Posted on by The Daily Shot Editor: Lev Borodovsky

Powell decouples taper from rate hikes

The Daily Shot: 30-Aug-21
• Administrative Update
• The United States
• The Eurozone
• Japan
• Asia – Pacific
• China
• Emerging Markets
• Cryptocurrency
• Energy
• Equities
• Rates
• Global Developments
• Food for Thought

 

Administrative Update

1. Please note that The Daily Shot will not be published on Friday, September 3rd and Monday, September 6th.
 
2. All administrative updates are posted online.

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The United States

1. Fed Chair Powell reiterated the central bank’s intention to begin tapering later this year if the economy performs as expected. However, Powell decoupled taper from rate hikes.

The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.

Source: CNBC   Read full article  
 
• Risk assets surged.
 
– Stocks:
 

 
– Copper:
 

 
– EM Currencies:
 

 
• The dollar and Treasury yields slumped.
 

 

 
• Gold shot up 1.4%.
 

 
• Inflation expectations moved higher (the market expects the Fed to let inflation “overshoot”).
 

 
• The market is pricing in the first full 25 bps hike by February of 2023.
 

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2. Last month’s consumer spending was a bit below consensus, …
 

 
… pulled down by weaker automobile purchases.
 
Source: Reuters   Read full article  
 

 
By the way, this slowdown is visible in the Evercore ISI auto dealers’ survey.
 
Source: Evercore ISI  
 
• Here is the breakdown by sector.
 
Source: @GregDaco  
 
• Spending remains above the pre-COVID trend.
 

 
But inflation-adjusted consumption has returned to trend.
 
Source: Mizuho Securities USA  
 
• Goods spending is declining while services expenditures are gradually recovering.
 
Source: Mizuho Securities USA  
 
Durable goods spending has been slowing, with household durables shares underperforming recently.
 
Source: Cornerstone Macro  
 
• Softer spending …
 
Source: Pantheon Macroeconomics  
 
… will result in GDP growth downgrades. Here is the Atlanta Fed’s GDP Now model.
 
Source: @AtlantaFed   Read full article  

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3. Personal income topped forecasts, running slightly above trend.
 

 
Source: Mizuho Securities USA  
 
Excluding transfers (government payments), personal income has just returned to pre-COVID levels.
 
Source: @GregDaco  

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4. The personal savings rate is normalizing.
 
Source: MarketDesk Research  
 
5. The PCE inflation grew at a slower rate last month.
 

 

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6. The updated U. Michigan consumer sentiment figures were even weaker than the earlier report.
 

 
7. Next, we have some high-frequency trends.
 
• COVID cases:
 

 
• The Evercore ISI restaurants survey:
 
Source: Evercore ISI  
 
• Air travel:
 
Source: Scotiabank Economics  
 
• Mobility trends:
 
Source: Scotiabank Economics  
 
• Public transport usage:
 
Source: Scotiabank Economics  

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The Eurozone

1. French consumer confidence declined again.
 

 
2. Italian consumer and manufacturing confidence indicators appear to have peaked.
 

 

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3. German import prices are surging.
 

 
Separately, SPD continues to climb in the polls.
 
Source: Reuters   Read full article  
 
Source: @EuropeElects   Read full article  
 
Here are the betting markets’ odds.
 
Source: @PredictIt  

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4. Eurozone marriage rates have been declining, except in Germany.
 
Source: Pantheon Macroeconomics  

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Japan

1. Speculators remain short the yen (often the short leg of carry trades).
 

 
2. Retail sales are approaching 2019 levels.
 

 
Large retail store sales are up sharply.
 

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Asia – Pacific

1. Asian tech IPOs outside of China surged this year.
 
Source: @markets   Read full article  
 
2. Australia’s COVID cases hit a new high.
 
Source: Reuters   Read full article  
 

 
Separately, second-quarter corporate profits surprised to the upside.
 

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China

1. The benchmark stock market index may test support again.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Shares have massively underperformed other emerging markets (2 charts).
 
Source: MarketDesk Research  
 
Source: Gavekal Research  

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3. International firms’ China sales have been weakening in line with the manufacturing PMI.
 
Source: Evercore ISI  

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Emerging Markets

1. Asian currencies are rebounding.
 
• The Malaysian ringgit:
 

 
• The Indian rupee:
 

 
Indian shares continue to hit new highs.
 

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2. COVID cases in the Philippines are climbing.
 
Source: Reuters   Read full article  
 

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3. Vietnam’s exports slowed this month but remain strong.
 

 
The pandemic is pressuring Vietnam’s retail sales.
 

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4. Turkey’s economic confidence is trending higher.
 

 
5. Russia’s COVID-related deaths are at record highs.
 
Source: TS Lombard  
 
6. Mexico’s trade balance swung into a massive deficit, surprising economists.
 

 
7. Bank lending in Brazil remains robust.
 

 
8. Many EM central banks have aggressively hiked rates since the beginning of this year.
 
Source: Oxford Economics  
 
9. Egyptian real yields are the highest among major EMs.
 
Source: Oxford Economics  
 
10. EM equity correlations to commodities have been declining.
 
Source: HSBC Global Research  

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Cryptocurrency

1. XRP has outperformed other large cryptos this month.
 
Source: FinViz  
 
2. Extreme leverage is declining, as seen in the lower premium of bitcoin futures to spot prices over the past few months. 
 
Source: CoinDesk   Read full article  
 
3. Bitcoin’s hashrate continues to recover as Chinese miners speed up their migration to alternate locales and US miners expand capacity.
 
Source: Glassnode   Read full article  
 
4. Bitcoin has been declining in the middle of the week before rising towards the end of the week in August.
 
Source: FundStrat  
 
5. Bitcoin and ether are lagging popular tech stocks on a risk-adjusted basis.
 
Source: IntoTheBlock  
 
6. There has been a shift toward altcoins recently.
 
Source: @markets   Read full article  
 
Here is the price chart of Cardano’s ADA token.
 
Source: @WSJ   Read full article  

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Energy

1. Hurricane Ida sent gasoline and natural gas prices higher this morning.
 
Source: Google  
 
Source: Platts   Read full article  
 

 

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2. European natural gas prices continue to surge.
 

 
3. US rig count recovery picked up in recent weeks.
 

 

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Equities

1. Powell’s dovish speech (decoupling taper from rate hikes) sent inflation-sensitive shares up sharply. US indices hit record highs.
 
• Inflation ETF:
 

 
• Metals & Mining:
 

 
• Energy:
 

 
Riskier stocks that benefit the most from lower rates also rallied.
 
• Small caps:
 

 
• High-growth/speculative stocks:
 

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2. The iShares Russell 2,000 small-cap ETF (IWM) is holding support relative to the S&P 500.
 
Source: Dantes Outlook  
 
Micro-cap stocks are starting to rise relative to the broader market after a period of underperformance (increased risk appetite).
 
Source: SentimenTrader  

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3. Here are last week’s equity factor trends.
 
• High-beta:
 

 
• Dividend Aristocrats:
 

 
• Momentum:
 

 
• Quality:
 

 
By the way, quality stocks have been outperforming small-caps this year.
 
Source: Morgan Stanley Research  

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4. Next, we have some sector updates.
 
• Banks:
 

 
• Transportation:
 

 
• Communication services:
 

 
• Consumer discretionary:
 

 
By the way, consumer discretionary shares have been underperforming this year …
 
Source: Morgan Stanley Research  
 
… pressured by Amazon.
 
Source: Morgan Stanley Research  
 
• Defensive sectors:
 
– Healthcare:
 

 
– Utilities:
 

 
– Consumer staples:
 

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5. The cyclically adjusted earnings yield is at multi-year lows.
 
Source: @TaviCosta  
 
However, according to Damien Klassen (Nucleus Wealth), an adjusted CAPE calculation suggests that stocks may not be as expensive as traditional CAPE estimates suggest.

Rather than averaging real 10-year earnings per share,
• average ten years of pretax earnings (not per share),
• apply today’s tax rate,
• apply today’s number of buyback adjusted shares.
It’s a subtle difference in the definition, which has a substantial impact on the outcome.

Source: Nucleus Wealth   Read full article  

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6. According to Lindsey Bell (Ally),

This year, the S&P 500 has closed under its 50-day moving average in just four days. Each time, the index rallied 1.4% or more the day after breaking the line, and was back to record highs within five trading days. 

Source: Lindsey Bell, Ally  
 
7. Options activity has grown versus spot activity over the past year, mostly driven by call buying (3 charts).
 
Source: TS Lombard  
 
Source: TS Lombard  
 
Source: @markets   Read full article  
 
A much higher options volume means more volatility when options expire. S&P 500 dips have coincided with options expiries in recent months. 
 
Source: TS Lombard  

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Rates

1. Last week, an investor sold 10K Jan. 2023 $110 puts in the iShares 20+ Year Treasury bond ETF (TLT). The last time TLT was trading below $110 was in 2014.
 
Source: Chris Murphy  
 
The investor may be betting that long-term Treasury yields will top out well below the highest levels from the financial crisis, or it could be a hedge against a short Treasury position, according to Chris Murphy at Susquehanna.
 
By the way, current TLT implied volatility for 12 and 18 months was significantly lower during the 2013-2014 taper-tantrum period.
 
Source: Chris Murphy  

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2. T-bills are pricing in the risk of a technical default if Congress fails to raise the debt ceiling.
 
Source: Bloomberg   Read full article  
 
Here is the projection for US Treasury’s liquidity balances.
 
Source: Bloomberg   Read full article  

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3. Treasury curve behavior has been very different from what we saw in 2013.
 
Source: Barclays Research  
 
4. Hedge funds remain short Treasuries, according to JP Morgan (chart shows the 10yr equivalent exposure).
 
Source: JP Morgan; @themarketear  

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Global Developments

1. Dry bulk shipping costs keep climbing.
 

 
2. Speculative accounts have been boosting their net long US dollar exposure. Friday was a bad day.
 

 
3. F/X implied volatility has been trending lower.
 
Source: Arbor Research & Trading  
 
4. Cross-asset risk-adjusted return dispersion has collapsed.
 
Source: Arbor Research & Trading  

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Food for Thought

1. Container shipping rates:
 
Source: @benbreitholtz  
 
2. The global supply chain crisis illustrated with a box of fertilizer:
 
Source: @business   Read full article  
 
3. BNPL (buy now pay later) vs. credit card users:
 
Source: Morning Consult   Read full article  
 
4. Buying counterfeit luxury goods:
 
Source: Statista  
 
5. Changes in superstore visits vs. 2019:
 
Source: Placer.ai   Read full article  
 
6. McDonald’s visits vs. 2019:
 
Source: Placer.ai  
 
7. Costliest US hurricanes (Ida could cost as much as $40bn):
 
Source: Bloomberg   Read full article  
 
8. CO2 emissions by ship type:
 
Source: UNCTAD   Read full article  
 
9. US foreign deployment of troops:
 
Source: BCA Research  
 
10. A few heavy storms or pouring all the time?
 
Source: @simongerman600, @erindataviz   Read full article  

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