The market still sees Fed rate cuts in the first half of next year

The Daily Shot: 26-Jul-22
The United States
Canada
The United Kingdom
The Eurozone
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Energy
Equities
Credit
Rates
Global Developments
Food for Thought



 

The United States

1. The Dallas Fed manufacturing index confirmed the weakness reported by other Fed districts.
 

 
Supply chain stress is easing, …
 

 
… and so are price pressures, althought we still have a ways to go before reaching more typical levels.
 

 
Fewer businesses are boosting wages.
 

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2. Next, we have some updates on the housing market.
 
More sellers have been cutting prices.
 
Source: Altos, CalculatedRisk   
 
Properties are taking longer to sell.
 
Source: Redfin  
 
New housing supply has been rising.
 
Source: @RickPalaciosJr  
 
Mortgage applications and homebuilder sentiment point to weakness ahead for new home sales.
 
Source: Pantheon Macroeconomics  
 
Source: Oxford Economics  
 
Building materials shortages are easing as demand moderates.
 
Source: @johnburnsjbrec  
 
The spread between mortgage rates and Treasury yields is elevated.
 
Source: Yardeni Research  
 
The overall housing supply remains tight.
 
Source: BCA Research  

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3. Here are some updates on consumer sentiment.
 
The current conditions component of consumer sentiment has been highly correlated with real consumer spending.
 
Source: Mizuho Securities USA  
 
Do we need to wait for real wages to rebound before sentiment turns meaningfully higher?
 
Source: BCA Research  
 
This chart shows consumer sentiment vs. Goldman’s Twitter Economic Sentiment Index (sentiment on Twitter).
 
Source: Goldman Sachs; @WallStJesus  

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4. The market continues to price Fed rate cuts in the first half of next year.
 

 
Bets on rate cuts this early in the hiking cycle are unusual.
 
Source: @WSJ   Read full article  

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5. The economic contraction, if one is coming, is expected to be shallow due to elevated excess savings.
 
Source: MRB Partners  
 
Goldman doesn’t see a recession – just slow growth.
 
Source: Goldman Sachs; @MikeZaccardi  
 
Here is Morgan Stanley’s recession probability model.
 
Source: Morgan Stanley Research  


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Canada

1. Consumer confidence appears to have stabilized.
 

 
2. The TSX Index is holding support, although breadth indicators remain weak.
 
Source: Aazan Habib, Paradigm Capital  


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The United Kingdom

1. The market doesn’t see the BoE hiking by more than 50 bps next month.
 

 
Source: Reuters   Read full article  

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2. The CBI report showed slower growth in industrial orders this month.
 

 
Price gains are moderating, …
 

 
… which will later show up in the PPI data.
 
Source: Pantheon Macroeconomics  

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3. Real retail sales continue to fall.
 
Source: Financial Times


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The Eurozone

1. Germany’s Ifo business expectations index is crashing …
 

 
Source: ifo Institute   
 
… which points to a contraction in Germany’s GDP (2 charts).
 
Source: @CavaggioniMario  
 
Source: Pantheon Macroeconomics  
 
Here is the spread between the Ifo expectations and current assessment indices.
 
Source: @StephaneDeo  

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2. Capital Economics forecasts a shallower path for the Eurozone GDP trajectory.
 
Source: Capital Economics  
 
3. Market pricing for the ECB’s rate hike trajectory has declined sharply.
 

 
The yield curve has flattened (2 charts).
 

 

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4. Household deleveraging is over.
 
Source: MRB Partners  
 
5. Consumer inflation expectations have been moderating.
 
Source: Pantheon Macroeconomics  


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Asia – Pacific

1. Japan’s services PPI continues to climb.
 

 
2. Singapore’s CPI surprised to the upside.
 

 
3. South Korea’s Q2 GDP growth was stronger than expected.
 

 
4. Taiwan’s industrial production remains robust.
 


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China

1. Beijing’s property sector bailout announcement is boosting developers’ shares …
 

 
… as well as iron ore prices.
 

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2. Business activity remains soft, according to the World Economics SMI report.
 
Source: World Economics  
 
3. Hong Kong’s exports are now well below last year’s levels.
 

 
The trade deficit hit a record high.
 


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Emerging Markets

1. Mexico’s economic activity eased in May.
 

 
Is inflation peaking?
 

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2. Brazil’s high-frequency price data show some moderation in inflation.
 

 
3. Turkey’s manufacturing confidence has been holding up well, but it’s starting to buckle.
 

 
Capacity utilization remains strong.
 

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4. The Philippine government budget is under pressure.
 

 
5. EM spreads have been tightening relative to the US.
 
Source: FTSE Russell   Read full article  
 
6. EM policy tightening started well before advanced economies.
 
Source: Oxford Economics  


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Cryptocurrency

1. Cryptos are taking another leg down.
 

 
2. Crypto investment products saw inflows totaling $30 million last week, following a strong uptick in the prior week, mostly in Switzerland (2 charts).
 
Source: CoinShares   Read full article  
 
Source: CoinShares   Read full article  
 
3. Bitcoin and Ethereum-focused products accounted for a majority of inflows last week, while multi-asset funds saw outflows.
 
Source: CoinShares   Read full article  
 
4. The total value locked (TVL) across DeFi tokens has declined by 70% in the last quarter alone toward $70 billion.
 
Source: CoinShares  
 
5. A collection of DeFi applications have been built on alternative blockchains over the past year, partly because of high transaction fees on Ethereum.
 
Source: CoinShares  


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Energy

1. WTI crude oil futures held support.
 

 
Oil markets remain tight.
 

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2. Russia is putting a squeeze on Europe’s natural gas markets.
 
Source: @WSJ   Read full article  
 
Futures jumped.
 

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3. US natural gas futures are nearing $9/mmbtu as the heatwave persists.
 

 
Source: NOAA  

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4. US retail gasoline prices are down 10% this month. The next move will likely be higher.
 


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Equities

1. We got some bad news from Walmart, sending shares down sharply after the close.
 
Source: CNBC   Read full article  
 

 
Amazon declined as well.
 

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2. Companies with higher non-US revenues saw stronger earnings and revenue growth.
 
Source: @FactSet  
 
3. US earnings estimates are getting trimmed faster than those in Europe and Japan.
 
Source: @JeffreyKleintop  
 
4. The short-term bottoming process in equities and bonds has coincided with the correction in commodities.
 
Source: Aazan Habib, Paradigm Capital  
 
But commodities are rebounding.
 

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5. Companies with low operating leverage have been outperforming in recent days.
 

 
Here is the operating leverage by sector.
 
Source: J.P. Morgan Asset Management; @Mayhem4Markets  

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6. The correlation among S&P 500 companies has been declining.
 

 
7. Microcaps have been underperforming small caps.
 

 
8. Speculative tech shares have given up last week’s outperformance.
 

 
9. Utilities have been underperforming this month.
 
Source: Evercore ISI Research  

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10. On a separate note, financial advisors expect to be adjusting their fee structure in the years ahead.
 
Source: Natixis Investment Managers   


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Credit

1. Leveraged loan prices are rebounding.
 

 
2. So far, we’ve had the biggest annual decline in high-yield bond issuance on record.
 
Source: @GunjanJS, @WSJmarkets, @ericwallerstein   Read full article  


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Rates

1. The 10-year – 3-month portion of the Treasury curve continues to flatten.
 

 
2. Are Treasuries attractive at current levels?
 
Source: Alpine Macro  
 
3. Asset managers have been boosting their bets on ultra-long bond futures.
 


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Global Developments

1. Manufacturing activity continues to slow.
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  
 
2. Markets expect many central banks to begin easing next year.
 
Source: BCA Research  
 
3. Risky asset fund flows have been low relative to safe assets.
 
Source: Goldman Sachs; @WallStJesus  
 
4. The peak in the stock-bond ratio tends to signal recessions.
 
Source: MRB Partners  
 
5. The percentage of countries with inflation below 2% has dropped to zero.
 
Source: Apollo Global Management; @MichaelRStrain  


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Food for Thought

1. Scarring effects of losing a job on wages (over the long term):
 
Source: @RichardvReeves, @kfbutcher, @ArielGelrud   Read full article  
 
2. The composition of income by income level:
 
Source: Tax Foundation   
 
3. Republicans’ views on climate change policy:
 
Source: @axios   Read full article  
 
4. GOP favorability ratings among Republicans:
 
Source: @databyler   Read full article  
 
5. Warmer nights and insufficient sleep:
 
Source: @financialtimes   Read full article  
 
6. Tour de France doping violations:
 
Source: Statista  

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