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Markets primed for US inflation, FOMC minutes, JPM kick off earnings season proper
European stocks were off half a percent this morning in early trade after another fragile day on Wall Street saw selling into the close and another weaker finish. All eyes today on the US CPI inflation number, minutes from the FOMC’s last meeting and the start of earnings season with numbers due out from JPMorgan. Asian equities mixed after Chinese trade data was better than expected.
Markets in Europe turned more positive after the first half-hour but it’s clear sentiment is anaemic The FTSE 100 is chopping around its well-worn range, the DAX is holding on to its 200-day moving average just about. Possible bullish crossover on the MACD needs confirming – big finish required.
JOLTS: We saw a marked jump in the „quits rate“ with 4.3m workers leaving their jobs, with the quits rate increasing to a series high of 2.9%. Tighter labour market, workers gaining bargaining power = higher wages, more persistent inflation pressures.
But… 38% of households across the US report facing serious financial problems in the past few months, a poll from NPR found. Which begs the question – why and how people are not getting back into work and quitting. One will be down to massive asset inflation due to central bank and fiscal policy that has enabled large numbers of particularly older workers to step back sooner than they would have down otherwise. Couple of years left to retire – house now worth an extra 20% and paid off, 401k looking fatter than ever, etc, etc. Number two is something more sinister and damaging – people just do nothing, if they can. Working day in, day out is like hitting your head against a brick wall – you get a headache, you die sooner, and you don’t go back to it once you’ve stopped doing it. Animal spirits – people’s fight to get up and do things they’d prefer not to do – have been squashed by lockdowns.
More signs of inflation: NY Fed said short and medium-term inflation expectations rose to their highest levels since survey began in 2013.
UoM preliminary report on Friday – will give us the latest inflation expectation figures. This is where expectations stand now. Today’s CPI print is expected to show prices rose 0.4% on the month to maintain the annual rate at 5.4%.
The Fed’s Clarida said the bar for tapering was more than met on inflation and all but met on employment. FOMC minutes will tell us more about how much inflation is a worry – we know the taper is coming, the question is how quickly the Fed moves to tame inflation by raising rates.
Watch for a move in gold – it’s been a fairly tight consolidation phase even as rates and the USD have been on the move – the inflation print and FOMC minutes could spur a bigger move. Indicators still favour bulls.
US earnings preview: banks kick off the season
Wall Street rolls into earnings season in a bit of funk. The S&P 500 is about 4% off its recent all-time high, whilst the Nasdaq 100 has declined about 6%, as the megacap growth stocks were hit by rising bond yields. S&P 500 companies are expected to deliver earnings growth of 30%, on revenue growth of 14%.
JPMorgan Chase gets earnings season underway with its Q3 numbers scheduled for Oct 13th before the market open. Then on Thursday we hear from Bank of America, Citigroup, Morgan Stanley and Wells Fargo, before Goldman Sachs rounds out the week on Friday. JPMorgan is expected to deliver earnings per share of $3, on revenues of $29.8bn. Note JPM tends to trade lower on the day of earnings even when it beats expectations for revenues and earnings.
Outlook: Nike and FedEx are among a number of companies that have already issued pretty downcast outlook. Supply chain problems are the biggest worry with a majority of companies releasing updates mentioning this. Growth in the US is decelerating – the Atlanta Fed GDPNow model estimates Q3 real GDP growth of just 1.3%. Higher energy costs, rising producer and consumer inflation, supply bottlenecks, labour shortages and rising wages all conspiring to pull the brake on the recovery somewhat. Still, economic growth has not yet given way to contraction and after a global pandemic it will take time to recovery fully.
Trading: Normalisation of financial markets in the wake of the pandemic – ie substantially less volatility than in 2020 – is likely to weigh somewhat on trading revenues, albeit there was some heightened volatility in equity markets towards the end of September as the stock market retreated. Dealmaking remains positive as the recovery from the pandemic and large amounts of excess cash drove business activity.
Costs: The biggest concern right now for stocks is rising costs. Supply-side worries, specifically rising input and labour costs, pose the single largest headline risk for earnings surprises to fall on the downside. The big banks have already raised their forecasts for expenses this year on a number of occasions. It’s not just some of the well-publicized salary hikes for junior bankers that are a concern – tech costs are also soaring.
Interest rates: Low rates remain a headwind but the recent spike in rates on inflation/tapering/tightening expectations may create conditions for a more positive outlook. The 10s2s spread has pushed out to its widest since June. Rising yields in the quarter may have supported some modest sequential net interest income improvement from Q2.
Chart: After flattening from March through to July, the yield curve is steepening once more.
Loan demand: Post-pandemic, banks have been struggling to find people to lend to. Commercial/industria loans remain subdued versus a year ago, but there are signs that consumer loan growth is picking up. Fed data shows consumer loan growth has picked up as the economy recovers. However, UBS showed banks were lowering lending requirements in a bid to improve activity, which could impact on the quality, though this is likely a marginal concern given the broad macro tailwinds for growth. Mortgage activity is expected to be substantially down on last year after the 2020 surge in demand for new mortgages and refinancing.
Chart: Consumer loan growth improving
Other stocks we are watching
The Hut Group (THG) – tanked 30% yesterday as its capital markets day seems to have been a total bust. Efforts to outline why the stock deserves a high tech multiple and what it’s doing with Ingenuity and provide more clarity over the business seemingly failed in spectacular fashion. The City has totally lost confidence in this company and its founder. No signs of relief for the company as investors give it the cold shoulder. Shares are off another 5% this morning.
Diversified Energy – the latest to get caught in the ESG net – shares plunged 19%, as much as 25% at one point after a Bloomberg report said oil wells were leaking methane. Rebuttal from company seemed to fall on deaf ears. Shares recovering modestly, +3% today.
Analysts are lifting their Netflix price targets, partly on the popular „Squid Game.“ Netflix will report its third-quarter earnings next week.
Stocks firm in Europe after US selloff
The rise in global bond yields that’s been gathering pace since the delayed reaction to last week’s Fed meeting saw US indices finally crack properly. Mega cap growth took a pounding, sending the Nasdaq down 2.8%, whilst the heavy weighting of these stocks on the S&P 500 sent the broader market lower by 2%. Jay Powell, facing scrutiny from lawmakers in Congress, said inflation could stay „elevated“ for longer than previously predicted. Investors are also paying close attention to events in Washington as Republicans once again blocked efforts to raise the debt ceiling and avoid a government shutdown and potential default. European stock markets were firmer in early trade, tracking the middle of the recent ranges. The FTSE 100 continues to trade in a range of a little over 100pts.
Next rose 2.5% as it once again raised its full-year outlook. In the six months to July, brand full-price sales were +8.8% versus 2019 and +62% against 2020. Profit before tax rose to £347m, up +5.9% versus 2019. Full-price sales in the last eight weeks were up +20% versus 2019, which management said ‘materially’ exceeded expectations. The strong outrun means Next is raising full-price sales guidance for the rest of the year to be up +10% versus 2019. And its forecast profit before tax has been raised to £800m, up +6.9% versus 2019 and +£36m ahead of previous guidance of £764m.
The dollar is making new highs, hitting its best since Nov 2020 even as the bond selling takes a pause. US 10yr rates have edged back to around 1.51%. Elsewhere, Citi cited Evergrande as it cut its China 2022 GDP forecast to 4.9% from 5.5%. A key gauge of long-term Eurozone inflation expectations rose to the highest since 2015.
Sterling moved to fresh YTD lows, with GBPUSD touching the 1.350 support. Some have pinned this on fuel (lorry driver) shortages and panic buying. Others have raised the stagflation klaxon because of the fuel problems. This looks like finding a narrative to suit the price action. Nothing changed yesterday relative to the day before. Much like we saw in the bond and equity markets, things move. And cable maybe is seeing a flushing out of some weak hands post the BoE hawkishness. What we have seen is the way sterling moves in a risk-on, risk-off fashion and yesterday was clearly risk off. Expectations for the BoE to raise rates before the Fed may create problems if the BoE has to walk that back in the face of a tougher economic backdrop. Clearly, bulls were caught in a bit of a trap last week and we need to see a bottom formed before we get excited again.
Stocks ease back at the open, oil and yields higher still
Yields are popping, as a bond market selloff that started last week in the wake of the Fed meeting gathers steam. US 20yr and 30yr paper is yielding the most since July, both above 2%, whilst the benchmark 10yr note has jumped above the psychologically important 1.5% level to 1.53%, its highest since June. Bets on central banks tightening monetary policy more swiftly than previously thought are fuelling the selling in rates as investors also focus in on the wrangling in Washington over the US debt ceiling. Whether we are talking reflation or stagflation, the ‘flation part of the equation is clear and yields need to rise as a corollary. If the Fed is buying $120bn a month in debt today, but buying less tomorrow, it makes sense that rates will inevitably rise.
Senate Republicans on Monday were true to their word and blocked a House bill that would avert a government shutdown and potential default on US debt. Democrats have until Friday to pass legislation that will avoid a shutdown, whilst it’s likely that the debt ceiling must be raised by the middle of October to prevent the US government defaulting on its debt. This pantomime must play out, but it seems impossible that the debt ceiling won’t be raised. A shutdown is possible, however default is unthinkable. Two Fed officials warned of extreme market reaction in the event of a default. Whilst this extreme tail risk is in any way ‘on the table’, Treasuries can expect to go through a period of further volatility.
And with rates on the rise the reflation-value play in the stock market is back on. Energy and financials and stocks tied to the reopening of the economy did well, mega-cap tech and growth was generally weaker as yields rose. Real estate, healthcare and utilities stocks also fell. That mix left the Dow higher but the S&P 500 and Nasdaq lower for the day. We await to see whether the rotation stardust can power further returns for the broad market – as happened at points earlier this year – or if the heavy weighting of the mega cap tech names will weigh further still. European stock markets are a touch lighter in early trade following Monday’s session which was a story of declining risk appetite throughout the session after a pop at the open. Oil keeps heading in one direction, with WTI above $76 and Brent touching $80.
Time to redo the dot plot: Whilst the Fed has started to sound a tad more willing to raise rates, two of its most hawkish members are on the way out. Boston Fed chief Eric Rosengren and Dallas Fed boss Robert Kaplan announced they will be stepping down shortly. “Unfortunately, the recent focus on my financial disclosure risks becoming a distraction to the Federal Reserve’s execution of that vital work,” Kaplan said in a statement. “For that reason, I have decided to retire.”
This does three things. One, it draws a line under the recent trading disclosure furore. It shows that the Fed under Powell won’t suspect behaviour. Two, it’s going to lower the chances of the insider trading story scuppering Powell’s renomination as Fed chair. Three, it removes two of the more hawkish members from the committee, which could have some implications for monetary policy depending on who replaces them. In the meantime vice presidents Meredith Black (Dallas) and Kenneth Montgomery (Boston) will stand in as interim presidents.
Powell and Yellen testify before a Senate Banking Committee today – the timing of Kaplan and Rosengren stepping down should allow Powell to easily bat away some potentially touch questions over their trading. We also have the Fed’s Evans, Bostic and Bowman on the tape later.
Rising Treasury yields offered support to the US dollar. EUR/USD is down to 1.1670 area, through some big Fib zones and near to the key support at 1.1664-66, while USD/JPY above 111.30 with the YTDS high at 111.64-66. Dollar index is north of 93.60 and towards the very top of the range of the last 11 months – big test here to see if the dollar is going to exert more strength into the back end of the year.
Gold struggling, making new lows this morning with rates on the march.
Attention shifts to bond yields as stocks rally, ARKX ETF launch, Deliveroo IPO priced at the bottom
Despite some volatility in individual names associated with the Archegos Capital fallout, chiefly the big banks that had acted as prime brokers to the hedge fund, there was no broad selloff in blue chips. The Dow Jones industrial average wiped out a 160pt loss at one point to finish 98 points higher for a fresh record close, while the S&P 500 and Nasdaq were flat. The DAX notched a record high, whilst the Euro Stoxx 50 hit its highest since the pandemic. European stock markets are broadly higher this morning, with the FTSE 100 eyeing 6,800 again with all sectors but healthcare in the ascendancy. The DAX made a fresh all-time high again. Banking shares in Europe are higher – shrugging off the Archegos episode as yields are on the move higher. Even CS is 1% higher this morning.
Market participants will be glad to see this has so far been contained – though there may be some more trades related to Archegos that need unwinding. Banks left holding the bag – which look to be Nomura and Credit Suisse more than others – will suffer significant losses. Goldman Sachs, surprise, surprise, seems to have escaped cleanly by acting swiftly and decisively to get out first. So far though there has not been a big unwind across assets.
Attention quickly turned to the bonds as the US 10-year yield jumped to 1.76% this morning, towards the top of the recent range. This helped lift the dollar to its highest since November, with the dollar index hitting 93. Gold fell to the bottom of the recent range to test $1,700 again – key trend and Fib support coalesces around $1,690 should the round number go. Bitcoin climbed to $58,000 say Visa offered more ‘corporate support’ by saying it would allow the use of the stablecoin USD Coin to settle transactions on its payment network. WTI (May) eased back from $62, the highest in a week, ahead of the OPEC+ meeting this week at which producers seem all but certain to maintain supply curbs through May.
Deliveroo is pricing its IPO at the bottom of the range, with shares off at £3.90 and valuing the company at £7.6bn. Still it’s the biggest London listing in a decade so it should get plenty of interest once the stock opens for unconditional trading next week. The IPO has not has been as warmly received in the City as found Will Shu might have expected. Numerous funds including giants Aviva, Aberdeen Standard and Legal & General are not taking part amid various concerns about governance (dual class shares), working practices (riders getting £2 an hour) and regulatory concerns. It’s also true to say that the path to profitability remains questionable.
Cathie Wood’s Space ETF – ARKX – is due to start trading today. The first new ETF in two years from the Wood stable is eighth in total. There are several eye-catching elements to the ETF’s holdings.
First, the holdings, which are not aligned very closely to existing space-focussed funds like the Procure Space UFO ETF. Somewhat amazingly, the second biggest holding in the ETF, at more than 6% weighting, is – get this – another ARK ETF, the 3D Printing ETF (PRNT). Loading up ETFs with other ETFs – which you are promoting – seems kind of wrong. You could rightly ask: is it a pyramid? It smacks of the 1920s American experience of the Goldman Sachs Trading Corporation, which in turn set up the Shenandoah Corporation, also an investment trust, which in turn set up Blue Ridge Corporation. Yes, another investment trust. What you had was a lot of trusts with the same people and same investments – cross-investing in one grand pyramid scheme. We all know how that ended up.
Second, it contains a number of names that are not associated with ‘space’. For instance, JD.com is a 5% holding, whilst Virgin Galactic is less 2%. Netflix is a 1.27% holding. True, the prospectus makes it clear that ‘space’ investments would only ever be no less than 80% of holdings, but it is nonetheless noteworthy to package up a load of investments in this way.
And, ARK has changed the language in its ETF prospectuses to remove the limits on single-company exposure. It also added a reference to blank-check companies (SPACs) to the risk section. This will only add to concerns about the concentration in large cap momentum stocks and exposure to high risk SPACs comes with its own set of worries for investors.
A light calendar for data today – just the US CB consumer confidence report on tap as well as preliminary German inflation numbers. Fed speakers Williams and Quarles are up, too.
Fed governor Christopher Waller offered a robust defence of the central bank’s policy making, refuting suggestions it is keeping rates low to finance government debt. That is one in the eye for MMT supporters. US total government has risen $4.5 trillion, about 20%, since March 2020. In many ways the pandemic brought MMT from the theoretical shadows to the de facto limelight without any debate. However, the Fed is seeking to assert its independence and rejected the idea that the central bank is working in concert with the government to directly finance debt.
“My goal today is to definitively put that narrative to rest. It is simply wrong,” Waller said in prepared remarks to the Peterson Institute for International Economics. “Monetary policy has not and will not be conducted for these purposes.” We shall see.
Yields weigh on stocks, inflation again, oil recovers from sharp selloff
Economy vs markets: The Fed gave a bullish outlook on the economic recovery this week, but left its dovish course of monetary policy unchanged. Perfect conditions for a market rally, some might say. After stocks in the US closed at record highs on Wednesday following the statement, the reckoning came on Thursday. Yields popped, nobbling tech stocks: the US 10-year Treasury yield rose to 1.75%, the Nasdaq fell 3%. The downbeat mood rippled across other markets and left all the major indices lower, Asian markets fell and Europe has opened in the red. The FTSE 100 is weaker as heavyweights BP and Shell fell in the wake of yesterday’s oil price plunge and HSBC declined 2%.
It looks like a classic case of rates go up, growth stocks fall. Cyclicals didn’t really benefit though – it is not a simple case of moving from one part of the stock market to another. Nevertheless, I think this is part of the natural churn we are going to see in stock markets as they respond on a daily basis to rises in bond yields. This is not about absolute levels – not yet at least – but about the pace of these moves in bond markets which will take out bulls and bears alike with the gyrations. These shakeouts will create new entry points. As I said after the FOMC meeting, the Fed and its chair Jay Powell are letting the dogs of inflation off the leash and this creates all kinds of tensions in markets. Yields and inflation expectations are going to rise – the Fed is explicitly telling them to do so. It couldn’t really be any clearer: the Fed wants inflation and yields to rise. It’s technically behind the curve, but wilfully, gleefully. It’s behind the curve in the way a driver of car steers his car round the bend looking firmly at the road ahead and knowing there are chicanes coming.
If the Fed wants to run the economy hot, the latest Philly Fed index suggests it’s already there. The index for current manufacturing activity in the region jumped from a reading of 23.1 in February to 51.8 for March its highest point in nearly 50 years. The current new orders index also increased to a 50-year high, rising 28 points to 50.9 in March. And inflation again reared its head as firms reported price pressures from purchased inputs. The prices paid index rose from 54.4 to 75.9, its highest reading since March 1980. These kinds of readings are going to become normal over the next few months and see pressure on yields – the big question is at what point the Fed breaks and concedes that this is not just a transitory blip. I don’t think it will buckle and this ought to exert much greater pressure on yields, potentially leading to some kind of ‘tantrum’ and creating further volatility in stocks, particularly growth and tech.
The Bank of England was unchanged. The MPC didn’t provide any push back on yields but this just chimes with what the governor, Andrew Bailey, has been saying. It also didn’t want to play up to market expectations for a hike next year. Overall, I call this a holding statement until we get more info on the recovery.
The Bank of Japan has widened its yield curve target, increasing the size of the band within which it allows longer-dated yields to move. JGB yields moved higher in response. The BoJ also said it would no longer commit to buying ETFs at an annual pace of 6tn yen, instead saying it would only purchase these assets when necessary. Both moves are attempts to give the central bank more flexibility and make its stimulus more sustainable in the wake of the pandemic as it tries to stimulate inflation. February core CPI inflation fell 0.4% year-on-year, signalling a decline in the rate annual declines in consumer prices for the second straight month, as rising fuel costs offset the drop in household spending.
Oil prices are higher after they tumbled yesterday in a brutal sell-off for complacent bulls. Demand fears maybe, rising inventories maybe; certainly, some lack of momentum after Brent hit $70 was a factor. I don’t think it is going to mark a reversal for bulls, more of a shakeout as the summer looks set to see strong demand again. Nevertheless, we had noted that the nearest months flipping to contango was a signal there was some fears that the market right now is not as tight as it might be. WTI dropped to touch its 50-day moving average and is firmer this morning. (good example of MACD divergence signalling a problem).
Gold remember still trades with the bullish MACD crossover in oversold territory on the daily chart supporting the bulls. On the hourly chart we see a firm bounce off the 200-hour simple moving average plus MACD crossover and trend supporting the thesis. Bulls require to take out the swing high at $1,756 with the big resistance at $1,760 before a return to $1,795/$1,800.
Cable: Hourly chart giving off some good signals for bulls after bouncing off the 200-hour SMA and MACD bullish crossover in play – looking for a retest of 1.40 perhaps, however the 38.2% retracement around 1.3950 is offering resistance.
Fed to let yields, inflation run; Bank of England to follow
Fresh records for Wall Street, a weaker US dollar, yields higher, volatility crushed: these were some of the outcomes from a dovish Federal Reserve yesterday as the US central bank resolutely stuck to its guns to let the economy run as hot as it needs to achieve full employment. European stocks moved higher in early trade Thursday but worries about vaccinations and Covid cases weigh. The FTSE 100 still cannot yet sustain a break north of 6,800 and is the laggard, declining a quarter of one percent this morning.
Longer dated paper moved a lot as Powell said the Fed would look past inflation overshooting; US 10-year Treasury yields have shot about 10 bps higher today to above 1.72%, whilst 30s are at their highest in almost two years close to 2.5%. Spreads are at their highest in over 5 years. Stock markets liked it – the Dow Jones industrial average climbed 0.6% to close above 33,000 for the first time. The S&P 500 closed within 25pts of 4,000. The Vix fell under 20.
Tracking the move in US Treasuries, gilt yields rose this morning as markets look to the Bank of England meeting to deliver the next dose of central bank action. It will leave interest rates on hold at 0.1% and the size of the asset purchase programme at £895bn. The success of the vaccine programme – albeit now running into some hurdles – has allowed the Bank to take a more optimistic view of the UK economy beyond Q1 2021. At its February meeting the Old Lady said the UK economy will recover quickly to pre-pandemic levels of output over the course of 2021. It expects spare capacity in the economy to be eliminated this year as the recovery picks up. All this really puts the negative rate conundrum on hold – the next move should be up, if not this year certainly next. Nevertheless, Andrew Bailey stressed earlier this week that the BoE is not concerned by rising yields or temporary inflation blips. So today it will be more about what the BoE doesn’t say. Remaining silent on the rise in bond yields could be the cue for sterling.
What did we learn from the Fed and Jay Powell? Chiefly, the Fed is staying its hand and letting the economy run hot. In a nutshell the Fed said inflation will overshoot but not for long; yields are moving up as part of the cycle as growth improves; and it won’t stop until full employment is achieved along with inflation above 2%. The Fed’s dovishness on monetary policy was contrasted by sharp upgrades to growth and inflation forecasts this year – but the Fed is in a new outcome-based regime focused on absolute employment levels, not on the Philip’s Curve. It also doesn’t really think the sharp bounce back this year is sustainable, meaning now is not the time to remove the punchbowl.
Transient: Things like supply bottlenecks and base effects will only lead to a “transient” impact on inflation, according to the Fed. The Fed plans to maintain 0-0.25% until labour market conditions achieve maximum employment and inflation is on course to remain above 2% for a sustained period. A ‘transitory’ rise in inflation above 2% as is seen happening this year does not meet criteria to raise rates. This is where things get dicey vis-a-vis yields since inflation could get a bit big this spring which would pressure (the Fed is immune so far) for hikes sooner. I think also the Fed should be looking around a bit more about where there is clear inflationary pressures and have been for some time, like in asset prices.
Stick: It seems abundantly clear that Powell and the Fed see no need and feel no pressure to carry out any kind of yield curve control or Twist-like operation to keep a lid on long-end rates. This is a steepener move and the market reaction was plain as we saw longer-end yields rise just as the yield on shorter-dated maturity paper declined at first. The 5s30s spread widened around 9bps to 1.66%, whilst 2s10s widened 7bps to 1.5%.
Patient: Is it time to start talking about talking about tapering? “Not yet” came the reply. Which matches expectations – any talk of tapering will not be allowed until June at the soonest when the Fed will have a lot more real data to work with post-vaccinations. That will be things get harder for the Fed as inflation starts to hit.
Outcome-based: Focus on ‘actual’ progress rather than ‘forecast’ progress. This tallies with what know already about the Fed taking a more outcome-based approach to its policy rather than relying on Philip’s Curve based forecasts. The Fed’s rear-view policymaking will let inflation loose. It also means the dots are kind of useless, but nonetheless the lack of movement on dots kept shorter dated yields on a leash, pushing real rates down. The question about what actually constitutes a material overshoot on inflation and for how long it needs to be sustained will be dealt with another day, with Powell admitting the Fed will have to quantify this at some stage.
SLR: Powell kept his cards close to his chest and only said something will be announced on SLR in the coming days. This may involve some kind of soft landing for the exemption to lessen any potential volatility.
Long end yields moved higher with curve steepeners doing well. I expect bond yields and inflation expectations to continue to rise over the next quarter – the Fed remains behind the market but this time, crucially, it doesn’t mind. Whilst Powell said the Fed would be concerned by a persistent tightening in financial conditions that obstruct its goal, the difference this time is that stock market stability is not what the Fed is about these days. Post 2008, the Fed fretted about market fragility since that is what caused the recession. Now it’s comfortable with higher yields and won’t be concerned if the stock market is lower from time to time.
With the long end of the curve anchored by the Fed’s dovishness, and longer-end yields and inflation expectations moving up, this creates better conditions for gold to mount a fresh move higher, but it first needs to clear out the big $1,760 resistance. MACD bullish crossover on the daily chart below is encouraging for bulls.
Excess is good for the stock market
Me, You, Madness…no it’s not a story about Roaring Kitty, GameStop and Melvin, though someone has to make that into a film (Michael Lewis will be writing the novel already, I’m sure). It’s actually a 2021 film starring Louise Linton, wife of ex Treasury secretary Steve Mnuchin. I have not seen it, but I have seen the trailer. The setup sounds fun – Linton plays a psychopathic hedge fund boss. But while it contains just everything you can cram into a feature film; it looks exceptionally bad. So bad it’s actually good. Maybe. How it ranks in the canon remains to be seen. It’s really a vanity project, which is really a form of excess that we see in lots of corners of the market right now – think Tesla, the meme stocks, Bitcoin (just don’t include the FTSE…).
Biden’s $1.9tn stimulus package is probably excessive. t’s certainly full of waste, full of ways to prop up failing businesses and deliver helicopter money to a lot of people who don’t really need it. The economy is rebounding anyway. Jobs are coming back. A lot of the money will find its way into things like paintings, cars or fine wine. It will also find its way into stocks, or crypto-assets, or even non-fungible tokens (NFTs).
It will also find its way into paying down debt, and this is huge. The US government is embarking on a massive debt transfer from households to government. It can unleash huge potential by transferring the burden from productive capital (private) to unproductive (public) and is potentially one of the most explosive forces in capital markets in several generations. This transfer of debt will unleash entrepreneurial spirits that would otherwise be restricted. I fail to see how it do anything but increase asset prices, including stocks – despite the rise in yields. It allows households to take on more debt, start businesses and buy more stuff. It also lets them invest in stocks directly. The craziest thing is that it won’t help inequality- poor folks need the money for bills, food etc. Middle class folks will put the money to work. Those without big outgoings will reduce debt so they take on more risk in future because they’re not saddled with big debt obligations like student loans. We’re going to be hit by a massive surge in growth and bond yields will spiral. Inflation will spike and unless the fed gets a grip, it will lose control of inflation. I feel like we’re at the start of a massive economic boom, at least in the US, where policy makers have been vastly more ambitious than they have elsewhere. I might be over-egging the pudding, but I sense people don’t appreciate just how important this debt transfer is going to be for the structure of markets and the economy.
Inflation is dead. Inflation is temporary…
Year-on-year comps will start to show inflation rising. The NY Fed’s Empire State Manufacturing Survey yesterday contained something interesting in its inflation component: „Input price increases continued to pick up, rising at the fastest pace in nearly a decade and selling prices increased significantly.“ Other datasets have shown input prices starting to inflate at the fastest pace in years.
Yesterday I touched on the way [some] central banks seemed kind of unconcerned by the rise in yields – last time he spoke Powell didn’t take the opportunity to push back against the rise in yields (no hint of a Twist), and the BoE’s Bailey said yields are rising because of growth. And now we have the RBA – the first to blink by stepping up asset purchases to counter the rise in bond yields – saying in the minutes to its last meeting that the gyrations in bonds are not that significant. And now the ECB – after another communication failure by Christine Lagarde – says yield curve control is unnecessary. ECB chief economist Philip Lane pointed out to the FT that the is not like the last crisis with years of lost output. Which means CBs don’t need to worry about taming yields in the same way.
The mantra seems to be that inflation – previously thought dead – will only be temporary and yields are just moving up because economic activity will hit 2019 levels this year. It’s just not that simple: yields reflect the fact that there is a lot more cash sloshing around – US bank reserves have doubled to about $3.4tn since the start of the pandemic. More stimulus, more growth, more money in the system, more debt issuance – yields are marching higher for number of reasons but mainly reflect growth expectations, inflation expectations and issuance – both real and expected. The extent each exerts a pull on yields (and the extent to which each is affecting the other) is obviously up for a lot of debate and a lot harder to measure. But what seems clear to me is that yields are facing a lot of upwards pressure. Then we have market functioning elements like extending SLR – failure to extend could see a heap of Treasuries come onto the market, making things more volatile.
But I think the big question that we are yet to really answer is how much markets are worrying about debt. I’ve banged on a lot about MMT before – deficits don’t matter and all that – not with any real view on what we should be doing, but rather with an interest in the debate about how we approach fiscal and monetary policy. If markets really are worried about the debt and their ability to absorb all this issuance, then it probably does have some important long-term implications, such as whether you can keep running perpetual deficits, can you always just increase the debt ceiling, and should you look to balance the books? How quickly do you suck the money back out of the system? And with the Democrats gaining those Senate seats in Georgia there is a lot more stimulus coming over the hill.
The back up in long end real rates took off on January 5th – after the Georgia runoffs – indicating people think issuance is a factor.
Inflation expectations are at multi-year highs.
Stocks in Europe took the cue from a positive session on Wall Street, with the main bourses mounting a fresh stab higher after yesterday’s early promise somewhat fizzled out in the latter part of the session. Positive Zalando and VW updates provided comfort to the Stoxx 600, whilst the DAX rose 0.6% in early trade. The FTSE 100 trades higher with a fresh attempt to clear the big resistance around 6,800 – near-term trend support is about to run into this level so a big test lies ahead with a possible leg up should 6,800 finally be taken out with conviction. Overall the mood in Europe was probably constrained yesterday by several countries halting the AstraZeneca vaccine, but this should prove a major constraint for the market.
Did you doubt that the arrival of ‘stimmy’ cheques would do anything other lift stocks? Yields didn’t really do anything so there wasn’t that immediate stress for the growth end of the market. Investors are looking at the yields and probably thinking yes it means multiple compression, but then you have to look at the $1.9tn coming over the hill at a moment of a strong cyclical recovery as fresh juice. US 10-year notes hovered around 1.6%. The Nasdaq 100 ended up 1% and the best of the induces after a big rally into the close. The Dow Jones rose 0.5% to a fresh record high as it notched its 7th straight daily gain. The S&P 500 also made a fresh ATH after rising 0.65% – its 5th straight day of gains. Futures point to another higher open.
Tesla rose 2% despite the company saying that Elon Musk’s title was changing to Technoking of Tesla, whilst CFO Zach Kirkhorn would henceforth be known as ‘Master of Coin’. GameStop sank almost 17%, AMC Entertainment rose 25% as it embarks on reopening cinemas. Keep your eye on these meme stocks as stimulus cheques could do a lot of work for them.
Yields remain the big threat to daily gains – if you see Treasury yields pop it will rock the market, but longer-term stocks can handle higher rates and unless there is another exogenous shock or a meltdown in funding markets like we saw with the repo stress a couple of years ago [watch that SLR decision], the path of least resistance is up. The Fed meeting this week is the clear risk event for yields but today we also have US retail sales to watch.
Sterling retreated to a one-week low vs the dollar. GBPUSD declined to around 1.3830 and may seek a test of the 50day SMA. The yield on 10-year gilts spiked to 0.86%, the highest in a year, but has this morning retreated back under 0.8%.
Bitcoin trades higher this morning with the 200-hour SMA offering the support. MACD bullish crossover seen.
Wochenausblick: EZB spricht, US-Verbraucherpreisindex und BoC-Stellungnahme
Wir haben eine volle Woche für die europäische Wirtschaft vor uns, mit der Pressekonferenz der EZB und Aussagen zum Zins. Kommen Änderungen der Wirtschaftspolitik, um die steigenden Rendite aufzuhalten? In den USA werden die Zahlen des Verbraucherpreisindex’ veröffentlicht. Sie werden einen Einblick in die Wirkung der Inflation geben. Die Bank of Canada wird auch ihre Tagesgeldsatzerklärung abgeben, und ein starker wirtschaftlicher Ausblick für Kanada könnte eine Änderung der Anleihekaufpolitik bedeuten.
Wird die EZB ihr Anleihenkaufprogramm anpassen, um die steigenden Renditen anzugehen?
Die Anleiherenditen haben in den letzten Wochen viele geldpolitische Gespräche geprägt, und wir werden in der dieswöchigen Erklärung und Pressekonferenz der EZB auf die Reaktion der Europäischen Zentralbank auf steilere Kurven achten.
Wir haben bereits gesehen, dass Vorstandsmitglied Fabio Panetta sich dafür einsetzt, weiterhin Anleihen zu kaufen und die finanzielle Unterstützung aufrechtzuerhalten, während die Pandemie anhält.
„Der Anstieg der mit dem nominalen BIP gewichteten Renditekurve, den wir jetzt sehen, ist nicht willkommen und muss widerstanden werden. Wir sollten nicht zögern das Einkaufsvolumen zu erhöhen und das Pandemic emergency purchase programme (PEPP) in vollem Umfang oder wenn nötig auch darüber hinaus auszunutzen,“ sagte Panetta am Dienstag, den 2. März.
„Die Unterstützung der Politik wird dafür weit über das Ende der Pandemie hinaus erforderlich bleiben,“ fügte er hinzu. „Die Risiken zu geringer Stützung überwiegen die Risiken von zu geringer Stützung bei weitem. Mit dem längeren Niedrighalten der nominalen Rendite können wir einen starken Anker bieten, um versorgende Finanzierungskonditionen zu erhalten.“
Trotz dessen haben wir eine Verlangsamung des Anleihenkaufprogramms der EZB am Montag den 1. März gesehen. Zu dem Zeitpunkt hatte die Bank 12 Milliarde Euro in Anleihenkäufen getätigt, gegenüber 17,5 Milliarden Euro in der Vorwoche. Der Rückgang ist auf viel höhere Rücknahmen zurückzuführen, berichtet Bloomberg. Vielleicht ein Zeichen für eine anstehende Politikanpassung?
Das könnte den Wünschen Panettas zuwiderlaufen: „Wir müssen die Glaubwürdigkeit unserer Strategie festigen, indem wir demonstrieren, dass eine unangemessenes Anziehen nicht toleriert wird.“
„Wir haben Möglichkeiten darauf zu reagieren,“ sagte Jens Weidmann, Chef der deutschen Bundesbank, CNBC. „Das PEPP kommt mit einer gewissen Flexibilität und diese Flexibilität können wir nutzen, um auf eine solche Situation zu reagieren.“
Das Notfall-Anleihenkaufprogramm der EU wird bisher bis März 2022 weiter fortgeführt, mit einem Gesamtvolumen von 1,85 Billionen Euro. Weidmann gab an, dass die EZB die Einkäufe im Kontext steigender Renditen wieder ankurbeln könnte.
„Das ist ein Element, das auf dem Tisch ist, die Flexibilität, die wir in der Umsetzung des PEPP zu nutzen,“ sagte Weidmann. „Aber nochmals, der erste Schritt ist die Analyse der zugrundeliegenden Ursachen und die Einschätzung, welche Wirkung wir auf unser schlussendliches Ziel haben, der Preisstabilität.“
Die Renditen und die Reaktion der EZB werden bei der nächsten Ankündigung am 11. März im Mittelpunkt stehen.
US-Verbraucherpreisindex, Renditen und Inflation
Wir werden mit der Veröffentlichung des Verbraucherpreisindex-Reports des US-Arbeitsministeriums weiter sehen, ob die Inflation in den USA wirklich Zähne zeigt.
Steigende Renditen von US-Anleihen sind quasi schon seit einigen Wochen Gesprächsmittelpunkt, da sie die globale Finanzwelt beeinflussen. Die Renditen der 10-jährigen US-Schatzanweisung überschritten am 17. Februar 1,3% und sind seitdem auf fast 1,6% gestiegen.
Renditen neigen dazu, zusammen mit Inflationserwartungen zu steigen, da Anleihen-Anleger weniger auf Anlagen mit niedrigen oder negativen Renditen aus sind. Höhere Renditen könnten außerdem mehr Schuldendienste für große Firmen bedeuten. Das wirkt sich negativ auf die Aktienmärkte aus, da Händler die Investitionsumgebung neu einschätzen.
Davor zeigte der Verbraucherpreisindex für Januar eine Schrumpfung, bei der die Inflation auf 0,3% zurückging. Im Vergleich zum Vorjahr blieb der VPI konstant bei 1,4%. Der Kern-Verbraucherpreisindex, der volatile Lebensmittel- und Energiepreise ausschließt, sank auf 1,4% im Januar von 1,6% im Dezember und sank damit tiefer, als die vom Markt erwarteten 1,5%.
Der Preisdruck war vermutlich im Februar stärker.
Die höhere Rendite und die Inflationsrate werden im Kontext weiterer Konjunkturpakete im Fokus bleiben. Das 1,9-Billionen-Dollar-Paket von Joe Biden wird sehr wahrscheinlich bald verabschiedet, was hoffentlich zu mehr Ausgaben und Konsum in der gesamten US-Wirtschaft führen wird. Mit mehr einfach erhältlichem Bargeld, könnte die Inflation weiter steigen.
Es gibt einiges aus den US-VPI-Veröffentlichungen dieses Monats herauszulesen.
BoC Zinsbekanntgabe – keine großen Änderungen erwartet
Die Bank of Canada wird diese Woche ihre jüngste Zinspolitik bestimmen. Könnte wir eine Zurücknahme der wirtschaftliche Stützung erleben? Vorläufige Berichte zum BIP suggerieren, dass der Ausblick für die kanadische Wirtschaft relativ gesund ist, sodass eine Zurücknahme der Anleihenrückkäufe am Horizont stehen könnte.
In einer Pressemitteilung vom Januar erklärte die kanadische Zentralbank, sie werde den aktuellen Leitzins halten, bis das Inflationsziel erreicht ist, während sie ihr quantitatives Lockerungsprogramm fortsetzt und jede Woche Anleihen im Wert von 4 Milliarden CAD kauft.
Allerdings zeigen die jüngsten kanadischen BIP-Zahlen eine widerstandsfähige Wirtschaft. Die kanadische Wirtschaft wuchs auf das Jahr gerechnet im vierten Quartal um 9,6%, wie Zahlen von Statistics Canada am Dienstag den 2. März zeigten, was über den von Analysten erwarteten 7,5% lag.
Zinssätze werden wahrscheinlich bis 2023 um die Null bleiben. Die Hypothekenzinsen haben sich jedoch aufgrund der steileren Renditekurven allmählich erhöht, aber der Leitzins wird noch einige Jahre lang niedrig bleiben, sagt BoC-Gouverneur Tiff Macklem.
Obwohl einige Beobachter der Ansicht sind, dass die stärkeren wirtschaftlichen Aussichten möglicherweise auf eine Kürzung der Anleihekäufe hindeuten, hat die BoC den Kauf von Provinzanleihen im Rahmen einer Gesamtstrategie beschleunigt, um steigenden Renditen entgegenzuwirken und den Provinzen mehr Liquidität zur Verfügung zu stellen, um ihre Wirtschaft in Zeiten der anhaltenden Covid-19-Pandemie zu stärken.
Die Zentralbank kaufte letzte Woche Anleihen im Wert von 436,5 Millionen CAD über das Provincial Bond Purchase Program – der größte Kauf seit Beginn der Anstrengungen im Mai.
Wie alle Volkswirtschaften, ist es allerdings unwahrscheinlich, dass Kanada weltbewegende Änderung während der am 10. März erwarteten Zinsentscheidung macht.
Top Wirtschafts-Daten der Woche
|Wed 10 Mar||1.30pm||USD||CPI m/m|
|1.30pm||USD||Core CPI m/m|
|3.00pm||CAD||BoC Rate Statement|
|3.30pm||USD||US Crude Oil Inventories|
|Thu 11 Mar||12.45pm||EUR||Main Refinancing Rate|
|12.45pm||EUR||Monetary Policy Statement|
|1.30pm||EUR||ECB Press Conference|
|Fri 12 Mar||1.30pm||CAD||Employment Change|
Top Geschäftsberichte diese Woche
|Tue 09 Mar||Deutsche Post||Q4 2020 Earnings|
|Continental||Q4 2020 Earnings|
|Wed 10 Mar||Oracle||Q3 2021 Earnings|
|Adidas||Q4 2020 Earnings|
|LUKOIL||Q4 2020 Earnings|
|Legal & General||Q4 2020 Earnings|
|Campbell Soup||Q2 2021 Earnings|
|Prada||Q4 2020 Earnings|
|Thur 11 Mar||Rolls Royce||Q4 2020 Earnings|
Powell worries markets, stocks decline as yields rise
You could call it a failure of communication. No hints of a Twist mark III, no worries about funding markets. Yields surged and the selloff in tech stocks gathered steam, dragging the whole market down as Fed chair Jay Powell refrained from jawboning yields or coming anywhere near close to signalling the central bank would attempt to lean on the yield curve. Powell is letting the market be a market – hallelujah you may say. Let the market fend for itself. Far from hinting at a third iteration of Operation Twist, he stressed confidence in the current pace of policy.
Powell said the Fed would need to see a broader increase across the rate spectrum before considering any action and stressed that the current policy stance is appropriate. He didn’t signal the Fed was in any rush to do anything about the rising yields. The truth is the Fed is still super-accommodative, but the bond market is testing its mettle. The closest hint of concern was this: “We monitor a broad range of financial conditions and we think that we are a long way from our goals,” Powell said, adding: “I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.”
The more dovish he sounds the more long-term rates go up. When there is no inflation, he can remain dovish and have no effect on the long end – but when the market thinks there is going to be inflation, he has no control, and the bond market will do the tightening for them. The Fed is left in an invidious position and now must play catch up to reconverge with the market. So, does that mean we get a more hawkish Fed – or less dovish perhaps? It seems unlikely and would go against everything the Fed has said so far. A third Twist may be a way out, but it will only kick the can down the road a little further.
I said yesterday Powell’s speech could be make or break time and so it transpired. The dollar ripped higher, stocks, metals and rates sold off. A lot of stocks in the tech space got a bloody nose, and a lot of investors did too, Cathie Wood among them. ARKK and Tesla both declined 5%.; the latter is down 30% from its highs. Apple declined 1.58% and is about 15% off its highs; the difference between real and illusory earnings starkly obvious within the ‘tech’ space. GameStop closed up 6% after it spiked on no news – flight to quality perhaps? (ho ho ho).
The Nasdaq 100 declined 1.73% and closed under 100-day simple moving average, but off its lows. The tech losses bled across – the S&P 500 fell 1.3% and the Dow was also down a little over 1% as energy and financials were less impacted. The US 10-year Treasury yield rose close to 1.59%. European stocks have tracked lower this morning, mirroring the move on Wall Street and a soft session in Asia. Nevertheless, European stocks were set to close the week out higher – less tech means less trouble right now – as the S&P 500 looks poised to end the week about 1% lower. And whilst down around 1% today, the FTSE 100 is set for a +1% gain for the week.
This is the kind of market that will trap bulls and bears alike. It was looking pretty solid in the early part of the US session before Powell spoke. Whilst it’s showing signs of a strong pullback, there are still dip-buyers out there. Moreover, this is about a re-rating to the rise in yields and not because the economic prospects are worse. A little froth is coming out of the market and that is no bad thing. The VIX is not really reacting in the way we might expect to this volatility, which indicates ‘fear’ is not high. If the S&P 500 drops under 3,750 at the close today, we may be looking to further downside. Otherwise, it’s maybe just a short-term capitulation on rising yields and we rally back.
Yield differentials took the dollar higher. GBPUSD this morning trades around 1.3850, its weakest since the middle of February. EURUSD is back under 1.20. Copper and zinc fell sharply as they retreat from multi-year highs – probably more speculative froth coming off the top than any warning signs for the economy. Gold sank as real yields rose firmly and is now testing the next Fib level around $1,690. NFP day today …
What does Joe Biden do? Should the US president by calling the Saudis to stop this rally, or is he happy to watch the cartel raise oil prices? A question for the president’s resolve perhaps, but for now we can safely say the market was caught off guard as OPEC didn’t elect to increase production next months.
Oil prices surged to their highest since January 2020 after OPEC and allies chose to roll over production cuts for another month. The 23-nation OPEC+ agreed not to raise output by 500k bpd in April as had been expected. Saudi Arabia also elected to maintain its additional voluntary 1m bpd production cut. Whilst Russia had been pushing for production to increase, it seems Saudi Arabia kept a grip on the cartel. Russia will be allowed to raise production by 130k bpd next month as compensation for lost output due to cold weather in Siberia. Kazakhstan will be allowed to increase production by 20k bpd.
OPEC+ reached a compromise that is bullish for prices, but this is likely to create more pressure on Saudi Arabia to let countries open the spigots when the cartel next meets in April to decide on output for May. Moreover, the market was already sharply tightening ahead of the meeting. It could be time for $70 crude oil again before long.
Stocks rally as yields retreat, UK housebuilders jump
Last week stocks came under pressure from rising bond yields, as a rates selloff that has been bubbling under the surface since last November gathered steam. US 10-year rates jumped above 1.6% at one stage, their highest in a year, hitting stocks that have been used to ultra-low rates. The FTSE 100 recorded its biggest single day fall since October. By the weekend there had been some paring of losses in the US with the Nasdaq rising on Friday even as the broad S&P 500 declined again, and the 10-year benchmark returned to the 1.4% handle. In his annual letter to investors, Warren Buffet warned that fixed income investors face a “bleak future” as “bonds are not the place to be these days”.
The Fed has signalled it’s comfortable with what’s going on, which only makes it more likely that the bond market is going to test its resolve. However the Reserve Bank of Australia is already stepping in and on Monday said it will buy more than $3 billion of longer-dated bonds, after announcing a surprise boost to purchases of three-year paper last week. Yields declined sharply, with the 10-year note declining from almost 1.9% to a low of 1.6%, as the central bank said it would double bond purchases as part of a regular operation. The RBA move helped to keep rates calm on Monday but you start to wonder if the genie is out of the bottle now.
Stock markets in Europe opened a lot firmer on Monday partly as a reaction to Friday’s big fall, partly with ‘vaccine optimism’ again a factor as the US regulators approved the Johnson & Johnson single-shot vaccine. The House of Representatives passed Biden’s $1.9 trillion stimulus package over the weekend, and the bill now heads to the Senate for debate. Democrats have the slimmest of majorities, and attention will focus on the likes of Joe Manchin, the West Virgina Senator who has become the kingmaker as far as Democrats are concerned. He has previously opposed direct payments, but since suggested he would be willing to back them so long as they are targeted at those in need. A generous fiscal package will almost certainly be passed, nevertheless.
Shares in housebuilders rose strongly to the top of the FTSE 100 on reports the chancellor is set to unveil fresh support for first-time buyers. A mortgage guarantee scheme will be launched, bringing back 95% deals. This will underpin confidence in the housing market, which is inextricably linked to confidence in the broader economy. It should also be a big boon for the housebuilders. Taylor Wimpey, Barratt Developments, Berkeley Group and Persimmon all climbed around 4-6% in early trade on Monday. IAG rallied over 4% as hopes grow of a speedier reopening of international travel.
In FX, the crash in the Australian dollar has eased with AUDUSD bouncing off the 0.77 region. Still, it’s down 3% or so in the last couple of sessions. Sterling was a little firmer but remains under $1.40 after the exhaustion gap last week. The latest CFTC report shows aggressive long positioning in sterling, with net long GBP rising to 31k in the week to Feb 23rd from 22.2k in the prior week.
Oil remains supported ahead of this week’s OPEC+ meeting. Sources indicate the cartel will increase output by 1.6m bpd from April as pressures mounts to open the spigots as prices have recovered. Bitcoin was steady around $47,000. Gold bounced after touching its weakest since last June on Friday. Prices advanced to $1,760 after dipping to $1,717 following the breach of the Nov 30th support at $1,763.