Posted on by The Daily Shot Editor: Lev Borodovsky

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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