Posted on by The Daily Shot Editor: Lev Borodovsky

The Citi Inflation Surprise Index hit a record high in May

The Daily Shot: 02-Jun-21
• The United States
• Canada
• The United Kingdom
• The Eurozone
• Europe
• Asia – Pacific
• China
• Emerging Markets
• Commodities
• Energy
• Equities
• Credit
• Rates
• Food for Thought

 

The United States

1. The ISM Manufacturing PMI continues to show rapid expansion in US factory activity.
 

 
• US manufacturers are struggling to keep up …
 

 
… as customers’ inventories shrink.
 

 
• Factories face two headwinds.
 
– worsening supply-chain bottlenecks:
 

 
– worker shortages (creating a drag on hiring):
 
Source: MarketWatch   Read full article  
 

 
• As a result, production growth has been moderating.
 

 
• Subdued manufacturing growth in China points to downside risks for the ISM Manufacturing PMI.
 
Source: Pantheon Macroeconomics  
 
2. A similar manufacturing indicator from IHS Markit also shows tremendous growth, …
 
Source: IHS Markit  
 
… with manufacturers rapidly boosting output prices.
 

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2. Out-of-stock or discontinued items remain about 20% higher than pre-pandemic levels. This is due to many sectors experiencing shortages of materials and labor.
 
Source: III Capital Management  
 
3. Next, we have some updates on inflation.
 
• Economists were surprised by the intensity of the pandemic recovery price gains. The Citi Inflation Surprise Index hit a record high.
 

 
• The component of core PCE inflation that does not correlate with the business cycle is rising sharply.
 
Source: Alpine Macro  
 
• US inflation spiked after WW-II but subsided within a couple of years. Should we expect a similar pattern in the current cycle?
 
Source: Atlanta Fed  
 
• A majority of inflation gains in the April CPI report came from flexible prices, not sticky prices, which tend to move more slowly.
 
Source: Morgan Stanley Research  
 
• The Fed has been taking comfort in inflation expectations being “well-anchored.”
 
– Consumer inflation expectations (short-term vs. long-term):
 
Source: @WSJ   Read full article  
 
– Market-based inflation expectations (short-term vs. long-term):
 
Source: @TheTerminal, Bloomberg Finance L.P.  

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4. Small business data from Homebase point to an ongoing recovery in the labor market.
 
Source: Homebase   
 
5. High-frequency indicators continue to improve.
 
Source: Cornerstone Macro  

Back to Index

 

Canada

1. Economic activity expanded quickly in March, …
 

 
… but the GDP growth for Q1 was disappointing (vs. expectations).
 

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2. Factory activity remains robust, but Canada’s manufacturers face the same issues as US peers.
 
Source: IHS Markit  
 
3. Unlike the US, Canada did not experience a spike in mortgage delinquencies during the pandemic.
 
Source: Scotiabank Economics  
 
4. Mortgage spreads have been somewhat stable over the past year.
 
Source: Scotiabank Economics  
 
5. Home prices are still exploding relative to incomes.
 
Source: Bespoke Investments  

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The United Kingdom

1. Home prices were up over 10% in May (relative to May of 2020).
 

 
2. Business sentiment continues to rebound and is now well above pre-COVID levels.
 

 
3. Manufacturing output has almost fully recovered.
 
Source: Pantheon Macroeconomics  
 
4. Factory activity grew rapidly in May, …
 
Source: IHS Markit  
 
… and output price hikes point to a sharp rise in the PPI.
 
Source: Pantheon Macroeconomics  

——————–

 
5. Public transportation costs have risen massively over the past decade.
 
Source: Statista  

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The Eurozone

1. Manufacturing growth has been exceptional, but supply-chain bottlenecks have intensified.
 
• Spain:
 
Source: IHS Markit  
 
• Italy:
 
Source: IHS Markit  
 
• The Eurozone:
 

 
Given slower growth in China, the euro area’s factory activity expansion is about to peak.
 
Source: Pantheon Macroeconomics  

——————–

 
2. The Eurozone’s core CPI is still below 1%.
 

 
• Energy drove most of the year-over-year increases in the headline CPI.
 
Source: Pantheon Macroeconomics  
 
• Businesses expect sharp gains in output prices, which points to higher consumer inflation ahead.
 
Source: Pantheon Macroeconomics  

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3. The ECB estimates that negative rates, the central bank’s forward guidance, and QE depressed bond yields by more than 250 bps.
 
Source: @fwred  
 
4. European industrial stocks have been outperforming materials since the financial crisis low.
 
Source: BCA Research  
 
5. Greek bond spreads over Germany hit a record low.
 

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Europe

1. The Swiss economy is roaring back.
 
• Retail sales:
 

 
• Economic expectations:
 

 
• The leading index:
 

——————–

 
2. Central Europe’s factory activity is surging.
 
• Poland:
 
Source: IHS Markit  
 
• The Czech Republic:
 
Source: IHS Markit  

——————–

 
3. Norway’s unemployment rate continues to moderate.
 

 
Is USD/NOK set for another down cycle? 
 
Source: Dantes Outlook  

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4. Sweden’s wage growth has not rebounded to pre-COVID levels.
 

 
But consumer sentiment is soaring.
 

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5. This chart shows electricity prices vs. wind and solar penetration.
 
Source: J.P. Morgan Asset Management  
 
6. Equity derivatives activity (used to leverage equity positions) has been on the rise.
 
Source: ECB, Bloomberg   Read full article  

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Asia – Pacific

1. South Korea’s inflation was firmer than expected in May.
 

 
2. Australia’s first-quarter GDP growth exceeded economists’ forecasts.
 

 
3. New Zealand’s home price appreciation topped 20% in May.
 

Back to Index

 

China

1. Smaller growth stocks (ChiNext) have been outperforming large caps.
 
h/t John Liu  
 
2. Hong Kong’s retail sales remain depressed – well below forecasts.
 

Back to Index

 

Emerging Markets

1. The Turkish lira hit a record low.
 
Source: @markets   Read full article  
 
Source: barchart.com  
 
Turkey’s manufacturing activity contracted in May.
 

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2. Here are some updates on South Africa.
 
• Manufacturing PMI (stronger than expected):
 

 
• Credit growth:
 

 
• Trade surplus (well above forecasts):
 

——————–

 
3. Philippine private-sector credit continues to contract.
 

 
4. India pulled out of recession in Q1.
 

 
5. Next, we have some updates on Mexico.
 
• Economic activity (through March):
 

 
• The unemployment rate (higher than expected):
 

 
• Manufacturing activity (still in contraction territory):
 

 
• Remittances (a record high for this time of the year):
 

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6. Chile’s economic activity contracted less than expected in April.
 

 
Business confidence remains robust.
 

——————–

 
7. Colombia’s manufacturing sector is struggling.
 
Source: IHS Markit  
 
8. Here is Argentina’s consumer confidence.
 

 
9. How long will it take to return to pre-COVID GDP per capita levels?
 
Source: OECD   Read full article  

Back to Index

 

Commodities

Here is the May performance across select commodities.
 
Source: Fiona Boal, S&P Global Market Intelligence  

Back to Index

 

Energy

1. The WTI crude curve backwardation keeps increasing as US inventories tighten.
 

 
2. European coal prices have been surging.
 

Back to Index

 

Equities

1. Let’s start with the May returns across sectors and factors.
 
Source: S&P Global Market Intelligence  
 
And here is how markets performed globally.
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  

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2. Next, let’s take a look at year-to-date sector performance.
 
• Banks:
 

 
• Housing:
 

 
• REITs:
 

 
• Industrials:
 

 
• Transportation:
 

 
• Metals & Mining:
 

 
• Tech:
 

 
• Consumer discretionary:
 

 
• Consumer staples:
 

 
• Utilities:
 

 
• Healthcare:
 

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3. Stock-bond correlations remain elevated, especially for growth shares.
 

 
4. Many SPACs will be forced to buy overpriced companies before hitting their deadlines (to return cash to investors).
 
Source: @jessefelder, @WSJ   Read full article  
 
5. There are “retail favorites,” and then there are meme stocks.
 

 
Madness …
 

 
Source: @jessefelder, The Blindfolded Chimpanzee   Read full article  

Back to Index

 

Credit

High-yield munis continue to rally, …
 

 
… outperforming high-yield corporates.
 

Back to Index

 

Rates

1. Realized volatility has declined in the 10-year Treasury yield and the iShares 20+ year Treasury bond ETF (TLT) since March (2 charts).
 
Source: @TheTerminal, Bloomberg Finance L.P.; h/t Chris Murphy, Susquehanna Derivative Strategy  
 
Source: @TheTerminal, Bloomberg Finance L.P.; h/t Chris Murphy, Susquehanna Derivative Strategy  

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2. Based on current yield levels, the bond market still doesn’t expect high inflation to persist for very long. The Fed’s QE also contributes to lower yields.
 
Source: @MikaelSarwe  
 
3. The Fed now holds more Treasuries than foreign investors.
 
Source: Nordea Markets, @jessefelder  

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Back to Index

 

Food for Thought

1. Declining hunger rate in the US:
 
Source: The Economist   Read full article  
 
2. Demand for grilling products:
 
Source: Bloomberg   Read full article  
 
3. Views on business regulation:
 
Source: Pew Research Center  
 
4. The value of US rental homes:
 
Source: @WSJ   Read full article  
 
5. US solar panel imports:
 
Source: S&P Global Market Intelligence  
 
6. US motorcycle exports to the EU:
 
Source: @jeffsparshott  
 
7. AI publications (2 charts):
 
Source: Artificial Intelligence Index Report 2021  
 
Source: Artificial Intelligence Index Report 2021  

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8. World leaders with most Twitter followers:
 
Source: Statista  
 
9. Types of economics papers:
 
Source: @maximananyev  

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