The Daily Shot: 07-Jul-22
• The United States
• Canada
• The United Kingdom
• The Eurozone
• Europe
• Asia – Pacific
• China
• Emerging Markets
• Cryptocurrency
• Commodities
• Energy
• Equities
• Credit
• Rates
• Global Developments
• Food for Thought
The United States
1. The FOMC minutes showed an increased focus on inflation expectations and a willingness to keep tightening well into restrictive territory.
– Concerns about “unanchored” inflation expectations:
… many participants raised the concern that longer-run inflation expectations could be beginning to drift up to levels inconsistent with the 2 percent objective. These participants noted that, if inflation expectations were to become unanchored, it would be more costly to bring inflation back down to the Committee’s objective. …
Many participants judged that a significant risk now facing the Committee was that elevated inflation could become entrenched if the public began to question the resolve of the Committee to adjust the stance of policy as warranted.
– Tightening financial conditions by projecting a hawkish stance:
… participants stressed that appropriate firming of monetary policy, together with clear and effective communications, would be essential in restoring price stability.
– Prepared to go the distance:
Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.
– Prepared for collateral damage (recession):
Most participants assessed that the risks to the outlook for economic growth were skewed to the downside. Downside risks included the possibility that a further tightening in financial conditions would have a larger negative effect on economic activity than anticipated …
– Frontloading (and perhaps a pause at the end of the year?):
Participants noted that, with the federal funds rate expected to be near or above estimates of its longer-run level later this year, the Committee would then be well positioned to determine the appropriate pace of further policy firming and the extent to which economic developments warranted policy adjustments.
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• The equity market took the hawkish FOMC minutes in stride, as oil prices continued to fall.
• Treasury yields jumped and the curve moved deeper into inversion.
• The dollar continued to advance.
• Market-based inflation expectations keep drifting lower with oil.
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2. Surging core inflation measures remain a challenge for the US central bank.
Source: Deutsche Bank Research
3. There is quite a bit of debate about how far the Fed will be forced to hike rates. The market still sees the terminal rate below 3.5%.
At that level, the peak inflation-adjusted fed funds rate will be negative.
Source: Deutsche Bank Research
Here are some projections.
• TS Lombard:
Source: TS Lombard
• Bloomberg Economics:
Source: @TheTerminal, Bloomberg Finance L.P.
• Oxford Economics:
Source: Oxford Economics
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4. The May ISM Services PMI report was stronger than expected.
Source: @TheTerminal, Bloomberg Finance L.P.
• Price pressures persist.
• Supply bottlenecks are still an issue (mostly in retail).
• One area of concern in the report was employment. Service firms are now shedding jobs.
5. Let’s continue with some updates on the labor market.
• The ISM Services employment print (above) doesn’t bode well for job growth.
Source: Pantheon Macroeconomics
• Labor markets remained extremely tight in May, with job openings not far from record levels.
Source: Reuters Read full article
Below are some examples.
– Retail, wholesale, and logistics:
– Hotels and restaurants:
– School teachers:
This chart shows the number of job openings for every unemployed American.
Voluntary resignations are off the highs but still elevated (the Great Resignation continues). This trend could make companies less willing to move ahead with layoffs in a slowdown scenario.
• What should we expect from the June payrolls report (this Friday)?
– FHN Financial (consensus estimate = 268k):
Source: FHN Financial
– Oxford Economics:
Source: Oxford Economics
– Morgan Stanley:
Source: Morgan Stanley Research
Morgan stanley sees the unemployment rate at 3.6%.
Source: Morgan Stanley Research
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6. The Atlanta Fed’s GDPNow model has the Q2 GDP growth at -2.1% (annualized), well below the consensus forecast of +2.6%.
Source: @AtlantaFed Read full article
7. Will falling gasoline prices stabilize consumer sentiment?
Source: @HPS_CS, @HPSInsight, @CivicScience
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Canada
1. Canadian companies are still facing capacity constraints.
Source: Scotiabank Economics
2. Growth is expected to slow sharply next year.
Source: Oxford Economics
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The United Kingdom
1. Boris Johnson agreed to resign after the government unraveled.
Source: @financialtimes Read full article
The pound is stronger.
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2. Growth in construction activity slowed more than expected last month.
3. The misery index is nearing the post-2008 peak.
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The Eurozone
1. German manufacturing orders and industrial production were almost flat in May.
Industrial production is well below trend.
Source: Commerzbank Research
Economists continue to downgrade the nation’s growth forecasts for this year.
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2. PMI indicators point to weakness in the euro-area economy ahead (2 charts).
Source: @WilliamsonChris
Source: @WilliamsonChris
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3. The euro is nearing parity.
Is it undervalued?
– Piper Sandler:
Source: Piper Sandler
– ING:
Source: ING
• So far, the EUR/USD trading range is not extreme relative to previous years.
Source: Deutsche Bank Research
• The dollar is already well ahead of the euro compared with previous hiking cycles.
Source: Deutsche Bank Research
• A decline toward 0.95 in EUR/USD would match or exceed the historical all-time extreme dislocations, according to Deutsche Bank.
Source: Deutsche Bank Research
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4. European stocks have been correlated with the euro lately.
5. Oil prices point to a moderation in the euro-area CPI.
Source: @fwred
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Europe
1. Sweden’s household consumption and private sector output continue to climb, pointing to robust economic growth.
But industrial orders are showing signs of strain.
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2. This chart shows the attribution of EU stock declines over the past six months.
Source: Numera Analytics
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Asia – Pacific
1. Australia’s trade surplus hit a record high, topping forecasts.
2. Taiwan’s inflation continues to climb.
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China
1. Developer fundraising in bond markets is starting to pick up.
Source: Gavekal Research
2. Mortgage lending has collapsed, and will likely remain weak until property sales rebound strongly, according to Gavekal.
Source: Gavekal Research
3. Local government debt growth has accelerated.
Source: @IIF
4. The nation’s digital economy has outpaced overall nominal GDP growth.
Source: Fitch Ratings
There has been a steady rise in software and IT sector output relative to other digital economy sectors.
Source: Fitch Ratings
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Emerging Markets
1. Let’s begin with Chile.
• Retail sales (still strong):
• Manufacturing output (now below 2018 levels):
• Copper production (picking up momentum):
• Business confidence (deteriorating):
• Overall economic activity (still strong):
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2. Next, we have some updates on Brazil.
• Manufacturing PMI (robust):
Source: S&P Global PMI
• Services PMI (very strong):
• Exports (record high):
• The unemployment rate (back below 10%):
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3. Russian vehicle sales remain depressed.
4. South Africa’s business activity is holding up well.
Producer prices are surging.
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5. Egypt is in a recession.
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Cryptocurrency
1. Only 17% of ETH 2.0 deposits are in profit.
Source: @glassnode
2. Bitcoin futures premiums are at an all-time low.
Source: @ArcaneResearch
3. Bitcoin’s implied volatility has flatlined.
Source: Skew
Bitcoin’s realized volatility has sold off from its spikes at the beginning of May and June.
Source: BlockScholes Read full article
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4. Shares of crypto mining firms continue to fall.
Source: Deutsche Bank Research
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Commodities
1. Gold has been under pressure as the dollar surges.
Source: Reuters Read full article
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2. Weaker liquidity conditions in China will be a drag on commodities.
Source: @crossbordercap
3. US farmers are unhappy.
4. Russia is a major exporter of raw materials, not only in the energy sector.
Source: Incrementum
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Energy
1. Brent crude is testing the $100/bbl support.
Source: @TheTerminal, Bloomberg Finance L.P.
Demand expectations declined and supply remained broadly unchanged last week.
Source: NY Fed Read full article
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2. Weaker global economic activity will be a drag on oil demand.
Source: @WilliamsonChris Read full article
3. Oil & gas CapEx has been trending lower.
Source: BlackRock Investment Institute
4. There is skepticism about Saudi Arabia’s and UAE’s ability to boost oil production.
Source: S&P Global Commodity Insights
5. European governments are taking control of power companies.
Source: @WSJ Read full article
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Equities
1. Investor sentiment remains bearish.
2. This chart shows the returns needed to get the S&P 500 back to January highs.
Source: J.P. Morgan Asset Management
3. Here is the 100-day moving average of the Nasdaq Composite’s high/low ratio. Entry point at 0.29?
Source: @jaykaeppel
4. The Smart Money Flow Index suggests that stocks could bounce from here.
Stifel expects a summer relief rally led by oversold cyclical stocks (2 charts).
Source: Stifel
Source: Stifel
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5. Small caps are cheap on an absolute and relative basis.
Source: MarketDesk Research
6. It was a challenging quarter for fund flows.
Source: SPDR Americas Research, @mattbartolini
7. Given the current valuations, what returns should we expect over the next five years?
Source: J.P. Morgan Asset Management
8. How much do earnings decline during recessions?
Source: BlackRock Investment Institute
Depressed consumer sentiment suggests that we could see a significant deterioration.
Source: @acemaxx, @MorganStanley
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9. Demand for out-of-the-money put options hit the lowest level since the 2020 pandemic shock.
10. The increased correlation between stocks and bonds has been a headache for investors.
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital
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Credit
1. Should we be concerned about rising bank CDS spreads?
2. This chart shows asset yields vs. their correlation to the S&P 500.
Source: J.P. Morgan Asset Management
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Rates
1. Treasury ETFs continue to see capital inflows.
2. The 10-year Treasury real yield is testing resistance, which could point to a peak in the Fed funds rate within three years. Could we see a Fed pause before then?
Source: Stifel
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Global Developments
1. The fall in asset prices will have a significant impact on GDP growth next year, according to Oxford Economics.
Source: Oxford Economics
2. Real GDP growth is declining faster than expected across key regions.
Source: Fitch Solutions Macro Research
Barclays expects the US, UK, and Europe are projected to slow below trend growth next year.
Source: Barclays Research
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3. Rapidly rising semiconductor inventories point to a risk of oversupply.
Source: Lombard Odier; @leveltargetnow
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Food for Thought
1. Annual revenue since the founding of social media platforms:
Source: @chartrdaily
2. EV market share:
Source: Statista
3. US labor force participation relative to the pre-COVID trend:
Source: S&P Global Ratings
4. Abortion laws globally:
Source: Statista
5. Which country is the biggest obstacle to peace after Russia’s invasion?
Source: European Council on Foreign Relations Read full article
6. Global political regimes:
Source: Visual Capitalist Read full article
7. Ranking sports by the degree of difficulty for key skills:
Source: ESPN, Microsoft Power BI Read full article
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