Sterling highest vs euro since Feb ’20, UK inflation spikes

Chances the Bank of England raising interest rates next month increased as UK inflation surged to a 10-year high last month. October’s CPI inflation hit 4.2%, above the 3.9% estimated and well north of the Bank’s 2% target. It marked a steep acceleration from the 3.1% reading in September and underlines that inflation is becoming more of a problem, not less. Core inflation also surged to 3.4%. The good news is that pay is up 5.8%. Will the Bank raise rates next month? The MPC noted in November that the decision not to raise rates was largely because they wanted to get more information about the health of the labour market. So, coupled with the strong employment data yesterday, the case for the Bank of England to act now is compelling. That does not, however, mean a hike next month is a done deal – unreliableness breeds uncertainty even when it seems obvious.  And we must stress that there are reasons to doubt the BoE will act: 1) there are still plenty on the MPC who are wedded to the transitory narrative – the Hawks v. Doves balance favours the latter camp still as the 7-2 vote indicated, 2) does the Bank think that hiking now would amount to a policy mistake a la Trichet? If so then even if they do feel that inflation is becoming unanchored and problematic, they may chicken out of hiking due to fears of killing off the recovery, and 3) do other risks to the economic outlook like Brexit mean hiking is simply not appropriate at this time? Whatever they think, the problem for the market is in not being able to trust statements about ‘acting on inflation’.   

 

GBPUSD rose after the CPI was released but has pared a lot of those initial gains vs the dollar, but cable still trades mildly higher this morning. But the dollar is something of a brick wall right now so maybe not the best gauge – the pound is doing much better against the euro, hitting its best level since Feb 2020. Euro weakness is the main theme here so this is likely a much better play on sterling strength and monetary policy divergence than cable is given where Fed and ECB are right now.

 

European stock markets were flat/mixed at the start of the session after Wall Street rose on Tuesday following some strong retail sales numbers. We also had strong earnings from Walmart and Home Depot, which topped the Dow. Better-than-expected retail sales figures helped lift bond yields, with US 10s touching 1.65%, its highest in three weeks. Gold pulled back as a result, whilst the dollar is at its highest since July 2020. 

 

The FTSE 100 trades lower by around 0.1-0.2% in early trade, whilst the DAX, CAC and Euro Stoxx 50 up by a similar kind of margin. Shares in Marks and Spencer traded –2% on a downbeat note from Jefferies, which downgraded the stock to hold from buy after the recent rally. They say the ‘easy lever of outsized earnings surprises on depressed multiples has been pulled’. This goes to what we talked about on the earnings update recently – easy wins behind, but much harder yards ahead in getting the stock back to 2015-18 levels. 

 

Bullish note from Goldman Sachs on US equities, who forecast that the S&P 500 will climb by 9% to 5100 by the end of 2022. Kostin and co write: “The S&P 500 P/E multiple will remain roughly flat, ending 2022 at 21.6x. After two years of near-zero interest rates, the Fed will likely begin hiking in July. 10-year Treasury yields will rise to 2% by the end of next year, but be offset by a declining Equity Risk Premium as policy uncertainty declines and consumer confidence rises. Strong corporate and household demand for equities will help support valuation.” 

 

GS’s top tips are: “(1) Own virus- and inflation-sensitive cyclicals; (2) Avoid high labor cost firms; (3) Buy growth stocks with high margins vs. low margin or unprofitable growth stocks.” 

 

Tesla things … new filings showed Elon Musk sold almost $1bn more in stock as shares in Tesla rose 4%. Meanwhile, Tesla is being sued by JPMorgan for $162m over Musk’s ‘funding secured’ tweet and losses that ensued for the bank as a result of the stock price movement.

 

Chart: EURUSD tests key 61.8% retracement level of the move higher from March 2020 to January 2021 at around 1.1290, though the euro has pared earlier losses that saw it touch 1.1265. Nevertheless, any breaks below 1.13 keeps sellers in charge.

FTSE leads as European shares stumble

  • FTSE 100 new post-pandemic high, Auto Trader leads, miners gain
  • Wall Street logs first back-to-back decline in a month
  • Musk sells $5bn in Tesla stock, Disney misses

Stocks fell on Wall Street after yesterday’s blowout inflation print, which showed prices rising in the US at the fastest pace in 30 years. Not only the pace but the breadth – the reading showed a broadening out in inflationary pressures and pointed to even racier readings over the coming months. Core inflation year-over-year could be heading to 6.5%, according to Pantheon Macroeconomics. Does it make the Fed hike earlier? Futures prices indicate the market pulled forward the bet on lift-off for rates from September to July, so there was some response in expectation the Fed might actually respond to the soaring inflation. That print was so hot markets are going to have to think more seriously about inflation and a possible Fed reaction.

Rates moved, slowly then all of a sudden, on the back of inflation hitting 6.2% in October. Benchmark 10yr Treasury yields enjoyed their biggest one-day rise in a year and across the curve we saw movement higher. But not fast enough – real rates plunged to hit record lows, sending gold to $1,868, its highest since June. A US holiday means no major data later in the session, but stock markets remain open. UK GDP figures today showed the economy grew by 1.3% in the third quarter – anaemic at best and in real terms not growing.

The dollar has rallied aggressively in the wake of the inflation report. The dollar index blew through a heap of horizontal resistance to take a 95 handle and we have fresh yearly lows for the euro and sterling. The mood seems to be that the Fed will move first – do not discount the Bank of England just yet. December remains ‘live’, even if we cannot believe anything Bailey says now. Another factor in the mix – there is a level of Brexit headline risk premium attached to the pound right now that we maybe haven’t really contended with for some time. Threats are flying around but so far, no action to destabilise the pound. The ECB keeps pushing back against any kind of rate hike talk for 2022.

European stocks were broadly weaker this morning after the first back-to-back declines on Wall Street for a month. Paris eked a small gain as ArcelorMittal posted its best quarterly profit in 13 years. We’d been suggesting a pullback was likely for the major US markets; so far it’s only mild but if inflation fears lead to expectations the Fed will tighten policy then stocks could have further to decline. As far as European markets go, watch cases on the continent and the political appetite to reimpose restrictions.

But UK stocks are outperforming. The FTSE 100 made a fresh post-pandemic high at 7,368 this morning, albeit supported chiefly by the weaker pound. Miners rose, but Autotrader stole the show with a pop of 11% after posting record half-year revenues and profits. Burberry was at the back of the class with Johnson Matthey; the former declining 9% despite revenues recovering, profits beating expectations and the board reinstating the dividend and starting a buyback programme. For the latter, a decision to offload its capital intensive battery operation dealt a blow to hopes it could be a major player in the EV growth space in the coming years – shares declined more than 17%.

More Musk things: the mercurial Tesla chief has sold about $5bn worth of his stock this week, according to regulatory filings published last night. About a fifth of the sale was part of a pre-arranged stock trading plan adopted in September. The rest at the behest of his followers on Twitter. He’d have to sell more than twice than again to meet his 10% target offered to followers on Twitter. Shares rallied 4% on Wednesday to reduce the weekly losses somewhat, and after hours trading places them about 2-3% higher this morning. Meanwhile, rival Rivian got off to a racing start to life on the Nasdaq as shares jumped by a third from the offer price to $100, at one point reaching $119 in a frenzied market debut.

And finally, Disney shares are 5% lower in the pre-market after it missed on revenues and profits. EPS of $0.37 vs $0.51 expected, while revenues of $18.53bn were a little light of forecast. Disney+ added 2.1m subscribers – slowdown to be expected as economies emerge from lockdowns. CEO Chapek reiterated the goal to hit 230-260m subs by 2024. More Hotstar subs in the Disney+ mix meant average revenues per user were 9% down on last year.

Tesla sinks, MKS and ITV deliver

Musk things 

 

About those unrealised gains being tax avoidance? What about unrealised losses? I mean, Elon musk is now worth about $50bn less than he was before Twitter poll. Surely that should count for something, too…?! Tesla shares skidded lower by another 12% on Tuesday, taking the two-day losses from Friday’s closing price to approximately 16%. 

 

Clearly, the poll has affected the stock price. But attributing a reason for conducting the Twitter poll is probably a pointless and fruitless exercise, since as we have noted before Musk is regularly doing dumb stuff on Twitter. There are theories – boy, are there theories. Big Short trader Michael Burry flagged personal debts for the reason – „Regarding what @elonmusk NEEDS to sell because of the proposed unrealized gains tax, or to #solveworldhunger, or … well, there is the matter of the tax-free cash he took out in the form of personal loans backed by 88.3 million of his shares at June 30th,“ he tweeted. I’ve even heard chatter about Musk seeking to lower the strike price on a bunch of fresh options coming his way… 

 

Whatever… what we know is that several insiders have been selling stock lately, capitalising on the $1tn valuation; Musk probably must sell soon – has said as much – to cover tax liabilities. Among the insiders, Musk’s brother Kimbal sold $109m the day before the tweet. Not an ideal setup – supply is likely exceeding demand, plus ‘optics’ – Musk is very much Tesla personified. He’s previously said he’d be the last money out – selling for whatever reason is problematic, partly because of his cult like status among investors.  When insiders sell, or say they will sell, stock after a huge run up in the shares it’s usually a sign they are not comfortable with the valuation. That is something to bear in mind. Even allowing for the stock’s drop over the last two days, it’s still commanding an absurd valuation – should the stock be worth what it is? Jefferies says more, raising its price target on the stock this week to a Street high $1,400.  

 

Whether it should or shouldn’t, a more pertinent question is can Tesla sustain a valuation that makes it worth more than every other carmaker combined? It seems unlikely. Competition for one. Rivian is an Amazon and Ford-back electric carmaker about to go public today on the Nasdaq with a stonking $66.5bn valuation after pricing shares at $78, well north of expectations. Revenues so far zero, losses high. But it’s got an order from Amazon for 100,000 trucks by 2025 – an actual order with a contract and everything (cf Tesla-Hertz). It’s an ‘exciting’ time for EV investors, for sure.

 

After announcing an order of 100,000 Teslas – well, sort of announcing – Hertz is back on the Nasdaq having been traded over the counter since it went bust last year. As part of the marketing push around this re-IPO it’s enlisted Tom Brady, who is very good a throwing an oval bowl forwards a long distance.  Yesterday Brady tweeted “To the moooooon… @Hertz #IPO #LETSGO.” (the tweet has been deleted, it seems). A fleet of Teslas on order, what could go wrong? Hertz has traded OTC under HTZZ since Oct 2020 following its Chapter 11 filing in May of that year. It’s now back under HTZ on the Nasdaq – shares closed Monday at $32.62 and closed Tuesday down about 9% on relisting. Presumably, Brady will be on CNBC or whatever soon with his take on the 2s10s curve flattening and who should be Fed president. It’s not that celebrities shouldn’t endorse brands, but it’s unclear to me why a celebrity endorsement is required for a stock market thing.  

 

The Metaverse 

 

An ETF called META has doubled its net asset value from $130m to $260m since Facebook changed its name two weeks ago. Volumes have also soared – right place, right time? Sometimes stocks with similar tickers to really buzzy or big names can find investors piling in by mistake. The SEC had to halt trading in Zoom last March because people were buying the wrong Zoom. Sometimes this gets front run by clever hedge fund types in expectation of mistaken identity. In the case of META, I’m not so sure it’s just some punters getting confused – META is designed to give investors exposure to the ‘metaverse’, whatever that is. So, if you think FB is doubling, trebling down on this area then META could be a vehicle for investors to tap the growth in the sector.  

 

Bitcoin eased off its all-time high made early Monday. Apple boss Tim Cook said he owns cryptocurrency and has been interested in it for some time. He said he believes it’s reasonable to own Bitcoin and Ethereum as a part of a diversified portfolio. However, he stressed that Apple would not invest in crypto since that is not why people own the stock. 

 

Shares in Coinbase sank 13% in after-hours trading after the company reported weaker-than-expected revenue for the third quarter. Turns out less volatile crypto markets (isn’t that what everyone wants?) is not so good for the exchange that is touted as the mainstream ticket to the crypto uni(meta?)verse. Monthly users fell from to 7.4m from 8.8m in the second quarter, though was still up from 6.1m a year earlier. Trading volume fell to $327bn from $462bn in the prior quarter.

 

Finally, Naked Brand Group, which makes swimwear and lingerie is merging with Cenntro Automotive Group, which works in the field of autonomous driving. Make sense? Nope, but this is 2021. Shares jumped 30% before trimming gains to end the day up 6%.

 

Markets 

 

European stock markets are tad higher this morning having closed mildly in the red on Tuesday – the DAX and CAC off by 0.1% and the FTSE 100 lagging at -0.3% for the session to sit underneath 7,300. All three are in the green in early trade today with the FTSE 100  recovering 7,300 but looks tentative – possible bearish MACD crossover to consider. Real yields on 30-year U.S. bonds sunk to a record low, of negative 0.57%, but gold pulled back in the face of key resistance levels. Oil prices firmed on tighter supply, strong demand signal from Vitol and JPM. US stock markets finally eased back after a run of gains that was one of the best for several years.

 

Wall Street closed lower, ending one of its best win streaks in years. The decline in Tesla was a factor, but ultimately such a straight charge up will just run out of gas sooner or later. The look-ahead to inflation is maybe a factor so this needs to be assessed with today’s CPI print.

 

Inflation is the order of the day – Chinese PPI – a big leading indicator for global consumer inflation- surged to 13.5% in Oct, hitting a 26-year high. US PPI stands at 8.6%, which was flat on Sep. Today’s US CPI inflation report could show a nudge beyond the 5.4% reported for the last 4 months – consumer prices are seen rising 5.8% on an annual basis in Oct, which would be the highest in 30 years. Core is seen at +0.4% mom and 4.3% yoy. German CPI inflation rose to 4.5% in Oct, +0.5% from the previous month – the highest level in 18 years – driven by an 18.6% rise in energy prices and doubling in heating oil prices. The split between the services inflation (+2.4%) and the inflation in goods (+7%) tells you all you need to know about the dislocation in the post-pandemic global economy. 

 

ITV update: slogging away – reopening of production and revival of ad revenues continues apace, but the longer-term doubts remain about the position of linear broadcasters in an on-demand world and its reliance on cyclical ad revenues. Still the numbers are v. good – ad revenues are forecast to rise 24% and hit the highest in its history. Total ad revenues (TAR) are growing but seeing sequential decline in growth rates that mirror the year-ago impacts. TAR hit 30% for the 9 months top the end of Sep, with July up 68%, August up 24% and September up 16% compared to the same period in 2020. That compared with growth of 115% in June and 87% in May. These numbers should settle down in due course as the effect of last year wash out. Total revenues were up 8% from 2019. Notable that ITV reports profit to cash conversion is expected to be around 60% in 2021, up from the previous guidance of 30%, due to the stronger than expected TAR performance. Shares rallied 6%.  

 

Marks & Spencer has smashed expectations as it raised its full-year profit outlook handsomely. Management is guiding profits to be around £500m – which is up from the £300-£350m guided back in May. There clearly must have been a big improvement only in the last few weeks for such a strong upgrade to the profit forecast – as recently as August the guidance was for the upper end of that range only. This upgrade came despite the requisite warning on the ‘supply chain’ – “well publicised cost pressures will become progressively steeper increasing the importance of our productivity plans, store rotation and technology investment in the coming year”. Profit before tax & adjusting items of £269.4m was up more than 50%, with food sales up 10% and ex-hospitality +17%. Ocado partnership is paying off. Shares soared 20% on the profit update before paring gains to trade +15%. Getting back to where it was before the pandemic knocked the stock for six is one thing, but by then it was already nursing years of pain – the recovery from the pandemic is complete, but can it recover 2015-2018-type levels? The restructuring is paying off – the pandemic allowed Marks to accelerate a process that had been taking far too long, and in many ways could have been a blessing. Looking for further progress in the coming quarters to drive positive price action.

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

Risk-on pile-on to end week as Pfizer delivers the good news

There is a big risk-on push to end the week as Pfizer delivered what could be the knockout blow to Covid. Reopening stocks are bid – IAG +4%, TUI +7%, EasyJet +5%, Wetherspoons +4% … you get the picture. In the US, Carnival, Royal Caribbean, MGM Resorts, Wynn Resorts, Las Vegas Sands, Delta, Southwest led the charge higher. It’s a pile-on for reopening stocks. Mega cap momentum (FANG+ index) lags XLE and XLF. Disney +3% to Netflix -2% tells the story of going out vs stay-at-home neatly. Drug manufacturers off strongly except Pfizer. Semis are having a good day.

All three of the major Wall Street indices posted fresh record highs, with gains of around 0.5%-0.9%, whilst the Russell 2000 showed up with a +1.8% rally. Vix being crushed to take a 15 handle as bears seem to be throwing in the towel. However, this is the kind of extended level at which I’d expect volatility to creep back in and stocks to pull back….but timing is everything and for now the bears are in hiding. In Europe the FTSE 100 made a new post-pandemic high at 7,332.45, trading up 0.5%. Euro Stoxx 50 also at a record high and trades +0.75% this afternoon.

The Pfizer anti-viral cuts risk of death and hospitalisation by 89%. It’s a game changer, for sure. The stock itself is +7% whilst Moderna is –19% on expectations that we won’t be needing booster jabs every few months. Coming after the Merck announcement it’s a very positive sign that we are through the worst of the pandemic now and won’t need to rely on vaccines + restrictions.

A strong US jobs report added to the sense of optimism. The headline 531k was a beat to expectations and revisions to Aug and Sep added a further 235k. Stronger jobs numbers indicate the US economy is reopening and healthier than at any point since before the pandemic, whilst it’s also been a positive for the dollar as it could draw the Fed into being more comfortable raising rates in line with market positioning, i.e. a tad sooner. At the other end, subtler wage growth – down to +0.4% from +0.6% in September – was a positive that wage spirals won’t lead to more permanent inflation.

The dollar found bid and hit its highest in a year before paring some of the gains. GBPUSD is weaker but off its lows. Several BoE members have been on the wires today trying to clear up some of the communications mess left by yesterday’s non-hike, but it’s not any clearer. They’re saying they will act, that the labour market will get tighter, and inflation will rise above 5%…so why not hike already? Yields are generally falling post FOMC and BoE, with the 10-year Treasury falling a one-month low at 1.467%. Bit of a yield flattener today with markets assuming perhaps a slightly quicker Fed taper but that could crimp long-run growth.

Dollar index: Fresh one-year highs but 94.80 is the big test, the 38.2% retracement of the longer-term peak to trough move. Chart maybe looks a bit toppy, but the bullish MACD crossover is in play.

Dollar Index 05.11.2021

Despite stronger USD, gold is bid and back above $1,800 as rates fell. US 10s down to 1.47% and real rates getting crushed. Struggling to gain much momentum above $1,800 but eyeing retest of the Oct high at $1,813. Support at 20-day SMA at $1,783.

Gold chart 05.11.2021

Oil is up 2% for the session but still set for a $3 fall this week. WTI holding the lower Bollinger but still looking bearish and heading for more bearish fundamental outlook.

Oil Chart 05.11.2021

No relief for sterling amid BoE mess

A tale of two central banks

A key part of the central banker role is communication. Meetings take place infrequently, maybe 8 times a year, so in the gaps in-between, when trading days are long, markets lust for guidance in other forms. Policymakers are generally free between meetings to make speeches, give Q&As, do TV interviews etc. Sometimes they are compelled by lawmakers to explain their policies, too. Naturally what they say is comprehended, dissected and assessed by the market as to what their words imply for the course of monetary policy. There is never an absolute: nobody will say ‘we are going to raise rates next month’. That is why you have the meeting and produce an official statement. But you can make it clear to the market what you think about the state of things and where you think is the likely or appropriate course of monetary policy.

After an uneasy start in his job, Jay Powell, the Fed chairman, is very good at doing this. Perhaps not quite as adept as Mario Draghi at carefully steering market expectations, but close. He has spent six months painstakingly guiding the market to expect this week’s announcement on tapering asset purchases. No tantrum, barely much of a reaction even. Talk of rate hikes is scorned.

Contrast this with the performance of Andrew Bailey, the relatively new head of the Bank of England. Loose – in retrospect – remarks over recent weeks led the market to expect an interest rate rise yesterday, only to be confounded by not just a failure to deliver on that but an apparent indifference to the fact that policy was so poorly communicated. “It is not our responsibility to steer markets on interest rates,” he said. Oh, right? That’s kind of the antithesis of the job description, but you’re the man in the hot seat I suppose.

Frequently handing over to Broadbent and Ramsden to answer questions he seemed unable to tackle, Bailey’s remarks were problematic. For example, he cautioned on the scale of rate bets seen in markets – saying he thinks the market has priced in too many rate rises. Maybe he shouldn’t have been stoking those expectations with hawkish remarks on inflation. Then, in response to a later question about whether the market was right or wrong, he said: „None of us are going to endorse the market curve at any point in time.” That is just untrue. Michael Saunders on Oct 9th: “I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously.” In response to a question about stagflation he rambled on about its etymology, said the bank doesn’t really use that word, so no before handing over to someone else to actually attempt an answer to the question. Even if you don’t use the word ‘stagflation’, you know the question is about falling growth and higher prices.

It seems like the BoE thinks ‘we’ll say something and the market can make of it what it likes, that’s not our business”. To a degree, that’s true. You can’t account for what others make of your statements. But you can be a lot more careful about those statements in the full knowledge that the market will read something into them since you are the governor of the Bank of England and not just anybody. There were several opportunities in recent weeks to lean against the aggressive market pricing, to gently nudge the market in the right direction, but the governor elected not to do that. The feeling is now that the BoE under Bailey has lost credibility and we will not be able to read as much into his remarks as we have done. This is not a good situation for a central banker to be in. I leave you with this, among the listed candidate requirements from the BoE’s job spec for Governor: “The ability to communicate with authority and credibility internally, to Parliament, the media, the markets and the wider public.”

Anyway, is the December meeting live? Citi and others think so, expecting a 15bps hike at the next meeting. Bailey said the vote at 7-2 was ‘close’, which maybe hints at several members – as I suggested may be the case yesterday – being close to swinging towards hiking but were not persuaded this week. Or not…it’s hard to tell these days. This morning on Today the governor said the BoE would not ‘bottle it’ when it came to raising rates and insisted they will rise. He also said that the Bank wants more time to assess the impact of the end of furlough on the labour market, and that this was the primary reason for not hiking rates yesterday. This could certainly indicate that Dec is ‘live’, since the Bank would not have had time to gauge the scarring, which so far looks small. But, then again, it might not.

Sterling got hit hard and is lower again this morning. GBPUSD blew through the 61.8% retracement area we’d highlighted at the start of the week and looks to retest 1.3410 September low and possible round number support at 1.340. This may mark the bottom though in the medium-term – if not then look to 1.3180, the 38.2% retracement of the 2020 low to 2021 high.

GBPUSD Chart 05.11.2021

Markets

European stock markets are mixed, showing a bit of caution ahead of today’s nonfarm payrolls print in the US. The FTSE 100 is up again and north of 7,300 as the softer pound appears to be delivering a bit of a boost as we witnessed in the aftermath of the Bank of England announcement yesterday. The DAX is flat but the Euro Stoxx 50 is up 0.3%. The dollar is firmer with DXY at 94.40, yields steady with 10s around 1.53%, and gold bashing its head against the $1,800 resistance again support by lower real rates.

Wall Street rallied for a 6th straight day, with the S&P 500 and Nasdaq both notching fresh record highs. The Dow Jones slipped back as financials struggled, with GS and JPM leading the index lower. Broadly speaking the Fed’s patient approach and the removal of any overhanging worry around the tapering is good for risk, whilst fundamentals in the form of earnings are positive. Both US and European equities are trading at record peaks.

We said at the start of the week that the coming days were a big test for central banks. Have they passed that test? After the blowout in the bond market, the spike in front-end yields, central banks have not this week been as hawkish as some feared. Is that a failure to grasp the inflation snake? Maybe, I tend to think so, but many believe that central banks are right to be patient since the inflation is not just a function of demand this time. The transitory inflation narrative remains, and the CBs didn’t really pull the trigger and continue to err on the side of caution.

Shares in Peloton cratered by a third in after-hours trading after it reported a wider-than-expected loss. Pinterest was up 6% after a decent beat, whilst Uber fell after its loss was larger than forecast. Airbnb delivered record quarterly revenues and earnings. The firm posted $2.24bn in revenues versus the consensus of $2.05bn, whilst net income surged 280% to $834m.

The S&P 500 looks a tad overextended however and ripe for a pullback. The 20-day SMA has been a good anchor and a retreat to this area at 4530, a drop of 3% roughly, could be achieved without upsetting the longer-term trend.

S&P Chart 05.11.2021

Oil prices plunged as Saudi TV reported the country’s oil output would top 10m bpd by December. OPEC+ committed to raising output at 400k bpd, resisting calls from the White House to do more. Speculative positions are being unwound and the market is starting flip from draws to builds. Reuters reported Saudi energy minister Prince Abdulaziz bin Salman as saying that oil stocks will see „tremendous“ builds at the end of 2021 and the start of next year because of slowing consumption.

Wide day for crude prices on Thursday highlighted by the $5 candle. Bearish MACD crossover still in charge.

Spot Oil Chart 05.11.2021

BoE credibility?

“Oh, the grand old Duke of York 
He had ten thousand men 
He marched them up to the top of the hill 
And he marched them down again” 

 

There’s been a lot of talk about loose shopping trolleys in Westminster today amid the government’s U-turn on MPs’ standards. (I didn’t know they had any?). But we need to look only to Andrew Bailey for our grand old Duke of York, happily marching markets up the hill to expect a rate hike today only to need to march them back down again. 

 

The Bank of England delivered a surprise by not raising rates, sending gilts and sterling into a bit of a spin. It’s really one of those moments where you have to question the communication strategy of the BoE. It had multiple occasions on which it could have gently nudged against the growing market anticipation around the November meeting being live but chose not to, and appeared to actively encourage tightening bets. Credibility is at stake, Mr Bailey. I’d said a hike was no slam dunk due to the way certain MPC members were leaning, but Bailey has been cheerleading tighter policy and didn’t vote for it himself – which suggests either he’s bad at communicating his views or there were simply not enough votes for him so he refrained from being a minority voter.

 

Members of the MPC voted 7-2 to keep rates at 0.1%, a move that the market had not anticipated. Recent chuntering from the members had suggested a hike was incoming but it looks like the Hawks didn’t have the votes this time – 7/2 maybe belies just how close they were to hiking today though. Dave Ramsden and Michael Saunders were the two known hawks calling for a hike, but none of the others followed in their wake. Although Catherine Mann did join those two in voting for an end to QE. 

 

Market reaction has been swift with sterling offered off the back of the announcement. GBPUSD moved rapidly to test the 61.8% level we’d targeted at the start of the week. The FTSE 100 popped higher on the news with lower sterling and looser monetary policy seen as positive for risk.

Cable reaction following today's BoE rate decision.

 

The Bank of England is sticking to the transitory line on inflation…

 

“CPI inflation is expected to dissipate over time, as supply disruption eases, global demand rebalances, and energy prices stop rising. As a result, CPI inflation is projected to fall back materially from the second half of next year.” 

 

And thinks expectations are not off the leash – despite year-ahead expectations rising to 4.4% in October. A slight fall in 5- and 10-year expectations was cited as a reason to be calm. 

 

“The MPC judged that inflation expectations remained well anchored in the United Kingdom at present.” 

 

Caution around employment just enough to warrant dovishness, it would appear.

 

“Initial indicators suggest that unemployment will rise slightly in 2021 Q4.” 

 

But tightening is still seen ahead  – the question for markets is when?

 

“The Committee has judged that some modest tightening of monetary policy over the forecast period was likely to be necessary to meet the 2% inflation target sustainably in the medium term.” 

Stocks rally after Fed tapers, BoE hike no slam dunk

“We wouldn’t want to surprise markets”

Tapering, so what? Market reaction to the long-awaited start of the Federal Reserve’s trimming of monthly bond purchases has been muted but positive. Stocks in Europe and US are at record highs – tapering is not tightening. The Fed managed to spend months carefully guiding the market to expect this move, by which it will take 8 months to reduce its $120bn-a-month QE programme, at a rate of $15bn-a-month; it’s not about to let market expectations for an interest rate hike get out of control. Still the Fed is still behind the market on this one and could be forced in to raising rates sooner than it expects. Jay Powell urged patience and caution, and seems to have largely pulled of the trick of not tying the tapering timeline to a provisional lift-off date for rates.

“Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate,” Powell said.

Both the dollar and stocks rose, with Wall Street achieving yet another record high and European stocks marking fresh record highs again this morning. Shorter dated bond yields were steady, US 2yr yields up a fraction at 0.47%, whilst the bigger move was seen further out the curve with 10s hitting 1.6%. That would be the kind of reaction Powell wanted – as far from the taper tantrum of the past as you can imagine.  As he said in the press conference, the Fed “wouldn’t want to surprise markets”.

What we did see was the Fed trying to shift the goalposts a bit on the inflation narrative. That’s important since it indicates it’s not rushing to hike to combat inflation, and in no hurry to raise rates. He explained that “transitory” for the Fed does not mean “short-lived” but rather that “it will not leave behind permanently – or very persistently higher – inflation”. This takes us into the arena of ‘long transitory’, which is a convenient intellectual get-out for the Fed without it needing to admit it got the inflation call wrong in the first place. On the labour market, Powell said there is “still ground to cover” to reach “maximum employment”.

Bank of England

Today the Bank of England is expected to raise rates, but that does not mean it will. It’s going to be a tough call as the nine members of the Monetary Policy Committee are not singing from the same hymn sheet. There are possibly three main outcomes from today’s vote – hiking 15bps and no attempt to push back on market expectations for future rate rises; a hike with a pushback against expectations for further hikes; or no hike. The ‘no hike’ outcome could also be split into one in which the Bank signals readiness to move next month, or one without such a signal.

As noted a couple of weeks ago in our preview, whilst some are worried about inflation, it’s all that clear if the hawks have the votes.

The MPC is relatively evenly split in terms of hawks and doves, so it is not abundantly clear if the recent messaging from some members – albeit including the governor – matches with the votes.

Bailey has sounded hawkish, and we know Ramsden and Saunders are itching to act. Huw Pill, the new chief economist replacing Andy Haldane has also sounded hawkish, though less so than his predecessor.

Commenting after UK inflation expectations hit 4% for the first time since 2008, he said: “The rise in wholesale gas prices threatens to raise retail energy costs next year, sustaining CPI inflation rates above 4 per cent into 2022 second quarter.” We place him in the ‘leaning hawkish’ camp.

On the dovish side, Silvana Tenreyro is highly unlikely to vote for a hike next month, calling rate rises to counter inflation ‘self-defeating’.

Deputy governor Broadbent said in July that he saw reasons for the inflation tide to ebb. The spike in energy prices since then could lead him to change his mind but for now we place in the ‘leaning dovish’ camp,

Rate-setter Haskel said in May he’s not worried by inflation, and in July said there was no need to reduce stimulus in the foreseeable future. He goes in the Dovish camp with Catherine Mann, who said last week that she can hold off from raising rates since markets are doing some of the tightening already. “There’s a lot of endogenous tightening of financial conditions already in train in the UK. That means that I can wait on active tightening through a Bank Rate rise,” she said.

That leaves Jon Cunliffe somewhat the swing voter. In July he stressed that inflation was a bump in the road to recovery.

Dovish Leaning dovish Centre Leaning hawkish Hawkish
Tenreyro

Mann

Haskel

Broadbent Cunliffe Pill Saunders

Ramsden

Bailey

We look to see whether the recent spike in inflation and inflation expectations has nudged the likes of Cunliffe, Pill and even Broadbent to move to the Hawkish camp. It seems unlikely that governor Bailey would have pointed the market towards quicker hikes if he did already have a feeling for the MPC’s views on the matter. He had ample opportunity to push back against market expectations but didn’t, which favours a dovish hike today, which is likely to be negative for sterling – though we note the dollar is topping at recent resistance and could pull back.

Sterling looks bearish still and little the BoE can now do for it with the hikes priced in – only disappoint. Near-term resistance offered by the 20-day SMA at 1.37, bearish MACD crossover still in play calling for retest of the 61.8% retracement around 1.3560, which was the mid-Oct swing low the provided the base for the rally through to Oct 21st.

GBPUSD Chart 04.11.2021

Inflation

Inflation is here and here to stay, which is probably why the Bank will ultimately raise rates. Yesterday’s services PMI indicated that while companies reported a sharp and accelerated rise in business activity during October, operating expenses and prices charged by service providers increased at the steepest rates since the survey began in July 1996.

The IHS/Markit report noted (emphasis mine): “Rising costs for energy, fuel, raw materials, transport and staff all contributed to increased prices charged across the service sector. Moreover, the rate of output charge inflation reached a fresh survey-record high in October. Service providers again noted that strong demand conditions and constrained business capacity had resulted in the swift pass through of higher input prices to clients.”

Stocks flat ahead of Fed taper announcement, Tesla stutters

Stock markets were mixed at the open in Europe as investors look ahead to the Federal Reserve announcement later. A rather flat start to the session saw the FTSE 100 test the 7,250 area before easing back towards the flatline around 7,275. The DAX was similarly flat as a pancake after 30 mins of trading – clearly investors are sitting on their hands until the Fed later.

Wall Street closed a new record high for a fourth-straight session as earnings continue to underpin confidence in fundamentals. It appears that fears about inflation eroding margins are so far unfounded. Whilst markets may have concerns about the Fed’s tapering and eventual tightening, these seem to have been well telegraphed thus far with the Fed chasing to catch up with bond markets and not the other way around.

Oil slackened as API inventories were soft – stocks rose by 3.6m barrels last week, well ahead of the 1.5m expected. EIA inventory data is due later, expected to show a build of 1.9m barrels. OPEC+ meets on Thursday amid calls for it to raise output further. Specifically, there seems to be some pressure coming from the White House as Joe Biden blamed the cartel for higher oil and gas prices, saying in Glasgow that he was reluctant to explain what he would do if OPEC doesn’t increase output – presumably he doesn’t mean kill off investment in US fossil fuels?

Shares in high street bellwether Next were down as the cautious outlook remained despite a very strong performance in the last few weeks. Full price sales in the 13 weeks to the end of October were up +17% versus two years ago. In the last 5 weeks full price sales rose 14%, ahead of the 10% expected. Nevertheless, the company stuck to its Q4 full price sales guidance at +10% and full year profit before tax at £800m.

Although Next continues to perform very well, it remains inherently cautious due to slowing demand, partly due to inflation; as well as the well-worn supply chain issues and labour shortages. The company says pent-up demand will slacken over time and warned that price increases will hurt sales despite consumer finances in decent shape. It also cautioned that while the availability of stock has improved, it “remains challenging, with delays in our international supply chain being compounded by labour shortages in the UK transport and warehousing networks”. Next is always super cautious but continues to deliver strong free cash year after year.

Taper time

The focus today is squarely on the Fed. It’s certain to announce the start of tapering, and push against interest rate hikes. Sounds easy enough but there are details which could affect the market reaction later. The 10yr Treasury yield sits above 1.53% ahead of the Fed statement, whilst 2s are back down around 0.45% having traded above 0.5% for the first time in 18 months in recent days. The dollar index is holding 94 after a stronger session yesterday, though is a tad weaker this morning.

Key questions relate to the pace and timing of tapering, and comments about the path of inflation and jobs from chair Jay Powell.
The Fed is likely to begin tapering its $120-a-month QE programme this month, or potentially wait until Dec. I don’t think this matters a huge amount, though delay could be marginally negative for the dollar and good for risk. It’s the pace of the tapering that really counts as this will determine when bond buying ends and could help shape expectations for when the Fed will begin raising rates. It’s expected that the Fed will reduce asset purchases at a rate of $15bn-a-month, which would mean the taper takes 8 months to complete. However, the Fed could go ahead at $20bn-a-month, ending two months earlier. Markets would likely see $20bn as more hawkish and suggest an earlier rate hike. There is no accompanying dot plot this month, but Powell is likely to reiterate that „a different and substantially more stringent test“ is required for interest rates to move up.

Clearly, inflation is proving less transitory than the Fed had originally thought. In his last press conference Powell avoided referring to inflation as being transitory, and recent remarks have generally indicated greater concern about sustained price hikes. If Powell expresses greater concern in Nov than Sep over inflation – which has remained stubbornly high (4% core CPI and 3.6% core PCE are both well above the Fed’s 2% target) – then the market may see this as a tacit acceptance that rates are likely to move higher by the middle of next year. Markets currently forecast a two-thirds chance of a hike by June next year, earlier than current FOMC projections. It’s hard to imagine Powell not sounding more worried – ie hawkish – on inflation.

Overall, today should be fairly straightforward for the Fed and Powell to communicate a taper which has been telegraphed for several months. The problems start to arrive if inflation remains at 4% next year and into the second quarter of 2022.

Electric cars

Electric cars are good, and internal combustion engines are bad, right? Nothing about the lifespan of batteries or the scarcity of rare earth metals or the fact that right now it takes a lot of fossil fuels to charge the batteries … anyway let’s leave all that to the green cops in Glasgow. I am sure they know what is best for us since they usually do.

Anyway, electric car uptake is kind of presumed – it’s just not clear how quickly nor who’s going to win the race. So when a major EV maker seems to get into bed with one of the world’s top car rental firms it is important for the stock of both companies. Tesla stock surged last week and the company hit a $1 trillion market cap for the first time after Hertz announced it was expanding its battery-electric vehicle fleet with “an initial order of 100,000 Teslas by the end of 2022”.

It turns out Tesla has not signed a deal with Hertz to supply the rental firm with 100,000 cars. So, it seems like the rally in Tesla and Hertz shares over the last week or two has been built on a fake news story? Who’d have thought that such a thing could happen in today’s markets…I mean it’s not like Tesla, and Elon Musk, don’t have previous here. Whilst the original statement came from Hertz, it’s not like Musk or anyone else at Tesla refuted it outright when they had the chance. I guess that is what happens when you do not have a public relations team and rely on your CEO’s tweets to deliver corporate messaging.

So, when Musk tweets all innocently yesterday, a full seven days after the Hertz claim, you have to raise an eyebrow at least. In reply to a fan post about the stock price rally, Musk tweeted: “If any of this is based on Hertz, I’d like to emphasize that no contract has been signed yet. Tesla has far more demand than production, therefore we will only sell cars to Hertz for the same margin as to consumers. Hertz deal has zero effect on our economics.”

So, Hertz doesn’t actually need a contract – if Musk is genuine here and Hertz are paying full whack then they can just buy the cars like anyone else would – as such it doesn’t materially alter the fact that Hertz is buying 100,000 Teslas – we just don’t know how or when. Matt Levine makes this point well in his Money Stuff newsletter.

But it does kind of leave you with a sense that they are not playing with the full face of the bat here. Tesla stock is up more than 28% since the Hertz order news broke. There has not been a heck of a lot of other news around the stock so I’d say at the minimum it’s a factor, and probably go as far to say a major one. Analysts got all giddy about the implications for the deal, which is important too. Here’s fanboy Dan Ives of Wedbush: “The Hertz deal we believe will be viewed as a tipping point for the EV industry … We believe this is the biggest transformation to the auto industry since the 1950′s with more consumers heading down the EV path over the coming years.”

Does it matter if it’s a contract or Hertz staffers ordering cars individually? I don’t know, but you could imagine a world close to our own where the SEC thinks that maybe these kind of opaque statements that drive significant increases in stock price valuations amounts to manipulation of some sort, or just carelessness? I don’t think this would be allowed by the FCA.

Yesterday Hertz responded indirectly to the Musk tweet by saying that “deliveries of the Teslas already have started”. The company added: “We are seeing very strong early demand for Teslas in our rental fleet, which reflects market demand for Tesla vehicles.”

Tesla shares fell, Hertz stock trading OTC initially dropped 10% before rallying 7%.

Talking of rental car companies – shares in Avis (CAR) surged in another kind of meme-stock-crazy-type move. The move came as Avis – one of the most talked about stocks on Reddit’s WallStreetBets thread – delivered a record quarterly profit and sales of more than $3bn. Earnings rose to $674 million, or $10.45 a share, in the June-September quarter, up from just $45 million, or 63 cents a share, a year before. Avis closed over 108% at $357, having at one point traded above $545 amid a frenzied day of trading that saw the stock halted on more than one occasion.

Staley out, stocks up ahead of massive test for central bankers

So, farewell Jes Staley. You ran a good investment bank but are not as Teflon-like as it seemed. Back in February 2020, when news of the investigation into his historic links to Jeffrey Epstein broke, I commented how anything relating to the disgraced financier was surely toxic and said Staley should probably go. It was a reputational thing for Barclays and Staley did not have an immaculate record. After the whistleblower incident and KKR thingy with his brother-in-law it seemed the cat was on his last life; it seemed a question of judgment, or lack of it. I said: “It turns out he’s being investigated by the FCA over his known links to Jeffrey Epstein. The board says he’s been transparent enough, so he has their backing. Coming after the whistleblowing fine, it’s looking like the cat may be running out of lives. I wonder if he can survive this.” 

 

Today Barclays says Staley is out. It all hinges on his “characterisation to Barclays of his relationship with the late Mr Jeffrey Epstein and the subsequent description of that relationship in Barclays‘ response to the FCA”. It appears his characterisation of the relationship is not exactly how the FCA and PRA see it. The board thought Staley was „sufficiently transparent” to keep his job last year – a statement at the time that already hinted a bit of a rift between CEO and board. Having seen the preliminary findings of the FCA and PRA report, either they think he wasn’t that transparent enough and/or just don’t want a mucky fight with the regulators to distract, since Staley will contest the findings. It should also be pointed out that “the investigation makes no findings that Mr Staley saw, or was aware of, any of Mr Epstein’s alleged crimes, which was the central question underpinning Barclays‘ support for Mr Staley following the arrest of Mr Epstein in the summer of 2019”, the statement from the company said. The FCA and PRA simply said they “do not comment on ongoing investigations or regulatory proceedings beyond confirming the regulatory actions as detailed in the firm’s announcement”. Barclays is right to pull the plug now. It probably could have done it earlier. As I said in February last year: “He’s got to go now as he risks tarnishing Barclays’ reputation.”

 

Shares in Barclays fell more than 1% after the announcement, whilst peers rose – Lloyds rallied about 2% and NatWest over 1%. CS Venkatakrishnan, previously head of global markets, will take the reins. A safe pair of hands but we probably need to see a bit more. Today’s release mentions that “the Board has had succession planning in hand for some timewhich if you had Jes Staley as your CEO would have been a prudent step to take.  

 

Stocks are higher in early trade on Monday, with the Stoxx 600 in Europe hitting a record high. The FTSE 100 trades up 0.5% or so amid a generally positive start to the session, the first of the month. Wall Street closed out Friday with its best month since November 2020 as all three major averages hit fresh all-time highs. Bets that central banks will raise rates to fight inflation may have caused a wipe-out in the shorter end of the bond market last week, but the gyrations are not affecting stock markets too much at the moment. Corporate earnings are strong with about 80% of US firms reporting delivering profits ahead of expectations. A slew of key central bank decisions this week has the potential to up-end the sense of calm but so far, we think policy moves are reasonably well telegraphed. Nevertheless, there are lots of questions facing the central bankers this week. 

 

The Bank of England faces a big test of credibility after a series of hawkish messages from key policymakers in recent weeks. As noted a couple of weeks ago, the situation is finely balanced. Senior policymakers like governor Bailey and chief economist Huw Pill have chucked some fairly hawkish words around. Others remain sensitive to what many believe would be a policy mistake in raising rates into a period of economic slowdown and higher taxes. The BoE will be keen to bill any hike as a dovish one that is designed to get ahead of the inflationary impulse and show it means business, but is not about to start an aggressive tightening cycle. It will be about reducing some of the distortions created post-pandemic and the need to act early before inflation expectations are off the leash and inflation itself becomes more persistent. Sterling is struggling to catch much in the way of a lift from the BoE’s apparent hawkishness and now GBPUSD looking to turn lower with a bearish MACD on the daily chart.

 

The Federal Reserve looks set to announce tapering of bond purchases but will be leaning hard on any notion that tapering is tightening. Powell is likely to reiterate that „a different and substantially more stringent test“ is required for interest rates to move up. The team sticky and team transient inflation match is still happening, though team sticky is clearly winning easily and the referee should call it off shortly. On Friday data showed US inflation running at its hottest in 30 years – headline PCE at 4.4% and core at 3.6%.

 

The Reserve Bank of Australia will need to figure out if it wants to abandon yield curve control. Last week saw a broad bond market selloff that saw the yield on Australian 3-yr paper jump above 1.25%, miles above the 0.1% target. It’s all but given up on this, it seems, though the RBA has still been active in 5- and 7-year paper to drive down yields. The question is whether the ditching of YCC begets a change in forward guidance – does it surrender to market expectations and signal it will likely raise rates before 2024? 

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