Quantitative tightening picks up speed

The Daily Shot: 08-Jul-22
The United States
Canada
The United Kingdom
The Eurozone
Europe
Japan
China
Emerging Markets
Cryptocurrency
Commodities
Energy
Equities
Rates
Global Developments
Food for Thought



 

The United States

1. Let’s begin with the labor market.
 
Initial jobless claims are still very low for this time of the year (below 2019 levels). The job market remains tight (for now).
 

 
Layoffs have picked up, but most workers are finding jobs quickly.
 

 
Source: @axios   Read full article  
 
There is room for labor force participation to recover further.
 
Source: Oxford Economics  

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2. Next, let’s take a look at housing.
 
Mortgage applications ticked up going into the holiday weekend but are still some 17% below last year’s levels.
 

 
The decline in mortgage applications and higher mortgage rates point to much slower home price appreciation in the months ahead (3 charts).
 
Source: Pantheon Macroeconomics  
 
Source: Piper Sandler   
 
Source: Desjardins  
 
Home price gains have been slowing but are still positive.
 
Source: Black Knight McDash  
 
Will we see real home price declines at the national level?
 
Source: Numera Analytics  
 
More sellers have been cutting prices.
 
Source: Redfin  
 
Purchase contract cancellations are surging in Denver.
 
Source: @AliWolfEcon  
 
Demand for vacation homes has been falling.
 
Source: Redfin  
 
Homebuilder sales continue to deteriorate.
 
Source: Evercore ISI Research  
 
US mortgage delinquency rates hit a record low.
 
Source: Black Knight McDash  
 
This chart shows rate lock distribution by purpose.
 
Source: Black Knight McDash  
 
Home values and equities have become roughly equal portions of household wealth.
 
Source: Desjardins  

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3. Manufacturing “onshoring” has been picking up momentum.
 
Source: Piper Sandler   
 
However, slowing demand could dampen companies’ willingness to keep investing in domestic production (2 charts).
 
Source: MarketDesk Research  
 
Source: @TheTerminal, Bloomberg Finance L.P.  

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4. It’s hard to see US utilities lowering prices even if natural gas prices don’t rebound.
 
Source: @RenMacLLC  
 
5. And so it begins. The Fed’s securities portfolio saw its first meaningful reduction in recent days (quantitative tightening).
 


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Canada

1. The Ivey PMI report showed robust growth in business activity last month.
 

 
2. CapEx plans remain strong.
 
Source: Scotiabank Economics  
 
3. As we saw yesterday, inflation expectations continue to climb.
 
Source: @RichardDias_CFA  
 
4. Could the BoC push Canada’s economy into recession if inflation remains stubbornly high?
 
Source: Oxford Economics  
 
Here is what could happen to the unemployment rate, according to Oxford Economics.
 
Source: Oxford Economics  


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The United Kingdom

The pound strengthened substantially vs. the euro after the news of Boris Johnson’s resignation.
 

 
Who will replace Johnson?
 
Source: YouGov  


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The Eurozone

1. The euro remains under pressure.
 

 
2. There are some concerns about the ECB’s defragmentation effort getting delayed.
 
Source: @financialtimes   Read full article  
 
Italian spreads widened.
 

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3. Euro-area retail sales are not crashing despite deteriorating sentiment.
 

 
4. European natural gas prices continue to surge as Russia tightens supplies.
 

 
As a result, one-year electricity contract prices are hitting record highs.
 
France:
 

 
Germany:
 
Source: S&P Dow Jones Indices  

——————–

 
5. HSBC expects inflation in France to ease as the government prevents the full pass-through of energy price rises, rather than subsidizing income.
 
Source: HSBC Global Research  
 
6. German shares have been underperforming.
 
Source: PGM Global  


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Europe

1. Poland’s latest rate hike was a bit more cautious. Markets expected to see a 75 bps increase.
 

 
2. Which countries extended their debt maturities since 2010?
 
Source: @RobinBrooksIIF  


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Japan

Shinzo Abe, Japan’s longest-serving prime minister, has been shot and is in “grave condition.”
 
Source: Reuters   Read full article  
 
The yen strengthened (chart shows the dollar falling against the yen – the title should say “USD/JPY”).
 


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China

1. FX reserves declined again, surprising the markets.
 

 
Hong Kong’s FX reserves are also falling.
 

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2. China is considering a massive stimulus package to focus on infrastructure. Copper prices perked up in response.
 
Source: Bloomberg   Read full article  
 
This effort will delay China’s shift toward services, a more productive part of the economy. As a result, the nation will have a difficult time realizing its full economic potential.
 
Source: @CFR_org   Read full article  

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3. Service sector employment growth has been slowing.
 
Source: TS Lombard  
 
4. China has lost most of its wage advantage vs. the US.
 
Source: @financialtimes   Read full article  
 
5. Average funding costs remain relatively low.
 
Source: Fitch Ratings  


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Emerging Markets

1. Let’s begin with Mexico.
 
Is inflation about to peak?
 

 
Loan growth reached 10%.
 

 
Manufacturing growth accelerated last month.
 
Source: S&P Global PMI  
 
Mexico hasn’t benefitted much from the US-China trade war.
 
Source: @financialtimes   Read full article  
 
Remittances continue to surge.
 

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2. Chile’s trade swung into deficit earlier than usual …
 

 
… due to high imports.
 

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3. India’s business activity remained robust last month (2 charts).
 
Source: S&P Global PMI  
 

 
India’s foreign direct investment outflows have accelerated.
 
Source: @acemaxx, @FT   Read full article  

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4. Turkey’s PMI report shows output declines picking up momentum.
 
Source: S&P Global PMI  
 
5. Malaysia’s central bank hiked rates again.
 

 
6. Historically, EM equities have outperformed the following six and 12 months after initial Fed rate hikes.
 
Source: Mirae Asset   Read full article  


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Cryptocurrency

1. Cryptos bounced with stocks …
 

 
… amid extreme bearishness.
 
Source: @Callum_Thomas  

——————–

 
2. The supply of Tether remains elevated.
 
Source: @sidcoins, @emilyjnicolle   Read full article  


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Commodities

1. At times, gold’s drawdowns have coincided with large equity declines.
 
Source: PGM Global  
 
Gold is usually sensitive to real yields, …
 
Source: PGM Global  
 
… making it vulnerable in this environment.
 
Source: @beursanalist  

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2. US coal exports are expected to surge.
 
Source: S&P Global Commodity Insights  


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Energy

1. Crude oil markets remain tight (elevated backwardation).
 

 
2. US gasoline and diesel demand was firmer last week ahead of the 4th of July weekend.
 
Source: Princeton Energy Advisors  
 
Source: Princeton Energy Advisors  
 
Here is the inventory data (somewhat distorted by the holiday weekend).
 

——————–

 
3. Crude oil futures open interest has been deteriorating.
 
Source: @LizAnnSonders  
 
4. US natural gas surged as last week’s inventories were tighter than expected – despite the Freeport LNG outage.
 

 

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5. Coal prices are climbing due to tight natural gas supplies globally.
 


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Equities

1. Earnings forecast downgrades continue to outpace upgrades as equity analysts attempt to catch up with the market.
 

 
2. Meme stocks outperformed this week as Gamestop announced a 4-for-1 stock split.
 

 
But the median stock price is lagging the S&P 500.
 

——————–

 
3. Corporate margin expansion forecasts look too optimistic.
 
Source: Goldman Sachs; @MaverickBogdan  
 
Economic data point to falling margins ahead.
 
Source: Pantheon Macroeconomics  

——————–

 
4. We are in for a rough earnings season.
 
Source: Piper Sandler   
 
5. The S&P 500 experienced a cluster of 2% intraday losses in the past 50 sessions, which is rare. Previous instances occurred near market troughs.
 
Source: SentimenTrader  
 
6. The ratio of cyclical stocks to defensive stocks has decoupled from real yields.
 
Source: PGM Global  
 
The same is true for value vs. growth and their earnings multiples.
 
Source: MarketDesk Research  
 
Source: MarketDesk Research  

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7. Global equities have discounted a lot of bad news.
 
Source: MRB Partners  
 
8. Dividend yields on non-US (vs. US) equities have been much higher than usual.
 
Source: J.P. Morgan Asset Management  
 
9. Dividend aristocrats have massively outperformed the S&P 500 in recent decades.
 
Source: Citi Private Bank  


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Rates

Rates implied volatility remains very high, especially at shorter maturities.
 
Source: @TheTerminal, Bloomberg Finance L.P.  


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Global Developments

1. Annual inflation averages are reaching multi-decade highs, with the exception of China and Japan.
 
Source: Barclays Research  
 
2. Here is the breakdown of inflation across G7 economies.
 
Source: OECD   Read full article  
 
3. Price changes become correlated across DM economies in high-inflation regimes.
 
Source: TS Lombard  
 
4. South Korea’s exports slowdown points to weaker global trade ahead.
 
Source: Pantheon Macroeconomics  
 
5. Historically, peaks in the global stock/bond ratio have coincided with US recessions.
 
Source: MRB Partners  
 
6. Despite the headwinds, global manufacturing activity held up relatively well last month.
 
Source: S&P Global PMI  


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Food for Thought

1. How do financial advisors get new clients?
 
Source: Natixis Investment Managers  
 
2. Energy consumption in the US since 1776:
 
Source: @EIAgov  
 
3. Tesla deliveries:
 
Source: @chartrdaily  
 
4. US inflation-adjusted stock market returns:
 
Source: BofA Global Research  
 
5. Global grain production:
 
Source: The Economist   Read full article  
 
6. LGBT identification by generation:
 
Source: Wells Fargo Securities  
 
7. US wildfires by day of the year:
 
Source: @chartrdaily  

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Have a great weekend!


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