Markets see the Fed’s new dot-plot as a hawkish shift

The Daily Shot: 17-Jun-21
The United States
Canada
The United Kingdom
The Eurozone
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Commodities
Energy
Equities
Food for Thought



 

The United States

1. Faced with an economy that’s expanding faster than projected and a rapidly tightening labor force, many FOMC members pulled forward their forecasts for rate hikes. The dot plot now shows two rate hikes in 2023, with a few more Committee members forecasting hikes next year.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Some analysts expect the FOMC to keep shifting the dots higher as the labor market heals. Evercore ISI expects to see four hikes by the end of 2023.
 
Source: Evercore ISI  
 
Fed officials boosted GDP and inflation projections for this year, but the theme of “transient inflation” remains in place. PCE inflation forecasts for 2022 and 2023 were mostly unchanged since March.
 

 
The Fed also made some technical adjustments to help its policy implementation (more on this tomorrow).

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2. The markets were surprised by the dot-plot change, seeing it as a hawkish shift. Treasury yields jumped, with the five-year note selling off sharply (the belly of the curve was hit the hardest). By the way, bond yields around the world also jumped in response to the Fed’s projections.
 

 
Source: MUFG, @johnauthers, @bopinion   Read full article  
 
Here is the change in the yield curve.
 

 
The market-based probability of a rate hike next year is back above 90%.
 

 
Inflation expectations dropped (the market expects the Fed to be a bit more aggressive).
 

 
And real yields surged (inflation-linked Treasury yields).
 

 
The dollar jumped, …
 

 
… while gold and emerging market stocks sold off.
 

 

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2. Next, we have some updates on the housing market.
 
The May residential construction report was a bit disappointing, with building permits turning lower.
 

 
Here is where we stand relative to the post-2008 recovery.
 
Source: Mizuho Securities USA  
 
Homebuilders are having trouble keeping up. Here is the number of units approved but not started.
 
Source: @axios   Read full article  
 
This chart shows housing starts for single- and multi-family units.
 
Source: Mizuho Securities USA  
 
Mortgage applications are roughly at 2019 levels for this time of the year.
 

 
Below are some sub-market mortgage activity trends (for home purchase).
 
Source: AEI Housing Center  
 
Home improvement demand remains elevated.
 
Source: S&P Global Market Intelligence  

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3. Import price gains have been accelerating.
 

 
The US dollar weakness has been a key driver of rising import prices.
 

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4. CEO hiring plans are hitting multi-year highs.
 
Source: @axios  
 
5. The ratio of GDP to payrolls points to strong gains in productivity since the start of the pandemic.
 
Source: Evercore ISI  


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Canada

1. The May inflation report was a bit stronger than expected.
 

 
However, prices are mostly returning to their pre-COVID trend.
 

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2. Bond yields jumped in response to the Fed’s hawkish shift.
 

 
3. Existing home sales declined again in May.
 

 
4. Housing starts remain robust.
 

 
5. Wholesale trade held well above the pre-COVID trend in April.
 


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The United Kingdom

1. Consumer inflation surprised to the upside boosted in part by clothing prices.
 

 
The core CPI index is back on the pre-COVID trend.
 

 
Accommodation and food services businesses are reporting prices rising “more than normal.”
 
Source: Pantheon Macroeconomics  
 
The recent strength in the British pound will be a drag on inflation over the next two years.
 
Source: Pantheon Macroeconomics  

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2. The core PPI remains “well-behaved.”
 

 
3. The official home price appreciation report surprised to the downside.
 

 
4. The GDP should return to pre-COVID levels next year.
 
Source: House of Commons    Read full article  
 
5. Port activity continues to strengthen.
 
Source: huq   Read full article  
 
6. Who is still unvaccinated?
 
Source: @financialtimes   Read full article  


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The Eurozone

1. Bund yields jumped in response to the FOMC dot-plot.
 

 
The euro dipped below $1.20.
 

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2. Covered bonds have been remarkably stable
 
Source: @FitchRatings   Read full article  
 
3. How do companies view a potential Conservative-green coalition in Germany?
 
Source: Deutsche Bank Research  


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Asia – Pacific

1. Open interest and foreign investors’ positioning in Japanese government bond futures have risen over the past few weeks. 
 
Source: Morgan Stanley Research  
 
2. Singapore’s exports were weaker than expected in May.
 

 
3. New Zealand’s Q1 GDP surprised to the upside.
 

 
4. Australia’s jobs report topped economists’ forecasts.
 
Job gains:
 

 
Labor force participation:
 

 
The unemployment rate (at pre-COVID levels):
 

 
Australian bond yields climbed in response to the Fed’s hawkish shift.
 


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China

1. China’s May economic activity report was disappointing.
 
Industrial production:
 

 
Retail sales:
 

 
Fixed-asset investment:
 

 
Growth has been moderating.
 
Source: Evercore ISI  
 
Here is the Citi Economic Surprise Index.
 

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2. The renminbi is down sharply in response to the Fed.
 

 
3. Home price appreciation continues to strengthen.
 

 
4. Real estate stocks are below long-term support.
 
Source: BCA Research  
 
5. Semiconductor output hit a record high.
 
h/t @JDMayger  


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Emerging Markets

1. Brazil’s central bank hiked rates (as expected).
 

 
2. India’s unemployment rate eased.
 
Source: Statista  
 
3. EM currencies took a hit in response to the FOMC’s hawkish shift.
 


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Cryptocurrency

1. The Bitcoin hash rate – the total computational power used to secure transactions on the blockchain – has dropped to the lowest level since November. 
 
Source: Glassnode   Read full article  
 
2. Bitcoin hedging costs remain elevated, indicating that fear caused by the May sell-off has not fully dissipated. 
 
Source: Skew   Read full article  
 
3. Entities with less than one bitcoin own close to 5% of the supply distribution.
 
Source: @glassnode  
 
4. The US Congress is holding four different hearings that are directly tied to crypto this month.
 
Source: CoinDesk  
 
5. No US bitcoin ETF for now …
 
Source: Bloomberg   Read full article  


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Commodities

1. US agricultural commodities are off the highs.
 
Soybeans:
 

 
Hogs:
 

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2. Beijing continues its attempts to curtail industrial commodity prices.
 
Source: Bloomberg   Read full article  
 
Source: @WSJ   Read full article  

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3. Metals & Mining stocks have been rolling over.
 


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Energy

1. US oil inventories continue to shrink.
 
Source: Fundamental Analytics  
 
2. Gasoline demand has rebounded.
 

 
Refinery runs and utilization rates are surging.
 

 

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3. US oil production broke out of its post-pandemic range.
 

 
4. Energy shares are recovering.
 
Source: Arbor Research & Trading  
 
5. Crude oil at $100?
 
Source: Arbor Research & Trading  


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Equities

1. US stock futures and shares elsewhere are lower in response to the Fed’s hawkish shift.
 

 
2. Bank shares jumped with Treasury yields, …
 

 
… while utilities and REITs declined.
 

 

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3. What Treasury yield could cause a correction in stocks?
 
Source: @ISABELNET_SA, @BofAML  
 
4. Historically, Powell’s press conferences haven’t been good for stocks.
 
Source: Bespoke Investment Group, @johnauthers, @bopinion   Read full article  


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Food for Thought

1. Struggling US limousine businesses:
 
Source: Evercore ISI  
 
2. The Oscar bump:
 
Source: @financialtimes   Read full article  
 
3. Sports betting revenues:
 
Source: @axios   Read full article  
 
4. Paid subscription news services:
 
Source: Statista  
 
5. Baseball is back but not recovered:
 
Source: The Daily Feather  
 
6. Shopping mall traffic, 2-year changes:
 
Source: @WSJ   Read full article  
 
7. Contributions to middle-class growth:
 
Source: J.P. Morgan Asset Management  
 
8. Types of milk in US households:
 
Source: Morning Consult   Read full article  
 
9. Top 20 US baby names of 2020:
 
Source: Social Security  

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