Stocks trade lower in wake of Powell nomination, Europe’s Covid surge

After a kneejerk bounce to fresh all-time highs, stocks on Wall Street ended the day lower as investors decided that Jay Powell is likely to tighten monetary policy more swiftly than Lael Brainard would have done. Quite how the market is reading so much into this reappointment is kind of hard to work out. Bond yields ticked up, with the policy-sensitive 2yr note rising to its highest since March 2020; the dollar rose to a new 16-month high and has held gains as of this morning; gold tumbled as yields climbed; financials and energy rose and tech stocks fell, dragging the broad market lower. Cyclicals helped the Dow Jones hold on to a tiny gain. European stocks have fallen this morning following the weaker US session, whilst the Covid spread is another factor likely weighing on sentiment. Reasonably upbeat PMIs this morning don’t reflect the shift in Europe we have seen over the last fortnight. Bond markets remain under pressure this morning with the US 2yr note trading at 0.63%, having yesterday jumped 8bps to 0.58%.

 

Markets now price in a full 25bps hike by June 2022. Are markets right to think the Fed is suddenly going to be more hawkish? Richard Clarida suggested last week the Fed could speed up the pace of its tapering – was this more of a signal shift than at first assumed? Yesterday Powell seemed to flag inflation as a concern: “We know that high inflation takes a toll on families… We will use our tools… to prevent inflation from becoming entrenched.”

 

As noted yesterday, the hawkish reaction to the news seemed odd, for a couple of reasons. Firstly, Powell has hardly been a hawk and the appointment means continuity; secondly the odds on Brainard were quite long. Nevertheless, the market seems to have taken the Powell nomination as something of a signal; broadly speaking we might say that the Fed and, more importantly maybe the White House, are starting to recognise the danger of inflation the longer it stays high. Janet Yellen, Treasury Secretary, told CNBC that inflation has reached a level that “concerns most Americans” and that the Fed needs to play an important role to make sure that inflation “doesn’t become endemic”. I guess we could be in the middle of a policy adjustment of sorts, but it’s mainly tinkering at the margins – whether the Fed hikes by June or July is kind of irrelevant. We must also consider a degree of ongoing uncertainty around a number of open governor and regional chair positions, which makes the outlook for 2022 a little harder to read than usual. Ultimately I don’t see how the Powell-led Fed is more hawkish today than it was last week, but we should always beware linear thinking: even the Fed can adapt and learn from the persistently high inflation. You never know perhaps the Fed – and the White House – are starting to heed some warnings about what untethered inflation can do. In summary, you could say there’s been a whiff of a hawkish tilt at the Fed in recent weeks and the administration is OK with that.

 

Crude remains under pressure, with WTI taking a $75 handle, as the US and other nations are set to release oil from strategic reserves to cool prices. Although such moves are unlikely to exert much of a long-term influence on prices, there is already worries about oversupply into the year end and start of 2022. Rising covid cases and new restrictions are a factor. OPEC+ could adjust its production plan to absorb the excess crude from strategic reserves, but it’s unclear as yet what they plan to do.

 

Profits warnings seldom come alone: AO World shares fell by a quarter after a sharp downgrade to guidance issued only two months ago, which was a also downgrade.  The company warned that growth in the UK has been impacted by the shortage of delivery drivers and the ongoing disruption in the global supply chain, whilst Germany has seen significantly increased competition. Availability of some new products is poor and inflation is biting with higher shipping costs, material input prices. As a result, management warn that current peak trading period is “significantly softer” than was anticipated only eight weeks ago. Full year group revenue is now guided to be flat to -5% year on year, with group adjusted EBITDA in the range of £10m to £20m. As noted of this stock in Oct, it needs high double-digit revenue growth. Margins in a highly commoditized business are wafer thin at the best of times. Now supply chain woes coupled with a shortage of drivers creates some serious headwinds for the stock, which benefitted greatly from the surge in online demand last year. It now faces some new challenges which seem set to perform the double trick of hammering margins and lowering revenue growth. 

 

Pets at Home shares rose on a decent set of interim results as the company posted group like-for-like (LFL) revenue growth of 22.2%, or 28.6% on a 2-year basis. Total group revenue growth of 18% to £677.6m. Profit before tax rose 77.2% to £70.2m, with growth of 68.3% on a 2-year basis. Free cash is up more than 50% to almost £92m. Basically, everyone was bored in lockdown and bought a puppy and most people have been decent enough human beings to continue to look after them. Or as management put it today: “The stronger than expected and continuing growth in the pet population over the past eighteen months is materially increasing the size of our addressable market.” 

 

Shares in Compass Group fell despite the company saying it should be back to pre-Covid operating margins next year. Margins improved to 5.8% in the fourth quarter (4.5% for the FY) and the company said it anticipates FY22 underlying operating margin to be over 6%, hitting 7% by the end of the year. Still revenues are stubbornly low despite the Healthcare & Senior Living and Defence, Offshore & Remote sectors performing well above pre-pandemic volumes. Underlying revenue recovered to 88% of 2019 revenue by Q4. FY underlying revenue is at 77% of 2019. Still nursing the lingering effects of the pandemic – a long Covid sufferer as people, particularly in business, office work, spend less time face to face. 

Telco stocks up on Telecom Italia bid

Stocks in Europe started mildly higher, shrugging off some of the caution that we saw at the tail end of last week on lockdowns in Austria and elsewhere. Telecoms stocks rallied as KKR made a bid for Telecom Italia; BT and Vodafone led the FTSE 100 higher with help from BP and Antofagasta. Vivendi, a major shareholder in Telecom Italia, led the Stoxx 50 higher. Telecom Italia itself rallied 22% on the news. There has been a lot of speculation about a possible takeover of BT of late, so the move by KKR creates some further excitement that Altice’s Patrick Drahi could launch a bid. A no-bid clause preventing Altice offering for BT expires Dec 10th More broadly, if private equity is starting to sniff around this sector then it suggests there could be value to be found in other names; it underlines just how unloved a corner of the market it has become.

 

Inflation remains on everyone’s minds – for now, the benign approach of the Federal Reserve and European Central Bank is keeping real yields pinned to the floor, which is supportive of risk, and both European and US stock markets continue to trade around their all-time highs. The market got a little frightened last week as European nations started to crank up their lockdown mechanisms again. This probably doesn’t amount to kind of economic impact as previous ones, even if Germany locks down its Christmas markets and so on. Meanwhile, the US has put all that nonsense behind it, so the market is not overly concerned about a winter of localised Covid restrictions. Also, consumer sentiment does not equal market sentiment when their liquidity is so ample and monetary and fiscal policy so loose.

 

Strong earnings from the US retailers helped the S&P 500 eke out a gain last week, whilst megacap tech lifted the Nasdaq Composite to a gain of 1.2%. In contrast, the pressure on energy/financials left the Dow nursing a loss of 1.3% for the week. Futures are pointing higher on Monday.  

 

Oil is a tad higher to start the week but looking cautious, with WTI holding a $76 handle as sellers remain in charge. Gold trades around $1,850 as deeply negative real rates do battle with the dollar’s strength. EURUSD is testing last week’s 16-month lows again this morning. 

 

This week is a holiday-curtailed one – the US stock market will be closed for Thanksgiving on Thursday, and it’s a half-day on Friday. The key focus during the week will be president Biden’s pick for the Fed chair – does he stick with Powell or opt for Brainard? Brainard could be even more dovish than Powell is, and possibly a lot tougher on bank regulation. But more importantly, does she have a strong enough commitment to climate?  

 

On the data front we are looking to Wednesday’s US PCE inflation, durable goods orders, Q3 GDP 2nd reading and minutes from the last Fed meeting, which will be parsed closely for two things: a) how worried are policymakers about inflation and b) how do they view how near the US labour market is to the level at which they can start thinking about thinking about raising rates. Richard Clarida – stepping down in a couple of meetings – said on Friday that the Fed could speed up the rate at which it tapers QE. 

 

Also this week, we should hear from the Bank of England’s Haskel, with traders looking anything solid on whether a December rate hike is a goer or not.  We haven’t heard from Haskel since the summer. In May he said he’s not worried by inflation, and in July said there was no need to reduce stimulus in the foreseeable future – we make him a dove and his vote not required for a hike – so this needs to be considered when reading his comments. On Friday chief economist Huw Pill said he doesn’t know which way he will vote in Dec.  

Mixed start for equities, weaker oil drags on FTSE

European stocks were mixed in early trade – the DAX and Euro Stoxx 50 rose again while the FTSE 100 fell, with Shell and BP leading the decline as lower oil prices dragged. Shares in Metro Bank tumbled 19% as private equity group Carlyle ended talks over a potential takeover. Housebuilders rose after a positive update from Crest Nicholson. National Grid shares were steady despite an upgrade to its profit outlook as higher energy prices boosted the bottom line.

Royal Mail shares rallied 5% on a huge surge in parcel volumes and return to profits in the first half of its financial year. The pandemic has forever shifted consumer habits, and Royal Mail has benefited as we do more shopping online. Positive restructuring and largely getting the union monkey off its back have helped, too. Shares recovered 60% in the last 12 months, though the stock is about a fifth off its June high. For the full year management expect £500m in adjust operating profit. Operating profits in the first half rose to £311m from a loss of £20m a year before. Parcel volumes are up a third on two years ago, though with a tough comparison on last year UK volumes fell 4%. However, GLS volumes were up 8%. The company also said it plans to return £400 million to shareholders via a £200 million share buyback commencing immediately and £200 million special dividend.

US stocks fell but remain anchored to the 4,700 area with futures back up there this morning. Apple was well bid, as was Tesla, and tech supported the broader market as energy and banks fell. Bond yields fell, with US 10s back under 1.6%, helping gold recover some ground at a high this morning of $1,870 from a low yesterday of $1,849. Philly Fed manufacturing, weekly unemployment claims and a few Fed speakers to look forward to later in the session.

Oil plumbed a 6-week low despite a larger-than-expected draw on US inventories as the bearish sentiment remains in force amid warnings of oversupply, whilst the White House has requested several nations release barrels from their strategic reserves to lower prices. Joe Biden has also engaged the Federal Trade Commission to investigate US oil majors over possible illegal behaviour that is driving up prices. Of course, he would never look to his own damaging energy policies…Biden knows high pump prices hurts him but he’s so in hock to the green mafia that he can’t possibly imagine that the simplest way to lower gasoline costs would be to increase US output. Releasing reserves is not a long-term solution – signs of oversupply are already there. Rising covid cases and concerns over lockdowns in Europe may have had some small impact on the demand side.

WTI trades under $77 to test the 38.2% retracement area. Looking at a potential visit of the $73 area. Our bearish MACD crossover at the end of Oct was a great sell signal, as it has often proved lately.

Oil Chart 18.11.2021

Dollar looking a tad tired this morning after yesterday’s jump. EURUSD is reclaiming some ground after finding support around the 61.8% retracement of the swing higher from Mar’20 to Jan’21, but still looks weak and susceptible to further declines with sellers still apparently in charge. GBPUSD is also firmer, approaching 1.35 with a definite shift in momentum.

Natural gas fluctuates on weather forecasts but still way off October highs

Weather trends continue to weigh heavily on US natural gas futures this week but shifting patterns could give Henry Hub a bump.

Natural gas trading

Shifting weather patterns confuse the markets

It was a poor weekend for natural gas prices. US gas futures fell to around the $4.749 level at their lowest on Friday afternoon.

Henry Hub futures have made their way back above $5 again, currently trading at around $5.151 as of Tuesday November 16th. However, they are still down 23% against October’s highs.

Weather outlooks continue to shift. That’s the nature of weather, I suppose, but forecasts have been pulling natural gas traders all over the shop recently.

At the start of the week, we were told that weather patterns were bringing unusually warm temperatures to most of the US. Now, the likelihood is cold Canadian winds, which were forecast weeks ago, are starting to finally sweep down into the continental United States.

Perhaps we should let the experts explain.

Natural Gas Weather states: “One weather system will exit New England, leaving behind chilly lows this morning of 20s and 30s. A second system is bringing rain and snow to the Northwest and Mtn. West with lows of 20s-40s.

“Most of the rest of the US will be mild/warm and dry w/highs of 60s to 80s for light demand. The system over the Northwest will track across the Midwest late in the week, while tapping colder Canadian air w/lows of 10s to 30s.

“Weather systems will continue across the northern US this weekend, while mild to nice elsewhere. Overall, demand will be LOW Tue-Thu, then MODERATE-HIGH late in the week.”

There’s quite a bit of uncertainty at the moment, so if you’re a gas trader, keep watching the skies for rain and snow in the US.

Rising US gas output may pressure prices too

US production floated around the 95 Bcf during the week ending November 12th – near to 2021 levels. What’s more, two more gas rigs came online during the last week too. US natural gas rigs are now at their highest levels since September 2020 at 102.

More US gas could be on the way – but we’ve got to keep watching the weather. Otherwise, the market could run into a high supply/low demand scenario, sending prices down again.

That said, stocks are still someway below the five-year average. The EIA’s inventory numbers for the week ending November 5th showed stocks were 308 Bcf less than last year at this time and 119 Bcf below the five-year average of 3,737 Bcf. For reference, inventories rose by 7 Bcf at this time for a total of 3,618 Bcf.

If the above scenario proves true, then the US could also turn some of that excess production towards export markets. Exports averaged 9.8 Bcf per day in October – an 0.3 BcF increase over September’s levels – according to the EIA.

Russia is already starting to let the gas flow to Europe and, if they prove steady, could eliminate the need for US LNG across Europe this winter.

 

Oil takes hit on supply expectations

Oil prices continue trending downward as supply worries start to seep into traders’ minds once more.

Oil trading

Prices slide as supply outlook shifts

Oil weakened over the weekend and continued to edge lower on Monday morning this week. Supply-side issues are contributing to a bearish atmosphere for oil traders right now.

Taking a quick look at the WTI and Brent benchmarks shows how the current scenario is weighing on price action.

WTI, for example, drifted below $79 on Monday although it did climb back over $80 in early trading on Tuesday morning.

Brent crude hit a low of $80.66 on Monday morning. As of Tuesday 16th November, the North Sea benchmark had climbed back to $82.60.

One of the bi catalysts for the poorer price activity is supply issues. America isn’t getting enough oil and consumers are starting to feel the pinch at the pumps.

The US holds a pretty privileged position and thinks it deserves low gasoline. You would have thought the 1973 oil crisis, which should really have been the death knell for gas guzzlers, would have been a wake-up call, but nearly 50 years later and Joe Sixpack still thinks his Ford Ranger V8 requires the cheapest gas available.

As such, the US may need to start dipping into its strategic gasoline reserve. President Biden is being urged by Senate Majority Leader Chuck Schumer to open up those stored barrels and let the crude flow.

“No industry is spared. But fuel gasoline is the worst of all,” Schumer said. “Let’s get the price of gas down right now. And this will do it.”

If that does occur, then crude prices may drop.

Baker Hughes’ rig count showed four more US rigs came online in the week ending November 12th – hinting at higher American supply. Maybe the US just has to be patient?

We’ve also seen OPEC+ modify its supply outlook somewhat. The cartel slashed its Q4 demand outlook by 330,000 bpd last week. That said OPEC+ is allegedly not worried about the US heading into its strategic oil reserve. Oman’s Energy Minister Mohammed Al-Rumhi has indicated the group of oil-producing nations won’t be moved by Biden’s pleas for more crude.

However, there are signs from some top OPEC players 2022 might be a difficult year for oil.

Russia and Saudi Arabia fear crude oil oversupply next year

“Everybody is predicting a surplus of supply starting from the first or second quarter,” next year, Russian Deputy Energy Minister Pavel Sorokin told Bloomberg at Adipec, the oil industry event in Abu Dhabi, this week. “Inventories have stopped drawing, which shows there is no deficit at the moment.”

That said, everyone who spoke to OPEC insiders at Adipec said the cartel was essentially sticking to its guns. OPEC+ will keep raising crude oil production by 400,000 bpd until April 2022 at the earliest. The crude must flow.

But he who controls the crude controls the universe. For many in the oil trading world, that He is Saudi Arabia. What’s the word from the OPEC+ top dog? 400,000 bpd is “enough”.

“We need not to panic,” Saudi Energy Minister Prince Abdulaziz bin Salman said. “We need to be calm.”

We saw last week oil get a boost from OPEC+’s decision to keep its production increases steady and not bow to outside pressures.

A glut would be bad news for oil prices – especially in the wake of rising global COVID-19 cases. China is tackling its largest Delta variant breakout to date while parts of Europe have sunk back into local lockdowns. Danger signs are starting to flash again. As we head into the winter months, there’s a real danger cases could rise exponentially across the Northern Hemisphere. That would weigh very heavily on oil demand.

FTSE eases back from post-pandemic high

Mixed start for stocks following a solid performance in the prior session and a mixed one in the US. After a slow start European stock markets – the Stoxx 600 and DAX – eked out fresh records Thursday and the FTSE 100 managed to hit its highest level in 20 months. In the US, the Nasdaq and S&P 500 rose but the Dow was dragged into the red by Disney. This morning, the FTSE 100 is down 0,3% and the rest of the major bourses are trading a little firmer. No sign yet of any major drawdown or volatility, but it seems too quiet.

 

Inflation is front of mind for investors this week after the US CPI report, which has driven a sharp rally in gold and the US dollar. Today’s University of Michigan inflation expectations will be closely watched, although it is unlikely to drive any material shift in the post-CPI momentum. Expectations are forecast to rise to 5% from 4.8% last month. We’re also watching the UoM consumer sentiment data and JOLTS job openings – a marker for the health of the US labour market, although these days, not such a great signal due to the massive mismatches and dislocation in the market post-pandemic.

 

Gold has pulled back from a 5-month high hit in the wake of the inflation data, holding around $1,855 in early trade. USD is solid to start the session with DXY consolidating above 95. Oil fell with spot WTI at $80 amid a resurgent US dollar and uncertainty over the path of US policy in terms of addressing higher gasoline prices. Higher case rates in Europe and Asia may also weigh – Austria heading to full medical apartheid with a lockdown for the unvaccinated. 

 

AstraZeneca shares fell 3% after earnings missed expectations, though it said it would start making a profit from its Covid vaccine from the fourth quarter onwards. ‘The Company is now expecting to progressively transition the vaccine to modest profitability as new orders are received. COVID‑19 vaccine sales in Q4 2021 are expected to be a blend of the original pandemic agreements and new orders, with the large majority coming from pandemic agreements,” the firm said in today’s Q3 trading update. Earnings per share of $1.08 was short of expectations but management stuck to its full-year guidance. Shares are up 24% YTD and it remains in a good place to tap growing demand. 

 

Shares in EV darling Rivian soared by another 22% to $123. Tesla ticked lower by just 0.4% after it filings showed founder Elon Musk had offloaded $5bn in stock. At the incredible valuation for Rivian, Musk tweetedI hope they’re able to achieve high production & breakeven cash flow. That is the true test. There have been hundreds of automotive startups, both electric & combustion, but Tesla is only American carmaker to reach high volume production & positive cash flow in past 100 years.” 

Natural gas cools as weather warms up

Prices of US-focused natural gas futures slide into the red as warmer temperatures cool off weather-driven demand gains.

Natural gas trading

Natural gas prices fall away on changing weather forecasts

Henry Hub futures have not started the week especially strongly. Activity was already subdued across the weekend and continue to trade in a bearish pattern.

For instance, US natural gas futures were trading at a high of $5.756 on Friday 5th November. As of European trading hours on the morning of Tuesday 9th November, the price was around $5.386, down -0.36% on the day.

As ever, the price drop is down to changing weather patterns. A couple of weeks ago, traders were buoyed by reports that cold Canadian winds would start sweeping down soon, bringing sleet and ice, and general high demand for heating gas.

That is likely still the case in the long term. However, near-to-mid term gas traders are seeing warmer temperatures across much of the United States.

That said, the Midwest may see some snow and ice towards the weekend, according to Natural Gas Weather. But on the whole, demand will be low to moderate throughout the continental US.

Natural Gas Weather forecasts: “National demand will remain light through Friday as high pressure with comfortable highs of 50s to 80s expands across the southern and eastern US. The West will be cool and unsettled as Pacific weather systems track inland with valley rain and mountain snow w/highs of 40s to 60s, lows of 20s-30s.

“A chilly weather system will drop out of southwest Canada and across the Midwest Thu-Fri with rain, snow, and lows of 10s to 30s, then tracking into the East this weekend into the start of next week for an increase in national demand. Overall, national demand will be LOW through Friday, then MODERATE this weekend.”

US inventories data – gas stockpiles still fall below the five-year average

As we move into winter heating season, the US is still playing catch up as regards fresh inventory injections.

The EIA natural gas inventories report for the week ending October 29th showed a build-up of 63 Bcf against the previous week. Total stockpiles came to 3,611 Bcf.

Stocks were 313 Bcf less than last year at this time and 101 Bcf below the five-year average of 3,712 Bcf.

Will the US have enough gas to keep it going through winter? With the advent of shale gas deposits, the US turned net exporter a couple of years ago, but tight global and domestic supplies mean it may have to look overseas for gas.

Gas production is actually up for another consecutive week. Baker Hughes has reported that more gas rigs have come back online too. Rig counts have been increasing for the past eight weeks.

According EIA reports, the US’ average total supply of natural gas rose to 99.9 Bcf per day for the week ending October 29th. That represents a minimal increase of 0.1%. The energy agency also reported the vast majority of fresh gas was delivered via dry natural gas production.

Oil gets boost as OPEC refuses to budge from output quotas

Despite calls from some big players to pump more crude, OPEC and allies aren’t budging just yet. Still, good news for oil prices.

Oil trading

OPEC+ sticks to its oil production guns

Sometimes a little dose of stubbornness can be a beautiful thing.

Across the past month, President Joe Biden has been calling on OPEC and allies to open their taps further, releasing a flood of crude to sweep across the world and into the fuel tanks of your average working class American.

OPEC+ isn’t budging. At last weeks November OPEC-JMMC meeting, the cartel committed to its now-familiar monthly crude production hike: an extra 400,000 bpd will be pumped in December.

In terms of prices, the WTI and Brent benchmarks made solid ground over the weekend. As of Tuesday morning, however, price action had remained pretty much flat.

At the time of writing WTI futures were trading for around $82.34.

Brent crude futures were exchanging hands at the $83.86 level.

To be honest, Saudi Arabia, Russia and the other key members of the cartel probably couldn’t care less about the plight of the average working class American. There are oil prices to protect here. It’s obvious that out of all the nations on Earth, OPEC+ members stand to gain the most from high oil prices. That’s why the taps will open as wide as the cartel wants them to open – no more, no less.

Saudi Arabia recently upgraded its crude oil pricing for Asian customers in December.

Essentially, Biden will have to look elsewhere, and should maybe look at pushing ahead with reopening and expansion of US shale and Gulf infrastructure, should he need to plug gaps in America’s crude supply.

It doesn’t appear OPEC is budging any time soon.

Infrastructure bill, jobs report puts support under oil prices

Helping support oil prices from the end of the week onwards were two key events in the US.

Firstly, the US nonfarm payrolls jobs report showed an estimate-meeting rise in the number of new roles created in October.  531,000 new positions were created in October, ahead of the 425,000 Wall Street predicted.

In terms of oil prices, more people in work means more economic activity means higher demand for gasoline and other petroleum products.

US Democrats have also passed Joe Biden’s centrepiece $1 trillion infrastructure bill into law. A nationwide construction programme, focusing on updating power supply networks, roads and highways, railways, and much more besides, will now sweep across the US.

Good news for oil prices then? That level of activity will no doubt require substantial levels of crude to pull off. Demand should be even higher.

US crude inventories show high build-up, but gasoline stocks drop

In the EIA report for the week ending 29th October, US crude stockpiles rose 3.3m barrels. That’s roughly 1.1m barrels higher than market analysts polled by Reuters had forecast. Total crude in storage now stands at 434.1m barrels.

However, gasoline stocks dwindled. According to the report, gasoline stockpiles fell by 1.5m barrels for a total of 214.3m barrels. Levels have sunk to a four-year low.

Muted start for equities, inflation in focus

Mixed, flattish start to trading for European stock markets after a record again on Wall Street as the S&P 500 closed above 4,700 for the first time. Gains of about 0.1% for the DAX and FTSE 100 keeping risk just in the green but the Stoxx 50 is flat. For US stocks it’s been a straight line up since the middle of October and whilst there is always this sense that ‘it must pull back soon’, that is sometimes when it’s finding the path of least resistance to the upside. Talking of which, Bitcoin has made a fresh all-time high and now could generate further upside now that resistance has been cleared. Read across to Coinbase, Microstrategy and other crypto stocks. Infrastructure stocks performed well as the market reacted to the passing of the $1tn infrastructure spending bill.

 

Risks are starting to take shape around rising covid cases in mainland Europe and the possibility of new lockdowns – something to watch in the coming days as it could play out with weakness for European equities. German infection rate at the highest since the pandemic started. Meanwhile the inflation threat looms as large as ever – tomorrow’s CPI numbers for the US will be closely assessed. Today we get the PPI numbers which are going to show ongoing supply chain pressure and pass through of costs to consumers, with the consensus at +0.6% for the headline number and +0.5% for the core PPI. Recent PMI surveys point in one direction for prices and that’s up.

 

On the whole inflation/rate hike theory…Yesterday, Fed mouthpiece Richard Clarida said conditions for rate rise likely to be met by end of 2022. Markets currently pricing for one by the middle of next year, so the Fed remains ‘behind the curve’. An alternative way to put this – as last week showed – is to say the market is ahead of itself.  

 

He also pointed out there is about $2tn in unspent free money accumulated during the pandemic that is yet to wash through the economy. Does that make inflation likely to be more or less transitory…? 

 

Yet more sticky signs: In August, Jay Powell noted that “if wage increases were to move materially and persistently above the levels of productivity gains and inflation, businesses would likely pass those increases on to customers, a process that could become the sort of ‘wage–price spiral’ seen at times in the past”. 

 

“Today we see little evidence of wage increases that might threaten excessive inflation,” he added. 

 

Well, the latest NY Fed median projected year ahead household income growth jumped to 3.3% in Oct from 3% in September. That’s just as productivity in the US plunged 5% in the third quarter to its lowest level in 40 years. Ok, so some of it is supply chain-related, but the picture is not the one that the Fed has been describing. Meanwhile, median one-year ahead inflation expectations rose 0.4% to 5.7% in October, reaching a new high for the survey launched in 2013. Clarida noted that the Fed had not anticipated the depth and breadth of the global supply shock. I guessed that but the question is – are you going to try to contain inflation expectations or not?

 

Charts: Sterling has found some near-term support and trying to now hold the 61.8/38.2% levels where there is clear near-term resistance to the bounce – eyes on the speeches of Bailey and Broadbent today.

GBPUSD Chart 09.11.2021

Gold: real rates under pressure again with 10yr TIPS out to –1.11%, testing the first area of resistance at the 38.2% retracement around $1,827, with further resistance at $1,833, the Jul and Sep peaks. Breach to the upside here may call for $1,875. Persistently high inflation and a dovish/patient Fed is a good setup for the metal – the sharp fall real yields since last week’s meeting tells you that. Weaker dollar also a factor with DXY down under 94 again to test its 20-day SMA after once again failing to break out above 94.60 area last week, just as it failed in Sep and Oct.

Gold Chart 09.11.2021

Tesla shares down after Elon Musk Twitter poll

Kind of unusualIf you were the CEO of a large listed company and decided you might like to sell some stock would you a) do it quietly and file it appropriately, or b) ask millions of people on Twitter whether you ought to? Obviously, Elon Musk chose the latter. Ok, so he’s often doing dumb stuff on Twitter and sometimes doing dumber things that regulators should probably look at. And occasionally he does really dumb stuff that regulators do look at.  

 

So, when he asked his Twitter followers over the weekend whether to sell 10% of his stock, lots of us laughed. I mean it’s sort of weird – why not just start selling some tranches, without the fanfare and attention-seeking…hahaha. You could say he just wants to sell some stock now because the valuation has rocketed lately, cash out while the going is good. It’s hard to criticise someone for doing that, is it? And rather than get berated by his fans for selling down his holdings, he can say ‘look, you told me to do it!’. Either way, Musk was due to start selling soon anyway as he faces a monster tax bill on some of his stock options. And since he takes no salary or bonus from being Tesla CEO (he likes to remind us), the only way to cover would be to sell some shares. Seems fair enough, but does it need all the fintwit showbusiness?  

 

Tesla shares in Frankfurt are off about 7% this morning and indicated to fall about 6.66% (!) in US pre-market trading. Now Musk would be aware that advertising his plans to sell $21bn (at Friday’s price) in stock would lead to a fall. It’s a simple bit of supply and demand economics on show. But he probably reckons on it being short term in nature or doesn’t particularly care at these insane valuations which he must think are ‘too high IMO’. Whatever he has said before the stock has risen in the end, and this way he controls the narrative of what amounts to a pretty massive stock sale, which is ultimately at the behest of the taxman. ‘Followers urge Musk to sell 10% of his stock’ sounds way better than ‘Musk dumps 10% of Tesla holdings, cash in at all-time highs, leaves investors as bagholders…et, etc’. I’m not 100% on where this fits, but you could again make a case of sorts for making market-moving statements that you shouldn’t really be doing. Hard to say it’s manipulation, but it’s not normal.

 

Markets 

 

Stocks are largely flat to start the session in Europe after a positive day Friday saw fresh cycle highs. Weak handover from Asia as Chinese import figures indicated weaker domestic demand. US futures are steady after another round of all-time highs on Friday. Earnings are better than were expected, jobs growth is picking up and the Fed’s carried off the taper without undue alarm. Pfizer’s antiviral announcement on Friday is a major positive: Dr Scott Gottlieb said the US is ‘close to the end of the pandemic phase’. After last week’s round of policy meetings, this week we get a lot of jawboning from the likes of Powell, Bailey and Macklem on equality and diversity. We’ll also be watching the US CPI numbers on Tuesday and UK growth numbers for the third quarter on Thursday. 

 

Bond yields are lower than they were last week with US 10s at 1.48%. The UK 2yr gilt yield is now back to 0.42% after trading as high as 0.76% on expectations the Bank of England would be more hawkish than it turned out to be. 

 

Real rates have fallen further with 10yr TIPS down to -1.09% on Friday, lifting gold to break out of the recent range and hit its highest since September. No breakout just yet but looking to the area at $1,827-1,833 to provide near-term test as this corresponds to the 38.2% retracement of the longer-term decline and the Jul/Sep peaks where we saw three attempted breakouts fail.

Gold Chart 08.11.2021

Crude prices are higher but just running into the resistance of the 20-day SMA. Late on Friday Aramco raised selling prices for its crude, whilst the passing in the US of the Biden infrastructure bill is also supportive. 

Oil Chart 08.11.2021

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