Investors unwind reflation trades

The Daily Shot: 18-Jun-21
Rates
Credit
Equities
Commodities
Energy
Cryptocurrency
Emerging Markets
China
Asia – Pacific
The Eurozone
Europe
The United States
Food for Thought



 

Rates

1. Investors’ response to the Fed’s hawkish dot-plot was to unwind some of the reflation trades, which have become crowded recently. In the equity markets, inflation-sensitive shares took a hit (2 charts).
 

 

 
In the rates markets, the curve steepener bets got unwound. Longer-dated Treasuries rallied.
 

 

 
The curve flattened.
 

 

 
The belly of the curve underperformed sharply (due to expectations of faster rate hikes). Here is the 2-5-10 butterfly.
 

 
The long-bond outperformed the 10yr note.
 

 
The iShares 20+yr Treasury Bond ETF saw substantial inflows.
 
Source: @kgreifeld  

——————–

 
2. Breakeven inflation expectations appear to have peaked.
 

 
Source: Gavekal Research  

——————–

 
3. The Fed decided to tweak some technical aspects of its rate policy. While these adjustments are small, they have significant consequences for short-term rate markets.
 
Source: Bloomberg   Read full article  
 
The central bank wanted to push the fed funds rate closer to the middle of the range.
 

 
The Fed boosted the rate paid on excess reserves (2 charts).
 

 
Source: Oxford Economics  
 
The Fed also raised the rate on the RRP facility by five basis points.
 

 
While that doesn’t seem like much, in a world awash with liquidity, a riskless five basis points on overnight deposits at the Fed has no shortage of takers. Money market funds and banks immediately dropped an additional $235 billion into the facility. This will drain some liquidity from money markets, offsetting QE and the Treasury’s withdrawals (more on the topic here).
 

 
Short-term rates jumped in response to the Fed’s “tweak.”
 
Overnight GC repo rate (private markets):
 

 
1-month T-Bill yield:
 

——————–

 
4. Bank holdings of Treasuries and non-MBS agency securities seem to track deposit growth with a 12-week lag, according to Deutsche Bank.
 
Source: Deutsche Bank Research  
 
Typically, bank demand has been focused on the 5-year sector.
 
Source: Deutsche Bank Research  


Back to Index

 

Credit

1. The correlation between CCC and BBB-rated US corporate bond spreads has dropped in recent months, which typically precedes periods of credit stress.
 
Source: Arbor Research & Trading  
 
The correlation among high-yield corporate credit returns is also falling.
 
Source: Arbor Research & Trading  

——————–

 
2. Sub-investment-grade yields adjusted for inflation (using the current CPI) are now negative.
 
Source: @johnauthers, @bopinion   Read full article  
 
3. US CLO issuance is expected to hit a multi-year high in 2021
 
Source: Deutsche Bank Research  


Back to Index

 

Equities

1. The reflation trade unwind drove sector rotations on Thursday.
 
Industrials:
 

 
Transportation:
 

 
Metals & Mining:
 

 
Energy:
 

 
By the way, analysts see more upside for energy shares.
 
Source: MRB Partners  
 
Banks:
 

 
Regional banks saw large inflows after the Fed announcement but had some outflows on Thursday.
 
h/t @kgreifeld  

——————–

 
2. Below are a couple of other sector charts.
 
Retail:
 

 
Semiconductors:
 

——————–

 
3. Here is another way to show the reflation trade unwind.
 

 
4. The mega-caps were firmly in charge on Thursday.
 
Equal-weght S&P 500:
 

 
FANG+:
 

——————–

 
5. The stock-bond correlation continues to climb.
 

 
6. Stock volatility has been subdued.
 
Source: @markets   Read full article  
 
7. Call options remain in high demand.
 


Back to Index

 

Commodities

1. The reflation trade unwind put pressure on commodity markets.
 
Copper:
 

 
By the way, copper is approaching oversold territory.
 

 
US grains:
 
h/t @dmarino4  
 
Bloomberg’s broad commodity index:
 
Source: @helloiamyvonne, @MarvinPerezmkts   Read full article  

——————–

 
2. Next, we have some updates on gold.
 
The gold/copper ratio is testing support.
 
Source: Alpine Macro  
 
The percentage of the monetary base backed by US government gold reserves has fallen to levels last seen near the end of the gold bear market in 2015-2016.
 
Source: Variant Perception  
 
Gold prices have diverged from the amount of negative-yielding debt outstanding this year.
 
Source: Variant Perception  
 
Gold tends to perform well into August and September based on seasonal patterns.
 
Source: Variant Perception  


Back to Index

 

Energy

1. Brent held resistance at $75/bbl.
 

 
2. Speculators are net-short NYMEX natural gas futures despite the latest rebound.
 
Source: Longview Economics  


Back to Index

 

Cryptocurrency

1. Bitcoin has outperformed other large cryptocurrencies month-to-date.
 
Source: FinViz  
 
2. ETH/BTC is at resistance.
 
Source: Dantes Outlook  
 
3. Past bitcoin bull market cycles have occurred alongside year-over-year increases in core CPI.
 
Source: Fundstrat   Read full article  
 
4. Bitcoin’s 90-day correlation with the S&P 500 has risen so far this year.
 
Source: Koyfin   Read full article  


Back to Index

 

Emerging Markets

1. The Turkish lira is trading near record lows.
 

 
2. The Chilean peso is under pressure due to the selloff in copper.
 

 
3. Here are some of the EM currency moves in response to the Fed’s hawkish shift.
 
Source: Capital Economics  
 
4. In the past 30 years, there has never been a rolling two-year period without a near 20% decline in EM stocks, according to Alpine Macro.
 
Source: Alpine Macro  
 
EM equity volatility is at relatively low levels as ETF flows improve.
 
Source: Alpine Macro  

——————–

 
5. The first common factor in EM inflation appears to be related to oil price swings and, to a lesser extent, agricultural prices. 
 
Source: IIF  


Back to Index

 

China

1. The recent rebound in A-share stocks has been driven by a handful of companies, evidenced by narrow breadth, which historically precedes price pullbacks (2 charts).
 
Source: BCA Research  
 
Source: BCA Research  
 
2. On a year-over-year basis, the pace of credit expansion has reached a two-year low.
 
Source: BCA Research  
 
3. USD/CNH (offshore yuan) broke above downtrend resistance (in response to the Fed).
 
Source: Longview Economics  
 
4. Energy sector CapEx has deteriorated over the past year.
 
Source: Gavekal Research  
 
5. Hong Kong’s unemployment rate is moderating.
 


Back to Index

 

Asia – Pacific

1. Aussie and Kiwi dollars are under pressure amid the reflation trade unwind.
 

 
2. Australia’s labor market underutilization hit the lowest level since 2013.
 
Source: ANZ Research  
 
3. Japan’s core CPI held steady in May.
 


Back to Index

 

The Eurozone

1. The core CPI is back at 1%, with prices following a narrow channel (2nd chart).
 

 
Energy inflation was the key driver behind the year-over-year increase in the headline CPI.
 
Source: Pantheon Macroeconomics  

——————–

 
2. Construction output dipped in April.
 

 
3. Growth in labor costs slowed sharply in Q1.
 
Source: Eurostat   Read full article  
 
4. Here is the Beveridge curve for the Eurozone and the EU.
 
Source: Eurostat   Read full article  
 
5. Will a slowdown in China weigh on European industrial activity?
 
Source: BCA Research  
 
6. Italy’s trade surplus held at multi-year highs for this time of the year.
 

 
7. The Dutch labor market continues to heal.
 


Back to Index

 

Europe

1. The EU’s new car registrations remain weak.
 

 
2. IPO activity in Germany has been heating up.
 
Source: @Swetha_Gopinath   Read full article  
 
3. This chart shows job vacancy rates across the EU.
 
Source: Eurostat   Read full article  
 
4. Foreign direct investment projects in Europe slowed last year.
 
Source: EY   Read full article  


Back to Index

 

The United States

1. The Philly Fed’s manufacturing index eased in June (roughly in line with expectations).
 

 
Supplier bottlenecks and order backlogs are easing.
 

 
Fewer factories are boosting employee hours.
 

 
But price pressures continue to build.
 

 
Manufacturers are upbeat about the future.
 
Expected shipments in six months:
 

 
CapEx expectations (labor shortages pressuring manufacturers to boost productivity):
 

——————–

 
2. The leading index rose further in May, boosted by declining unemployment claims (2nd chart).
 

 
Source: Oxford Economics  

——————–

 
3. Speaking of jobless claims, there was a setback last week, but the downtrend remains in place.
 
Source: @GregDaco  
 
Continuing claims should be dropping sharply in the months ahead (as many states cut emergency benefits), …
 
Source: Mizuho Securities USA  
 
…, which should boost payrolls. As a result, the Fed will begin to set up for QE taper.
 
Source: Goldman Sachs, h/t J B  

——————–

 
4. Consumer confidence keeps improving, …
 

 
… but the partisan gap is widening.
 
Source: @TheTerminal, Bloomberg Finance L.P.  

——————–

 
5. Small businesses are increasingly concerned about the quality and cost of labor, taxes, and inflation (2 charts).
 
Source: Morgan Stanley Research  
 
Source: Morgan Stanley Research  

——————–

 
6. The NY Fed’s national economic activity index (WEI) appears to have peaked.
 
Source: NY Fed  
 
7. Based on BofA’s card data, consumers are increasingly spending outside of home.
 
Source: BofA Global Research; @SamRo  


——————–

Back to Index

 

Food for Thought

1. Western US drought conditions (3 charts):
 
Source: NCAR  
 
Source: The New York Times   Read full article   Further reading  
 
Source: The New York Times   Read full article   Further reading  
 
Change in precipitation:
 
Source: The New York Times   Read full article  
 
Temperatures:
 
Source: WeatherBELL Analytics, @MikeZaccardi  

——————–

 
2. The carbon footprint of heating systems:
 
Source: @adam_tooze   Read full article  
 
3. US gun sales:
 
Source: @Not_Jim_Cramer  
 
4. College wage premium:
 
Source: @adam_tooze, @joshbivens_DC, @LarryMishel, @EconomicPolicy   Read full article  
 
5. Female entrepreneurs:
 
Source: Statista  
 
6. The cost of semiconductors in autos:
 
Source: Bloomberg   Read full article  
 
7. Online supermarkets:
 
Source: ecommerceDB.com¬†   Read full article  
 
8. The US cybersecurity market:
 
Source: Visual Capitalist   Read full article  
 
9. Father’s Day spending:
 
Source: Statista  
 
Father’s Day gift categories:
 
Source: Result First   Read full article  

——————–

 
Have a great weekend!


Back to Index