The market sees a more aggressive Fed slowing the economy to tame inflation

The Daily Shot: 18-Oct-21
The United States
Canada
The United Kingdom
The Eurozone
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Commodities
Energy
Equities
Credit
Global Developments
Food for Thought



 

The United States

1. September retail sales surprised to the upside. US consumers complain about high prices but keep spending.
 

 
Excluding autos and gas, the dollar amount of retail sales hit another record high.
 

 
Here are the trends by sector.
 
Source: ING  
 
Spending on automobiles increased in September after months of declines from the peak (still well above pre-COVID levels).
 

 
This chart compares the current trajectory of retail sales with the post-2008 recovery.
 
Source: Mizuho Securities USA  

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2. Global inflationary trends (combined with robust US consumption) are causing the market to reevaluate the Fed’s actions over the next few years.
 
The market is increasingly convinced that the Fed will be forced to hike twice next year.
 

 
Moreover, the market sees the central bank becoming more aggressive over the next few years as inflation becomes tougher to tame. The front end of the Treasury curve is steepening.
 
h/t @lisaabramowicz1  
 
On the other hand, the longer end of the Treasury curve is flattening.
 

 
The market sees a more hawkish Fed slowing the economy as it fights inflation.
 

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3. Economists are downgrading next year’s US GDP growth forecasts.
 

 
4. The October U Michigan consumer sentiment report was softer than the market was expecting.
 

 
Analysts expected an improvement as the COVID situation eases.
 
Source: Pantheon Macroeconomics  
 
But rising prices, especially on gasoline, have been a drag on consumer confidence.
 
Source: ING  

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5. Next, we have some updates on inflation.
 
Short-term consumer inflation expectations keep climbing.
 

 
But longer-term expectations seem to be “well-anchored.”
 
Source: Mizuho Securities USA  
 
Import price inflation has peaked for now as the dollar rebounded.
 

 
Here is the share of CPI components that are above 2.5% on a year-over-year basis (inflation breadth).
 
Source: Evercore ISI  
 
The trimmed-mean CPI has diverged from the trimmed-mean PCE inflation measure.
 
Source: @DomWh1te  

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6. The Empire Manufacturing report from the NY Fed (the first regional report of the month) showed some moderation in factory activity.
 

 
But manufacturers remain upbeat about the future.
 

 
Price pressures …
 

 
… and supply chain bottlenecks persist.
 


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Canada

1. After five months of declines, existing-home sales ticked higher in September.
 

 
2. Manufacturing sales remain robust.
 


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The United Kingdom

1. Home price appreciation is holding up well, according to the Rightmove asking price index.
 

 
2. Retail sales have moderated over the past few months.
 
Source: Desjardins  
 
3. Some consumers are experiencing shortages of food items.
 
Source: Statista  
 
4. Used car prices continue to surge.
 
Source: Pantheon Macroeconomics  
 
5. Consumer-facing services have been recovering.
 
Source: BCA Research  
 
However, the COVID situation appears to be worsening again.
 

 
Source: Reuters   Read full article  


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The Eurozone

1. Market-based inflation expectations continue to climb.
 

 
2. Economists have been downgrading Germany’s 2021 growth forecasts.
 
Source: @Schuldensuehner   Read full article  
 
3. Slower reopening in Europe has meant the service sector is now 6-8 months behind the US. As growth picks up, inflation is likely to follow. 
 
Source: MRB Partners  
 
4. Core inflation appears to have cooled in France.
 
Source: Pantheon Macroeconomics  
 
5. New car registrations continue to run at multi-year lows in the EU and the Eurozone.
 

 
6. The Eurozone’s trade surplus surprised to the downside.
 

 
Source: Pantheon Macroeconomics  


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Asia – Pacific

1. Traders have been boosting their bets against the yen.
 
Source: Bloomberg   Read full article  
 
2. Japan’s service sector activity hit the lowest level since 2020 in August.
 

 
3. New Zealand’s CPI surprised to the upside, which reverberated across global fixed-income markets.
 

 

 

 
The Kiwi dollar is testing resistance.
 
Source: barchart.com  
 
New Zealand’s service-sector PMI rebounded from the lows but remains in contraction territory.
 


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China

1. China’s economy slowed last quarter, with the GDP report coming in below forecasts.
 

 
Source: Reuters   Read full article  
 
BCA Research expects GDP growth to rebound in Q4.
 
Source: BCA Research  
 
Retail sales improved in September.
 

 
But industrial production slowed further.
 

 
Fixed asset investment was below expectations.
 

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2. We had another double-digit gain in thermal coal prices today as the energy crisis worsens.
 

 
China’s industrial sector consumes a much larger share of electricity than in the US.
 
Source: @davidfickling, @bopinion   Read full article  
 
China is trying to lock in more LNG imports.
 
Source: Reuters   Read full article  

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3. Next, we have some updates on China’s markets.
 
Equity fundraising is at the highest level since 2016.
 
Source: Gavekal Research  
 
Hong Kong’s stocks are cheap relative to global peers.
 
Source: Oxford Economics  
 
Foreign holdings of onshore bonds have been climbing.
 
Source: CreditSights  
 
Local government debt issuance (via LGFVs) remains elevated.
 
Source: Goldman Sachs  


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Emerging Markets

1. The Turkish lira remains under pressure.
 

 
And local-currency bonds have also sold off.
 

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2. Israel’s inflation is hitting multi-year highs.
 

 
3. Brazil’s economic activity is holding at pre-COVID levels.
 

 
4. Colombia’s manufacturing output hit a record high.
 

 
5. EM inflation is starting to surprise higher.
 
Source: Pavilion Global Markets  


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Cryptocurrency

1. It’s official. The SEC approved the first futures-based bitcoin ETF.
 
Source: CoinDesk   Read full article  
 
Bitcoin blasted past $62k.
 

 
And the futures-spot spread has blown out.
 
Source: @Marcomadness2  
 
2. Grayscale is planning to convert its bitcoin trust product (GBTC) into a spot bitcoin ETF.
 
Source: CNBC   Read full article  
 
GBTC has traded at a discount to NAV for most of the year, and the conversion would (in theory) remove the discount.
 

 

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3. The recent rise in bitcoin’s price coincided with stabilization in equity markets, keeping the correlation between BTC and the S&P 500 elevated. 
 
Source: CoinDesk   Read full article  
 
4. This chart shows the shift of bitcoin mining out of China.
 
Source: @biancoresearch  


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Commodities

1. Copper is trading near the highs, …
 

 
… as inventories tighten.
 

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2. The CRB raw industrial metals index is near a decade high even when adjusted for inflation (the nominal index hit a record high).
 

 
3. The simultaneous rally in commodities and the US dollar is not sustainable.
 
Source: SentimenTrader  


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Energy

1. Crude oil continues to climb, …
 

 
… with options traders increasingly betting on $100/bbl oil.
 
Source: @WSJ   Read full article  
 
But a stronger US dollar could stall the rally in oil.
 
Source: Lindsey Bell, Ally Invest  

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2. US fracking activity continues to rebound.
 

 
3. US natural gas prices are rolling over amid warm weather.
 

 
Source: NOAA  


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Equities

1. This year’s flows into US equities hit a record high.
 
Source: Goldman Sachs; @carlquintanilla  
 
2. Will rising bond yields stall the stock market rally?
 

 
3. Hedge funds’ equity exposure remains elevated.
 
Source: Evercore ISI  
 
Commercial hedgers are now net short index futures.
 
Source: SentimenTrader  

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4. The pandemic ushered in a period of extreme sectoral rotation in global stocks that persists in 2021. 
 
Source: TS Lombard  
 
5. The Russell 2000 earnings revisions have reversed while those of the Russell 1000 (large caps) are relatively stable. 
 
Source: FTSE Russell   
 
Valuations of small-cap stocks are back to their historical premium to large-cap stocks (Russell 1000) as the pandemic recovery progresses. 
 
Source: FTSE Russell   

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6. Most institutional investors favor quality and value factors over the next 12 months, according to a Scotiabank survey.
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  
 
7. Proposals to raise taxes could push equity flows out of the US. 
 
Source: SOM Macro Strategies   


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Credit

1. HY funds saw some outflows in recent days.
 
Source: @lcdnews   Read full article  
 
2. CLO equity (unrated tranches) performed well this year.
 
Source: @WSJ   Read full article  
 
3. Year-to-date US leveraged finance issuance exceeds $1 trillion.
 
Source: @lcdnews  
 
4. The correlation between TIPS (inflation protection) and mortgage-backed securities (MBS) tends to be strong. 
 
Source: Pavilion Global Markets  


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Global Developments

1. Hedge funds continue to boost their bets on the US dollar.
 

 
2. Wage growth remains elevated across OECD economies.
 
Source: Oxford Economics  
 
3. The pandemic permanently scarred global economic growth.
 
Source: VOX EU   Read full article  


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Food for Thought

1. Still working from home:
 
Source: Gallup   Read full article  
 
2. Using TikTok:
 
Source: Statista  
 
3. Time it took to reach one billion users:
 
Source: @chartrdaily  
 
4. Semiconductor use in cars:
 
Source: @technology   Read full article  
 
5. US murder rate:
 
Source: The New York Times   Read full article  
 
6. Getting a booster shot:
 
Source: Morning Consult   Read full article  
 
7. Life expectancy trends:
 
Source: Princeton School of Public and International Affairs  
 
8. The global wealth distribution:
 
Source: Visual Capitalist   Read full article  
 
9. The world’s wealthiest families:
 
Source: Statista  
 
10. The oldest constitutions still in place:
 
Source: @CivicScience   Read full article  

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