Labor force participation is increasingly limited by US aging population

The Daily Shot: 04-Nov-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. Service sector growth has been slowing but remains sturdy for now. Here is the ISM Services PMI.
 

 
Source: Mizuho Securities USA  
 
Hiring has slowed in recent months.
 

 
Price gains increased in October for the first time since the April peak, suggesting that cost pressures persist.
 

 
A similar index from S&P Global also suggests that service firms are still struggling with inflation.
 
Source: S&P Global PMI  
 
The gap between manufacturing and service price pressures is widening.
 
Source: Wells Fargo Securities  
 
At the consumer level, it will take much longer to tame inflation in services than in goods.
 
Source: Oxford Economics  

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2. US factory orders showed small gains in September, driven by aircraft purchases.
 

 
But manufacturing has lost momentum outside of transportation.
 
Source: Reuters   Read full article  
 

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3. Unit labor costs grew at a slower rate last quarter.
 

 
Rising labor costs could put further pressure on corporate margins.
 
Source: BCA Research  
 
Productivity showed modest growth but is still down significantly on a year-over-year basis.
 

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4. Next, we have some updates on the labor market.
 
Jobless claims hit another multi-year low for this time of the year and are firmly below pre-COVID levels. The labor market strength continues to top expectations.
 

 

 
Layoffs have been inching higher but remain low relative to historical levels.
 

 
Morgan Stanley expects to see 180k jobs created last month. The consensus estimate is 195k.
 
Source: Morgan Stanley Research  
 
The bank expects the unemployment rate to tick up to 3.6% (in line with consensus).
 
Source: Morgan Stanley Research  
 
Labor force participation is increasingly limited by US aging population.
 
Source: BlackRock Investment Institute  

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5. The GDPNow model has the Q4 GDP growth at 3.6% (annualized), …
 

 
… boosted by robust consumer spending (PCE).
 
Source: @TheTerminal, Bloomberg Finance L.P.  

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6. The terminal rate (peak fed funds rate) continues to climb as the market expects the Federal Reserve to maintain pressure for longer.
 

 
The peak has now shifted all the way to July of next year.
 

 
Nomura now expects the terminal rate to go even higher.
 
Source: @carlquintanilla  
 
For the Fed, it’s all about hammering demand now.
 
Source: @jasonfurman, @adamshap5, @sffed  
 
The market is increasingly convinced that the Fed will get inflation under control.
 
Source: @MacroAlf   Read full article  
 
It took a worsening recession for the Fed to “pivot” in 1974.
 
Source: BofA Global Research  
 
The 2-year yield is heading toward 5%.
 

 
The Treasury curve hasn’t been this inverted since 1981.
 


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Canada

1. Building permits tumbled in September.
 
Source: MarketWatch   Read full article  
 

 
Source: Statistics Canada  

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2. Exports boosted Canada’s trade surplus.
 
Source: Bloomberg   Read full article  
 

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3. A budget surplus in five years?
 
Source: Desjardins  
 
Here is the forecast for Canada’s debt-to-GDP ratio.
 
Source: Desjardins  


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The United Kingdom

1. The BoE followed the Fed with a 75 bps rate hike.
 

 
The central bank sees a long recession ahead.
 
Source: BoE  
 
However, the market’s rate projections used in the forecast above have already been scaled back.
 
Source: @WSJ   Read full article  
 
The BoE wants to see rate expectations lowered, …
 
Source: @business, @_Davidgoodman, @PhilAldrick   Read full article  
 
… as mortgage rate resetting will devastate many households.
 
Source: BoE  
 
Pantheon Macroeconomics sees the terminal rate at 4%.
 
Source: Pantheon Macroeconomics  
 
2. The pound slumped on the BoE’s recession forecasts.
 
Source: Reuters   Read full article  
 


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The Eurozone

1. The labor markets remain strong.
 
Spain’s unemployment unexpectedly declined last month.
 

 
Unemployment rates remain relatively low.
 
Italy:
 

 
Belgium:
 

 
Ireland:
 

 
Greece:
 

 
The Eurozone:
 

 
But forecasters now expect the unemployment rate to rise sharply next year.
 
Source: ECB   Read full article  

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2. The US and the Eurozone are fighting different types of inflation. Here is the spread between the headline and the core CPI.
 
Source: Allianz; @MikeZaccardi  
 
3. Is it Europe’s turn to deal with financial stress?
 
Source: Arcano Economics  


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Europe

1. Sweden’s service sector is holding up well.
 

 
2. Norway’s central bank hiked rates by 25 bps. The market expected 50 bps.
 

 
3. Swiss inflation appears to have peaked.
 

 
4. Equity outflows have been severe.
 
Source: BofA Global Research  
 
5. This map illustrates the level of participation in social media across Europe.
 
Source: Eurostat   Read full article  


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Asia – Pacific

1. Japan’s service sector remains resilient.
 

 
2. Australia’s retail sales have been strong. Given the weakness in consumer sentiment, will we see a pullback?
 


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China

1. China’s equity market underperformance vs. the US followed the underperformance in earnings expectations.
 
Source: Truist Advisory Services  
 
2. Foreigners have been reducing their holdings of China’s domestic bonds.
 
Source: @financialtimes   Read full article  
 
3. More cities have seen declining home prices.
 
Source: Barclays Research  
 
4. The spike in COVID-19 cases contributed to falling mobility.
 
Source: MRB Partners  


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Emerging Markets

1. Let’s begin with LatAm vehicle sales, which have been softening.
 
Brazil:
 

 
Mexico:
 

 
Chile:
 

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2. Brazil’s foreign exchange reserves have deteriorated.
 
Source: PGM Global  
 
3. Russia’s services activity appears to be weakening.
 
Source: S&P Global PMI  
 
4. South Africa’s business activity is not growing.
 
Source: S&P Global PMI  
 
The nation’s electricity production and consumption tumbled in September.
 

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5. Turkey’s core CPI is above 70%, …
 

 
… and the PPI is nearing 160%.
 

 
The lira continues to hit record lows vs. USD.
 

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6. India’s service sector remains sturdy.
 
Source: S&P Global PMI  
 
7. Inflation in the Philippines continues to surge.
 

 
Source: ING  
 
The trade balance showed some improvement in September.
 

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8. There has been a large dispersion in EM equity returns this year.
 
Source: PGM Global  


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Cryptocurrency

1. It’s been a mixed week for cryptos, with litecoin (LTC) outperforming other large tokens.
 
Source: FinViz  
 
The LTC/BTC ratio held support above its 200-day moving average.
 

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2. Bitcoin’s drawdown is approaching previous bear-market lows.
 
Source: @ArcaneResearch  


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Commodities

1. Iron ore bounced from the lows on China reopening hopes.
 

 
2. The LME nickel price is testing long-term support as inventories steadily decline.
 
Source: Aazan Habib, Paradigm Capital  
 
3. Gold fund outflows have been severe as the Fed keeps tightening.
 
Source: BofA Global Research  


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Energy

1. Brent crude is at resistance again.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
2. US crude oil exports to Asia have been rising.
 
Source: Reuters   Read full article  
 
3. US LNG exports are surging (in dollar terms).
 
Source: @JosephPolitano  
 
4. US natural gas in storage is approaching the 5-year average. A warm winter could send prices tumbling.
 

 
5. This chart from BloombergNEF shows ” the year-on-year change in power generation from coal, gas, wind and solar, including projections for 2022 and 2023.”
 
Source: @NatBullard, @IEA   Read full article  


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Equities

1. Energy stocks continue to outperform the S&P 500.
 

 
This chart shows the trajectory of earnings expectations for the S&P 500 with and without the energy sector.
 
h/t @mikamsika, @Bloomberg  

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2. Earnings are increasingly important to performance. Companies with higher earnings revisions have been consistent outperformers since July.
 
Source: @MichaelKantro  
 
3. Tech stocks continue to widen their underperformance.
 

 
Big tech has peaked relative to small caps.
 
Source: BofA Global Research  
 
This chart shows the tech sector’s forward earnings relative to the S&P 500.
 
Source: Truist Advisory Services  

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4. How has the S&P 500 performed around FOMC statements and press conferences?
 
Source: Nomura Securities; @pattidomm, @carlquintanilla  
 
5. Large drawdowns tend to be followed by positive one-year returns.
 
Source: @LizAnnSonders  
 
6. Equity fund inflows have been strengthening.
 
Source: @WSJ   Read full article  
 
But cash inflows have been rising this quarter as well.
 
Source: BofA Global Research  

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7. The put/call ratio surged this week.
 
Source: Yardeni Research  
 
8. Long/short equity hedge funds have been reducing their exposure to the market.
 
Source: Deutsche Bank Research  
 
9. Will the gap between US and non-US earnings narrow further?
 
Source: Truist Advisory Services  
 
10. Which styles/equity factors will outperform over the next few weeks? Here is a model-based forecast from CornerCap Institutional.
 
Large caps:
 
Source: CornerCap Institutional  
 
Small caps:
 
Source: CornerCap Institutional  


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Credit

1. Bond yields are at or near their 10-year highs.
 
Source: Truist Advisory Services  
 
2. A major credit event in the works?
 
Source: @WSJ   Read full article  
 
3. Leveraged loan fund flows have turned positive.
 
Source: BofA Global Research  


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Rates

1. Positive real yields (now probably all above r*) indicate restrictive monetary policy.
 
Source: @MacroAlf   Read full article  
 
2. Fixed income volatility is at its highest since 2020 and appears to be peaking.
 
Source: Aazan Habib, Paradigm Capital  


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Global Developments

1. Is the global tightening synchronization peaking?
 
Source: TS Lombard  
 
2. M&A activity has been moderating.
 
Source: S&P Global Market Intelligence  
 
3. Supply and price pressures are easing (2 charts)
 
Source: @PkZweifel  
 
Source: S&P Global PMI  


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Food for Thought

1. Murdoch’s “remerged” empire:
 
Source: @chartrdaily  
 
2. UK’s inflation expectations and wars going back to 1688:
 
Source: @nfergus, Bloomberg   Read full article  
 
3. North Korean missile tests:
 
Source: Statista  
 
4. Where are Russia’s newest soldiers coming from?
 
Source: The Economist   Read full article  
 
5. Sentiment in news headlines over time:
 
Source: Rozado, Hughes, Halberstadt   Read full article  
 
6. Support for teaching about various topics in the classroom:
 
Source: Brookings   Read full article  
 
7. US voting intentions vs. 2018:
 
Source: Morning Consult  
 
8. Support for various voting laws:
 
Source: Statista  
 
9. Mini wind turbines for rooftops (no blades):
 
Source: GNN   Read full article  

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Have a great weekend!


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