Sainsbury’s pops on bid rumour and will Delta scupper the Fed’s fall plans?

Morning Note

Corporate raiders: Sainsbury’s shares leapt over 12% to the top of the FTSE 100 after reports it is a target of Apollo, which missed out on the takeover of Asda last year. SBRY shares have already risen 40% this year amid heavy speculation it would be the next in the private equity firing line. Sainsbury’s is undeniably a good target for private equity with a considerable store estate, with the company having more than $10bn in property assets – more than its current market cap by decent margin. The Argos tie-up is another long-term growth lever and provides further scale, while profits are on the up again in the wake of the pandemic, and net debt has come down. It’s hard to beat those reliable cash flows – even without a big sale & leaseback plan the supermarkets are generating the kind of yield that is hard to get elsewhere. Meanwhile MRW shares trade steady at 291p, around 6p above the latest CD&R offer as investors bet there is more to come in that particular bidding war.

European stock markets made broad gains in early trade on Monday, trying to recover some of last week’s losses, which saw the FTSE slump to its worst week since Feb. The Euro Stoxx 50 advanced 1% after a solid session in Asia, though data showed Japanese factory activity growth slowed in August. Sector wise, utilities and tech and real estate are lower in London, with the rest higher led by energy and consumer cyclicals with risk on for the moment.

Flash PMIs for Europe display some further loss of momentum but still growth is solid. The dollar is a tad softer as risk finds bid, though EURUSD eased back from a 5-day high as those PMIs were a little softer than expected. The surveys indicate good momentum, and inflation pressures could be easing just a touch but there are warning signs that it’s only going to persist. Input cost and selling price inflation rates in August were the third-highest recorded over the past 20 years, exceeded only by the increases seen in June and July. However, the report found ‘unprecedented’ supply chain delays which continue to lengthen and future sentiment cooled for a second month to the lowest since March. Job creation is strong but so too is wage growth. Strong growth led by demand growth combined with severe supply constraints will only make higher inflation more persistent.

Meanwhile, Bitcoin rose above $50k again, hitting a more than 3-month high as the rebound shows no signs of cooling. Could be big area of resistance here as it would close the gap back above the May plunge. Pullback could look for support around $47k in the near term. The move comes as PayPal has announced it will allow people to buy, sell and hold cryptos in the UK. Meanwhile, the news last week that Coinbase will buy $500m in cryptos to put on its balance sheet and put 10% of quarterly profits into a crypto portfolio has lent support to sentiment.

Will Delta Scupper the Fed’s Fall Plans?

Apple delays return to office mandate, problems in China’s ports and US hospitalisations on the up…Delta messing with your autumn plans yet? And could it yet stop the Fed from announcing its taper? A single Covid case set the RBNZ off course, and with cases rising sharply again in the US – the 7-day rolling average is now more than twice what it was at the time of the last FOMC meeting – and a slowdown in the data, it is not unfathomable that despite the Fed speak we have heard these last two weeks, and despite the hawkish meeting minutes, that the FOMC will delay tapering of its $120bn-a-month bond buying programme for a wee bit longer.

Stagflation readings? UK retail sales fell 2.5% in July. In the US, the decline was 1.1%. One-off factors could be to blame for sure, but the direction is instructive: the spread of the virus is happening, and people are not so confident as they were back in April. Last week the Philly Fed manufacturing index fell for a fourth straight month, hitting its weakest since peak-Covid December, whilst the index for prices received was at the highest since May 1974. Consumer inflation expectations keep on going up and they are wobbling – the UoM consumer sentiment index fell to a pandemic-era low as it suffered one of its largest drops on record in August. The final reading of that data series comes on Friday, alongside the key PCE inflation reading – the Fed’s preferred gauge of inflation.

Last week saw global stocks fall amid signs of slowing growth, China’s tech crackdown – which saw the Hang Seng officially enter a bear market on Friday – and a sudden lockdown in places like New Zealand and Australia. This week provides more grist for the mill: flash PMIs for the EZ, UK and US today, preliminary US GDP numbers for Q2 and the PCE inflation number. The two things driving the market in the last few weeks has been the changing economic data and chatter about a Fed taper. So, against all this hard data and rising Covid cases we get the old Jackson Hole central bank convention. For all the world it looks like the Fed ought to be teeing up a taper – but the Delta variant could yet upend the Fed’s plans for the Fall.

Chart: Oil bounces off 3-month low as risk catches bid this morning, but sentiment remains bearish.

Can the Fed beat inflation?

Morning Note

Perhaps the single biggest question mark over the broader economic picture and the macro-outlook is one of inflation. This is the key doubt we might have about the current pace of Fed policy and its willingness to look through what it sees as temporary rises in prices. Over the next few months, we will get a great deal more clarity over just how strong the inflation impulse is, how long it is likely to last and what this will imply for the path of inflation expectations, Treasury yields and Fed policy. The Fed says it will look through this – the question is really whether this is the right thing to do.

Quite apart from the asset price inflation we have seen for years; even by the relatively narrow gauge of inflation used by central banks, the kind of pricing pressures we are seeing seem pretty unprecedented. I think you are going to see Powell, Lagarde and co kind of get slapped around the chops by some hefty inflation prints over the next few months. Question is can they tough it out – bond yields will almost certainly move in one direction higher. The phrase ‘be careful what you wish for’ springs to mind.

Commodities are roofing. Corn, wheat and soybeans are trading around eight-year highs while coffee and sugar are also up strongly. It looks like there is a perfect storm of pricing pressures in the form or weather-related supply constraints and surging demand. Several factors at work: bad weather in the Upper Midwest has hit corn, whilst drought conditions in the Dakotas could also impact wheat and soybeans. The crops in South America are known to be lower this year, and demand is peaking in China and other Asian nations. Lumber prices seen a well-documented rally on a post-pandemic building boom. Copper is at a 10-year high on a mix of surging demand and supply problems in Chile, while palladium is at a record. Massive infrastructure spending is a factor, so too a major rebound in demand and supply constraints.

Last week’s PMIs told the story that has been talked about in this column for some months now. US manufacturing PMI reported input costs increased at the sharpest rate since July 2008 on severe supplier shortages and marked rises in transportation fees. The increase was the second-fastest on record as firms continued to partially pass-through costs to clients. And importantly clients can cope – consumer confidence is high, stimulus cheques have filled the coffers and people are ready to spend.

In the UK, IHS Markit recorded that rapid cost inflation persisted across the UK private sector, led by higher fuel bills, staff wages, commodity prices and freight surcharges. “A combination of greater operating expenses and stronger customer demand meant that average prices charged continued to increase at one of the fastest rates for the past three-and-a-half years,” the composite PMI reported told us.

In Europe, average input prices for manufacturing and services rose at the sharpest rate for ten years. Higher costs are usually being passed on to customers. “Average prices charged for goods and services rose at the fastest rate since January 2018, fuelled by a record increase in goods prices … Prices charged for services rose only modestly by comparison, though showed the biggest increase since the start of the pandemic,” the report said.

Meanwhile corporates are flagging the cost input inflation. Earnings calls have been charged with references to higher commodity and transport costs, which they will pass on to consumers. The comments from executives suggest their views do not seem to match squarely with the Fed’s view on a temporary inflationary impulse. The Fed looks set to be too accommodative for too long. It will ultimately need to start hiking rates really fast – if it wants the cycle to be a long one, it will need to act fast at the end of it.

Lumber prices roof to all-time high

Chart showing lumber price increases.

Corn highest since June 2013, +37% YTD

Chart showing corn price increases.

Wheat highest since February 2013, +16 YTD

Chart showing wheat price increases.

Grain and oilseed compared

Chart comparing corn & oilseed prices.

Treasury yields rose yesterday, with the 10-year yield up at its fastest pace in 4 weeks to 1.64% ahead of the Fed statement today. Stock markets in the US were flat yesterday, whilst European bourses fell slightly. Big tech largely delivered: Alphabet shares jumped 4% as it reported a massive earnings beat as YouTube ad revenues rose 50% year-on-year. Total earnings were up 34% to $55.31bn vs $51.70 expected, as earnings per share hit a lofty $26.29 vs $15.82 expected. Cloud revenues were up 46%. Meanwhile Microsoft also reported earnings and sales that beat analyst expectations, driven by growth in the cloud. Still, with shares bid up ahead of the earnings the stock dipped a little in after-hours trade.

Elsewhere, oil rallied to a week high as OPEC+ kicked their April meeting down the road for a May gathering after having set out planned production increases through to May at the March meet. WTI (Jun) rose above $63, its best since its big decline on April 20th. Gold was weaker as Treasury yields rose. Bitcoin eased back to test the 38.2% level around $53,900 with near-term MACD showing a bearish bias.

Bitcoin price chart.

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