The market now sees the Fed making a “policy error” with aggressive rate hikes

The Daily Shot: 06-Dec-21
 The United States
Canada
The United Kingdom
The Eurozone
Europe
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Energy
Equities
Credit
Rates
Global Developments
Food for Thought



 

 The United States

1. The November payrolls report was disappointing.
 

 
However, the unemployment rate declined more than expected. One interpretation is that the labor market has tightened further, with employers increasingly struggling to hire workers.
 

 
Some economists have suggested that the payrolls figure is inaccurate and will be revised higher. For example, the household survey showed 1.136 million jobs created in November vs. 210k from the establishment survey.
 

 
Below are some additional trends from the jobs report.
 
Underemployment (nearing pre-COVID levels):
 

 
The unemployment rate by race/ethnicity:
 
Source: @WSJ   Read full article  
 
Labor force participation (at pandemic-era high):
 
Source: Chart and data provided by Macrobond  
 
Employment-to-population ratio (total and prime-age):
 

 
Part-time employment for economic reasons (back at pre-COVID levels):
 

 
Long-term unemployment:
 

 
Looking for full-time and part-time work:
 

 
Employment level vs. pre-pandemic CBO projections:
 
Source: @WSJ   Read full article  
 
Employment levels by earnings tier:
 
Source: Mizuho Securities USA  
 
Wage growth (below consensus in November but still well ahead of the trend):
 

 
Biggest employment gains and losses by sector:
 
Source: @WSJ   Read full article  
 
Nursing home employment:
 

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2. The Services ISM PMI hit another record high pointing to robust service-sector activity in Q4.
 

 
Source: Reuters   Read full article  
 
The pace of hiring has been lagging business expansion.
 
Source: @LizAnnSonders  
 
The ISM index has been distorted to the upside by supplier delays.
 
Source: Mizuho Securities USA  
 
For now, there are no signs in the report that supply-chain issues are easing.
 
Order backlog:
 

 
Supplier delivery times:
 

 
Prices paid:
 

 
Inventory sentiment (exceptionally tight):
 

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3. Factory orders continued to surge in October.
 

 
The updated capital goods orders were even stronger than the earlier report. Business investment remains healthy.
 

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4. The market now sees the Fed making a “policy error” with aggressive rate hikes starting next year. By early 2024 the central bank will be forced to cut rates.
 
Source: Bloomberg
 
5. COVID cases are on the rise again.
 


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Canada

1. Canada generated almost as many jobs as the US did in November, despite having a tenth of the labor force.
 

 

 
The jobs recovery continues to outpace the US.
 
Source: @GregDaco  
 
The unemployment rate was below expectations.
 

 
Wage growth remains robust.
 

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2. Productivity dipped in Q3 as more Canadians returned to work.
 

 
3. Property shares have been under pressure.
 
Source: @markets   Read full article  
 
4. The yield curve continues to flatten.
 


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The United Kingdom

1. The market-based probability of a rate hike this year dropped to 25%.
 
Source: Reuters   Read full article  
 

 
2. Related to the above, the pound hit the lowest level in a year vs. USD.
 

 
3. UK equities were hit badly during the first COVID waves, albeit with declining intensity.
 
Source: Citi Private Bank  
 
COVID cases continue to trend higher.
 

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4. UK inflation expectations have been tracking natural gas prices.
 
Source: Deutsche Bank Research  
 
5. The UK is getting warmer, wetter, and sunnier.
 
Source: @neilrkaye  


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The Eurozone

1. German factory orders unexpectedly tumbled in October, …
 

 
… driven by lower demand from abroad.
 
Source: Statistisches Bundesamt  

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2. Are COVID cases peaking in Germany?
 

 
3. French industrial production improved but remains well below pre-COVID levels.
 

 
4. Italian and Spanish service-sector growth accelerated last month, topping expectations.
 

 

 
As a comparison, here is Germany’s service-sector activity, which was hit by the latest COVID wave.
 

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5. Euro-area retail sales are nearing the pre-COVID trend.
 

 
6. How much debt is held outside of the ECB’s QE? Adjusted for bond duration, that figure has been rising.
 
Source: Deutsche Bank Research  
 
7. For euro-area economies, bond yields are correlated to debt-to-GDP ratios.
 
Source: @RobinBrooksIIF  
 
8. The ECB’s medium-term systemic risk indicator continued to increase in recent months.
 
Source: ECB   Read full article  
 
The ECB views stretched financial asset valuations as vulnerable to repricing if global liquidity conditions change.
 
Source: ECB   Read full article  
 
Euro-area residential property prices continue to rise.
 
Source: ECB   Read full article  


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Europe

1. The Swiss franc hit a multi-year high against the euro, …
 

 
… which should cap import price gains.
 
Source: BCA Research  
 
Swiss COVID cases continue to surge.
 

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2. Norway’s unemployment rate is back at pre-COVID levels.
 

 
3. European – US equity valuation gap continues to widen.
 
Source: @TheTerminal, Bloomberg Finance L.P.  


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Asia – Pacific

1. South Korea’s COVID cases have exploded.
 

 
2. Australia’s inflation is elevated but not extreme.
 

 
Job ads hit another multi-year high.
 

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3. Here is a look at the change in debt, largely as a result of pandemic support, across Asia/Pacific countries (2 charts).
 
Source: Fitch Ratings  
 
Source: Fitch Ratings  
 
Some countries have made extensive use of non-fiscal support such as loan guarantees, particularly Japan, Korea, and Mongolia.
 
Source: Fitch Ratings  


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China

1. Evergrande is getting ready to restructure.
 
Source: Bloomberg   Read full article  
 
The recent bounce in high-yield bond prices is reversing quickly.
 

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2. How long will Beijing tolerate the renminbi’s strength?
 

 
3. Shares of tech firms continue to tumble in Hong Kong.
 

 
4. China’s carbon reduction target is conservative. It implies a decline in carbon intensity by 3.9% per year in 2020-2025, far slower than the 5.4% rate achieved in the last five years.
 
Source: Gavekal Research  


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Emerging Markets

1. Turkey’s central bank once again tried to intervene in the currency markets to stabilize the lira. There are only so many bullets left in that gun, as F/X reserves dwindle.
 
Source: Bloomberg   Read full article  
 
So far the interventions haven’t worked.
 

 
The lira’s recent crash has been boosting inflation.
 
CPI:
 

 
PPI (blasting past 50%):
 

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2. The Vietnamese dong has been falling as the US gives the nation room to ease (without labeling Vietnam a currency manipulator).
 

 
Source: Reuters   Read full article  

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3. India’s service-sector growth held up well last month.
 

 
Separately, USD/INR is testing resistance at 75.0 as the rupee weakens.
 
Source: barchart.com  

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4. Russia’s service business growth went into contraction mode last month (PMI < 50).
 

 
5. South Africa’s 4th COVID wave is here, driven by omicron.
 

 
6. Brazil’s industrial production continues to deteriorate, stymied by supply-chain issues.
 

 
7. Argentina’s vehicle production hit a multi-year high.
 

 
8. Colombia’s CPI is above 5%.
 

 
9. EM fund flows have slowed.
 
Source: IIF  
 
Portfolio flows:
 
Source: IIF  
 
Longer-term trends by country:
 
Source: IIF  


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Cryptocurrency

1. Cryptos experienced a flash crash on Saturday, …
 

 
… with bitcoin testing the 200-day moving average.
 

 
It’s a rough start to the month.
 
Source: FinViz  

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2. Bitcoin’s trading volume across major exchanges ticked higher during the Saturday sell-off.
 
Source: CoinDesk   Read full article  
 
3. El Salvador bought the dip. Sort of.
 
Source: @nayibbukele  
 
4. The ETH/BTC price ratio faces significant resistance.
 
Source: Dantes Outlook  
 
5. The correlation between bitcoin and stocks has been climbing.
 

 
6. Should crypto investors be concerned about slower global liquidity growth?
 
Source: @MrBlonde_macro  
 
7. This chart shows the NFT market dominance by blockchain network.
 
Source: @MessariCrypto  
 
Sports NFT sales were high at the beginning of the year.
 
Source: @MessariCrypto  


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Energy

1. Crude oil market sentiment has deteriorated (2 charts).
 
Source: @jessefelder; Bloomberg   Read full article  
 
Source: @sentimentrader, h/t @CapitalObserver  

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2. If oil prices evolve based on the forward curve, producers won’t deliver enough crude to supply the market.
 
Source: JP Morgan Research; @HFI_Research  
 
3. US refined products inventory is much too low for this time of the year.
 
Source: @HFI_Research  
 
4. Warm weather in the US put further downward pressure on natural gas prices.
 
Source: NOAA  
 

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5. Finally, this chart shows the electricity mix in Asia-Pacific.
 
Source: Fitch Ratings  


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Equities

1. We are far from capitulation, but some of the froth has been blown off the markets.
 
Consolidated positioning:
 
Source: Deutsche Bank Research  
 
Post-IPO stocks:
 

 
Meme stocks:
 

 
Most shorted names (favored by retail investors) and non-profitable tech:
 

 
Off-exchange (OTC) volume (favored by retail investors):
 
Source: Deutsche Bank Research  
 
Crowded stocks:
 
Source: @biancoresearch  
 
Most-traded stocks:
 
Source: Bloomberg   Read full article  
 
The CNN Fear & Greed index:
 
Source: CNN Business  
 
Demand for put options (2 charts):
 
Source: @acemaxx, @FT   Read full article  
 
Source: Deutsche Bank Research  
 
The put/call ratio:
 

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2. However, despite the market slump, the ProShares 3X Nasdaq 100 ETF (TQQQ) saw inflows every day this past week. The bulls are not throwing in the towel.
 
Source: @EricBalchunas  
 
3. Chinese companies trading in the US took a hit in recent days as Beijing forced DiDi to delist.
 

 
Even Chinese EV shares, which have been riding the global EV bubble, tumbled last week.
 

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4. The Nasdaq 100/Dow Jones ratio held resistance at the dot-com peak.
 

 
5. Next, we have some sector trends over the past week.
 
Sector performance:
 

 
Retail:
 

 
Biotech:
 

 
Housing:
 

 
Defensive sectors outperformed:
 
REITs:
 

 
Consumer Staples:
 

 
Utilities:
 

 
Communication Services have been underperforming recently as social media firms sold off.
 
Source: MarketDesk Research  

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6. VIX has been above 30, …
 

 
… which is a bullish sign for stocks.
 
Source: Bloomberg   Read full article  

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7. Finally, we have quarterly return attributions (changes in earnings expectations, P/E multiples, and dividends) for the S&P 500 …
 

 
… and the S&P 600 (small caps).
 


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Credit

1. Credit funds saw some outflows recently.
 
Source: @financialtimes   Read full article  
 
2. Loan issuers are not embracing SOFR even as the deadline approaches.
 
Source: @WSJ   Read full article  


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Rates

1. The Treasury curve flattened further on Friday.
 

 
2. Real rates have been flattening as well.
 

 
3. The flatness of the yield curve has never been observed outside of actual rate hikes.
 
Source: BCA Research  


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Global Developments

1. Speculative accounts have been boosting their bets on the US dollar, …
 

 
… as asset managers unwind their short positions.
 

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2. Mobility has increased since the first COVID wave.
 
Source: Citi Private Bank  
 
3. Finally, here is a look at the evolution of asset bubbles.
 
Source: @saxena_puru  


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Food for Thought

1. Asset mix by generation in the US:
 
Source: Korey Bauer   Read full article  
 
2. US household debt distribution by product and age:
 
Source: NY Fed  
 
3. Automobile affordability crisis:
 
Source: The Weekly Quill  
 
4. Population growth over the past decade:
 
Source: @USDA_ERS   Read full article  
 
5. Parents’ education of doctorate recipients at US universities:
 
Source: @annastansbury   Read full article  
 
6. Booster shots (2 charts):
 
Source: @KFF   Read full article  
 
Source: Capital Economics  

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7. Omicron data from South Africa:
 
Source: @Robert__Rennie, @FT   Read full article  
 
8. Planned activities in retirement:
 
Source: MagnifyMoney   Read full article  

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