Posted on by The Daily Shot Editor: Lev Borodovsky

Deep Fed rate cuts priced in starting in H2-2023

The Daily Shot: 12-Dec-22
• The United States
• The United Kingdom
• The Eurozone
• Europe
• Japan
• China
• Emerging Markets
• Cryptocurrency
• Commodities
• Energy
• Equities
• Credit
• Rates
• Global Developments
• Food for Thought

 

The United States

1. Let’s begin with some updates on inflation.
 
• The November PPI report surprised to the upside, with the core PPI climbing by 0.4% last month.
 

 
On a year-over-year basis, the PPI growth is trending lower.
 

 
The “trade services” PPI continues to moderate, signaling lower corporate margins.
 

 
• What should we expect from the CPI report this week? Nomura estimates a similar monthly gain to what we saw in October, once again driven by housing.
 

 
• Rent inflation is expected to moderate next year (2 charts).
 
Source: Vanda Research  
 
Source: Alpine Macro  
 
• Here is the price ratio of core goods to core services CPI.
 
Source: BofA Global Research  
 
• Inflation typically peaks during recessions and decelerates afterward, lagging the GDP.
 
Source: Alpine Macro  
 
• Short-term inflation expectations eased this month, …
 

 
… as gasoline prices decline. A gallon of unleaded is now cheaper than it was 12 months ago.
 

 
• The market expects inflation to ease rapidly, with longer-term inflation expectations remaining at manageable levels (2 charts).
 
Source: Nordea Markets  
 
Source: Deutsche Bank Research  

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2. Consumer sentiment benefitted from lower gasoline prices this month, with the U. Michigan index topping forecasts.
 

 
• The Penta-CivicScience Economic Sentiment Index also showed an improvement.
 
Source: @CivicScience   Read full article  
 
• Households expect a relatively robust increase in nominal income (higher wage expectations) …
 

 
… as they take advantage of tight labor markets.
 
Source: Oxford Economics  

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3. The market expects substantial Fed rate cuts over the 12-month period starting next July. Too much enthusiasm, perhaps?
 

 
Source: @business, @ctorresreporter, @mccormickliz   Read full article  
 
Here is what happened in previous recessions.
 
Source: @MacroAlf  

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4. BofA expects a recession next year as demand crumbles.
 
Source: BofA Global Research  
 
It’s worth noting that households spent only about a third of their pandemic-era excess savings.
 
Source: BCA Research  

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The United Kingdom

1. Electricity prices surged last week as temperatures plunge.
 

 
Source: The Independent   Read full article  

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2. Home prices continue to ease.
 

 
3. The market is pricing in a 50 bps BoE rate hike this week and another one in February.
 
Source: @ANZ_Research  
 
4. Ambulance response times in England have risen substantially.
 
Source: @opinion   Read full article  

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The Eurozone

1. Speculative accounts continue to bet on further gains in the euro.
 

 
2. The market sees a 50 bps ECB rate hike this week.
 
Source: @ANZ_Research  
 
3. Which German manufacturing sectors are most affected by the energy crisis?
 
Source: @financialtimes   Read full article  
 
Separately, mortgage lending has declined sharply in Germany.
 
Source: @BarkowConsult   Read full article  

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4. Nuclear power generation bounced from the lows in France but remains well below the typical levels for this time of the year.
 
Source: @ANZ_Research  
 
Source: @Gavekal  

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Europe

1. Norway’s inflation appears to have finally peaked.
 

 
2. This chart shows R&D spending across the EU.
 
Source: Eurostat   Read full article  
 
3. Here is the EU’s trade in green energy products.
 
Source: Eurostat   Read full article  
 
4. The map below shows battery plants across Europe.
 
Source: @financialtimes   Read full article  

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Japan

1. The BoJ is sticking with its yield control policy (distorting the yield curve).
 
Source: Reuters   Read full article  
 

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2. The PPI surprised to the upside.
 

 
3. The yen has deviated far from fair value.
 
Source: BCA Research  
 
4. Japan’s longer-term rate expectations have decoupled from the US.
 
Source: Goldman Sachs  

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China

1. Beijing has pulled back on COVID testing, resulting in lower reported cases.
 
Source: @financialtimes   Read full article  
 
Vaccinations have picked up.
 
Source: TS Lombard  

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2. Households remain cautious.
 
Source: BofA Global Research  
 
3. China’s shrinking labor force will increasingly become a drag on GDP growth in the decades ahead.
 
Source: Goldman Sachs  
 
4. China’s ranking in the Global Innovation Index significantly improved over the past decade.
 
Source: Fitch Ratings  
 
Policy initiatives such as tax deductions have incentivized research and development spending.
 
Source: Fitch Ratings  
 
Corporate research and development spending has outpaced GDP growth in recent years.
 
Source: Fitch Ratings  

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Emerging Markets

1. Brazil’s inflation continues to moderate.
 

 
2. This chart shows EM growth in local- and hard-currency debt outstanding.
 
Source: @WSJ   Read full article  
 
3. EM portfolio flows jumped last month.
 
Source: IIF  
 
4. Next, we have some performance data from last week.
 
• Currencies:
 

 
• Bond yields:
 

 
• Equity ETFs:
 

Back to Index

 

Cryptocurrency

1. Bitcoin is struggling to hold above $17k.
 

 
2. Here is a look at the crypto market cap versus the S&P 500’s.
 
Source: Oxford Economics  

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Commodities

1. Speculators started to cover their net short gold positions.
 
Source: @ANZ_Research  
 
2. Gold miners have experienced rising production costs, …
 
Source: PGM Global  
 
… with profit margins rolling over.
 
Source: PGM Global  

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3. Here is last week’s performance across key commodity markets.
 

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Energy

1. The front end of the Brent curve remains in contango.
 

 
2. Trend followers are shorting crude oil.
 
Source: @WSJ   Read full article  
 
3. Will US crude oil production hit a record high next year?
 
Source: @jeffsparshott, @WSJ  
 
4. Here is a look at growth in electricity capacity, including projections.
 
Source: BofA Global Research  
 
And this map shows the cheapest source of new electricity generation capacity.
 
Source: @BloombergNEF, @TheTerminal, Bloomberg Finance L.P.   Read full article  

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Equities

1. The market expects a volatile week. Here is the S&P 500 vol term structure (now vs. a week ago).
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
The CPI release days saw sharp market swings in recent months.
 
Source: @markets, @JessicaMenton, @lena_popina, @Matt_Turnerr   Read full article  

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2. Last week’s stock/bond divergence is signaling recession concerns.
 
Source: Vanda Research  
 
3. The Russell 2000 small-cap index/S&P 500 price ratio is back below its 200-day moving average.
 
Source: Aazan Habib, Paradigm Capital  
 
4. Dividend stocks typically outperform during inflationary periods.
 
Source: Newton Investment Management   Read full article  
 
High dividend yield stocks are trading at a discount versus low dividend yield stocks.
 
Source: Newton Investment Management   Read full article  

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5. Fund flows showed no signs of capitulation in this year’s selloff.
 
Source: BofA Global Research  
 
6. Retail investors have pulled back on stock purchases in recent weeks.
 
Source: Vanda Research  
 
• Retail fund flows have turned sharply negative.
 
Source: Goldman Sachs; @carlquintanilla  
 
• Retail investor positioning …
 
Source: TD Ameritrade  
 
… and sentiment remain depressed.
 
Source: Deutsche Bank Research  

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7. Stocks shunned by mutual funds have been outperforming.
 

 
8. Finally, we have last week’s performance data.
 
• Sectors:
 

 
• Equity factors:
 

 
• Thematic ETFs:
 

 
• Largest US tech firms:
 

Back to Index

 

Credit

1. Leveraged finance issuance picked up in November. This chart also shows the year-to-date use of proceeds.
 
Source: Deutsche Bank Research  
 
2. Next, we have leveraged loan downgrades and upgrades.
 
Source: @lcdnews   Read full article  
 
3. Investors are underweight in IG credit.
 
Source: BofA Global Research  
 
4. Here is last week’s performance by asset class.
 

Back to Index

 

Rates

1. Speculative bets against Treasury futures are hitting extreme levels.
 
Source: Deutsche Bank Research  
 
2. The 10-year Treasury yield is closely correlated with the yield on the eighth eurodollar contract. Alpine Macro expects lower yields as the market has fully discounted the tightening cycle.
 
Source: Alpine Macro  
 
3. FHLB notes have become an attractive alternative to T-bills.
 
Source: PGM Global  
 
4. Longer-dated swap spreads have been inversely correlated to Treasury yields.
 
Source: Goldman Sachs  

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Global Developments

1. DM central banks are moving rates into restrictive territory.
 
Source: Scotiabank Economics  
 
2. 2023 could be the first year of the 21st century without a major election in any G7 country.
 
Source: Deutsche Bank Research  
 
3. Here are the top destinations for foreign direct investment.
 
Source: IMF   Read full article  
 
4. Global potential GDP expansion will continue to soften as population growth slows.
 
Source: Goldman Sachs  
 
5. Next, we have some performance data from last week.
 
• Bond yields:
 

 
• Trade-weighted currency indices:
 

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Back to Index

 

Food for Thought

1. Stolen packages:
 
Source: ValuePenguin   Read full article  
 
2. Stress during the holiday season:
 
Source: @CivicScience  
 
3. Toyota Prius sales:
 
Source: @chartrdaily  
 
4. Top wealth shares in the United States:
 
Source: @gabriel_zucman  
 
6. US debt scenarios:
 
Source: Committee for a Responsible Federal Budget  
 
6. Share of US 25-34-year-olds living with parents vs. living alone:
 
Source: Calculated Risk  
 
7. “Do not call” complaints:
 
Source: @semafor   Read full article  
 

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