as critical infrastructure by the Department of Homeland Security. The bill would direct the department and other agencies to develop guidance on how to protect it. Under the bill, space infrastructure would include spacecraft and launch vehicles, space-related terrestrial systems and launch infrastructure, related production facilities, and information technology systems.
Why it Matters:
Assets in space are vital to the U.S. economy and national security. This bill officially classifies space as a critical infrastructure sector and allows the defense of it. The lack of formal identification of space as critical infrastructure came up in discussions last year about Space Policy Directive 5, which established cybersecurity best practices for space systems.
Electrification Policy:
Floating Wind: Norwegians unveil new floating offshore wind technology – Splash247.com
Norwegian floating offshore wind developer Wind Catching Systems is collaborating with Aibel and the Institute for Energy Technology (IFE) to commercialize a new solution for floating offshore wind farms, which is said to cut land use by 80% and helps floaters to produce electricity at the cost of bottom-fixed solutions.
Why it Matters:
The new technology expands the areas where offshore wind turbines can be deployed. Wind Catching believes there are significant opportunities for projects in the North Sea, on the west coast of the USA, and in Asia in the coming decades. We highlight this development as just another example of the private sector innovating an existing renewable technology to make it more widely applicable.
Commodity Super Cycle Green.0:
Clean Gas: U.S. LNG rebrands with vows to be greener - Argus
New U.S. LNG project developers are pledging to build carbon capture and storage facilities to handle emissions from the energy-intensive liquefaction process for facilities proposed on the US Gulf Coast. Some are exploring the idea of requiring suppliers to certify that feedgas are "responsibly sourced" in order to control methane emissions. The climate-focused strategy comes after the EU set more ambitious goals under the Paris climate accord and has been considering a border-adjustment tax tied to carbon emissions.
Why it Matters:
The LNG export sector is keen to avoid a repeat of last year when French gas and power firm Engie ended talks on a long-term supply deal with U.S. firm NextDecade because of concerns over the emissions profile of US gas. Exporters will likely have to go even further as liquefaction accounts for less than a fifth of the carbon emissions of producing, processing, and transporting natural gas to the EU. We continue to believe that energy exports (such as LNG to the EU) are an important geopolitical tool while developing nations transition to a less fossil fuel-intensive energy portfolio and industry and the Biden administration should focus on improving “green” logistics.
Copper: Copper boom: how clean energy is driving a commodities Supercycle - FT
Governments around the world are launching huge stimulus programs focused on job creation and environmental stability, hailing the arrival of a commodities Supercycle and asking if copper is set to become the new oil, a strategically important raw material. “We see the potential for a multi-decade commodity cycle ahead driven by decarbonization of the global economy and shift to cleaner energy,” says Tal Lomnitzer, a senior fund manager at Janus Henderson. “It has more legs to it than the China boom of the early 2000s.”
Why it Matters:
This article reiterates what we have highlighted since the end of last year and why we are calling the theme Commodity Super Cycle Green.0. While there is no agreed definition of a supercycle, it has been commonly used to describe a period where commodity prices rise above their long-term trend for between 10 and 35 years. These cycles are typically triggered by a structural boost to demand that is large enough to register globally and to which supply is slow to respond. We believe we are in the early stage of one led by a global push to slowly greenify the global economy.