When should we expect the last Fed rate hike?

The Daily Shot: 14-Feb-23
• The United States
• The United Kingdom
• The Eurozone
• Europe
• Japan
• Asia – Pacific
• Emerging Markets
• Cryptocurrency
• Commodities
• Energy
• Equities
• Rates
• Global Developments
• Food for Thought

The United States

1. Let’s begin with some data on inflation.

• The Fed has been focused on core services inflation, excluding housing. The US central bank is concerned that high wage growth could keep this component of consumer inflation elevated for some time. Below is a forecast from Morgan Stanley.

Source: Morgan Stanley Research

Here is the core services PCE inflation excluding rent on a month-over-month basis compared to pre-COVID levels.

Source: Morgan Stanley Research

• Inflation “persistence” indicators remain elevated.

Source: Torsten Slok, Apollo

• Asia’s reopening has been a source of goods disinflation in the US.

Source: Goldman Sachs

• Core inflation has fallen since June, but the pace has been less extreme when accounting for the latest revision.

Source: Nomura Securities

Here is the impact on the core PCE inflation.

Source: Nomura Securities

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2. The terminal rate continues to push higher. Here is the market-implied fed-funds rate trajectory at different points in time.

Source: @TheTerminal, Bloomberg Finance L.P.

• If inflation surprises to the upside, the trajectory could shift up significantly. Below are some scenarios from Goldman.

Source: Goldman Sachs

• According to BofA’s fund manager survey, investors increasingly see the terminal rate above 5%.

Source: BofA Global Research

• When is the last Fed rate hike?

Source: BofA Global Research

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3. The gap between soft and hard economic data continues to widen, with soft data signaling a more severe economic weakness.

Source: BCA Research

• An indicator from MarketDesk points to a significant contraction in Q1 and Q2.

Source: MarketDesk Research

• Investors are now less certain about an impending recession.

Source: BofA Global Research

• Goldman continues to indicate that the probability of a recession is relatively low.

Source: Goldman Sachs

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4. This chart shows the regional breakdown of US goods imports.

Source: @WSJ Read full article

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The United Kingdom

1. Economists have reduced the severity of their recession forecasts.

2. Insolvencies will surge this year, according to Capital Economics.

Source: Capital Economics

Which sectors will be most impacted?

Source: Capital Economics

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3. This chart shows the volatility of inflation components vs. their persistence.

Source: ING

4. FTSE 100 is about to breach 8k for the first time

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The Eurozone

1. Economists no longer see a recession in the Eurozone.

• Here is a forecast from Goldman.

Source: Goldman Sachs

• Fewer European investors expect a recession.

Source: BofA Global Research

• Declining real money supply could weigh on economic growth.

Source: Gavekal Research

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2. The ECB’s selling of Italian, Portuguese, and Greek bonds did not cause spreads to widen.

Source: @DanielKral1

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Europe

1. Swiss core inflation reaccelerated last month.

The central bank continues to “drain” liquidity from the banking system.

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2. This chart shows Riksbank’s (Sweden’s central bank) rate projections.

Source: ING

3. Poland’s trade gap widened again in December.

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Japan

1. The 10-year JGB yield is hovering around 50 bps (the BoJ’s cap).

2. The Q4 GDP growth was weaker than expected.

Source: Reuters Read full article

• Consumer spending increased.

• But business investment was weak.

• Inventories were a drag on growth.

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Asia – Pacific

1. It was the worst January in years for New Zealand’s home sales.

New Zealand’s inflation expectations came off the highs this quarter.

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2. Australia’s business confidence improved in January.

But consumer sentiment deteriorated this month.

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3. How do global and Chinese stocks influence Asian equity markets?

Source: Gavekal Research

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Emerging Markets

1. India’s CPI surprised to the upside.

2. Turkey’s real retail sales have been surging. Perhaps the CPI adjustment doesn’t fully reflect the hyperinflation.

3. South Africa’s fund managers do not see an operational solution to Eskom’s (power company) troubles.

Source: BofA Global Research

4. Mexico’s 2-year yield is approaching 11% as inflation remains stubbornly high.

5. Colombia’s consumer confidence is deteriorating again.

6. EM equities are underperforming this month.

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Cryptocurrency

1. Cryptos are struggling this month.

2. Crypto funds saw minor inflows last week, driven by long-bitcoin and ethereum funds. Multi-asset funds continued to see outflows.

Source: CoinShares

3. The steep downtrend in DeFi tokens relative to large-cap tokens is stabilizing. Over time, a breakout could signal improving risk appetite among crypto traders.

Source: @StocktonKatie

4. The New York Department of Financial Services is concerned about Binance’s stablecoin (BUSD) collateral adequacy.

Source: @WSJ Read full article

BUSD dipped below its dollar peg, …

Source: CoinMarketCap

… while Tether climbed above its peg, signaling a rotation.

Source: CoinMarketCap

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Commodities

1. Gold’s performance is in line with previous US recessionary environments.

Source: Variant Perception

2. Industrial commodities could face cyclical headwinds given the onset of a US recession and no upturn in China’s leading economic indicators, according to Variant Perception.

Source: Variant Perception

3. The Baltic Dry shipping index is back at pre-COVID levels.

It’s down 90% from the peak.

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Energy

1. Large oil firms are not plowing their surging earnings into new production.

Source: @liamdenning, @opinion Read full article

2. Compliance with the G7 oil price cap is estimated to be highest at Baltic and Black Sea ports, but lower in Pacific and Arctic ports where Western-owned oil tankers play a smaller role. (2 charts)

Source: IIF

Source: IIF

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3. How will China’s reopening impact oil prices?

Source: Goldman Sachs

4. New tax incentives boosted US wind turbine orders.

Source: @atinjai, @BloombergNEF Read full article

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Equities

1. Bullish options strategies volume has picked up.

Source: Deutsche Bank Research

• Tech call volume has been surging.

Source: Deutsche Bank Research

• The overall options trading volume remains elevated, dominated by “intraday” options.

Source: @WSJ Read full article

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2. BofA’s survey of fund managers continues to show caution.

• Risk appetite:

Source: BofA Global Research

• Cash balances:

Source: BofA Global Research

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3. PE multiples and margins will be a drag on returns over the next five years, according to Oxford Economics.

Source: Oxford Economics

4. Leading indicators continue to signal weaker earnings growth ahead.

Source: Gavekal Research

5. Which equity factors are most vulnerable to an economic contraction?

Source: MarketDesk Research

• The value factor has delivered greater excess returns during periods of high inflation.

Source: Research Affiliates Read full article

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6. Most recent S&P 500 gains occurred during the morning session.

Source: Chris Murphy, Susquehanna International Group

Recent day-session returns have far outpaced the overnight returns, …

Source: Chris Murphy, Susquehanna International Group

… which is the opposite of the longer-term trend.

Source: Chris Murphy, Susquehanna International Group

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7. The implied volatility of e-mini S&P 500 March puts at the 4,100 strike rose sharply over the past few weeks. Hedging ahead of today’s CPI?

Source: Aazan Habib, Paradigm Capital

8. This chart shows the S&P 500 real return attribution.

Source: Numera Analytics (@NumeraAnalytics)

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Rates

Based on the FOMC’s forecast of the “longer-run” fed funds rate, the Fed’s policy is deep in restrictive territory.

Source: @TheTerminal, Bloomberg Finance L.P.

But the market expects the fed funds rate to run much higher over the long term. Nonetheless, the policy is still restrictive.

Source: @TheTerminal, Bloomberg Finance L.P.

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Global Developments

1. The trade-weighted US dollar index is testing resistance at the 50-day moving average.

Source: Alpine Macro

• Is the US dollar oversold?

Source: Alpine Macro

• Investors and analysts expect the dollar to weaken over the next 12 months (2 charts).

Source: BofA Global Research

Source: Wells Fargo Securities

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2. Unemployment rates are at multi-year lows across advanced economies.

Source: BofA Global Research Read full article

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Food for Thought

1. US consumer balance sheet:

Source: J.P. Morgan Asset Management

2. US federal interest expense and tax receipts:

Source: PGM Global

3. Larger families going to the Super Bowl:

Source: Placer.ai

4. Fertility rates around the world:

Source: @genuine_impact

5. US population by age:

Source: The New York Times Read full article

6. US cancer death rates:

Source: @WSJ Read full article

7. Valentine’s Day spending vs. the relationship length:

Source: LendingTree Read full article

• The most commonly desired Valentine’s Day gifts:

Source: LendingTree Read full article

• Skipping Valentine’s Day:

Source: LendingTree Read full article

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