MIDDAY MACRO — DAILY COLOR — 6/10/2021

PRICE MATRIX

OVERNIGHT/MORNING RECAP / MARKET WRAP

Narratives:

• Equities are mixed, with S&P and Nasdaq retracing their post inflation data rally while Russell seeing greater selling pressure
• Treasuries are flat, with a significant post-CPI drop being immediately bought
• WTI is higher, recovering the post-EIA drop yesterday

Price Action:

• S&P and Nasdaq notably higher at the open but now bouncing around after giving up gains
• Nasdaq outperforming S&P/Russell
• Growth, Low Volatility, and High Dividend Yield factors outperforming
• Health Care, Technology, and Utilities sectors outperforming
• Zero Gamma Level is 4184 while Call Wall is 4250, technical levels remain the same with support at 4205 while resistance is at 4270
• Major Asian indexes are mixed: Japan +0.3%. Hong Kong -0.1%. China +0.5%. India +0.6%.
• European bourses are mixed, at midday, London +0.3%. Paris -0.2%. Frankfurt flat.
• Treasuries flat, slightly bull steepening — 5yr = 0.74%,10yr = 1.49%, 30yr = 2.17%
• WTI higher by 0.6% to $70.40 after overnight gains reversed post-NY-open
• Copper lower by -0.75% to $4.50 — Metal markets broadly under pressure on talks about price controls possibly being considered in China
• Aggs are mixed but generally higher, with corn outperforming
• DXY flat at 90.10 (2 days in a row)
• Gold slightly lower by -0.2% to $1895
• Bitcoin higher by 2.5% to $37.2K

Econ Data:

Consumer Prices: The core CPI prices jumped a further 0.7% in May, and the headline CPI rose 0.6%. Measures unaffected by base effects are rising quickly, with core and headline CPI prices up an annualized 8.3% and 8.4%, respectively, over the last three months. The price of shelter rose 0.3% MoM with rent of primary residence up 0.2% MoM and owners’ equivalent rent up 0.3% MoM. Used car prices soared again, rising 7.3%, new car prices rose 1.6% (the largest one-month gain in 11½ years), vehicle rental prices surged 12.1%, airfares jumped 7.0%, and apparel prices rose 1.2%.

Why it Matters: Several re-opening categories led the charge, but increases were broad-based. Categories like furniture and apparel highlighted continued supply chain issues meeting robust demand. This is no longer a moderate overshoot of the Fed’s 2% target. The Fed will now have to change their rhetoric around current inflationary conditions in the next FOMC meeting.

Policy Talk:

ECB Meeting: No significant change in policy stance emerged from this week’s ECB meeting. There was no change in rates with the primary refinancing rate, marginal lending facility, and deposit facility remaining at 0.00%, 0.25%, and -0.50%, respectively. In unchanged language, rates are expected “to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics”. The ECB will conduct PEPP asset purchases at an increasing pace with a total envelope of €1.85 trillion “until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over”.

Why it Matters: The ECB meeting had a more dovish tone. The Eurozone’s economy seems to be a quarter or two behind the U.S. in its recovery. Patience by the Fed will give cover for the ECB to also tolerate increasing levels of inflation. Finally, the EZ isn’t drunk on fiscal stimulus as their program will only meaningfully hit in the second half of this year.

Analysis:

• Tough to imagine a world where an annualized rate of core inflation over the last three months can come in at 8.3% and the 5-year Treasury is flat, but here we are.
• Although inflationary data beat expectations, it was within the “margin of error,” allowing Treasuries to go generally unfazed.
• Equities seem to be a little unsure how to interpret today’s inflation data as the initial bullish response quickly reversed.
• The underperformance of small-caps post data shows concerns that inflationary pressures will weigh on earnings heavier there.
• We continue to favor large-caps, with our preference for “profitable” growth over value.
• Equities price action is also likely being exacerbated by dealer optionality hedging as the currently active range is between 4200 to 4250, as well as the “meme” world having 40% of their gamma expiring tomorrow.
• It’s far too early to expect any capitulation from the “transitory” camp after today’s data. Still, our view that more structural inflationary forces are building on top of continued longer-lasting “transitory” factors was further emboldened.
• Many re-opening-related categories (some of which slowed slightly from last month’s nose-bleed levels) continue to be highly elevated.
• Non-reopening categories saw continued upward pressure due to increased input costs, supply chain impairments, and labor shortages.
• Shelter prices are continuing to pick up, with increases in rents likely to compensate for an expected moderation in housing purchasing activity.
• Will medical care prices start to rise as people feel safer and catch up on past needs?
• More antidotal reports by various industries/companies highlighting pricing pressures and passing on costs continue outside today’s data.
• Increased asset correlation due to the more herd-like behavior the investing community is currently exhibiting (brought on by the synchronization in markets and economies the pandemic created) continues.
• This positive correlation continues to increase the risk that when the full scope of policy error (that is occurring) comes to light, there will be a greater negative feedback loop as everyone rushes to the door simultaneously in both rates and equities.

TECHNICALS / CHARTS

Four Key Macro House Charts:

Growth/Value Ratio: Growth Outperforming on the Week Chinese Iron

Ore Future Price: Iron Ore Higher on the Week

5yr-30yr Treasury Spread: Curve is Flatter on the Week

EUR/JPY FX ross: Euro Higher on the Week

HOUSE THEMES / ARTICLES

MEDIUM-TERM THEMES:

Real Supply Side Constraints:

No Soup for You: Campbell Plans to Raise Prices as Higher Costs Cut into Profits — WSJ

• The soup maker is the latest example of how inflationary pressures are hampering profits for food manufacturers as it and others such as General Mills and J.M. Smuckers are raising prices to compensate for higher transportation, commodity, and labor costs. General Mills has said that it expects grocery shoppers to accept the higher price tags coming to stores because inflationary pressures are widespread.

Why it Matter:

• Food companies are passing on costs and expecting these cost increases to lower sales volume this year. This reinforces our view that inflationary pressures will continue into the next year and limit overall economic and earnings growth potential. As a result, firms with products that have more inelastic demand and lower variable costs should outperform.

LONGER-TERM THEMES:

National Security Assets in a Multipolar World:

Data Wars: Biden revokes and replaces Trump orders banning TikTok and WeChat — The Verge

• President Biden signed an executive order Wednesday revoking the Trump-era bans on TikTok and WeChat and has directed the Commerce Department and other federal agencies to work together to craft recommendations to protect against the collection, sale, and transfer of sensitive US consumer data to foreign adversaries. The order does not address actions or investigations taken by the Committee on Foreign Investment in the United States, or CFIUS, which set deadlines for apps like TikTok to divest from its Chinese owner ByteDance.

Why it Matter

• Legal challenges to Trump’s original executive order have caused a reapproach to the issue of securing U.S. citizen’s personal data from foreign nations. However, it is still a priority for the current Administration. TikTok recently changed its privacy policy, allowing it to collect biometric data, including face prints and voiceprints of all its U.S. users. The wars of the future will be waged in cyber as much in the physical realm, and the ability of foreign adversaries to target key individuals that can influence national security will be a common ploy. Hence there is a growing need to ensure foreign adversaries don’t increasingly possess citizen profiles.

Electrification Policy:

Fragile Internet: Fastly blames global internet outage on software bug — AP

• Fastly, the company hit by a major outage that caused many of the world’s top websites to go offline briefly this week, blamed the problem on a software bug that was triggered when a customer changed a setting. The outage was “broad and severe,” but the company quickly identified, isolated, and disabled the problem, and after 49 minutes, most of its network was up and running again. The bug had been included in a software update rolled out in May, and the company is trying to figure out why it wasn’t detected during testing.

Why it Matters:

• Major internet outage caused by a customer changing a setting? Who is actually in charge here, sir? This last year has been a humbling reminder that whether due to pandemics, weather, or hackers, much of the things we take for granted are significantly more fragile than they appear. As a result, we highlight an ever-growing tail risk to financial markets that a significant disruption (exogenous shock) is constantly lurking in the shadows.

Commodity Super Cycle Green.0:

Faster Transition: Shell eyes faster energy transition after court ruling — Argus

• Shell said it plans to accelerate its energy transition strategy and is likely to take “some bold but measured steps over the coming years” after a Dutch court ruled last month that the company must sharply reduce its CO2 emissions this decade. “Now we will seek ways to reduce emissions even further than envisaged in the existing strategy in a way that remains purposeful and profitable,” CEO van Beurden said.

Why it Matters:

• A combination of forces are pushing big oil to transition from their traditional business models faster than many are expecting. A more active and “woke” shareholder certainly is the most important force (as seen recently with Exxon). However, government views on climate change are undergoing a massive change as well. We highlight this not as anything new but as an increasing force that will continue to support energy prices. There is still little loss of demand for fossil fuels, while new production capacity and supplies will become increasingly harder to implement.

Iran: Iran’s NIOC aims for quick crude output return — Argus

• Iran’s state-owned NIOC has outlined ambitious plans to ramp up crude production to pre-sanctions levels within three months. Iran would not only bring production back up to pre-sanctions levels but also boost production to 4mn b/d in a second phase. Iran has increased production this year and produced 2.39mn b/d in May, according to Argus estimates.

Why it Matters:

• Some Iran observers have been less optimistic about the country’s ability to ramp up production quickly. However, Iran does have potentially 50–70 million barrels in storage, adding to the uncertainty over how sanction relief will affect output restraint agreements. Iran historically has been less compliant with OPEC wishes, and recent behavior doesn’t give comfort.

ESG Monetary and Fiscal Policy Expansion:

Tax Policy: We Ran the Treasury Department. This Is How to Fix Tax Evasion. -NYT

• Five former U.S. Treasury secretaries penned an editorial proposing strategies for recouping the six hundred billion they estimate is legally owed but uncollected in taxes. Over the past 25 years, I.R.S. resources have been steadily cut, with the ratio of enforcement funding to returns filed falling by around 50%.

Why it Matters:

• It is always worth highlighting an oped by Geithner, Lew, Paulson, Rubin, and Summers, given the breadth of politics they cover. The main message from the group is simple, giving the IRS the resources to do its job would significantly increase tax revenue without having to change the code. The Biden administration has called for an increase in primarily mandatory funding to provide multiyear resources to support necessary workforce, service, and information technology advancements.

Green Pensions: Maine Senate passes bill to divest state investments from fossil fuels — Pensions & Investments

• The legislation says the state $16.7 billion pension fund may not invest in any assets in fossil-fuel-related companies or any company that has as its core business the exploration, extraction, refining, processing, or distribution of fossil fuels, or the construction or operation of fossil fuel infrastructure, and the 30 largest publicly traded owners of coal-fired power plants.

Why it Matters:

• MainePERS currently holds $1.27 billion in the energy and utility sector it will have to divest from. It is certainly not the first public pension to announce intention to avoid fossil fuel-related investments and simply further highlights the pressure the industry is under from shareholders. Oil majors will increasingly face the choice to transition their portfolio to renewables through M & M&A or CAPEX or pay more capital out to hold on to the remaining shareholder base.

Banks: Banks to Companies: No More Deposits, Please — WSJ

• Bankers thought the improving economy would reduce companies’ desire to hold cash, but deposit inflows have continued in recent weeks. Between late March and May 26, they rose by $411 billion to $17.09 trillion, according to the latest available data from the Federal Reserve. That is slower than the pace last spring but still nearly four times the average of the past 20 years.

Why it Matters:

• Since the SLR exemption ended in March, banks have been forced to raise capital or reduce deposits by moving clients into money market funds. Flows into U.S. money-market funds have surged in recent months, pushing the total assets held in such funds to $4.61 trillion, just shy of the record set in May 2020. The money markets, facing few places to park this capital, are now turning back to the Fed and using its overnight reverse repurchase program, which has grown to over $500 billion. As the pandemic fully ends and corporate confidence improves, cash holdings should subside, likely leading to greater shareholder payouts through buybacks and dividend increases.

Thanks for reading and please reachout with comments or questions…

Mike