How did we get into this inflation mess?

The Daily Shot: 23-Jun-22
The United States
Canada
The United Kingdom
The Eurozone
Europe
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Commodities
Energy
Equities
Alternatives
Credit
Global Developments
Food for Thought



 

The United States

1. Despite the housing market headwinds, mortgage applications are holding up.
 

 
This chart shows mortgage rate locks.
 
Source: AEI Center on Housing Markets and Finance  
 
Here is another look at deteriorating housing affordability.
 
Source: @lenkiefer  

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2. Next, we have some updates on inflation.
 
Market-based inflation expectations have been moving lower with oil.
 

 
The core goods PPI should moderate if oil prices stay near current levels.
 
Source: Pantheon Macroeconomics  
 
Upstream price pressures have been extreme.
 
Source: Pantheon Macroeconomics  
 
How did we get into this inflation mess? Here are three key reasons.
 
Source: Evercore ISI Research  
 
This is Economics 101:
 
Source: @greg_ip  

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3. As we saw previously, the Fed is willing to allow significant collateral damage to get inflation under control.
 
Source: @WSJ   Read full article  
 
Investors have been positioning for economic pain.
 
Source: Deutsche Bank Research  

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4. According to the HPS-CS index, consumer confidence continues to deteriorate.
 
Source: @HPS_CS, @HPSInsight, @CivicScience  
 
5. Finally, we have some updates on consumer spending.
 
Real card spending growth is now negative.
 
Source: Bank of America Institute; h/t @SamRo  
 
“Non-necessary” spending is down.
 
Source: AEI Center on Housing Markets and Finance  
 
Further weakness in retail sales could spell trouble for GDP growth.
 
Source: ING  


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Canada

1. The May CPI report topped expectations – again. The trend has been ugly.
 
Headline CPI:
 

 
Month-over-month and 3-month changes:
 

 
Core inflation measures (3 charts):
 

 

 

 
CPI breadth:
 
Source: Scotiabank Economics  
 
A couple of CPI components:
 

 

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2. The market has penciled in a 75 bps BoC rate hike next month.
 

 
Below is the rate expectation for the year-end.
 

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3. Canada’s stock market underperformed in recent days as oil prices moved lower while rate hike expectations climb.
 

 
4. The housing market is highly vulnerable as rates climb.
 
Real prices:
 
Source: The Economist   Read full article  
 
Valuation:
 
Source: MRB Partners  
 
Affordability:
 
Source: MRB Partners  
 
Housing activity:
 
Source: MRB Partners  


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The United Kingdom

1. The CPI report was in line with expectations, with the headline index now above 9%.
 

 
Source: @M_McDonough  
 
The peak will be above 10%, according to Pantheon Macroeconomics.
 
Source: Pantheon Macroeconomics  
 
The core CPI is off the highs.
 

 
But the retail price index surprised to the upside.
 

 
Producer prices continue to surge, with upstream price pressures at extreme levels.
 

 
The CPI – PPI gap points to shrinking corporate margins.
 
Source: @samueltombs  

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2. The official index of house price appreciation was back above 12% in April.
 


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The Eurozone

1. The June PMI data was softer than expected. More on this tomorrow.
 

 
2. Consumer confidence hit the lowest level since the debt crisis, …
 

 
… which doesn’t bode well for household spending.
 
Source: Pantheon Macroeconomics  
 
Dutch consumer confidence hit a new low this month.
 

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3. Next, we have some updates on Italy.
 
Business investment:
 
Source: Deutsche Bank Research  
 
The trade balance and current account balance:
 

 

 
Population:
 
Source: Alpine Macro  

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4. Tight financial conditions are lifting borrowing costs. The ECB will need an ongoing program to contain fragmentation risks.
 
Source: Numera Analytics  
 
5. Ukrainian refugees are boosting the euro-area labor force, which should support economic growth over the long term.
 
Source: Morgan Stanley Research   Read full article  


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Europe

1. Sweden’s labor market remains tight.
 
Source: Nordea Markets  
 
The nation’s housing market is under pressure.
 
Source: Nordea Markets  

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2. The Czech central bank hiked its benchmark rate by 125 bps to 7%. The pace of tightening has been unprecedented.
 

 
The market expects a recession, with the yield curve deeply inverted.
 

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3. Poland’s retail sales are off the highs but remain very strong.
 

 
Source: ING  

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4. Here is a look at the minimum wage across the EU.
 
Source: Eurofound   Read full article  


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Asia – Pacific

1. Japan’s business activity picked up in June, driven by services.
 
Source: S&P GlobalĀ PMI  
 
But the nation’s service sector is facing a squeeze in profit margins.
 
Source: TS Lombard  

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2. South Korea’s PPI is back near 10%.
 

 
3. Australia’s business activity is holding up well.
 
Source: S&P GlobalĀ PMI  


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China

1. Stocks continue to outperform global peers.
 

 
2. USD-denominated high-yield bonds are not rebounding.
 

 
3. Developers have less money to spend on land auctions.
 
Source: Pantheon Macroeconomics  
 
4. According to the World Economics SMI report, business activity remained in contraction mode in June (SMI < 50).
 
Source: World Economics  
 
How much has China’s GDP slowed?
 
Source: Alpine Macro  


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Emerging Markets

1. South Africa’s CPI topped forecasts.
 

 

 
2. Inflation across EM economies continues to surprise to the upside.
 
Source: TS Lombard  
 
3. Turkey’s consumer confidence keeps deteriorating amid hyperinflation.
 

 
4. Ukraine will have to rely on its national bank and domestic bond issuance for financing despite monetary assistance from abroad (2 charts).
 
Source: IIF  
 
Source: IIF  


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Cryptocurrency

1. Bitcoin is trading far below its 200-day moving average.
 
Source: @glassnode  
 
2. Here is a look at bitcoin’s current drawdown versus previous drawdowns.
 
Source: @ArcaneResearch  
 
3. The launch of the short-bitcoin ETF could be a bullish sign.
 
Source: @allstarcharts  
 
4. This chart shows Tether’s asset reserve composition as of March 31.
 
Source: S&P Global Ratings  
 
Tether and USD Coin have the highest market cap among stablecoins.
 
Source: S&P Global Ratings  


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Commodities

1. Copper hit the lowest level since February of 2021, …
 

 
… putting more pressure on the Chilean peso.
 

 
Other industrial metals have also been selling off. Here is aluminum.
 
Source: @TheTerminal, Bloomberg Finance L.P.  

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2. Agricultural commodities are also moving lower.
 
Soybeans:
 

 
Cotton:
 

 
Bloomberg’s agricultural commodity index:
 

 
Palm oil is down 29% month-to-date.
 

 
Source: @markets   Read full article  


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Energy

1. US energy shares slumped in recent weeks, …
 

 
… as renewable energy stocks outperform.
 

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2. US gasoline sales are down vs. last year.
 
Source: @WSJ   Read full article  
 
By the way, gasoline prices remain below record levels in real terms.
 
Source: Dallas Fed   Read full article  

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3. Russia has significantly cut back on natural gas deliveries to Europe, …
 
Source: @ANZ_Research  
 
Source: Barclays Research  
 
… boosting prices.
 
Source: @GasTSOua  
 
Are European natural gas inventories about to turn lower?
 
Source: Pantheon Macroeconomics  

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4. Russia is finding ways to sell its crude oil.
 
Source: @bpolitics   Read full article  
 
Source: @markets   Read full article  
 
But its production could slow substantially in the months ahead.
 
Source: ECB   Read full article  

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5. The US is facing high electricity demand this summer.
 
Source: @financialtimes   Read full article  
 
6. Southwestern states are expected to maintain their lead in US onshore crude oil production.
 
Source: @EIAgov  


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Equities

1. The percentage of investors who are bearish is near the highest levels since the financial crisis.
 

 
2. After sharp declines this month, …
 
Source: S&P Dow Jones Indices  
 
… defensives outperformed on Wednesday.
 

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3. Slower economic activity suggests that equity risk premium (chart below) should be higher (2nd chart).
 

 
Source: Morgan Stanley Research; @WallStJesus  

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4. Massive fiscal stimulus boosted US corporate profits, resulting in remarkable outperformance vs. the Eurozone. What happens now as the stimulus impact ebbs?
 
Source: Robert C. King, The Jerome Levy Forecasting Center  
 
Recent earnings downgrades have been significant, especially excluding energy and COVID-hit companies.
 
Source: Deutsche Bank Research  
 
Consensus earnings estimates for cyclical companies are well above trend.
 
Source: Deutsche Bank Research  
 
Deutsche Bank expects cyclical earnings to gradually return to trend levels (or slightly below), especially as economic growth slows.
 
Source: Deutsche Bank Research  
 
Earnings suddenly matter. Firms with positive earnings have outperformed negative earnings firms every month since June of last year.
 
Source: SPDR Americas Research, @mattbartolini   Read full article  
 
This chart shows earnings sentiment trends.
 
Source: Goldman Sachs; @WallStJesus  
 
Double-digit declines in earnings ahead?
 
Source: @jessefelder, @IanRHarnett   Read full article  

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5. This chart tracks 1%+ market moves across different periods.
 
Source: @allstarcharts  
 
VIX has been elevated this year.
 
Source: S&P Dow Jones Indices  

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6. What can US truck tonnage tell us about downside risks for the market?
 
Source: @ISABELNET_SA  


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Alternatives

1. Equity hedge funds have been reducing their exposure, exacerbating the selloff. More to go?
 
Source: Deutsche Bank Research  
 
Source: Evercore ISI Research  

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2. Secondary fund transactions have been trading at a deeper discount.
 
Source: Citi Private Bank  
 
3. Private equity and private credit AUM growth has been impressive.
 
Source: Moody’s Investors Service  
 
Large alternative managers’ assets under management have increased fivefold in the past decade, boosting market influence, according to Moody’s.
 
Source: Moody’s Investors Service  

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4. This chart shows private capital IRRs by vintage year.
 
Source: Citi Private Bank  
 
5. For US VC deals closed in Q1, there has been a roughly 30% drop in the average late-stage valuation from last year’s highs. PitchBook expects further declines to eventually trickle down to earlier stage deal valuations.
 
Source: PitchBook  
 
6. This table shows the top countries by venture capital funding per capita so far this year.
 
Source: PitchBook  
 
7. Publicly-traded (previously) venture-backed companies have significantly underperformed relative to the S&P 500 this year.
 
Source: PitchBook  
 
8. The number of global unicorns (startups valued >$1 billion) peaked in September of last year.
 
Source: PitchBook   Read full article  
 
9. Direct real estate exposure has a weak correlation to the S&P 500, unlike REITs.
 
Source: J.P. Morgan Asset Management  
 
Here is a look at real estate performance in different inflation regimes.
 
Source: J.P. Morgan Asset Management  


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Credit

1. US high-yield spreads continue to widen.
 

 
The credit risk premium is rising across high-yield and investment-grade markets and is now firmly above pre-pandemic levels.
 
Source: Morgan Stanley Research  
 
Fed policy shifts tend to occur around sharp turns in credit spreads.
 
Source: Morgan Stanley Research  
 
Without the massive government intervention, credit markets should have seen a high number of defaults in the high-yield space during the pandemic, according to Morgan Stanley.
 
Source: Morgan Stanley Research  

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2. Refinancing risks appear to be contained even if the current slow pace of leveraged finance issuance were to continue, according to S&P.
 
Source: S&P Global Ratings  
 
3. This chart shows the sector concentration of issuers from North America and EMEA rated ‘B-‘ and below with debt maturing over the next 18 months.
 
Source: S&P Global Ratings  
 
4. Here is a look at US fixed-income securities outstanding.
 
Source: SIFMA  
 
5. Who holds muni bonds?
 
Source: SIFMA  


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Global Developments

1. How high will policy rates rise in the largest advanced economies? Below is a forecast from Capital Economics.
 
Source: Capital Economics  
 
2. Next, we have the distribution of global fixed-income securities outstanding.
 
Source: SIFMA  
 
3. What percentage of outstanding government debt is held by central banks?
 
Source: Simon White, Bloomberg Markets Live Blog  
 
4. The global shipping fleet is aging.
 
Source: J.P. Morgan Asset Management  
 
Here is a look at the age distribution of the world merchant fleet by vessel type.
 
Source: Statista  


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Food for Thought

1. Global commercial flights:
 
Source: @WSJ   Read full article  
 
2. GDP contribution of IP-intensive industries:
 
Source: USPTO  
 
Employment in IP-intensive industries:
 
Source: USPTO  
 
Wages in IP-sensitive industries:
 
Source: USPTO  

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3. GDP per capita vs. food and energy consumption (as a share of total):
 
Source: Trahan Macro Research  
 
4. Views on moral values in the US:
 
Source: Gallup   Read full article  
 
5. Reporting cybersecurity incidents:
 
Source: Moody’s Investors Service  
 
6. Most common crops by county:
 
Source: @erindataviz  

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