The stock market is signaling a manufacturing recession in the US

The Daily Shot: 12-May-22
The United States
The United Kingdom
The Eurozone
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Energy
Equities
Credit
Global Developments
Food for Thought



 

The United States

1. The CPI report surprised to the upside. Inflation continues to run hot.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 

 
The core services CPI (ex. energy services) saw the biggest monthly gain in decades, …
 

 
… boosted by shelter …
 

 
Source: Pantheon Macroeconomics  
 
… and airline fares.
 

 
New vehicle prices also surprised to the upside (although there was a methodology change in this series).
 

 
Here are some of the CPI drivers.
 
Source: Nomura Securities  
 
Since the Fed’s new policy is to target price levels rather than the inflation rate, here is the evolution of the CPI index vs. the 2% target.
 
Source: Mizuho Securities USA  
 
Economists expect inflation to moderate in the months ahead.
 
Source: Pantheon Macroeconomics  
 
We will have more inflation data tomorrow.

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2. Treasury yields jumped initially in response to the CPI report but retreated shortly after. The yield curve flattened.
 

 
The 10yr yield continues to decline this morning, …
 

 
… as the market prices in a deterioration in economic activity. The stock market is now signaling a manufacturing recession in the US.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
By the way, many economic indicators are pointing to lower bond yields.
 
Source: BCA Research  
 
Here is the ISM Manufacturing PMI vs. the 10yr Treasury yield.
 
Source: @jsblokland   Read full article  

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3. Deutsche Bank’s model is signaling a further acceleration in residential rental costs..
 
Source: Deutsche Bank Research  
 
But the market isn’t sure that demand will be there. Shares of apartment properties and even single-family (2nd panel) rental firms have sold off sharply.
 
h/t @conorsen  
 
4. Next, we have some updates on the housing market.
 
Mortgage applications have been remarkably strong, given the spike in loan rates.
 

 
Anecdotal evidence suggests that buyers have been in a hurry to lock in rates before they move higher. Here is the mortgage rate lock count.
 
Source: AEI Center on Housing Markets and Finance  
 
But bankers now see slower demand for mortgages.
 
Source: Federal Reserve Board  
 
Refi activity is collapsing.
 
Source: AEI Center on Housing Markets and Finance  
 
ARM financing is picking up.
 
Source: @lenkiefer  
 
Home price appreciation is holding up well, …
 
Source: Redfin  
 
Source: AEI Center on Housing Markets and Finance  
 
… even as affordability deteriorates.
 
Source: Redfin  
 
Consumers expect home price growth to remain high.
 
Source: Mizuho Securities USA  
 
Inventories are tight.
 
Source: Redfin  
 
Demand has softened by only slightly.
 
Source: Redfin  
 
There are signs of increased contract cancelations. Here is the situation in Denver, for example.
 
Source: @AliWolfEcon  

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5. Consumer sentiment continues to weaken.
 
Source: @HPS_CS, @HPSInsight, @CivicScience  


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The United Kingdom

1. The pound is under pressure. And it’s not all about the dollar (2nd panel).
 

 
2. The housing market held up well last month.
 


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The Eurozone

1. Germany’s core CPI hit a multi-year high.
 

 
2. The ECB officials are gearing up to take action.
 
Source: Bloomberg   Read full article  
 
This chart shows the market-implied trajectory of short-term rates.
 


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Asia – Pacific

1. South Korea’s price pressures have been broad.
 
Source: @ANZ_Research  
 
2. New Zealand’s home sales weakened sharply last month.
 

 
3. The Aussie dollar broke below support at 0.7 USD.
 
Source: barchart.com  


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China

1. The renminbi resumed its decline.
 

 
This chart shows the US dollar’s 2-week appreciation against CNY in standard deviations.
 
Source: TS Lombard  

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2. Tentative signs of stabilization in the property market?
 
Source: BCA Research  
 
The stock market isn’t buying it. The rebound in property developers’ shares was short-lived.
 

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3. Locktowns continue to put pressure on the economy.
 
Shanghai truck freight:
 
Source: Fitch Ratings  
 
Port waiting times:
 
Source: Fitch Ratings  
 
Car sales:
 
Source: @WSJ   Read full article  

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4. The Hong Kong dollar fell to the weak end of its permitted trading band. The central bank intervened.
 

 
Source: South China Morning Post   Read full article  


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Emerging Markets

1. Let’s begin with Brazil.
 
Retail sales continued to rebound in March.
 

 
Car sales are still soft.
 

 
Inflation remains a challenge for the central bank.
 

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2. Car sales in Russia plummeted over the past two months.
 

 
Source: Bloomberg   Read full article  

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3. Malaysia’s central bank unexpectedly hiked rates.
 

 
4. EM inflation keeps surprising to the upside.
 
Source: @acemaxx, @MorganStanley  
 
Some EM countries could enter a period of stagflation.
 
Source: Fitch Solutions Macro Research  


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Cryptocurrency

1. Panic is setting in as bitcoin dips well below 30k.
 

 
Ether is underperforming.
 

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2. Isn’t bitcoin supposed to provide protection against inflation? Here is what happened after the CPI report.
 
Source: @M_McDonough  
 
Bitcoin now basically trades like a high-beta stock.
 

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3. The Terra blockchain’s native token, LUNA, lost most of its value. LUNA is supposed to absorb price shocks of the blockchain’s algo stablecoin, TerraUSD (UST).
 
Source: CoinDesk   Read full article  
 
Source: CoinGecko  

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4. Tether is now also below par.
 
Source: Google.com  
 
5. Coinbase has been crashing.
 

 
Source: Insider   Read full article  

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6. Bitcoin’s trading volume ticked higher over the past few days, albeit by less than previous spikes.
 
Source: CoinDesk   Read full article  
 
7. Bitcoin’s CME futures open interest continues to decline.
 
Source: @CoinbaseInsto  
 
8. Futures leverage increased over the past few weeks, which could lead to sharp price swings if more liquidations or deleveraging occurs.
 
Source: @glassnode  
 
9. Implied volatility rose to the highest level since March.
 
Source: Skew   Read full article  
 

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10. Bitcoin’s put/call ratio increased.
 
Source: @CoinbaseInsto  
 
11. Bitcoin’s fractal dimension measure signals a trend reversal.
 
Source: BCA Research  


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Energy

1. US distillates inventories are at multi-year lows, …
 

 
… driven by shortages on the East Coast.
 

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2. Gasoline inventories are also tightening, …
 

 

 
… but demand hasn’t been great.
 

 
3. US crude oil inventories have improved a bit.
 

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4. European natural gas prices are higher after Ukraine cut off some of the Russian flows (going through parts of occupied territory).
 

 
Source: @WSJ   Read full article  
 
Natural gas storage levels in eastern Europe are relatively high, and supply has become increasingly diversified (2 charts).
 
Source: IIF  
 
Source: IIF  


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Equities

1. Stock market pain continued after a worse-than-expected CPI report.
 

 
We are 2% away from the S&P 500 going into bear-market land.
 

 
Given the surge in real yields, there could be more downside risk for the Nasdaq 100 vs. the S&P 500.
 
Source: Jack Ablin, Cresset Wealth Advisors  

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2. Stocks and bonds have been correlated for the first time in years as the Fed tightens (2 charts).
 
Source: BofA Global Research  
 
Source: Evercore ISI Research  

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3. Various technical indicators, such as this one from BCA Research, suggest that the market is in oversold territory.
 
Source: BCA Research  
 
Here is the S&P 500 forward PE ratio vs. VIX.
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  

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4. This chart decomposes stock declines in advanced economies.
 
Source: Numera Analytics  
 
5. Hedge funds have been cutting exposure to stocks.
 
Source: @CycleWacher  
 
6. VIX ETFs (ETNs) have been experiencing outflows.
 

 
7. Consumer discretionary stocks have been getting crushed as the market increasingly expects a pullback in spending.
 

 
Here are some additional sector performance charts.
 
Tech and semiconductors:
 

 

 
Defensive sectors:
 
Utilities:
 

 
Consumer staples:
 

 
Healthcare:
 


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Credit

1. European investment-grade bonds saw a historic correction.
 
Source: @acemaxx, @FT   Read full article  
 
2. The duration of US investment-grade bonds is decreasing as yields climb.
 
Source: PGM Global  
 
3. New-issue CLO spreads are widening.
 
Source: Deutsche Bank Research  


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Global Developments

1. The US dollar keeps grinding higher.
 

 
USD strength has persisted despite the hypothesis that US economic sanctions against other countries would induce dollar weakness.
 
Source: BCA Research  
 
Even currencies of commodity exporters have been under pressure vs. USD.
 
Source: Fitch Solutions Macro Research  

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2. Real wages are falling.
 
Source: BCA Research  
 
3. Which countries are most exposed to variable-rate mortgages.
 
Source: Deutsche Bank Research  


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Food for Thought

1. Gasoline prices around the world:
 
Source: Statista  
 
2. Biggest obstacles to shopping for groceries online:
 
Source: Appinio, Spryker   Read full article  
 
3. Printed book sales:
 
Source: Statista  
 
4. Concerns about COVID in the US:
 
Source: Gallup   Read full article  
 
5. Beer consumption per capita:
 

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