US inflation breadth increased sharply last month

The Daily Shot: 13-May-21
The United States
The United Kingdom
The Eurozone
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Energy
Equities
Credit
Rates
Global Developments
Food for Thought



 

The United States

1. The CPI report massively overshot market expectations.
 

 
Given the base effects in the year-over-year data, …
 
Source: Mizuho Securities USA  
 
… let’s focus on the monthly changes.
 

 
The CPI surprise vs. economists’ consensus was unusually large.
 
Source: @Not_Jim_Cramer  
 
While these price gains are substantial, they are not that unusual from a historical perspective. We just haven’t seen such increases in recent years, especially in the core CPI.
 
Source: @GregDaco  
 
A spike in used car prices was a significant contributor to the core CPI jump.
 

Source: Bloomberg   Read full article  
 
In fact, it’s the COVID-sensitive components that explain most of the gains (3 charts).
 
Source: Pantheon Macroeconomics  
 
Source: Bloomberg   Read full article  
 
Source: @bespokeinvest   Read full article  
 
The “flexible” CPI, which is sensitive to demand, rose sharply. Note that the Fed tends to focus more on the sticky CPI.
 
h/t Mizuho Securities USA  
 
There are a couple of key trends suggesting that we should not dismiss this large increase just because it is concentrated in these few sectors.
 
Inflation breadth rose sharply.
 
Source: RBC Captial Markets.; @Scutty  
 
The trimmed-mean CPI had a significant increase. These indicators point to broader price gains.
 

 
However, it’s too early to say if stronger price gains will be sustained. The core CPI index is only slightly above the pre-COVID trend.
 

 
It’s important to note that the Fed’s recent targeting policy change focuses on price levels rather than the rate of inflation. And we are not at the Fed’s price targets yet, especially with respect to the core CPI.
 
Source: @M_C_Klein, @barronsonline   Read full article  
 
We will have more updates on inflation tomorrow.

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2. The market had a strong reaction to the CPI surprise. Bond yields rose around the world.
 
The 30yr Treasury yield:
 

 
The dollar:
 

 
Stocks:
 

 
VIX (implied volatility):
 

 
The probability of a rate hike next year rebounded, essentially offsetting last week’s lousy employment report.
 

 
Source: Reuters   Read full article  
 
Market-based inflation expectations continue to climb.
 

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3. The 2021 budget deficit keeps widening, with the April gap exceeding forecasts.
 

 
4. Next, we have some trends in US international trade (from the Wall Street Journal).
 
Source: @jeffsparshott  
 
Source: @jeffsparshott  

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5. The COVID situation continues to ease.
 
Source: The New York Times   Read full article  


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The United Kingdom

1. The first-quarter GDP report was lousy. While the headline GDP figure was in line with expectations, private consumption and investment tumbled.
 


 
Government spending and collapsing imports saved the day.
 

 

 
The UK’s growth has been underperforming other advanced economies.
 
Source: Pantheon Macroeconomics  
 
However, the March monthly GDP estimate painted a better picture.
 
The GDP:
 

 
Industrial production:
 

 
Services:
 

 
Construction:
 

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2. Trade with the EU is improving.
 
Source: Bloomberg   Read full article  
 
3. According to the latest RICS report, the housing market is hot.
 

 
4. Mortgage overpayments (reducing debt) suggest that households remain cautious.
 
Source: Pantheon Macroeconomics  


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The Eurozone

1. Bund yields jumped in response to the US CPI surprise.
 

 
Market-based inflation expectations continue to climb.
 

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2. Industrial production was flat in March, but we should see improvements in the months ahead.
 

 
The Eurozone continues to underperform the overall EU output.
 
Source: Eurostat   Read full article  

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3. The EC boosted its forecasts for euro-area growth.
 
Source: Bloomberg   Read full article  
 
4. There are still many items in the CPI report with falling prices.
 
Source: Oxford Economics  


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Asia – Pacific

1. Japan’s leading index improved more than expected and is now highest since 2014.
 

 
2. The Kiwi dollar tumbled 1.6% in response to the US CPI report and is now at support.
 


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China

1. We continue to see slowing credit expansion in China. Aggregate financing is now well below the 2020 levels on a year-to-date basis (2nd chart).
 

 
Money supply metrics surprised to the downside. These trends will increasingly be a drag on global commodity prices.
 

 
By the way, iron ore futures tumbled 7% from the highs.
 

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2. The Shanghai Shenzhen 300 Index is at support.
 
Source: @TheTerminal, Bloomberg Finance L.P.  


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Emerging Markets

1. India’s industrial production is now back at 2019 levels.
 

 
India’s inflation was a bit higher than expected, boosted by energy prices.
 

 
Separately, here is the COVID impact by income category.
 
Source: @financialtimes   Read full article  

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2. The Turkish lira weakened further, with USD/TRY hitting resistance.
 
Source: barchart.com  
 
3. Russia’s car sales have rebounded.
 

 
Russian exports exceeded market expectations.
 

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3. Mexico’s industrial production continues to recover.
 

 
Job creation is now back inside the pre-COVID range.
 

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4. EM manufacturing PMIs have underperformed developed markets so far this year.
 
 
Source: BCA Research  


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Cryptocurrency

1. Our friend Elon has been paying attention to this trend (#4 here).
 
Source: CNBC   Read full article  
 
That announcement put some pressure on bitcoin.
 
Source: FTX  

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2. The Ehtereum outperformance has been impressive.
 
Source: @macro_daily  
 
3. The NFT market is heating up.
 
Source: Statista  
 
Source: The News & Observer   Read full article  

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4. The crypto market has exceeded US currency in circulation.
 
Source: @WSJ   Read full article  


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Energy

1. US retail gasoline prices rose further, with significant increases in some states.
 
Source: @axios   Read full article  
 

 
Source: GasBuddy  
 
Tanker rates between the US Gulf and Europe spiked, with market participants choosing to store gasoline offshore or ship it to Europe.
 
h/t @helloimserene  
 
 
But Colonial Pipeline is restarting, …
 
Source: CNBC   Read full article  
 
… sending gasoline futures lower.
 

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2. US gasoline demand climbed last week.
 

 
3. Oil inventories have normalized.
 
Source: @WSJ   Read full article  
 
4. US Henry Hub natural gas prices are low relative to Asia and Europe. This spread will encourage more LNG exports.
 
Source: BCA Research  


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Equities

1. Wednesday’s increase in VIX was impressive (see the US section). This scatterplot shows the daily percent changes in VIX futures vs. the S&P 500 futures.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
The VIX curve inverted.
 

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2. Stock analysts tend to be too conservative early in economic cycles …
 
Source: Citi Private Bank  
 
…which is one reason why a large majority of S&P 500 companies are beating estimates.
 
Source: Citi Private Bank  

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3. Despite recent underperformance, growth stocks continue to trade at a substantial premium to value (2 charts).
 
Source: Bloomberg   Read full article  
 
Source: @ISABELNET_SA, @BofAML  

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4. Here is a look at 10-year pre-tax and after-tax annualized returns for select mutual funds.
 
Source: Jack Ablin, Cresset Wealth Advisors  


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Credit

1. Bets against investment-grade bonds are at multi-year highs.
 
Source: @markets   Read full article  
 
2. Credit investors are increasingly concerned about inflation.
 
Source: BofA Global Research  


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Rates

1. The Treasury curve steepened further after the CPI surprise.
 

 
2. A JP Morgan survey points to rising bets against Treasuries.
 
Source: JP Morgan, @themarketear  
 
3. The US Treasury’s cash balance at the Fed keeps shrinking, injecting more liquidity into money markets.
 

 
Money market rates remain near or below zero.
 

 
Demand for the Fed’s RRP offering (to place cash at the Fed) keeps rising.
 
h/t @DiMartinoBooth  


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Global Developments

1. The dollar has diverged from global manufacturing PMIs over the past year.
 
Source: Mizuho Securities USA  
 
2. Inflation is exceeding central bank midpoint targets in some countries.
 
Source: Fitch Solutions Macro Research  
 
Inflation readings have exceeded analysts’ expectations in both developed and emerging markets in recent months.
 
Source: Fitch Solutions Macro Research  
 
Fitch Solutions expects global inflation to accelerate in Q2 due to base effects and higher commodity prices.
 
Source: Fitch Solutions Macro Research  

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3. Manufacturers are passing rising raw materials costs on to their clients.
 
Source: IIF  
 
4. Global executives are increasingly upbeat.
 
Source: McKinsey   Read full article  


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Food for Thought

1. Chicken prices:
 
Source: @WSJ   Read full article  
 
2. How many houses can be built with $50k worth of lumber?
 
Source: @VisualCap   Read full article  
 
3. Concentrations in semiconductor vs. auto parts supply chains:
 
Source: Nikkei Asia   Read full article  
 
4. Gasoline taxes:
 
Source: @EIAgov   Read full article  
 
5. CEO pay:
 
Source: @WSJ   Read full article  
 
6. Retail store closures:
 
Source: Bloomberg   Read full article  
 
7. Key issues in the US:
 
Source: Reuters   Read full article  
 
8. Americans’ views on global warming:
 
Source: Gallup   Read full article  
 
9. Party identification by age:
 
Source: @PollsAndVotes, @RoperCenter  
 
10. US employment changes by city:
 
Source: Bloomberg   Read full article  
 
11. Whiskey preferences:
 
Source: Ranker  

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