The market has transitioned from inflation worries to growth concerns

The Daily Shot: 25-May-22
The United States
Canada
The United Kingdom
The Eurozone
Europe
Japan
New Zealand
China
Emerging Markets
Cryptocurrency
Commodities
Energy
Equities
Credit
Rates
Global Developments
Food for Thought



 

The United States

1. Let’s begin with the housing market.
 
New home sales dropped to pandemic-era lows last month, …
 

 
… dipping well below the trend.
 
Source: Mizuho Securities USA  
 
New home inventories, measured in months of supply, surged. This trend contributed to the deterioration of homebuilder sentiment (see chart).
 

 
The average new home price has sharply diverged from the median, indicating a shift toward higher-end homes.
 
Source: Wells Fargo Securities  
 
This chart shows inventory-to-sales ratios by stage of construction.
 
Source: Mizuho Securities USA  
 
Homebuilder margins have peaked.
 
Source: @RickPalaciosJr  
 
Demographics will remain a tailwind for the housing market.
 
Source: Oxford Economics  
 
So far, home prices are not budging.
 
Source: AEI Center on Housing Markets and Finance  
 
But home price appreciation rates have diverged across regions.
 
Source: Wells Fargo Securities  
 
Here is a look at household formation split between renters and homeowners.
 
Source: Yardeni Research  

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2. The S&P Global (Markit) manufacturing PMI ticked lower this month but held up well.
 

 
Supply bottlenecks are easing.
 

 
Service-sector PMI came in below estimates but is holding in growth territory.
 

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3. On the other hand, the Richmond Fed’s regional manufacturing index fell sharply this month.
 

 
Cost pressures are worsening, …
 

 
… while demand is deteriorating, putting pressure on margins.
 

 
Supply bottlenecks are disappearing, which means suppliers will have a tough time raising or even maintaining prices.
 

 
Hiring is expected to slow sharply …
 

 
… as outlook dims.
 

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4. The Philly Fed’s service sector report also shows extreme cost pressures.
 

 
5. The combination of the NY, Philly, and Richmond Fed reports doesn’t bode well for manufacturing activity at the national level.
 
Source: Yardeni Research  
 
The slowdown in China also points to downside risks for US factory activity.
 
Source: @AndreasSteno  
 
But weaker manufacturing conditions could signal moderation in inflation.
 
Source: BCA Research  

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6. Economic surprise indicators point to a sharp slowdown in growth.
 
Bloomberg’s economic surprise index:
 

 
Monthly changes in Citi’s economic surprise index:
 
Source: Citi

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7. The market has transitioned from inflation worries to growth concerns. The correlation between stocks and bonds has turned negative. This scatterplot shows the changed relationship between stocks (SPY) and longer-dated Treasuries (TLT).
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
8. Unlike in previous rate hike cycles, the Fed is expected to frontload the policy tightening.
 
Source: @ANZ_Research  
 
BCA Research sees the Fed rate hike trajectory starting to lag current market expectations later this year as economic growth slows.
 
Source: BCA Research  


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Canada

1. Consumer sentiment continues to deteriorate.
 

 
2. Housing valuations look stretched.
 
Source: PGM Global  
 
By the way, real estate activity is a substantial portion of Canada’s economy.
 
Source: PGM Global  


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The United Kingdom

1. The May PMI report showed softening business activity. Growth in manufacturing orders stalled.
 

 
And export orders are crashing.
 

 
Supplier bottlenecks have been easing.
 

 
Service-sector growth is stalling as cost pressures squeeze margins.
 

——————–

 
2. The CBI retail sales index bounced this month, but business outlook remains weak.
 

 
Source: Reuters   Read full article  

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3. Government borrowing was robust in April.
 

 
Source: Sky News   Read full article  


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The Eurozone

1. The composite PMI ticked lower this month.
 

 
Germany’s manufacturing PMI held steady in May, but the headline index masks a rapidly sinking demand. The decline in export orders accelerated.
 

 
Below are some additional PMI trends.
 
German services PMI:
 

 
French manufacturing PMI:
 

 
French services PMI:
 

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2. French business confidence is holding up well.
 

 
But output expectations are deteriorating.
 

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3. Euro-area households still have a substantial amount of excess savings.
 
Source: Deutsche Bank Research  
 
But the increase in net bank borrowing shows signs of a rundown in pandemic savings for some households.
 
Source: Deutsche Bank Research  
 
The sharp increase in economic uncertainty could weigh on consumption (2 charts).
 
Source: Deutsche Bank Research  
 
Source: Deutsche Bank Research  


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Europe

1. The divergence between business and consumer confidence in the Czech Republic has reached extreme levels.
 

 
2. Next, we have the labor market slack by country.
 
Source: Eurostat   Read full article  
 
3. This chart shows the number of marriages per 1000 people across the EU.
 
Source: Eurostat   Read full article  


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Japan

1. Japan’s service firms face severe cost pressures and are starting to pass those on to the customers.
 

 
2. Manufacturing export orders have been under pressure.
 

 
Supplier bottlenecks are worsening, in part due to China’s lockdowns.
 

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3. Japan’s manufacturers are no longer shifting production overseas.
 
Source: @financialtimes   Read full article  
 
4. Department store sales held up well in April.
 


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New Zealand

The RBNZ hiked rates by 50 bps and signaled more to come.
 

 
Source: Mizuho Securities USA   Read full article  
 
Bond yields and the Kiwi dollar jumped.
 

 


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China

1. The World Economics SMI report showed continuing weakness in business activity this month. The labor market is under pressure amid lockdowns.
 
Source: World Economics  
 
Source: World Economics  

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2. Steel rebar futures are reflecting economic weakness, especially in housing.
 

 
3. Real retail sales have diverged from the US.
 
Source: Barclays Research  
 
4. Here is Deutsche Bank’s GDP forecast.
 
Source: Deutsche Bank Research  
 
5. COVID cases easing, but lockdowns persist in many areas.
 
Source: BCA Research  
 
6. Net capital outflows have been severe in 2022, pulling the renminbi lower.
 
Source: Gavekal Research  
 
Source: Natixis  

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7. Local governments have accelerated bond issuance as weak land sales leave a hole in their budgets.
 
Source: CreditSights  
 
8. Demographics will put further pressure on the property market in the years ahead.
 
Source: BCA Research  
 
Source: @financialtimes   Read full article  


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Emerging Markets

1. Brazil’s CPI continues to grind higher.
 

 
2. Has Mexico’s CPI peaked?
 

 
3. Nigeria, Africa’s largest economy, hiked rates by 150 bps.
 

 
4. The Turkish lira fell further, breaking through 16 to the dollar.
 

 
5. Public sector indebtedness has risen across emerging markets following the pandemic.
 
Source: Alpine Macro  
 
Four economies exhibit particularly high public debt and fiscal deficits: Brazil, Egypt, Greece, and India.
 
Source: Alpine Macro  
 
Which EM economies exhibit the highest debt stress vulnerability?
 
Source: Alpine Macro  


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Cryptocurrency

1. This chart shows the long-term decline in bitcoin’s compound annual growth rate (CAGR).
 
Source: Glassnode   Read full article  
 
2. The total value locked in decentralized finance (DeFi) protocols continues to fall. These protocols are used for lending margin on top of providing loans and derivatives, which faced liquidation from speculators unable to meet margin calls. And the liquidated collateral is other cryptos whose values have fallen.
 
Source: Scotiabank Economics  
 
3. There has been high churn among the largest addresses holding Tether’s USDT stablecoin (de-risking) and the USDC stablecoin (perceived assurance).
 
Source: @coinmetrics  
 
By the way, the token value of stablecoins to the network value of ETH is the highest it has ever been – a key component of the DeFi ecosystem.
 
Source: @coinmetrics  

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4. Here is a look at the market cap of various stablecoins over time …
 
Source: Deutsche Bank Research  
 
… and Tether’s reserves.
 
Source: Deutsche Bank Research  


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Commodities

1. The divergence between agricultultiral commodities and industrial metals signals stagflation fears.
 
Source: Gavekal Research  
 
2. Gold futures are holding short-term support.
 
Source: Aazan Habib; Paradigm Capital  
 
3. Cotton futures are off the highs as parts of Texas finally got some rain.
 

 
Source: Lubbock Avalanche-Journal   Read full article  

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4. Corn futures are lower in response to the Brazil/China deal.
 

 
Source: S&P Global Commodity Insights   Read full article  


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Energy

1. It’s a bit surprising that investors have not been eager to have shale firms reinvest more of their cash to boost production. Are they concerned about oil prices holding at these levels?
 
Source: @WSJ   Read full article  
 
Nonetheless, the rig count continues to march higher.
 

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2. Next, we have US battery storage resource additions.
 
Source: S&P Global Market Intelligence  


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Equities

1. Dip buyers stepped in again on Tuesday, but the Nasdaq 100 underperformed.
 

 
Will the Nasdaq 100 / S&P 500 ratio break long-term support?
 
Source: @TheTerminal, Bloomberg Finance L.P.  

——————–

 
2. This chart shows the number of consecutive weekly losses for the S&P 500.
 
Source: Deutsche Bank Research  
 
3. Earnings downgrades continue to outpace upgrades.
 

 
Bloomberg Intelligence has been downgrading S&P 500 operating margins for the rest of 2022
 
Source: Bloomberg Intelligence   Read full article   Further reading  

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4. Valuation multiples tend to be sensitive to bond yields.
 
Source: BCA Research  
 
5. Insiders have been buying.
 
Source: @luwangnyc, @markets   Read full article  
 
6. Is the equity selloff overdone?
 
Source: BCA Research  
 
7. Consumer staples have diverged from other defensive sectors amid recession fears.
 
Source: Evercore ISI Research  
 
But consumer staples sales are not crashing.
 
Source: Evercore ISI Research  

——————–

 
8. The market hasn’t punished negative earnings surprises this much in years. It hasn’t been too kind to positive earnings surprises either.
 
Source: @FactSet   Read full article  
 
9. Sector ETFs saw substantial outflows this month.
 
Source: @markets   Read full article  
 
10. US companies with high free cash flow yields have massively outperformed this year.
 
  Further reading  
 
11. The cyclicals/defensives ratio is increasingly pricing in a deterioration in economic growth.
 

 
12. Hedge funds’ picks continue to widen their underperformance.
 

 
13. The gap between value and growth stocks keeps widening.
 

 

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14. Finally, this chart shows the relative weight of high-dividend shares in each sector.
 
Source: MarketDesk Research  


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Credit

1. Investment-grade bonds have been outperforming high-yield this month (2 charts).
 

 
Source: BCA Research  

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2. The investment-grade spread curve has steepened sharply.
 
Source: BofA Global Research; @MikeZaccardi  
 
3. US corporate balance sheets have been healthy, but analysts expect some deterioration going forward as profits slow and funding costs climb.
 
Source: BCA Research  
 
4. Yields across fixed-income asset classes are elevated relative to the past decade.
 
Source: LPL Research  


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Rates

1. CD rates are extremely low relative to other market rates.
 

 
This is what Chase is offering.
 
Source: bankrate.com  
 
Meanwhile, the 2yr Treasury yield is above 2.5%.
 

 
And individual investors have been buying.
 
Source: Deutsche Bank Research  

——————–

 
2. The 10-year Treasury yield has risen amid an increase in global policy uncertainty, which is unusual.
 
Source: BCA Research  
 
This divergence from the cyclicals/defensives ratio is also unusual.
 
Source: @MrBlonde_macro  

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3. But there is room for real yields to rise further.
 
Source: MRB Partners  
 
4. Treasury price drawdowns have been severe across the curve.
 
Source: S&P Dow Jones Indices  


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Global Developments

1. The dollar is entering a seasonally weak period.
 
Source: SentimenTrader  
 
The dollar could weaken over the long term as the US economy’s share of the global GDP shrinks.
 
Source: MRB Partners  
 
For now, the dollar is still widely used in international trade and finance.
 
Source: Oxford Institute for Energy Studies  

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2. Manufacturing export orders have been slowing in advanced economies while price pressures worsen.
 
Source: Capital Economics  
 
3. What does the decline in Japan’s machine tool orders tell us about DM corporate earnings?
 
Source: BCA Research  


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Food for Thought

1. Russian citizens avoiding Western brands:
 
Source: Morning Consult   Read full article  
 
2. The Democracy Index:
 
Source: Visual Capitalist   Read full article  
 
3. Firearm deaths:
 
Source: CDC   Read full article  
 
4. Opinions on abortion by country:
 
Source: POLITICO   Read full article  
 
5. Wearing a face mask when flying:
 
Source: Gallup   Read full article  
 
6. Fintech adoption by region:
 
Source: Statista  
 
7. Semiconductor manufacturing by region:
 
Source: The Times   Read full article  
 
8. Working from home turned out better than expected.
 
Source: Bloomberg   Read full article  
 
9. Highest-grossing Star Wars movies:
 
Source: Statista  

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