The measures of slack in the economy should be recalibrated

The Daily Shot: 25-Oct-21
The United States
Canada
The United Kingdom
The Eurozone
Europe
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Commodities
Equities
Rates
Food for Thought



 

The United States

1. The October Markit PMI report showed robust business activity at the national level.
 
The manufacturing PMI eased a bit from September as order growth slowed. This result is consistent with the NY and Philly regional reports.
 

 
Supplier bottlenecks …
 

 
… and price pressures remain near extreme levels.
 

 
Markit’s service-sector PMI was stronger than expected. Demand has been solid.
 

 
Similar to manufacturing, service businesses are rapidly boosting prices.
 

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2. Next, we have some updates on inflation.
 
Based on economic data, there is plenty of slack in the US economy. As a result, inflation should moderate. However, when production capacity and labor utilization are constrained by supply instead of demand, one should recalibrate the measures of slack.
 
Source: Alpine Macro  
 
Wage growth is likely to accelerate.
 
Source: Nordea Markets  
 
The recent surge in used vehicle prices will boost the core CPI in the months to come.
 
Source: Nomura Securities  
 
Will the core CPI hit 6% next year?
 
Source: Pantheon Macroeconomics  
 
In the late 1970s, the Fed was surprised by the rapid rise in inflation.
 
Source: Deutsche Bank Research  
 
Market-based inflation expectations continue to climb.
 

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3. The fiscal 2021 budget deficit hit $2.77 trillion.
 
Source: AP News   Read full article  
 

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4. The recent increase in savings has been much broader than in the post-2008 recovery.
 
Source: Morgan Stanley Research; @Scutty  
 
5. This chart shows US financial assets as a share of GDP.
 
Source: J.P. Morgan Asset Management  


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Canada

1. Retail sales continued to climb in August, running well above the pre-COVID trend.
 

 
2. BoC rate hikes priced into the market are now well above the consensus forecast.
 
Source: Scotiabank Economics  


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The United Kingdom

1. The manufacturing PMI ticked higher this month, but output has nearly stalled.
 

 
Export orders are contracting.
 

 
Price pressures persist.
 

 
Services PMI rebounded, exceeding forecasts (similar to the US).
 

 
The input price index for services hit a record high.
 

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2. Retail sales dipped further below the pre-COVID trend last month.
 

 
3. Inflation expectations continue to surge.
 

 
4. Consumer confidence is running below the past decade’s average, …
 
Source: Pantheon Macroeconomics  
 
… as COVID cases continue to climb.
 


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The Eurozone

1. The PMI report showed business activity moderating as supply challenges persist.
 
Source: IHS Markit  
 
Manufacturing eased slightly but was above expectations.
 

 
Services PMI declined.
 

 
Supply-chain bottlenecks are holding at extreme levels.
 

 
Input prices continue to surge, and factories are passing on higher costs to their clients (2nd chart).
 

 
Here are the trends for Germany and France.
 
Manufacturing:
 

 

 
Services:
 

 

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2. Market-based inflation expectations continue to climb.
 

 
3. The ECB is expected to boost the regular QE program to smooth the pace of taper, as the emergency program (PEPP) expires early next year.
 
Source: Bloomberg   Read full article  


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Europe

1. A large part of the valuation gap between Europe and the US is due to the continent’s lower exposure to mega-cap growth companies.
 
Source: Deutsche Bank Research  
 
2. Natural gas in storage remains at multi-year lows, …
 
Source: Pantheon Macroeconomics  
 
… keeping electricity prices near record highs.
 
Source: Nordea Markets  
 
There is strong support for the Nordstream 2 pipeline among the German public, according to opinion polls.
 
Source: BCA Research  
 
Source: Reuters   Read full article  

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3. Here is the share of people who received at least one vaccine dose.
 
Source: @redouad   Read full article  


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Asia – Pacific

1. The won continues to rebound.
 

 
2. Taiwan’s unemployment rate dipped below 4% last month.
 

 
3. Net-short positioning in the Australian dollar is at an extreme.
 
Source: Variant Perception  


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China

1. Evergrande dodged a bullet – for now.
 
Source: Bloomberg   Read full article  
 

 
Source: Bloomberg Law   Read full article  

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2. Coal prices continue to sink, …
 

 
… with several other commodities following.
 

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3. Economic surprise indices have been moving lower, indicating further loss of momentum.
 

 

 
Are we looking at a 2% GDP growth?
 
Source: Bain & Company¬†  

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4. The renminbi remains resilient, with recent gains becoming a drag on financial conditions.
 

 
5. Next, we have some updates on the equity market.
 
Chinese stocks are testing long-term support relative to US stocks.
 
Source: @mark_ungewitter  
 
China’s A-shares have been range-bound lately, albeit above long-term support.
 
Source: @topdowncharts  
 
Foreign capital inflows have accelerated in recent days.
 
Source: Bloomberg

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6. Hong Kong’s CPI declined, driven by government housing rent adjustments.
 


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Emerging Markets

1. The lira continues to tumble as Erdogan “wags the dog.”
 
Source: Reuters   Read full article  
 

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2. Russia’s central bank unexpectedly hiked rates by 75 bps and indicated that there is more on the way.
 

 
Source: Reuters   Read full article  
 
The ruble continues to strengthen.
 

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3. Mexico’s core CPI is now the highest in over a decade.
 

 
4. Economists are aggressively downgrading their forecasts for Brazil’s 2022 GDP growth.
 

 
The stock market remains under pressure.
 


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Cryptocurrency

1. The ProShares Bitcoin Strategy ETF’s (BITO) assets under management are equivalent to about 13% of CME’s bitcoin futures open interest.
 
Source: CoinDesk   Read full article  
 
CME bitcoin futures trading volume soared over the past two weeks.
 
Source: @skewdotcom  
 
By the way, CME has replaced Binance as the world’s largest bitcoin futures platform.
 
Source: Skew   Read full article  
 
Here is a simplified graphic of blockchain layers (or “tech stack”).
 
Source: BofA Global Research  
 
Meme cryptos remain hot.
 
Source: Bloomberg   Read full article  
 
Source: Coinbase  


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Commodities

1. Copper inventories continue to trend lower amid signs of hoarding.
 
(LME + SHFE + COMEX)
 
Source: KITCO   Read full article  
 
Copper prices retreated from the highs.
 

 
But the curve remains in deep backwardation.
 

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2. US wheat futures are surging on supply concerns.
 

 

 
Source: @markets   Read full article  


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Equities

1. The majority of buyback blackouts are wrapping up next week.
 
Source: Deutsche Bank Research  
 
2. The market has been punishing earnings misses.
 
Source: JP Morgan Research  
 
Earning beats have been softer, especially after removing bank loan loss provisions.
 
Source: Deutsche Bank Research  

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3. Sales growth has slowed.
 
Source: Deutsche Bank Research  
 
The outlook for profit growth has been weakening.
 
Source: Nordea Markets  

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4. Retail investors continue to buy the dip.
 
Source: Morgan Stanley Research  
 
Demand for call options has picked up again, depressing the put/call volume ratio.
 
Source: Deutsche Bank Research  

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5. Next, we have some sector performance updates.
 
Communication Services:
 
Source: Reuters   Read full article  
 

 
Transportation:
 

 
REITs:
 

 
Banks:
 

 
Have US banks’ net-interest margins reached a bottom?
 
Source: MarketDesk Research  
 
Regional bank stocks with high commercial and industrial loan exposure tend to perform well during Fed tightening.
 
Source: MarketDesk Research  
 
Utilities:
 

 
Defensive sectors such as utilities and staples have been in a relative downtrend this year (2 charts).
 
Source: Truist Advisory Services  
 
Source: Truist Advisory Services  

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6. The S&P Value Index hit a record high.
 
Source: @Callum_Thomas  
 
7. CNN’s Fear & Greed Index is rapidly moving into “greed” territory.
 
Source: CNN Business  


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Rates

1. Treasury market implied vol index (MOVE) continues to diverge from equity implied vol (VIX).
 

 
2. TLT (iShares 20+ Year Treasury Bond ETF) short interest has been climbing.
 
Source: @hedgopia  
 
3. TIPS continue to outperform.
 
Source: S&P Global Market Intelligence  
 
4. It’s been a tough year for Treasuries.
 
Source: @Not_Jim_Cramer  


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Food for Thought

1. Assets in 529 college savings plans (through 2021-Q2):
 
Source: Board of Governors of The Federal Reserve System  
 
2. North Korea-China trade:
 
Source: @financialtimes   Read full article  
 
3. Countries with armed forces conscription:
 
Source: The Economist   Read full article  
 
4. Global nuclear warhead inventories:
 
Source: Visual Capitalist   Read full article  
 
5. The bipartisan infrastructure bill – betting market odds of becoming law:
 
Source: @PolymarketHQ  
 
6. Children with lead exposure:
 
Source: @axios   Read full article  
 
7. Real-time payments:
 
Source: Statista  
 
8. Chicken wing prices:
 
Source: BofA Global Research; @MikeZaccardi  
 
9. Participating in Halloween activities (2 charts):
 
Source: @CivicScience  
 
Source: Morning Consult   Read full article  

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