MIDDAY MACRO - 7/8/2021
Daily Color on Markets, Policy, and Geo-Politics
MIDDAY MACRO - DAILY COLOR – 7/8/2021
OVERNIGHT/MORNING RECAP & MARKET ANALYSIS
Narratives/Price Action:
Equities are lower, as traders act on a more risk-off tone out of China
Treasuries are higher, but notably off highs pre-NY-open
WTI is higher, following a low overnight that was $6 below the post-OPEC highs a few days ago
Analysis:
Equity markets are lower but now rebounding as the overnight session saw key resistance levels broken while Treasuries rallied to new recent highs.
The Russell is outperforming the S&P and Nasdaq with Low Volatility, Higher Dividend Yield, and Small-Cap factors, and Real Estate, Energy, and Utilities sectors all outperforming.
S&P optionality strike levels decreased with zero gamma strike moving lower to 4289 while the call wall increased to 4400; technical levels show support at 4280 and resistance at 4305 followed by 4330.
Treasuries saw a further flattening of the curve overnight, with the 10yr yield approaching its 200 DMA at 1.21%, but currently, selling pressure has increased, causing a re-steepening of the curve.
The catalyst for today’s sell-off is a little unclear, but it coincides with the drop in the Chinese 10-yr yields that occurred overnight as changes to a more supportive policy stance there, highlighted in yesterday's note, may have hurt risk sentiment.
The S&P is bouncing off its zero-gamma level, slightly below 4300, indicating that the melt-up is still intact as a break lower (especially below 4250) will increase dealer selling and volatility (forcing deleveraging from the vol-orientated community).
Ultimately, the PBOC's more dovish rhetoric is a positive for global growth (although a lot to say here), but it is currently seen as a sign that the Chinese economy is in worse shape than thought.
The forces supporting the Treasury market are likely to continue for some time further (stopping any major sell-off), but we question the sustainability of the extreme levels we are now reaching.
Stepping back, we still see positive cross-asset correlation as problematic to risk management and, as a result, increases the probability of a sharp deterioration in markets if expectations for Fed policy change too quickly.
The June FOMC minutes continued to support our belief the Fed will be patient, reiterating “substantial further progress” has not been met yet in labor markets while inflationary pressure will subside in the second half of the year.
Fed tightening can move forward faster if a few things occur in tandem;
Supply-side disruptions notably improve, which will be evident through ISM, PMIs, NFIB, and regional Fed business surveys.
Firms do not meaningfully increase wages in the 3rd quarter, taking a more cautionary approach to the current increased demand.
The upcoming earnings season and business surveys will also shed light here.
Long-term unemployment and prime-age UR for blacks, Hispanics, and women improve significantly in the 3rd qtr.
We do not believe any of these will meaningful occur fast enough to cause policy expectations to tighten enough to “spook” markets into a meaningful correction but want to highlight the risk and above as something readers should have on their radar.
Finally, our view continues to be that the Fed is “behind the curve” due to misunderstandings on inflationary forces and labor market conditions, setting up a policy error that will need to be corrected in the second half of 2022 through a more aggressive hiking cycle (in 2023+) than expected.
Policy Talk:
June’s FOMC Minutes released yesterday shed some further light on where policymakers stand on the sequencing and timing of policy tightening. Fed officials hinted that “tapering” of the purchases might start earlier than expected, given the stronger economic outlook. However, the committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met, though participants expected progress to continue,” the minutes said. Some officials urged caution in reading too much into the current data, given potential quirks associated with the economic reopening. Information in the coming months would allow for a “better assessment of the labor market and inflation path,” the statement said.
Why it Matters: We believe the elevation in uncertainty around the economic outlook by “several participants” acknowledges concerns over the stickiness of “transitory” inflationary forces and the confusion over the labor market outlook. This is exactly what we have also recently heard from Fed officials such as Kaplan, Harker, Barkin, Bullard, Clarida, and yes even Bostic! We continue to believe that the velocity of increases in inflation will slow, although generally stay positive into year-end as the supply-side disruptions improve gradually. We also view the labor market’s uncertainty as continuing until fall when the opening of schools, end of extra federal UEBs, and further run-down in household savings allow/incentivizes labor hold-outs to reenter. As a result, we still believe that tapering will likely be announced in September and start in December or January, given the Fed will finally have the clarity (in the data) they need to decide by then.
TECHNICALS / CHARTS
FOUR KEY MACRO HOUSE CHARTS:
Growth/Value Ratio: Growth Outperforming on the Week
Chinese Iron Ore Future Price: Iron Ore Higher on the Week
5yr-30yr Treasury Spread: Curve is Flatter on the Week
EUR/JPY FX Cross: Yen Higher on the Week
HOUSE THEMES / ARTICLES
MEDIUM-TERM THEMES:
Real Supply Side Constraints:
Lead Times: Lead times at record highs and 'still accelerating': ISM – Supply Chain Dive
Lead times are at record highs and "still accelerating," Timothy R. Fiore, chair of the Institute for Supply Management's Manufacturing Business Survey Committee, said today. The lead time for production materials rose from 85 days in May to 88 days in June, which is the highest figure since ISM began collecting data in 1987. Extended lead times are particularly affecting electronic supplies, which include semiconductors.
Why it Matters:
Lengthened lead times and slowed supplier deliveries are not unique to any one industry. ISM's report assesses 18 industries, and 17 reported slower supplier deliveries in June. Fiore also emphasized that the biggest challenge is recruitment and retention of labor at manufacturers and their suppliers. But he added that many manufacturers are reluctant to raise wages in case demand subsidies in the future. Finally, Fiore commented this is a seller’s market, as supply managers will pay the price to acquire materials, “price being secondary.”
LONGER-TERM THEMES:
Electrification Policy:
Micro-Satellites: First Astranis satellite in the final phase of assembly - SpaceNews
Astranis announced that the satellite is the first in a line of “micro GEO” satellites, weighing 400 kilograms each, that will deliver 7.5 gigabits (per second) of broadband coverage globally. “That means the Astranis-PDI partnership will bring affordable broadband to that many more people.” Said John Gedmark, chief executive of Astranis.
Why it Matters:
Although a little niche for our general audience, this article highlights the race to create mega-constellation is heating up. This will eventually change how the majority of the world receives internet connectivity and further empower the “Internet of Things” trends we are already experiencing. It will also continue to move space security to the forefront of national security and open up a new theater for war.
Face-Off: Faces are the Next Target for Fraudsters - WSJ
Facial recognition for one-to-one identification has become one of the most widely used applications of artificial intelligence, allowing people to make payments via their phones, walk through passport checking systems, or verify themselves as workers. Security analysts expect to see fraudsters increasingly create “Frankenstein faces,” using AI to combine facial characteristics from different people to form a new identity to fool facial ID systems. The strategy is part of a fast-growing type of financial crime known as synthetic identity fraud, where fraudsters use an amalgamation of real and fake information to create a new identity.
Why it Matters:
The article highlights numerous cases of fraudulent activity regarding facial recognition and its evolution in recent years. This is creating an industry of security firms determined to stop this fraud and endeavors by existing big-tech. The problem goes further as deepfakes have continued to mislead people with the technology involved constantly improving. There is much to watch in this space as we increasingly rely on facial recognition to enable day-to-day activities.
Commodity Super Cycle Green.0:
Hydro 2.0: No Soil. No Growing Seasons. Just Add Water and Technology. – NYT
A new generation of hydroponic farms is coming. They create precise growing conditions using technological advances like machine-learning algorithms, data analytics, and proprietary software systems to coax customized flavors and textures from fruits and vegetables. And they can do it almost anywhere. “We’ve perfected mother nature indoors through that perfect combination of science and technology married with farming,” said Daniel Malechuk, the chief executive of Kalera, a company that sells whole lettuces, with the roots intact, in plastic clamshells for about the same price as other prewashed lettuce.
Why it Matters:
These farms arrive at a pivotal moment, as swaths of the country wither in the heat and drought of climate change, abetted in part by certain forms of agriculture. The demand for locally grown food has never been stronger, and the pandemic has shown many people that the food supply chain isn’t as resilient as they thought. However, there is resistance to this style of growing, and it is also energy-intensive. However, we believe there will eventually be a strong adoption of this form of farming in more climate-stressed regions.
ESG Monetary and Fiscal Policy Expansion:
Inflation Needed: ECB Agrees on New Inflation Goal of 2%, Will Allow Overshoot - Bloomberg
The ECB has agreed to raise their inflation goal to 2% and allow room to overshoot it when needed. The decision marks a significant change from the previous target of “below, but close to, 2%,” which some policy makers felt was too vague. The finished review also covered a wide range of other policy issues, including how to aid the fight against climate change, the interaction of fiscal and monetary policies, employment trends, and globalization.
Why it Matters:
The revamped strategy could give officials the justification for sustaining ultra-loose monetary policy for longer as they strive to reverse years of below-target inflation. However, the ECB approach will be different from the policy of average inflation targeting that the Federal Reserve announced last year after its own review, which implies an automatic overshoot after periods of weakness. We will also be watching for further clarification on policy stances regarding more ESG issues.
