The “donut effect” in US housing markets

The Daily Shot: 07-Jul-21
The United States
Canada
The Eurozone
Europe
Asia – Pacific
China
Emerging Markets
Cryptocurrency
Commodities
Energy
Equities
Rates
Global Developments
Food for Thought



 

The United States

1. The ISM Services PMI came off the highs, surprising to the downside. To be sure, US service sector activity continued to expand at a healthy pace in June, but growth was slower than in May.
 

 
Source: Oxford Economics  
 
The employment index dipped into contraction territory (PMI < 50).
 

 
Prices continued to climb, but a touch slower.
 

 
Service firms, particularly retailers, are struggling to fill orders, …
 

 
… amid supply bottlenecks (slow deliveries) …
 

 
… and extraordinarily tight inventories.
 

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2. The Citi Economic Surprise Index is back near zero due to the ISM data miss.
 

 
3. Treasury yields tumbled, and the curve flattened. Bond yields around the world followed (see the rates section). It wasn’t entirely clear just how much of the Treasury rally and the downshift in risk sentiment on Tuesday was due to the disappointing ISM report.
 
Source: CNBC   Read full article  
 

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4. Given the urgent demand for labor in many areas, more workers should be coming off unemployment.
 
Source: @PIIE   Read full article  
 
5. The following chart shows the change in wages by industry over the past three months.
 
Source: @axios   Read full article  
 
6. Excess household savings are nearing $2.6 trillion.
 
Source: S&P Global Market Intelligence  
 
7. Property price trends continue to show the “donut effect” as housing demand shifts toward suburban areas (2 charts).
 
Source: TS Lombard  
 
Source: The Economist   Read full article  

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8. The gap between the return on capital and the cost of capital is incentivizing businesses to invest (see Morgan Stanley’s CapEx expectations chart).
 
Source: BCA Research  


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Canada

Consumer and business confidence indicators are hitting multi-year highs.
 

 
Source: @markets   Read full article  


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The Eurozone

1. Let’s begin with Germany.
 
Manufacturing orders unexpectedly declined in May.
 

 
And industrial production continued to shrink. While some attribute this weakness to supply-chain problems, it’s worth noting that the downtrend started in 2018 (2nd chart).
 

 
Construction activity continues to shrink (PMI < 50).
 

 
The ZEW expectations index surprised to the downside.
 
Source: Bloomberg   Read full article  
 

 
The Citi Inflation Surprise Index hit a record high.
 

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2. Spain’s industrial production is now well above pre-COVID levels.
 

 
3. Euro-area retail sales were back above trend in May.
 
Source: IHS Markit
 
4. Construction activity at the Eurozone level is stable but not growing (PMI = 50).
 
Source: ANZ Research  
 
5. The ECB will begin tapering later this year.
 
Source: Nordea Markets  
 
6. The TLTRO program (attractive ECB financing for banks) more than offset the cost of negative rates on excess reserves.
 
Source: ING  
 
7. Negative corporate loan flows (declines in business loan balances) have been concentrated in France and Spain.
 
Source: Deutsche Bank Research  


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Europe

1. Online search data point to a strong rebound in retail and recreation mobility.
 
Source: Arbor Research & Trading  
 
2. Which invoicing currencies are most commonly used for EU imports and exports?
 
Source: Eurostat   Read full article  
 
3. Next, we have some data on Western Europe’s younger population.
 
Youth unemployment in the EU:
 
Source: Eurostat   Read full article  
 
Opportunities for new graduates:
 
Source: @financialtimes   Read full article  
 
Millenials with tertiary educational attainment:
 
Source: Eurostat   Read full article  
 
According to Eurostat, “In 2020, 9.9 % of 18-24-year-olds in the EU had completed at most a lower secondary education and were not in further education or training.”
 
Source: Eurostat  


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Asia – Pacific

1. Taiwan’s unemployment rate surged in May.
 
Source: Reuters   Read full article  
 

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2. South Korea’s fiscal stimulus was smaller than what we saw in other economies.
 
Source: @PIIE, @jfkirkegaard   Read full article  
 
3. New Zealand is approaching full employment. Rate hikes are coming this year.
 
Source: ANZ Research  
 
4. The RBA has set the stage for removing some accommodation.
 
Source: ING   Read full article  
 
But the market wasn’t impressed. The increase in yields was short-lived.
 


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China

1. Beijing’s aggressive stance on DiDi may sap demand for China’s equity listings abroad.
 
Source: @WSJ   Read full article  
 
Recently-listed US shares of Chinese companies took a hit.
 

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2. Banks are revising the ceilings on rates offered to depositors. 
 
Source: Gavekal Research  
 
Source: Gavekal Research  

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3. Domestic rates remain low despite the pullback in stimulus.
 
Source: BCA Research  
 
4. BCA Research expects credit growth to stabilize later this year.
 
Source: BCA Research  
 
5. This chart shows the contributions to China’s GDP growth.
 
Source: @JPMorganAM  
 
6. Steel producer earnings grew over the past quarter while coal weakened.
 
Source: China Beige Book  


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Emerging Markets

1. Many EM central banks are starting to raise rates (2 charts).
 
Source: Capital Economics  
 
Source: Capital Economics  

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2. Foreign exposure to EM bonds has risen over the past year. However, foreign investors’ share in local EM bond markets has been declining since 2015. This is mainly due to EM countries issuing debt at a faster pace than foreign investors are willing/able to absorb, according to Oxford Economics.
 
Source: Oxford Economics  
 
This chart shows foreign investors’ holdings of local government bonds.
 
Source: Gavekal Research  
 
Political risks have pushed up local-currency bond yields across Latin America.
 
Source: Capital Economics  

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3. The Philippine peso continues to weaken, dragged lower (in part) by elevated oil prices.
 


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Cryptocurrency

1. Bitcoin faces resistance at the 50-day moving average.
 
Source: Dantes Outlook  
 
2. Bitcoin trading volume dropped significantly over the past week as price remains stuck in a range between $30,000 and $40,000.
 
Source: Arcane Research  
 
3. Bitcoin miner revenue is starting to recover.
 
Source: Glassnode  
 
4. Digital asset investment funds attracted net capital inflows last week after four consecutive weeks of redemptions.
 
Source: CoinDesk   Read full article  
 
5. Rising crypto ransom payments increase reputational risks for the market.
 
Source: Statista  


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Commodities

1. US grains tumbled on Tuesday, with rains expected to ease drought in many parts of the country. There are also concerns that China’s buying spree will moderate. As the chart below shows, corn and other grans have been whipsawed since May.
 

 
Volatility in US grains has reached multi-year highs.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
2. This volatility is making farmers uneasy as sentiment tumbles. Part of the decline is also due to US politics.
 
Source: Purdue University/CME Group Ag Economy Barometer   
 
3. US grain inventories have been trending lower.
 
Source: @WSJ   Read full article  

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4. This chart illustrates the looming lithium market deficit.
 
Source: Institutional Investor   Read full article  


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Energy

1. The US involvement in OPEC’s spat improves the chances of a deal to boost production. Crude oil tumbled.
 
Source: Bloomberg   Read full article  
 
Source: barchart.com  
 
By the way, Brent crude is at a long-term downtrend resistance.
 
h/t @AkshayChinchal4  

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2. Renewables’ share of net new power generating capacity keeps climbing.
 
Source: REN21   Read full article  


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Equities

1. Current valuations don’t bode well for longer-term returns.
 
Source: @JPMorganAM  
 
2. Equity multiples could start to decline if inflation expectations remain elevated.
 
Source: Oxford Economics  
 
In an inflation scenario, world equity prices are 10% lower than Oxford Economics’ baseline forecast.
 
Source: Oxford Economics  
 
Equities are more resistant to an inflation spurt than bonds.
 
Source: Oxford Economics  

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3. We continue to see signs of exuberance in the market.
 
The Longview Economics risk appetite indicator:
 
Source: Longview Economics  
 
Trading sessions since a 5% drawdown:
 
Source: Longview Economics  
 
The TD Ameritrade retail investor positioning index (record high):
 
Source: @TDAmeritrade  

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4. Earnings contribution of the top ten stocks in the S&P 500 are still near record highs.
 
Source: @JPMorganAM  
 
5. This chart shows equity factor/style year-to-date returns.
 
Source: S&P Global Market Intelligence  
 
Which factors will outperform over the next 12 months?
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  

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6. The gap between S&P 500 and Nasdaq 100 volatility measures has been tightening.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
7. Meme stocks continue to struggle, which could be a positive for crypto.
 


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Rates

1. Global yields dipped on Tuesday with Treasuries.
 

 
2. US inflation-linked Treasury yields (real rates) declined as well.
 


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Global Developments

1. How will investors change allocations in response to higher inflation and a more hawkish Fed?
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  
 
2. Container shipping costs continue to surge.
 
Source: @benbreitholtz  
 
3. This scatterplot shows business activity (PMIs) vs. vaccination rates.
 
Source: IHS Markit  
 
4. The chart below shows currencies used in the international monetary system.
 
Source: The Economist   Read full article  


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Food for Thought

1. Share of the population fully vaccinated against COVID:
 
Source: Statista  
 
2. US views on the Delta variant:
 
Source: The Washington Post   Read full article  
 
3. Vaccination rates by state:
 
Source: Statista  
 
4. Uneven vaccination progress in the US:
 
Source: Bloomberg   Read full article  
 
5. US daily deaths by cause:
 
Source: Peterson-KFF   Read full article  
 
6. Demonstrations in 2020:
 
Source: ACLED   Read full article  
 
7. CCTV cameras in LA and Beijing:
 
Source: Visual Capitalist   Read full article  
 
8. US local public education employment:
 
Source: @WSJ   Read full article  
 
9. Sub-Saharan Africa working-age population:
 
Source: IMF, @adam_tooze   Read full article  
 
10. Population density across the African continent:
 
Source: @simongerman600   Read full article  
 
11. Superyachts flocking to Greece:
 
Source: Bloomberg   Read full article  

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