For every ten people hired in the US, seven others quit

The Daily Shot: 05-Jan-23
The United States
The United Kingdom
The Eurozone
Japan
Asia – Pacific
China
Emerging Markets
Commodities
Equities
Credit
Rates
Global Developments
Food for Thought



 

The United States

1. The FOMC minutes confirmed the Fed’s hawkish stance, pushing back against market pricing for rate cuts later this year.

No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience  cautioned against prematurely loosening monetary policy.

Nonetheless, the market sees rate cuts starting as soon as July, …
 

 
… with some 40 bps of cuts priced for the second half of the year.
 

 
The terminal rate remains just below 5%.
 
Source: Jack Ablin, Cresset Wealth Advisors  
 
The FOMC is not happy with the recent easing in financial conditions.

Participants noted that, because monetary policy worked importantly through financial markets, an  unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability. Several participants commented that the medians of participants’ assessments for the appropriate path of the federal funds rate in the Summary of Economic Projections, which tracked notably above market-based measures of policy rate expectations, underscored the Committee’s strong commitment to returning inflation to its 2 percent goal.

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2. As expected, the ISM Manufacturing PMI signaled a further weakening in US factory activity last month.
 

 
Here are the contributions to the ISM PMI (2 charts).
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Source: Mizuho Securities USA  
 
Demand is deteriorating quickly, …
 

 
… confirming the PMI report from S&P Global (see chart).
 
Source: @WilliamsonChris, @SPGlobalPMI  
 
However, hiring improved last month.
 

 
Supplier delivery times are shrinking rapidly amid soft demand.
 

 
And costs are dropping faster than expected.
 

 
Falling factory input prices should ease consumer inflation (2 charts).
 
Source: Oxford Economics  
 
Source: @macro_daily  

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3. Demand for labor remains exceptionally strong, fueling the Fed’s hawkish stance.
 

 
The labor market imbalance persists, with over 1.7 job openings per unemployed American.
 

 
Here is a comparison to the UK and Germany.
 
Source: ING  
 
Moreover, the quits rate (voluntary resignations) remains elevated …
 

 
… which tends to boost wage growth.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
The Great Resignation is alive and well. For every ten people hired in the US, seven others quit. The quits-to-hires ratio hit a record high.
 

 
One sector that saw a softer quits rate was construction, as the housing market slump takes a toll.
 
Source: LPL Research  
 
The Beveridge Curve also shows the labor market imbalance.
 
Source: @GregDaco  
 
Here is the hires-to-openings ratio.
 

 
This chart shows the November job openings changes by sector.
 
Source: Oxford Economics  
 
And here is the distribution by firm size.
 
Source: Chart and data provided by Macrobond  

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4. US automobile sales ended the year on a weak note.
 

 
Source: @WSJ   Read full article  


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The United Kingdom

1. Mortgage approvals tumbled in November.
 

 
Source: @financialtimes   Read full article  

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2. Growth in the broad money supply is slowing quickly.
 

 
3. New car sales remain below pre-COVID levels.
 

 
4. Foreigners continue to dump gilts.
 

 
Source: @PhilAldrick, @markets   Read full article  

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5. UK small caps registered the worst relative performance among major markets.
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  


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The Eurozone

1. The French headline CPI came off the highs.
 

 
Consumer confidence remains depressed.
 

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2. Services PMI indicators point to stabilization.
 
Italy:
 
Source: S&P Global PMI  
 
Spain:
 
Source: S&P Global PMI  
 
France (an exception):
 
Source: S&P Global PMI  
 
Germany:
 
Source: S&P Global PMI  

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3. Germany’s yield curve remains heavily inverted.
 

 
4. The market is pricing in a number of ECB rate hikes ahead.
 

 
A higher ECB terminal rate means increasing funding costs for Italy.
 
Source: TS Lombard  


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Japan

1. Bearish sentiment is starting to wane for the Japanese yen, and momentum indicators are not yet overbought despite the recent rally.
 
Source: MRB Partners  
 
The dollar-yen carry trade is being unwound.
 
Source: PGM Global  

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2. Traders are pressing their bets against the BoJ’s yield control policy via JGB futures.
 
Source: PGM Global  
 
The JGB market functioning has deteriorated.
 
Source: Capital Economics  


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Asia – Pacific

1. Singapore’s business activity suddenly started contracting in December.
 
Source: S&P Global PMI  
 
2. New Zealand’s home price declines are accelerating.
 

 
3. The market expects the RBA to keep tightening in the months ahead.
 


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China

1. Beijing is stepping up its efforts to bail out property developers.
 
Source: @markets   Read full article  
 
Developers’ stocks and bonds are rallying.
 

 

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2. Capital is flowing into the mainland’s equity markets (1st panel), boosting share prices (2nd panel).
 

 
The renminbi continues to rally.
 

 
Shares trading on Nasdaq have completely closed their massive underperformance over the past six months.
 

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3. Mobility remains depressed (2 charts).
 
Source: Capital Economics  
 
Source: Longview Economics  
 
4. COVID cases in Hong Kong are rising quickly.
 
Source: @OurWorldInData   Read full article  


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Emerging Markets

1. Brazil’s services growth is stalling.
 
Source: S&P Global PMI  
 
2. ASEAN manufacturing growth has almost stopped.
 
Source: S&P Global PMI  
 
3. Egypt just experienced another currency devaluation.
 

 
Source: @NettyIsmail, @TTablawy, @markets   Read full article  


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Commodities

1. What are the market expectations for commodity markets in 12 months?
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  
 
2. Gold has diverged sharply from Bloomberg’s broad commodity index.
 

 
Gold miners’ shares are at resistance.
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  

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3. Will commodities break out in real terms?
 
Source: PGM Global  
 
4. Commodity prices have diverged from the US equity risk premium over the past year. We could see stronger flows into hard assets if a Fed pivot and/or falling yields do not materialize, according to PGM Global.
 
Source: PGM Global  
 
5. Dry bulk shipping costs have been falling rapidly.
 


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Equities

1. Earnings expectations have been correlated with US job openings.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
2. There was a wide dispersion in breadth across S&P 500 sectors last month.
 
Source: Global X ETFs   Read full article  
 
Breadth remains elevated, given the level of the S&P 500 drawdown.
 
Source: @t1alpha  

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3. The Russell 2,000 small-cap index tends to outperform when inflation is falling.
 
Source: Alpine Macro  
 
4. 2022 was the first time the S&P 500 and the 10-year Treasury note lost more than -10% on a total return basis for a full calendar year since 1872.
 
Source: Deutsche Bank Research  
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  

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5. Next, we have some sector updates.
 
2022 sector returns vs. absolute contributions to the S&P 500 return:
 
Source: @genuine_impact  
 
Drivers of profit margin expansion:
 
Source: @WarrenPies, @3F_Research  
 
By the way, margins are expected to revert to their long-term trend.
 
Source: MarketDesk Research  
 
Forward PE multiples and earnings expectations:
 
Source: MarketDesk Research  

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6. The global value factor still has room to run, according to AQR.
 
Source: AQR Capital Management   Read full article  
 
7. Next, we have some equity factor performance charts for 2022.
 
Large caps:
 
Source: CornerCap Institutional  
 
Small caps:
 
Source: CornerCap Institutional  

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8. Finally, we have the S&P 500 implied vol term structure.
 
Source: @TheTerminal, Bloomberg Finance L.P.  


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Credit

1. Weakness in the ISM PMI points to wider HY spreads.
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  
 
2. Leveraged loan issuance was dominated by refinancings in Q4.
 
Source: @lcdnews  
 
Weaker credits have been mostly shut out of the market.
 
Source: @lcdnews  


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Rates

1. The duration supply from this year’s Treasury coupons (notes and bonds) is expected to be roughly equal to last year’s. This is still large compared with pre-pandemic levels.
 
Source: Deutsche Bank Research  
 
2. Treasuries are attractive based on their yield and US sovereign risk.
 
Source: Piper Sandler   
 
3. Real yields continue to grind higher, which tends to be a headwind for growth stocks.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
4. Finally, here is the composition of the FOMC this year.
 
Source: Wells Fargo Securities  


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Global Developments

1. BCA Research sees significant downside potential in global bond yields if inflation continues to slow. That could benefit long-duration assets.
 
Source: BCA Research  
 
2. The correlation between US stocks and bonds and US stocks versus international stocks remains elevated. We could see normalization this year, according to Global X.
 
Source: Global X ETFs   Read full article  


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Food for Thought

1. Expected cybercrime costs:
 
Source: Statista  
 
Ransomware victims by country:
 
Source: @axios   Read full article  

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2. Video game user penetration:
 
Source: Statista  
 
3. Opioid overdose rates:
 
Source: @bbgvisualdata   Read full article  
 
Opioid overdose rates by state:
 
Source: @bbgvisualdata   Read full article  

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4. Suicide risk among US teens:
 
Source: The Economist   Read full article  
 
5. The Civil Liberty Index:
 
Source: Alpine Macro  
 
6. Installed solar capacity, by company:
 
Source: Canary Media   Read full article  
 
7. More turkeys than people:
 
Source: @axios   Read full article  

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