Posted on by The Daily Shot Editor: Lev Borodovsky

A sharp decline in market-based inflation expectations in May

The Daily Shot: 26-May-22
• The United States
• The Eurozone
• Europe
• Asia – Pacific
• China
• Emerging Markets
• Commodities
• Energy
• Equities
• Credit
• Global Developments
• Food for Thought

 

The United States

1. The FOMC minutes confirmed the Fed’s goal to frontload rate hikes, which the markets fully expected.

FOMC: – Many participants judged that expediting the removal of policy accommodation would leave the Committee well-positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.

There was nothing in the report to suggest a 75 bps hike in the months ahead. The market has started pricing in a very small probability that we may not even get the full two 50 bps hikes over the next two months if economic growth hits a wall.
 

 
There is also some talk about a pause and “reassessment” in September.
 
Source: MarketWatch   Read full article  
 
Stocks moved higher, and the dollar declined.
 

 

 
Treasury yields have been drifting lower.
 

 
2. Longer-term market-based inflation expectations declined sharply this month amid concerns about economic growth.
 

 
Here are the monthly changes in the above index.
 
Source: @kgreifeld  

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3. Durable goods orders were softer than expected last month.
 

 
Source: Reuters   Read full article  
 
As a result, the Atlanta Fed’s GDPNow Q2 growth model forecast dipped below 2% (annualized).
 
Source: @AtlantaFed   Read full article  
 
Capital goods shipments have been robust during the COVID-era recovery, …
 

 
… indicating strong investment spending.
 
Source: Morgan Stanley Research  
 
But CapEx expectations point to a slowdown in business investment ahead.
 

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4. The mix of high commodity prices, a strong dollar, and rising rates point to a sharp slowdown in economic growth.
 
Source: Alpine Macro  
 
• Higher bond yields and credit spreads also signal a slowdown (2 charts).
 
Source: Redfin  
 
Source: @crossbordercap  
 
• Most economists don’t see a recession amid lofty household excess savings.
 
Source: Wells Fargo Securities  

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5. Consumer confidence continues to deteriorate.
 
Source: @HPS_CS, @HPSInsight, @CivicScience  
 
6. Job openings are expected to moderate.
 
Source: BofA Global Research; @MikeZaccardi  
 
7. Retail inventory-to-sales ratios are above pre-COVID levels. Retailer discounting is coming.
 
Source: Capital Economics  
 
8. Next, we have some updates on the housing market.
 
• Mortgage applications have declined substantially but are not collapsing.
 

 
Here is the number of rate locks.
 
Source: AEI Center on Housing Markets and Finance  
 
• The recent spike in mortgage rates points to a significant decline in home price appreciation, …
 
Source: Alpine Macro  
 
… as affordability deteriorates.
 
Source: Piper Sandler   
 
• Housing demand weakened this month.
 
Source: Redfin  
 
• More sellers are cutting prices.
 
Source: Redfin  
 
• Apartment rental yields have been tumbling. But with the recent surge in bond yields, this trend should reverse (property prices will decline).
 
Source: @WSJ   Read full article  

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The Eurozone

1. The upcoming rate hike is a big deal for the ECB. It hasn’t raised rates since 2011.
 
Source: Chart and data provided by Macrobond  
 
And the market expects 25 bps rate increases, which are large for the ECB. Some central bankers want to leave 50 bps increases on the table.
 

 
Here are the rate trajectory forecasts.
 
• ANZ Research:
 
Source: @ANZ_Research  
 
• Wells Fargo:
 
Source: Wells Fargo Securities  
 
• The market:
 
Source: BCA Research  

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2. German consumer confidence remained depressed in May.
 

 
French consumer confidence deteriorated further.
 

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3. Germany’s robust business investment kept the GDP growth in positive territory in Q1.
 

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Europe

1. Similar to other European economies, Sweden shows a sharp divergence between business and consumer sentiment.
 

 
2. Norway’s unemployment rate hit the lowest level since 2008.
 

 
3. Poland’s unemployment rate is also very low.
 

 
4. The Swiss economic expectations index remained depressed in May.
 

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5. The EU struggles to retain STEM professionals.
 
Source: ECOSCOPE   Read full article  

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Asia – Pacific

1. Japan’s services PPI surprised to the upside in April.
 

 
2. South Korea’s central bank hiked rates again.
 

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China

1. Economists continue to downgrade their GDP growth forecasts for China.
 

 
2. The renminbi’s bounce from the lows was short-lived.
 

 
3. Household demand for credit is down sharply.
 
Source: BCA Research  
 
4. Energy, healthcare, and materials companies boosted profits in Q1, while consumer and property firms weakened.
 
Source: Fitch Ratings  
 
Consumer staples companies saw the biggest margin contraction in Q1, although healthcare and telecom improved.
 
Source: Fitch Ratings  

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Emerging Markets

1. The Turkish lira is trading near record lows. This is not going to end well.
 

 
2. Russia’s current account surplus surged last month.
 
Source: @elinaribakova  
 
3. Mexican exports declined more than expected in April but are still elevated.
 

 
Despite strong exports, Mexico is running a substantial trade deficit.
 

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Commodities

1. Will an increase in China’s credit impulse support demand for base metals?
 
Source: @ANZ_Research  
 
Metals tend to perform well during rising inflation expectations and Fed tightening cycles (2 charts).
 
Source: @ANZ_Research  
 
Source: @ANZ_Research  

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2. The supply of US arable land has declined significantly. That’s partly because of repurposing of what was once farmland into commercial real estate and transport networks, according to Quill Intelligence.
 
Source: Quill Intelligence  
 
3. More downside for lumber prices ahead?
 
Source: Pantheon Macroeconomics  
 
4. How did commodities perform during the 1970s, a period of high inflation.
 
Source: Deutsche Bank Research  

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Energy

1. US crude oil and refined products inventories remain low for this time of the year (3 charts).
 

 

 
Source: Redfin  
 
This chart shows US distillates inventories by region.
 

 
2. Oil prices continue to grind higher.
 

 
3. US refinery runs jumped in recent weeks.
 

 
But demand hasn’t been great (2 charts).
 

 
Source: @HFI_Research  

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4. US crude oil exports are back at pre-pandemic highs.
 

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Equities

1. Are retail investors responsible for the late afternoon market recoveries we’ve been seeing?
 
Source: Vanda Research  
 
2. S&P 500 sector return dispersion is at an extreme high.
 
Source: @matthewbartolini; State Street Global Advisors  
 
3. The decline in the stock/bond ratio suggests further downside in earnings.
 
Source: Alpine Macro  
 
4. Most of the risk reduction in a 60/40 portfolio comes from the lower volatility of bonds.
 
Source: Sean Markowicz; Schroders  
 
Correlations and bond vol would need to rise a lot to erode the risk/reward of a 60/40 portfolio.
 
Source: Sean Markowicz; Schroders  

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5. The Credit Suisse fear barometer (based on S&P 500 options) continues to move further into “fear territory.”
 

 
6. SPACs will need to lock in a lot of deals next year to avoid returning capital.
 
Source: @WSJ   Read full article  
 
7. Massive amounts of private equity dry powder are a tailwind for the stock market.
 
Source: BofA Global Research  
 
8. Next, we have some sector performance updates over the past five business days.
 
• Banks:
 

 
• Real estate (REITs):
 

 
• Transportation:
 

 
• Metals & Mining:
 

 
• Energy:
 

 
• Communication Services:
 

 
• Semiconductors:
 

 
The sector got more discouraging news after the close.
 
Source: Reuters   Read full article  
 

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9. Finally, let’s take a look at some equity factor trends over the past 12 months.
 
• High-dividend:
 

 
• Low vol:
 

 
• Momentum:
 

 
• Small-cap value vs. growth:
 

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Credit

1. Leveraged loans remain under pressure.
 

 
2. Global credit defaults declined in April, but Moody’s expects a modest rise from here (below the five-year average).
 
Source: Moody’s Investors Service  
 
Here is a breakdown of corporate defaults by region.
 
Source: Moody’s Investors Service  

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3. More downgrades ahead?
 
Source: S&P Global Ratings  
 
4. Higher credit spreads ahead?
 
Source: @MichaelKantro  

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Global Developments

1. The global credit impulse points to further downside risks for economic sentiment.
 
Source: Chart and data provided by Macrobond  
 
2. This chart shows the breakdown of household assets in the Eurozone, UK, US, and Japan.
 
Source: Capital Economics  
 
3. This scatterplot shows equity P/E multiples (valuations) vs. returns on equity in advanced economies.
 
Source: TS Lombard  

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Food for Thought

1. Spending the tax refund:
 
Source: @CivicScience  
 
2. EV search trends:
 
Source: Protocol   Read full article  
 
3. Interactions with financial services providers:
 
Source: Morning Consult   Read full article  
 
4. US drug overdose deaths (updated):
 
Source: AP   Read full article  
 
Source: @WSJ   Read full article  

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5. Sibling correlations across various traits:
 
Source: BCA Research  
 
6. The Rolex Price Index since last November:
 
Source: Evercore ISI Research  
 
7. US office occupancy:
 
Source: BofA Global Research; @MikeZaccardi  
 
8. The largest number of blades in a Gillette razor:
 
Source: Bloomberg   Read full article  

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