MIDDAY MACRO - 7/14/2021
Daily Color on Markets, Policy, and Geo-Politics
MIDDAY MACRO - DAILY COLOR – 7/14/2021
OVERNIGHT/MORNING RECAP & MARKET ANALYSIS
Narratives/Price Action:
Equities are mixed, with the Nasdaq again leading the way at the open but all indexes now under pressure
Treasuries are higher, with the long-end recovering most of yesterdays sell-off
WTI is lower, as selling increased post inventory numbers
Analysis:
Large-Cap growth is again outperforming, however overnight and morning strength has reversed with energy and financial sectors the hardest hit. Treasuries have retraced much of their post 30yr auction sell-off, showing buyers are waiting to pick up any dips.
The Nasdaq is outperforming the S&P and Russell with Low Volatility and Growth factors, and Utilities, Real Estate, and Consumer Staple sectors all outperforming.
S&P optionality strike levels increased with the zero gamma strike level moving higher to 4356 while the call wall remains at 4400; technical levels show support at 4350 and resistance at 4400.
Treasuries have shrugged off the higher CPI and PPI data as well as the new supply, with yields falling and the curve flattening again.
Powell’s opening testimony before Congress today (covered further below) maintained a more patient and dovish tone, even as both CPI and PPI month-on-month increases surprised to the upside this week.
The outperformance of large-cap growth and the flattening of the Treasury curve all picked up pace following the June FOMC meeting, as markets gravitated to a lower growth outlook.
The lower growth outlook was based on worries the Fed would tighten faster due to increased inflationary pressures, supply-side disruption would be more persistent, the Delta variant was worse than expected, and the geopolitical backdrop was worsening.
The Fed will now use the market's reduced growth expectations as an additional reason to stay patient as market-implied future inflation expectations are now trending lower, something that holds more weight than current actual inflation metrics.
The real problem for future growth is more structural and comes down to weaker demographics and lower labor availability.
As highlighted in yesterday's NFIB Small Business Survey, finding and retaining qualified available workers is increasingly becoming the primary concern for businesses.
The available pool of workers is shrinking, making the Fed’s goal of returning to a pre-pandemic employment-to-population ratio (EPOP) highly unlikely.
Decreases in foreign workers and immigrants, increased retirements, lower college recruitment, increases in the gig economy, and a general “new reality” outlook by many (as in I don’t have to have a salary to live) have all reduced the available pool of full-time workers.
As a result, the increased emphasis on supporting labor by the Fed increases the risk of a policy error (staying too accommodative) if they don’t correctly understand the structural changes occurring.
Econ Data:
The Producer Price Index increased 1% in June. Final demand for services rose 0.8% MoM while final demand for goods increased 1.2% MoM. Energy and foods rose 2.1% and 0.8%, respectively. Gasoline prices, meats, electric power, processed poultry, and motor vehicles all moved higher. Increases in services can be largely attributed to automobiles and automobile parts rising 10.5% on the month. Processed goods are now higher by 22.6% on the year, the largest increase since February 1975.
Why it Matters: As with yesterday’s CPI, there are no signs of slowing in the month-on-month increase in PPI. The spread between PPI and CPI also widened after falling last month. This means input costs will continue to put pressure on final customer prices, and the rise in CPI will not be able to slow until we see monthly PPI increases abate.
Policy Talk:
Although more information will come out in today’s Q&A, Chairman Powell’s opening testimony in his Semiannual Monetary Policy Report to Congress reinforced our view the Fed has not brought forward their tightening timeframe/sequencing. Powell noted that “conditions in the labor market have continued to improve, but there is still a long way to go.” He expands on this by stating; “the pandemic-induced declines in employment last year were largest for workers with lower wages and for African Americans and Hispanics. Despite substantial improvements for all racial and ethnic groups, the hardest-hit groups still have the most ground left to regain.” He again deflates the risk of runaway inflation, focusing instead on expectations still being contained. “Measures of longer-term inflation expectations have moved up from their pandemic lows and are in a range that is broadly consistent with the FOMC's longer-run inflation goal.”
Why it Matters: At the risk of sounding like a broken record, the Fed’s focus has changed, as made apparent by changes to the Statement of Longer-Run Goals last year. Price stability is now secondary to the promotion of a more equitable economy/recovery. This has changed the Fed’s reaction function as higher inflation levels will be tolerated for longer if the current policy stance is deemed supportive of increasing the EPOP and promoting greater labor market inclusivity.
TECHNICALS / CHARTS
FOUR KEY MACRO HOUSE CHARTS:
Growth/Value Ratio: Growth is outperforming on the week as CPI/PPI data continue to dampen the growth outlook.
Chinese Iron Ore Future Price: Iron ore is higher on the week, as China's Demand holds up.
5yr-30yr Treasury Spread: Curve is little changed on the week, as even with increased volatility, Treasuries stay range-bound.
EUR/JPY FX Cross: Yen is higher on the week, indicating a more risk-off tone
HOUSE THEMES / ARTICLES
MEDIUM-TERM THEMES:
Real Supply Side Constraints:
Storage Wars: Warehouse rents climb in Q2 as e-commerce drives demand: Cushman & Wakefield – Supply Chain Dive
Demand for industrial real estate continues to outpace supply, with U.S. vacancy rates hitting a record low of 4.5% in Q2. Rental rates are climbing alongside Demand throughout the U.S. The asking rent for industrial space increased 6.8% YoY, driven by Class A space around major cities and ports.
Why it Matters:
E-commerce represented 25% of logistics real estate giant Prologis' new lease signings in Q1. A recent CBRE report said the U.S. must add 330 million square feet of e-commerce warehouse space by 2025 to keep pace with industry growth. "We are really not seeing an end in sight for that rental rate growth," said Carolyn Salzer, Cushman & Wakefield's head of logistics and industrial research for the Americas. "It's really picked up."
Boom and Bust: Cosco, ONE, Yang Ming, and Maersk all tipped to order in next great wave of boxship expansion – Splash247
More than 300 boxships were ordered in the first half of the year, according to data from Alphaliner. Combined with a healthy number of newbuilding contracts signed in late 2020, the overall order book to fleet ratio has more than doubled from 9.4% a year ago to 19.9% at the end of H1. Containership newbuild prices have increased 15% so far this year.
Why it Matters:
Although we have highlighted it before, containership orders continue to increase. This is adding to inflationary pressures and will not alleviate the supply shortage for some time (given the time it takes to build the ships). Unlike other industries that have been more CAPEX disciplined, the shipping industry risks having too much capacity in a year or two. This will be occurring as global trade may be peaking due to U.S. and China decoupling and regionalization more generally.
China Macroprudential and Political Tightening:
Dog in the Fight: Obscure Cyber Agency Becomes Nemesis of China's Tech Giants – Bloomberg
The Cyberspace Administration of China has burst into prominence over the past two weeks, doing what powerful financial regulators could not by extending its oversight to overseas initial public offerings, all with the backing of the governing State Council. Under new rules unveiled this month, any company that wants to go public abroad will need to seek CAC approval if they have more than 1 million users. No agency held such explicit gatekeeper powers in the past.
Why it Matters:
Xi’s efforts to remove Chinese firms from overseas capital markets highlight a few important things. First, Beijing continues to see the tech princelings and their products as a threat to the CCP’s ever-growing surveillance and authoritarian state. Second, it highlights his desire to grow China’s domestic capital market on the mainland and in Hong Kong. Finally, it highlights the importance of critical technologies (AI, facial recognition, data compression..) in Xi’s long-term goals for “Dual-Circulation.”
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Never Enough: China’s chip imports soar in June as manufacturers build up supply amid global shortage – SCMP
China imported 51.9 billion semiconductor devices in June, the third-biggest volume in a single month after a record high in March and another strong period in April this year. Chips remain the largest product category imported by China. The country spent a total of US$38 billion on semiconductor imports in June, almost double the cost of its crude oil shipments in the same month.
Why it Matters:
Investors from China’s public and private sectors have been pouring more money into the country’s semiconductor industry, about 40 billion yuan (US$6.2 billion) in the first five months of this year, in a bid to deliver on Beijing’s goal of self-sufficiency and meet the rapidly growing demand for advanced chips. China is still behind in developing and producing advanced chips. Still, given their level of state support (both through capital investments in FAI and increasing skilled labor as well as their corporate espionage programs), it is likely they will close the gap faster than expected.
Commodity Super Cycle Green.0:
Deep Deficit: OPEC+ Uncertainty, Virus Variant Worries Linger in Oil Market, IEA Says - WSJ
The IEA said that if OPEC+ cannot reach a supply agreement, the crude market faces “the prospect of a deepening supply deficit.” The IEA did not change its global oil-demand forecast for 2021 and trimmed its growth estimates for next year by 100,000 barrels a day to 3 million barrels a day. Meanwhile, the agency increased its forecast for non-OPEC supply growth this year by 60,000 barrels to 770,000 barrels a day and maintained its forecast growth of 1.6 million barrels a day for next year.
Why it Matters:
With the global oil market has now used up the supply glut it accrued at the start of the pandemic, potential inflationary pressures could damage the fragile global economic recovery, the IEA said. At the same time, the memory of last year’s oil price war—which contributed to the collapse of the crude market—remains fresh for investors, and “the possibility of a market share battle, even if remote, is hanging over markets,” the IEA’s report added. Bottom line, both supply and demand uncertainties are making forecasting particularly hard right now.
ESG Monetary and Fiscal Policy Expansion:
Drill Baby Drill!: Biden Promised To End New Drilling On Federal Land, But Approvals Are Up - NPR
The Interior Department approved about 2,500 permits to drill on public and tribal lands in the first six months of the year, according to an Associated Press analysis of government data. That includes more than 2,100 drilling approvals since Biden took office. If the recent trends continue, the Interior Department could issue close to 6,000 permits by the end of the year, an amount not seen since 2008.
Why it Matters:
The Biden Administration is forgoing a drilling ban in hopes of getting bipartisan support for its infrastructure package, which includes clean energy incentives and other measures to address global warming. Biden is also likely concerned about the political cost of a $3+ national average gasoline price. However, it will be sometime before new permits lead to greater domestic supply, which is why there has been little effect on the current price increases.
Everything is Infrastructure: Senate Democrats Agree to $3.5 Trillion Tax, Spending Plan - Bloomberg
The $3.5 trillion topline is in addition to the bipartisan infrastructure plan, which includes $579 billion. The total long-term economic agenda would top $4 trillion. Senate Finance Chairman Ron Wyden told reporters discussions are ongoing about how pieces of the agenda would be paid for, and many details will be determined later. The resolution will prohibit tax increases on people making less than $400,000 a year and on small businesses, according to a Democratic aide familiar with it.
Why it Matters:
Schumer wants to send both the bipartisan infrastructure bill and budget resolution to the floor this month, with votes on the follow-up partisan $3.5 trillion infrastructure bill enabled by the budget resolution in the fall. Negotiations on the $579 billion bipartisan bill focused on physical infrastructure made some headway. Senator Rob Portman of Ohio, the lead Republican negotiator, said: “about half” of the outstanding issues were resolved Tuesday night, but a “couple dozen” remain. It’s starting to look like we will be getting another dose of fiscal stimulus soon.
