Will the Fed push rates to 5%?

The Daily Shot: 16-Sep-22
The United States
Canada
The United Kingdom
Europe
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Energy
Equities
Alternatives
Global Developments
Food for Thought



 

The United States

1. Initial jobless claims are now firmly under pre-COVID levels, hitting a multi-year low. Investors have been looking for signs of some loosening in the labor market. This report didn’t provide any.
 

 
Continuing claims are also very low.
 

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2. August retail sales held up a bit better than expected. The markets have been looking for signs of a meaningful pullback in consumer spending. Once again, the data didn’t show that.
 

 
Spending on vehicles jumped.
 

 
The “core” retail sales were flat in August (an increase was expected).
 

 
This chart shows retail sales in dollar terms – both nominal and real.
 

 
Next, we have nominal retail sales by sector.
 
Source: ING  
 
The share of online sales is moving higher again.
 
Source: Mizuho Securities USA  

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3. With retail sales stable and unemployment claims falling to multi-year lows, the Fed may need to do more to reduce demand.
 
The fed funds rate trajectory has repriced sharply since the CPI report. The terminal rate is nearing 4.5%.
 

 
The market is now pricing in almost 200 bps of rate hikes between now and the end of the year.
 

 
The nominal Fed funds rate tends to exceed inflation around the late-cycle stage.
 
Source: Deutsche Bank Research  
 
With the stubbornly sluggish pullback in inflation, Deutsche Bank sees the Fed raising rates to 5%.
 
Source: Deutsche Bank Research  
 
Short-term yields continue to climb.
 
2yr note:
 

 
1yr bill:
 

 
The Treasury curve is moving deeper into inversion territory.
 

 
Real yields are grinding higher, creating further headwinds for stocks.
 

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4. Industrial production edged lower in August, driven by utilities. But manufacturing output increased.
 

 
Source: Bloomberg   Read full article  
 
Manufacturing output (index):
 

 
Vehicle production:
 

 
Capacity utilization:
 

 
The regional manufacturing reports from the NY Fed and the Philly Fed were mixed. We will have the details on Monday.

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5. The Atlanta Fed’s model estimate for the Q3 GDP growth dipped to 0.5%.
 
Source: @AtlantaFed   Read full article  
 
Here is the attribution.
 
Source: @TheTerminal, Bloomberg Finance L.P.  

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6. Inventory-to-sales ratios continue to normalize.
 

 
7. The decline in import prices was smaller than expected in August.
 

 
But the trade-weighted US dollar index reached the highest level since 2002, which should ease import prices.
 


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Canada

1. Home sales have declined for six months in a row.
 

 
The housing market is under pressure. This chart shows the sales-to-new-listings ratio and home price appreciation.
 
Source: Scotiabank Economics  

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2. A deep recession is coming, according to Oxford Economics.
 
Source: Oxford Economics  


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The United Kingdom

1. The pound reached its lowest level against the dollar since 1985.
 

 
2. This chart shows UK employment changes by status.
 
Source: @WSJ   Read full article  


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Europe

1. With energy costs soaring, the Eurozone trade deficit hit a new (seasonally-adjusted) record in July, exceeding forecasts.
 

 
2. German industrial firms have been rapidly cutting back on natural gas usage.
 
Source: @WSJ   Read full article  
 
3. Norway’s trade surplus is soaring (due to energy sales).
 

 
4. EU gas storage continues to build.
 
Source: Variant Perception  
 
5. Who are the top beer producers in the EU?
 
Source: Eurostat   Read full article  


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Asia – Pacific

1. Japan’s service-sector activity declined in July.
 

 
2. South Korea’s unemployment rate hit a new low.
 

 
Source: Reuters   Read full article  

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3. Taiwan continues to see portfolio outflows, which puts additional pressure on the Taiwan dollar (2nd chart).
 
Source: @ANZ_Research  
 

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4. New Zealand’s factory activity strengthened last month.
 


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China

1. August industrial production and retail sales topped expectations (2 charts).
 
Source: CNBC   Read full article  
 

 

 
2. The unemployment rate continues to move lower.
 

 
3. Property investment has been slowing.
 

 
4. New home prices are down for 12 months in a row.
 

 
Mortgage lending slowed sharply this year
 
Source: @WSJ   Read full article  

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5. The renminbi continues to fall vs. the dollar …
 

 
… despite the PBoC’s increasingly aggressive attempts to stabilize the currency.
 

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6. Stocks remain under pressure.
 

 

 
7. Retail corporate profit margins are declining.
 
Source: @ChinaBeigeBook  


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Emerging Markets

1. Brazil’s economic growth accelerated in July, topping forecasts.
 

 
Source: Reuters   Read full article  

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2. Colombia’s factory output remains robust.
 

 
But retail sales are starting to slow.
 

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3. India’s portfolio flows have turned positive.
 
Source: @ANZ_Research  
 
India is now the fifth biggest economy.
 
Source: Statista  


 
4. Russia’s FX reserves continue to move lower, partially due to the US dollar strength (reserves are measured in dollars, but Russia doesn’t hold significant dollar balances).
 

 
5. EM central banks tightened much earlier than advanced economies, which creates more flexibility with easing monetary policy.
 
Source: MRB Partners  


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Cryptocurrency

1. The Ethereum Merge turned out to be a “buy the rumor, sell the fact” event.
 
Source: CoinDesk   Read full article  
 
ETH has underperformed other top cryptos so far this week.
 
Source: FinViz  
 

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2. The ETH/BTC price ratio dipped below its 50-day moving average. The next major support level is about 15% away.
 

 
3. Bitcoin’s market cap relative to the total crypto market cap (dominance ratio) bounced from support as altcoins underperformed.
 

 
4. The Crypto Fear & Greed Index moved deeper into “extreme fear” territory this week.
 
Source: Alternative.me  
 
5. Below is a survey on bitcoin usage.
 
Source: Bonus Insider   Read full article  


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Energy

1. Here is the attribution of the recent decline in oil prices from Numera Analytics.
 
Source: Numera Analytics  
 
2. The energy sector earnings have been outpacing oil prices.
 
Source: Deutsche Bank Research  
 
And so has the energy sector’s relative performance.
 
Source: @TaviCosta  

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3. Gazprom has been very profitable this year.
 
Source: Barclays Research  
 
4. LNG margins are expected to decline from peak levels, albeit still above $3/MMBtu, which would provide an incentive for new projects, according to OIES.
 
Source: Oxford Institute for Energy Studies  


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Equities

1. Technicals don’t look good for stocks (2 charts).
 
Source: Bloomberg   Read full article  
 

 
And futures are heavy this morning.
 

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2. FedEx dropped 11% after the close, which doesn’t bode well for economic growth.
 

 
Source: CNBC   Read full article  

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3. Next, we have some charts on PE ratios from Longview Economics.
 
Stocks with PE ratios of over 30 vs. under 10x:
 
Source: Longview Economics  
 
PE ratios under 10x:
 
Source: Longview Economics  
 
Median PE ratio:
 
Source: Longview Economics  

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4. Current S&P 500 valuations are still too high given above-trend earnings and high inflation, according to Deutsche Bank Research.
 
Source: Deutsche Bank Research  
 
5. Utilities are very expensive relative to the S&P 500 amid demand for defensive stocks.
 
Source: @LizAnnSonders  
 
6. Hedge funds’ short positions continue to climb.
 
Source: Goldman Sachs; @LanceRoberts, h/t @pav_chartbook  
 
7. Mutual funds have been raising their cash balances to manage redemptions.
 
Source: RBC Wealth; @_____JustMe__  
 
8. The combination of rising asset yields and earnings declines have been the worst periods for equities.
 
Source: Bridgewater Associates   Read full article  


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Alternatives

1. Private equity deal volume has been trending lower.
 
Source: S&P Global Market Intelligence  
 
Here is the deal volume by sector.
 
Source: S&P Global Market Intelligence  

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2. This has been a good year for private-equity renewables investing.
 
Source: S&P Global Market Intelligence  
 
3. Serial entrepreneur-led startups have leveraged their experience to raise higher amounts of capital than their peers.
 
Source: PitchBook  


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Global Developments

1. Inflation rates have been running well above central banks’ targets.
 
Source: Scotiabank Economics  
 
2. This chart shows Morgan Stanley’s forecasts for policy rates in select economies.
 
Source: Morgan Stanley Research  


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Food for Thought

1. Days worked from home:
 
Source: The Washington Post   Read full article  
 
Source: WFH Research   Read full article  

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2. The cloud computing market:
 
Source: @financialtimes   Read full article  
 
3. NYC arrests:
 
Source: Bloomberg   Read full article  
 
4. Solar power potential by region:
 
Source: Statista  
 
5. CO2 emissions from vacation travel:
 
Source: @financialtimes   Read full article  
 
6. COVID deaths globally:
 
Source: Statista  
 
7. The 74th Emmy Awards:
 
Source: @chartrdaily  

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Have a great weekend!


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