Can US inflation suddenly accelerate?

The Daily Shot: 04-Dec-20
The United States
The United Kingdom
The Eurozone
Europe
Asia – Pacific
China
Emerging Markets
Commodities
Energy
Equities
Credit
Rates
Global Developments
Food for Thought



 

The United States

1. The ISM Services PMI index declined in November, but service-sector activity remains well into growth territory (PMI > 50).
 

 
Here are the components of the ISM index.
 
Source: Mizuho Securities USA  
 
Hiring has slowed.
 

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2. Next, we have some updates on inflation.
 
An increasing share of service-sector companies have been boosting prices, according to the ISM report (above).
 

 
The dollar continues to weaken, putting upward pressure on commodities and import prices. By the way, this is a positive development for domestic manufacturers who will have an easier time competing with foreign firms.
 

 
Can consumer inflation suddenly accelerate as it did in the late 1960s/early 1970s?
 
Source: BCA Research  
 
Many economists doubt that we could get a repeat of the inflation spike shown above because of the US demographics. Young people now represent a much smaller proportion of the population relative to the Boomer wave.
 
Source: @TCosterg  

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3. Bloomberg’s consumer sentiment index has not improved since the summer.
 

 
4. Initial jobless claims declined last week, but we still saw a million Americans file for unemployment benefits (assuming the government figures are correct).
 
Source: @GregDaco  
 
There is an ongoing shift into the emergency programs as regular benefits expire (3 charts).
 
Source: Goldman Sachs  
 
Source: @GregDaco  
 
Source: @GregDaco  

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5. Will the government extend these emergency programs? The new bipartisan bill contemplates adding a few months. Here is a comparison to the GOP’s bill introduced a few months back.
 
Source: @bpolitics   Read full article  
 
6. Online activity related to searching for a job has deteriorated.
 
Source: Arbor Research & Trading  
 
7. The unemployment report has been showing a spike in wages. That’s a distortion due to disproportionally high layoffs among low-wage workers, making the average salary artificially high. The employment cost index provides a more accurate picture.
 
Source: Pantheon Macroeconomics  
 
8. Eviction moratoriums have reduced US bankruptcy petitions.
 
Source: @WSJ   Read full article  
 
Also, the US household debt service ratio is at a record low. That’s due to lower interest rates and a massive cash injection from the government.
 
Source: @jsblokland  
 
By the way, mortgage rates continue to hit new lows.
 


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The United Kingdom

1. The probability of the BoE taking rates into negative territory has diminished.
 
Source: Pantheon Macroeconomics  
 
2. GBP/USD is testing resistance at $1.35.
 

 
3. How do we get from the March 2020 public-sector borrowing forecast to the one last month?
 
Source: @financialtimes   Read full article  
 
4. Business investment has declined much more than during previous downturns.
 
Source: Pantheon Macroeconomics  


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The Eurozone

1. The updated service-sector PMI data from Markit confirmed the deterioration in November. The chart below shows the divergence between manufacturing and services in the Eurozone and the UK.
 
Source: @jeffsparshott  
 
Spain:
 

 
Italy:
 

 
Here is the composite PMI at the Eurozone level.
 

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2. Retail sales accelerated in October, topping economists’ estimates.
 

 
3. Below are some updates on Germany.
 
Car production has recovered.
 
Source: Commerzbank Research  
 
Inflation-linked bond yields, a proxy for real rates, continue to fall.
 
h/t Tradeweb   
 
Here is the GDP breakdown.
 
Source: Pantheon Macroeconomics  

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4. This chart shows how the euro performed vs. other currencies over the past month.
 
Source: Gavekal   


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Europe

1. Sweden’s service sector strengthened further last month, exceeding forecasts.
 

 
2. Switzerland’s core CPI is still in negative territory – a third bout with deflation over the past decade.
 

 
3. Here are the various emergency support programs in the EU.
 
Source: ECB   Read full article  


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Asia – Pacific

1. The 10yr JGB yield adjusted for inflation is positive, which is unusual.
 
Source: BCA Research  
 
2. Asian currencies are soaring.
 
The South Korean won:
 

 
The Taiwan dollar (highest since 1997):
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
ANZ expects further upside for Asian currencies versus the dollar next year. This is mainly due to improved growth prospects, which bodes well for exports and investor risk sentiment (chart shows the dollar weakening against Asian currencies).
 
Source: ANZ Research  

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3. South Korea’s current account surplus hit a multi-year high as exports recover.
 

 
4. Here are some updates on Australia.
 
Retail sales (through October):
 

 
Mobility trends:
 
Source: Goldman Sachs  
 
The decline in emissions:
 
Source: ANZ Research  


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China

1. This chart shows Chana’s asset management industry trend.
 
Source: @WSJ   Read full article  
 
2. The China-Australia dispute created a bottleneck for ships discharging coal.
 
Source: @aaronaclark1, @TheTerminal, Bloomberg Finance L.P.  
 
3. Exports continue to grow.
 
Source: Barclays Research  
 
Source: TS Lombard  


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Emerging Markets

1. Brazil’s service sector growth slowed last month.
 

 
The Q3 GDP rebound was a bit softer than expected.
 

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2. The Colombian peso is soaring.
 

 
3. India’s service-sector growth was stable in November.
 

 
4. Thailand’s CPI continues to trend lower.
 

 
5. But inflation in the Philippines jumped last month (after the typhoons).
 

 
Credit growth in the Philippines continues to slow.
 

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6. Turkey’s inflation is accelerating after the massive currency devaluation.
 

 
7. Here are some fund flow trends.
 
Source: @RobinBrooksIIF  
 
8. This chart shows the changes in COVID-related deaths.
 
Source: TS Lombard  


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Commodities

1. Industrial commodities are flying high.
 
Iron ore:
 

 
Copper:
 

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2. Platinum is at resistance.
 
Source: barchart.com  
 
3. Here is Goldman’s estimate of CTA’s gold positioning.
 
Source: @ISABELNET_SA, @Nomura  


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Energy

1. Brent is testing $50/bbl.
 
Source: barchart.com  
 
2. The next couple of charts show cost trends for renewables.
 
Source: @MaxCRoser   Read full article  
 
Source: @bopinion   Read full article  


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Equities

1. Given the current S&P 500 valuations, what returns should we expect over the next decade?
 
Source: Jim Reid, Deutsche Bank Research  
 
2. Sentiment indicators are flashing excessive optimism.
 
Source: @sentimentrader  
 
As we saw earlier (chart), fund flows point to high levels of risk appetite.
 
Source: @ISABELNET_SA, @GoldmanSachs  

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3. Next, let’s take a look at the equal-weight S&P 500 index.
 
Relative performance over the past three months:
 

 
By the way, the above trend resulted in the “S&P 5” underperforming “S&P 495”.
 
Source: Anastasios Avgeriou, BCA Research  
 
Sector distribution of the equal-weight index:
 
Source: S&P Global Market Intelligence  
 
Equity factor “weights”:
 
Source: S&P Global Market Intelligence  

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4. Analysts expect earnings growth to accelerate next year.
 
Source: Deutsche Bank Research  
 
5. Here are a couple of revenue trends (consensus expectations).
 
Airlines:
 
Source: Yardeni Research  
 
Air freight (limited global capacity this year):
 
Source: Yardeni Research  


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Credit

1. The yield on US high-yield bonds hit a record low.
 

 
Even CCC yields are at multi-year lows.
 
Source: @lisaabramowicz1  

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2. Moody’s expects the US speculative-grade default rate to peak in Q1 next year.
 
Source: Moody’s Investors Service  
 
3. Here is an updated chart on corporate bankruptcies from S&P Global.
 
Source: S&P Global Market Intelligence  
 
4. What are the advantages for borrowers of using private credit?
 
Source: Dechert  


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Rates

1. The 10yr-2yr Treasury spread is at resistance as the curve steepens.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
2. TIPS yields (real rates) are falling again as inflation expectations climb. We see the same trend in Germany (the Eurozone section).
 

 
US real yields are some of the lowest among developed economies.
 
Source: Alpine Macro  

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3. The market is bringing forward expectations of the first Fed rate hike.
 


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Global Developments

1. The recovery in Taiwan’s export orders bodes well for global manufacturing PMIs.
 
Source: BCA Research  
 
2. This chart shows youth unemployment in advanced economies.
 
Source: @markets   Read full article  
 
3. Peak globalization?
 
Source: BCA Research  


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Food for Thought

1. US household incomes with and without government stimulus:
 
Source: @adam_tooze, @LondonReview   Read full article  
 
2. Pandemics can sometimes reduce inequality.
 
Source: Science   Read full article  
 
3. Pfizer’s vaccine is not a “one-shot” procedure.
 
Source: Statista  
 
4. Gen-Z under stress:
 
Source: APA   Read full article  
 
5. The number of storms that rapidly intensify:
 
Source: @business   Read full article  
 
6. “Did not vote” is the winner:
 
Source: @BrilliantMaps  
 
7. Gun policy outcomes:
 
Source: VOX   Read full article  
 
8. Computer programming jobs:
 
Source: @financialtimes   Read full article  
 
9. Where it is legal to own a raccoon:
 
Source: @toddrjones  

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Have a great weekend!


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