Posted on by The Daily Shot Editor: Lev Borodovsky

The market is buying the Fed’s “transient” inflation narrative

The Daily Shot: 10-Jun-21
• The United States
• The United Kingdom
• The Eurozone
• Europe
• Japan
• China
• Emerging Markets
• Commodities
• Energy
• Equities
• Credit
• Rates
• Food for Thought

 

The United States

1. Let’s begin with some labor market and wage trends.
 
• As discussed previously, worker shortages in manufacturing are becoming acute.
 
Source: Barron’s   Read full article  
 
The hires-to-openings ratio in the sector is lower than the overall US labor force.
 

 
• Restaurants are having trouble hiring as they reopen.
 
Source: Guggenheim   
 
• This scatterplot shows the relationship between changes in job openings and sector wages.
 
Source: JP Morgan; @bcheungz  
 
• Here are the dollar amounts drawn from unemployment benefits programs (2 charts).
 
Source: Mizuho Securities USA  
 
Source: Morgan Stanley Research  
 
When will the emergency programs expire?
 
Source: Morgan Stanley Research  
 
• Labor force growth is vital for economic expansion.
 
Source: Bain & Company    Read full article  
 
But it’s expected to remain tepid.
 
Source: Bain & Company    Read full article  
 
• This chart shows the recent divergence between productivity and wages (these indices were partially distorted by disproportionally large job losses in low-wage sectors).
 
Source: Yardeni Research  
 
• Wage growth has been surprising to the upside.
 
Source: @markets   Read full article  
 
• Evercore ISI expects faster growth in compensation costs in Q2.
 
Source: Evercore ISI  
 
• Above-average wage growth can compress business margins.
 
Source: HBR   Read full article  

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2. Restaurant and auto sales have been leading the surge in retail activity.
 
Source: MarketDesk Research  
 
3. Rising prices in consumer durables and rapid home price appreciation are becoming a drag on consumer confidence.
 
Source: @HPSInsight, @CivicScience  
 
4. The market is buying the Fed’s “transient” inflation narrative. Here is the US inflation swap curve.
 

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The United Kingdom

1. Home price appreciation strengthened last month.
 

 
2. The sharp uptick in COVID cases is alarming.
 
Source: Pantheon Macroeconomics  
 
The pace of vaccinations needs to accelerate.
 
Source: Pantheon Macroeconomics  

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The Eurozone

1. Many analysts don’t expect the ECB to begin tapering until Q4 or later.
 
Source: Pantheon Macroeconomics  
 
• ING does not expect the ECB to follow the Fed’s lead in selling its corporate bond holdings. 
 
Source: ING  
 
• Here are some scenarios for today’s ECB announcement and a potential impact on the euro.
 
Source: ING  
 
2. Positive economic surprises relative to the US have benefited EUR/USD over the past year.
 
Source: Nordea Markets  
 
However, a record spread between euro-area and US core-inflation could weigh on EUR/USD.
 
Source: Nordea Markets  
 
3. Here is a comment from Danske Bank on inflation: “Although the recent recovery in inflation expectations is welcoming news for the ECB, we think the rise in core inflation observed this year will be temporary.”
 
Source: Danske Bank  
 
4. Germany’s trade surplus continues to trend lower.
 

 
5. Italy’s retail sales remain well below the pre-COVID trend.
 

 
6. Despite sharp increases in debt-to-GDP ratios, governments’ interest payments have been moving lower.
 
Source: The Economist   Read full article  

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Europe

1. Let’s begin with Sweden.
• Household consumption tumbled in April.
 

 
• Industrial orders eased.
 

 
• Private-sector output is still below pre-COVD levels.
 

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2. The EU’s labor force growth will remain negative in the decades to come.
 
Source: Bain & Company    Read full article  
 
3. This chart shows household rent burdens in select economies.
 
Source: WEF   Read full article  
 
4. European equity markets are hitting record highs.
 
Source: S&P Global Market Intelligence  

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Japan

1. Producer price gains surprised to the upside, driven by energy and industrial commodities.
 

 

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2. Gains in machine tool orders paused in May.
 

 
3. Tokyo’s office vacancy rate keeps climbing.
 

 
4. Private consumption is expected to be a drag on GDP growth again this quarter.
 
Source: Pantheon Macroeconomics  

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China

1. Land sales point to real estate investment slump.
 
Source: TS Lombard  
 
How do property developers fund themselves?
 
Source: TS Lombard  

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2. Beijing’s crackdown on tech firms had more impact on shares trading in Hong King than in the mainland.
 
Source: @WSJ   Read full article  
 
3. According to Gavekal Research, “migration is shrinking the average household size more sharply than previously estimated.”
 
Source: Gavekal Research  

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Emerging Markets

1. Let’s begin with Mexico.
 
• The markets cheered the ruling leftist coalition failing to secure two-thirds of the seats in the lower house.
 
Source: BCA Research  
 
• Core inflation surprised to the upside, with price gains now deviating from the pre-COVID trend (2nd chart).
 

 
• A sharp increase in single Mexican men apprehended at the US border points to a deterioration in the nation’s labor market.
 
Source: CBP  

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2. Guatemala’s remittances remain at record highs for this time of the year.
 

 
3. South Africa’s business confidence is rebounding.
 

 
4. EM Asia’s inflation is on the upswing.
 
Source: MRB Partners  
 
5. Asian equity markets saw outflows in May.
 
Source: Reuters   Read full article  
 
6. This scatterplot shows the relative amounts of public and private debt vs. external/internal debt mix.
 
Source: Barclays Research  

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Commodities

1. Industrial metal prices appear to be overbought.
 
Source: MRB Partners  
 
2. Industrial metals users’ business activity accelerated in May.
 
Source: IHS Markit  
 
3. This chart illustrates the looming lithium market deficit.
 
Source: Kitco   Read full article  
 
4. Technicals don’t look great for lumber.
 

 
5. Here the price evolution of major emissions allowance markets.
 
Source: ftserussell.com   Read full article  

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Energy

1. US gasoline demand dropped sharply last week, perhaps distorted by the Memorial Day holiday.
 
Source: Princeton Energy Advisors  
 
2. Non-gasoline refined products inventories jumped.
 
Source: @bespokeinvest   Read full article  
 
3. Refinery utilization is surging.
 

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4. Global nuclear electricity generation has been steadily recovering over the past decade.
 
Source: Longview Economics  
 
Uranium mining stocks have rallied over the past year.
 
Source: Longview Economics  

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5. Here are the largest global oil & gas companies.
 
Source: Statista  

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Equities

1. Most-owned names in the S&P 500 have consistently underperformed over the past 12 months.
 
Source: @MichaelKantro  
 
2. Valuation multiples tend to contract when inflation climbs.
 
Source: @ISABELNET_SA, @BofAML  
 
3. Japanese investors have been selling US stocks.
 
Source: Masaki Kondo   Read full article  
 
4. The 15% minimum effective tax rate should not impact the market (consensus estimates are higher across the board).
 
Source: @ISABELNET_SA, @GoldmanSachs  
 
5. Growth stocks have posted strong earnings, although valuations remain high.
 
Source: TS Lombard  
 
The earnings recovery for value stocks has lagged growth over the past year (2 charts).
 
Source: TS Lombard  
 
Source: TS Lombard  

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6. The recent underperformance of growth stocks has been more pronounced among small-caps.
 
Source: FTSE Russell   
 
7. Companies with weak balance sheets continue to outperform (reflation bets).
 

 
8. Companies are increasingly citing “ESG” on earnings calls.
 
Source: @FactSet  
 
9. According to Goldman, “small-lot trading declines prior to the peak in share price, implying that large traders drive stock price moves prior to and following the peak in the episodes we analyzed.”
 
Source: Goldman Sachs; @carlquintanilla  
 
10. Next, we have some updates on the options markets.
 
• Demand for call options accelerated in recent days, …
 

 
… sending the put-call ratio to extreme lows.
 

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• The VVIX-to-VIX ratio keeps climbing, pointing to strong demand for VIX call options.
 

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Credit

1. Muni markets continue to outperform.
 
• The muni-Treasury yield ratio:
 
Source: @markets   Read full article  
 
• HY muni yield (a new low):
 

 
• High-yield munis outperforming high-yield corporates:
 

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2. Corporate pensions are close to being fully funded. Will they roll out of risky assets into investment-grade debt to lock in their funding levels?
 
Source: Bloomberg   Read full article  
 
3. US CLO activity remains robust.
 
Source: Deutsche Bank Research  

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Rates

1. The 10yr Treasury yield is below 1.5%, …
 

 
… as the Treasury curve flattens.
 

 
Is all the “good news” about the US economy priced in?
 
Source: @oliver_brennan  

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2. Longer-dated real yields continue to move lower.
 

 
3. The decline in China’s credit impulse points to lower Treasury yields.
 
Source: Alpine Macro  

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Food for Thought

1. US population growth (3 charts):
 
Source: Brookings  
 
Source: @PollsAndVotes   Read full article  
 
Source: Moody’s Analytics  

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2. US population with a driver’s license:
 
Source: Mizuho Securities USA  
 
3. Homeownership by age:
 
Source: Deutsche Bank Research  
 
4. Why are some parents sticking with remote learning – even as schools reopen?
 
Source: The Brookings Institution   Read full article  
 
5. State-funded preschool:
 
Source: The Upshot   Read full article  
 
6. Underfunded US infrastructure:
 
Source: Oxford Economics  
 
7. US states ranked:
 
Source: YouGov   Read full article  
 
8. Falling support for holding the Summer Olympics in Japan:
 
Source: Morning Consult   Read full article  
 
9. The 1946 Italian referendum on becoming a republic vs. a monarchy:
 
Source: Wikipedia   Read full article  

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