Does higher inflation mean a shorter economic cycle?

The Daily Shot: 03-Feb-22
The United States
The Eurozone
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Commodities
Energy
Equities
Rates
Global Developments
Food for Thought



 

The United States

1. The January ADP report was ugly, showing a loss of 300k private-sector payrolls. What happened? At least 20 million Americans were infected with omicron in January. Many couldn’t come to work, with some not getting paid – which reduced the number of people counted as employed.
 
Source: ADP Research Institute  
 
Job losses were broad.
 
Source: ADP Research Institute  
 
The market expects the official figures to show a gain of 100k in private payrolls this Friday, but there is quite a bit of uncertainty around that figure.

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2. Mortgage applications remain very strong despite higher rates.
 

 
3. Is consumer spending shifting toward services?
 
Source: @WSJ   Read full article  
 
Source: Chart and data provided by Macrobond  
 
Source: Mizuho Securities USA  

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4. Next, we have some inflation trends.
 
Here is a look at inflation spikes across historical events.
 
Source: Citi Private Bank  
 
Inflation has been outpacing the employment cost index.
 
Source: Citi Private Bank  
 
Gasoline prices are nearing multi-year highs again, which is pressuring consumer sentiment.
 

 
Below is the Fed’s measure of inflation expectations, which will influence the central bank’s policy decisions as tightening takes shape.
 
Source: Reuters   Read full article  
 
The rise in corporate profits suggests input costs pressures are being passed through to consumers.
 
Source: PGM Global  
 
This chart shows the number of CPI items for each range of price increases.
 
Source: Reuters   Read full article  
 
The reversal in fund flows to Treasury Inflation-Protected Securities (TIPS) suggests that inflation is peaking.
 

 
5. Does higher inflation mean a shorter expansion cycle this time?
 
Source: Bain & Company¬†  
 
Most economists see the current cycle continuing for a while.
 
Source: Chart and data provided by Macrobond   Read full article  
 
The risk of recession remains low based on these measures.
 
Source: Gavekal Research  

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6. The federal debt has exceeded $30 trillion.
 


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The Eurozone

1. The euro-area inflation report was a shocker, with the CPI climbing above 5% for the first time. Energy was the biggest driver of inflation, but the core CPI (2nd panel) surprised to the upside as well.
 

 
Source: Numera Analytics  
 
Source: Nordea Markets  
 
This was the highest upside CPI surprise on record.
 
Source: @fwred  
 
Italy’s inflation hit the highest level in decades.
 

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2. Bond yields continue to rise as the market prepares for the ECB to shift to a less dovish posture.
 

 

 
Here are some potential scenarios for the ECB’s direction and their impact on the euro.
 
Source: ING  
 
The ECB will be forced to adjust its inflation projections much higher. Here is a forecast from Pantheon Macroeconomics.
 
Source: Pantheon Macroeconomics  


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Asia – Pacific

1. The 5yr JGB is approaching zero for the first time in seven years.
 

 
The curve has been steepening.
 

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2. South Korean manufacturing shifted back into growth mode last month.
 
Source: IHS Markit  
 
3. Australian building approvals were better than expected in December.
 

 
The nation’s trade surplus declined again at the end of the year.
 


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China

1. China is very dependent on its property sector – both directly and indirectly.
 
Source: KKR  
 
Construction activity has been soft.
 
Source: Gavekal Research  

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2. China accelerated the construction of offshore wind turbines last year.
 
Source: @DrSimEvans  


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Emerging Markets

1. Let’s begin with Brazil.
 
The central bank hiked rates by 150 bps again but going forward, the increases are likely to be smaller.
 

 
Source: Financial Post   Read full article  
 
The yield curve inverted further.
 

 
Industrial production jumped in December, but indicators (including the PMI report) suggest that activity deteriorated in January.
 

 

 
Vehicle sales were terrible in January.
 

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3. Mexican auto sales were soft as well.
 

 
But Chile continues to surprise to the upside.
 

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4. Russia’s industrial production finished the year on a strong note.
 

 
5. Erdogan’s party continues to lose popularity as inflation surges.
 
Source: Wells Fargo Securities  


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Cryptocurrency

1. The bitcoin downtrend resistance is holding.
 

 
2. Ether is starting to outperform major cryptos, …
 
Source: FinViz  
 
… but bitcoin is still ahead of other tokens over the past month.
 

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3. Bitcoin’s trading volume across exchanges continues to decline, which is typical after a sell-off.
 
Source: CoinDesk   Read full article  
 
4. The ETH/BTC price ratio is holding short-term support.
 
Source: CoinDesk   Read full article  
 
5. Here is the index of global cryptocurrency adoption.
 
Source: Statista  


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Commodities

1. This commodity rally has been impressive.
 
Source: Deutsche Bank Research  
 
Are commodity prices peaking? What does it mean for commodity exporters? Here is a forecast from Capital Economics.
 
Source: Capital Economics  

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2. US hogs and cattle futures surged this week as traders watch a major storm in the Midwest.
 
Source: Reuters   Read full article  
 
Source: AccuWeather  
 

 


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Energy

1. US petroleum inventories remain tight.
 
Crude oil:
 

 
Crude oil at Cushing, OK.
 

 
Distillates:
 

 
Total petroleum inventories:
 
Source: Fundamental Analytics  

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2. Gasoline demand has been relatively soft.
 

 
3. Crack spreads continue to widen.
 

 
4. European natural gas prices are well off the highs, but the uptrend support is holding.
 
Source: @TheTerminal, Bloomberg Finance L.P.  


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Equities

1. Some bad news from Meta on Wednesday sent the share price sharply lower after the close, pulling the Nasdaq 100 down by 2%.
 

 
Source: CNBC   Read full article  
 
Here are the index futures.
 

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2. Small-cap underperformance continues to widen.
 

 
3. Value typically lags quality after leading in a down market. However, value stocks have been consistently cheaper this cycle, which historically matters more for performance, according to Fidelity (2 charts).
 
Source: Denise Chisholm; Fidelity Investments  
 
Source: Denise Chisholm; Fidelity Investments  
 
Fund flows shifted sharply toward value last month.
 
Source: SPDR Americas Research, @mattbartolini  
 
But the economic backdrop is becoming less supportive for the value factor.
 
Source: Oxford Economics  

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4. Despite high valuation multiples, …
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  
 
… a majority of institutional investors surveyed by Scotiabank expect a 5%-15% upside in North American equities this year.
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  

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5. Short interest levels remain depressed.
 
Source: Goldman Sachs; @WallStJesus  
 
6. Sector funds’ annualized total returns have lagged broad market benchmarks by a wide margin over most trailing periods.
 
Source: Amy C. Arnott, Morningstar   Read full article  
 
7. The dispersion in sector returns has blown out as energy outperforms.
 
Source: S&P Global Market Intelligence  
 
Here is the spread between the best- and worst-performing sectors across major indices.
 
Source: S&P Global Market Intelligence  

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8. Finally, we have some data from LPL Research showing the massive growth in sustainable-investing funds.
 
Source: LPL Research  


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Rates

1. The value of negative-yielding global debt continues to tumble as the euro-area inflation surges and JGBs sell off.
 

 
All 10-year yields are now positive.
 
Source: @RichardDias_CFA  

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2. Treasury General Account (TGA) balances (at the Fed) are close to the anticipated seasonal peak.
 
Source: Deutsche Bank Research  
 
3. The SOMA runoff will significantly increase the Treasury’s privately-held borrowing amount, particularly next year.
 
Source: Deutsche Bank Research  
 
4. Treasury yields tend to peak around the first rate hike.
 
Source: MarketDesk Research  


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Global Developments

1. Valuations across all asset classes have been near record highs.
 
Source: Goldman Sachs Asset Management  
 
Goldman expects returns across major asset classes to be lower this year and beyond.
 
Source: Goldman Sachs Asset Management  

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2. The dollar appears overvalued on a real effective exchange rate (REER) basis.
 
Source: BCA Research  
 
3. Weaker aggregate stimulus in China will hit global manufacturing activity this year.
 
Source: Stifel  


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Food for Thought

1. Best cities for international students:
 
Source: Statista  
 
2. All-time temperature records:
 
Source: The New York Times   Read full article  
 
3. How long European leaders have stayed in office:
 
Source: Datawrapper   Read full article  
 
4. Netflix streaming inflation:
 
Source: @chartrdaily  
 
5. Spending time online:
 
Source: Pew Research Center   Read full article  
 
6. Popular online games:
 
Source: Statista  

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