Five Minute Macro 8-2-2021

In this week’s Five Minute Macro, the Fed meeting provides more clarity on taper decisions while the market continues to struggle with Delta fears. The Senate worked through the weekend to finish the infrastructure bill, while risks in China remain elevated and earnings season continues.

 

 

Five Minute Macro 7-19-2021

Growth and the Delta variant fears are driving a market sell-off, which clashes with the Fed’s pivot to tightening discussions. Infrastructure negotiations continue along with earnings season as oil prices fall following OPEC+ production increases.

Morning Markets Brief 5-10-2021

Summary and Price Action Rundown

Global risk assets are mixed this morning as market participants digest last week’s rally and ponder the outlook for inflation amid high and rising commodity prices. S&P 500 futures indicate a 0.1% higher open after the index advanced 0.7% on Friday to surmount the prior week’s record high, taking year-to-date gains to 12.7%. The tech-heavy Nasdaq is set to open slightly lower after it outperformed on Friday amid doubts over the growth outlook following the lagging nonfarm payroll data. EU equities are moderately lower this morning while Asian indexes were mostly higher overnight. Longer-dated Treasuries are steady, with the 10-year yield holding at 1.58%, near the middle of its recent range. The broad dollar index remains unable to rally, sliding back to four-month lows. Oil prices continue to fluctuate at the top end of their recent range, with Brent crude nearing $69 as traders ponder the ramifications of the US pipeline shutdown (more below).

Inflation in Focus Ahead of Key Data as Commodity Price Pressures Percolate

The prospect of higher gasoline prices in the US after a cyberattack over the weekend shut down a key East Coast pipeline is spurring further attention on price pressures, with an array of US inflation data due later this week. The continued disruption of the Colonial Pipeline due to a ransomware attack over the weekend is raising the specter of gasoline shortages in the eastern US ahead of the start of the summer driving season, when millions of stir-crazy Americans are eager to hit the road. As the White House forms a task force to confront the issue, traders are grappling with the ramifications for oil and gasoline prices. US benchmark WTI crude prices are moderately higher at $65.21 per barrel but remain below their recent peak in early March of $66.09, while futures markets remain consistent with prices settling lower over the coming quarters. Gasoline futures have been more volatile, with the June contract spiking over 4% at the outset of trading but have since settled to a more modest gain of 1.5%. While oil and gasoline prices are elevated relative to pandemic-era levels but not compared to historical peaks, other commodities, like copper and lumber, are registering all-time highs. Earnings reporting season featured management broadly agreeing with the Fed’s view that these price pressures are temporary and that supply bottlenecks will be cleared over the coming year to alleviate the price picture. However, uncertainty among investors over the issue of inflation remains considerable and this week’s US consumer, producer, and import/export price data will be scrutinized for signs of continued upside momentum after the March readings greatly outpaced estimates. Breakevens on 5- and 10-year TIPS, which are the main market-based gauges of long-run inflation expectations, are at cycle highs of 2.70% and 2.50%, respectively. Though these levels are not obviously out of line with the Fed’s average 2% inflation mandate given the amount of time the gauge has spent under 2%, their recently renewed uptrend is notable. – MPP view: We don’t doubt that a supply response can be mustered over the coming quarters to moderate these price dynamics, while US growth outperformance should help firm up the dollar and moderate the reflationary impulse, which should help validate the Fed’s expectations over the next year that price pressures settle down. But our long-run view is for a secular shift to a higher plane of inflation as globalization gradually rolls back and the pendulum shifts back from the disinflationary paradigm of the last decade.

Cryptocurrency Follies Over the Weekend Highlight the Task Ahead for Treasury and the SEC

After Elon Musk called popular cryptocurrency Dogecoin a “hustle” during an appearance on Saturday Night Live, sending the coin down over 30% last weekend before partially recovering, other crypto assets are relatively unmoved by the drama. Bitcoin is slightly lower this morning while Ethereum is hitting a new record high even as the crypto community ponders the significance of the mixed messages from Dogecoin’s most famous proponent. Ahead of his jocular dig against Dogecoin on the show, Musk had stirred up more excitement over his appearance by including the coin’s Shiba Inu dog in a promotional tweet the prior day. Perhaps providing some support to the beleaguered cryptocurrency was news that Musk’s SpaceX paid for a moon satellite mission entirely with Dogecoin. Given Dogecoin’s roots as a parody of Bitcoin, some analysts are speculating that its travails are beneficial to the more mainstream cryptocurrencies rather than a poor reflection on the asset class in its entirety. – MPP view: We continue to expect that the process of mainstreaming cryptocurrencies will involve further meaningful challenges to their valuations as Treasury and the SEC establish increasingly bright-line and robust regulatory and tax oversight. Please see our video below for a discussion on the regulatory outlook for crypto.

MPP Video: The Crypto Dome – Markets Policy Partners enters the Nucleus195 Crypto Dome, joining Adam Blumberg from Interaxis to discuss the shifting regulatory environment for cryptocurrencies, how the Treasury is likely to work in conjunction with the SEC, and what it all means for RIA’s and the individual investor. MPP Crypto Video

Additional Themes

UK Pound Rallies as Scottish Independence Movement Hits Potholes – The Scottish National Party, which is intent on pushing toward another vote on Scotland’s independence from the UK, fell one seat short of an outright majority in the Scottish parliament but upped its tally to 64 of the 129 seats. Combined with the Green Party, analysts expect a strong pro-independence majority but still foresee a difficult road ahead for the movement. UK Prime Minister Johnson opposes another independence referendum for Scotland following the 2014 vote which resulted in a win for the unionists, though it is not clear if he will be able to block the effort. Market participants contemplate a lengthy process, clearing the near-term outlook for the pound, which is 0.8% higher versus the dollar this morning to re-approach February’s multi-year high.

MPP Video: NFP Shocker – Brendan and John discuss the disappointing jobs number, the new Fed messaging and the patent waiver proposal. Enjoy the weekend! MPP Macro Video

Latest Podcast – Well That Number Was Unexpected – Tony, John, and Brendan are joined by Stratton Kirton, Managing Director at HPS, to break down the surprising April jobs numbers. The gang discusses why predictions may have missed the mark and what the numbers mean for the state of economic recovery. They also discuss Treasury Secretary Janet Yellen stepping on the Fed’s toes and the implications of the Biden administration’s COVID-19 vaccine patent decision. Latest Macrocast

Looking Ahead – This week features a major array of economic data, with the US consumer price index (CPI), the producer price index (PPI), retail sales, and industrial production, initial jobless claims, consumer sentiment, and small business optimism all due. Global inflation readings will also be in focus, with China’s CPI and PPI, along with CPI for Germany and France. UK GDP and EU industrial production data is also on the calendar, amid a recent trend of upside surprises for regional economic figures. The barrage of Fed communications will continue, with Vice Chair Clarida, Fed Governor Brainard, and hawkish outlier Dallas Fed President Kaplan all delivering remarks. OPEC will also issue its monthly oil report with crude prices fluctuating at recent highs.

Five Minute Macro 5-10-2021

Despite mixed growth signals, Treasury yields remain steady, while there continues to be more and more signs of inflationary pressures. Meanwhile, the disappointing jobs number bolsters the Fed’s dovish guidance, which is contributing to a weakening of the dollar. Finally, Dogecoin follies highlights the conundrum the sector poses for regulators.

Afternoon Markets Brief 5-7-2021

 Summary and Price Action Rundown

US equities hit new records today as disappointing US jobs data eased overheating fears and reinforced the accommodative policy posture of the Federal Reserve, keeping Treasuries tame and sinking the dollar. The S&P 500 advanced 0.7% today to surmount last week’s record high, taking year-to-date gains to 12.7%. The tech-heavy Nasdaq outperformed as a hint of doubt crept in over the growth outlook following the lagging nonfarm payroll data. The Euro Stoxx Index also registered solid gains while Asian bourses were mixed overnight. Longer-dated Treasury yields fluctuated but closed little changed, with the 10-year edging up to 1.58%, while the dollar fell back to a more than two-month low. Oil prices continued to chop near the top of their recent range, with Brent crude closing just above $68 per barrel.

April Jobs Figures Miss Estimates by a Country Mile

After a series of economic readings earlier this week that were strong but slightly below expectations and encouraging initial jobless claims yesterday, the nonfarm payroll tally for last month was a major disappointment, lending further credence to the Fed’s cautious guidance. The US economy added 266 thousand jobs in April, following a downwardly revised 770 thousand rise in March and well below market expectations of 978 thousand, as employers face worker shortages. Job gains were centered in leisure and hospitality, with 331 thousand and local government education with 31 thousand. However, these gains were partially offset by losses in temporary help services, losing 111 thousand and in couriers and messengers, losing 77 thousand. Jobs also fell 18 thousand in manufacturing and 15 thousand in retail trade and were unchanged in construction. In April, nonfarm employment is down by 8.2 million, or 5.4%, from its pre-pandemic level in February 2020. Furthermore, the unemployment rate rose to 6.1%, from 6.0% in March and well above market expectations of 5.8%, as more workers began looking for work and re-entered the labor market. The number of unemployed people increased by 102 thousand to 9.81 million and the number of employed was up by 328 thousand to 151.2 million, while the activity rate rose to 61.7% from 61.5%. Unemployment levels were down considerably from their recent highs in April 2020 but remained well above their levels prior to the coronavirus pandemic.” – MPP view: We’re going to see a lot of fluky numbers like this over the coming months but this downside surprise was consequential. Our base case had been that the market eventually would come around to believing the Fed’s guidance but not until the FOMC had been forced to get more explicit about the taper timeline – we may have to reassess this as today’s data is making more market participants true believers (like we are) in the Fed’s staunchly accommodative posture.

Fed Communications Focus on the Long Path to Recovery

Sagging payrolls underscore the Fed’s cautious messaging, as markets reprice policy expectations to align more closely with the dovish guidance. During a call with reporters earlier this morning, Minneapolis Fed Chair, Neel Kashkari, said it was essential to maintain the current ultra-accommodative monetary policy stance following the dramatically substandard monthly gain in US jobs. The regional Fed president noted that today’s subpar jobs report is an example of just how far the economy remains from the Fed’s employment goals, and he doesn’t “see any reason right now to change something that is working.” Kashkari expressed that the most important step right now is “to rebuild this labor market and put them back to work,” and in the future, “there will be plenty of time to normalize monetary policy,” he said. In a separate speech this morning, Richmond Fed President, Thomas Barkin, speculated that today’s disappointing jobs figure might be attributable to the growing challenges of matching unemployed job-seekers to available positions. He additionally conjectured that the stimulus checks deployed earlier this year are allowing low-wage workers to be “a little choosy” when selecting from available positions.

Elsewhere, Treasury Secretary Yellen spoke during today’s White House press briefing, and stated that while “today’s jobs report underscores the long haul climb back to recovery,…the 266,000 jobs added in April represent continued progress,” and “we should also be encouraged by the ongoing expansion of the labor force.” She continued on to state that “we will reach full employment next year.” Nonetheless, Yellen noted the unevenness present within the labor market recovery, and tied the Biden administration’s $4 trillion fiscal plans to invest in American families and workers to achieving “a strong, prosperous economy this year and in 2022,…[and to] our country’s long-term economic health.” President Biden additionally delivered remarks today and firmly defended his $1.9 trillion pandemic relief package. “When we passed the American Rescue Plan, I want to remind everybody, it was designed to help us over the course of a year, not 60 days,” he said. Markets reacted accordingly to today’s overall discourse, broadly improving as the continuation of fiscal and monetary support was again firmly acknowledged by lead policymakers. Yields on the benchmark 10-year Treasury fell below 1.5% this morning, though bounced back to 1.58%, with futures markets repriced rate expectations to incrementally push back the anticipated timing of hikes. – MPP view: Please see our Market Viewpoint this weekend for a deeper dive into the Federal Reserve outlook.

Additional Themes

MPP Video – Brendan and John discuss the Biden administration and its proposed $1.8 trillion American Families Plan, which is the more social and softer infrastructure-focused. The all-important Fed communications and what a massive earnings season. Enjoy the weekend! MPP Macro Video

MPP Video: The Crypto Dome – Markets Policy Partners enters the Nucleus195 Crypto Dome, joining Adam Blumberg from Interaxis to discuss the shifting regulatory environment for cryptocurrencies, how the Treasury is likely to work in conjunction with the SEC, and what it all means for RIA’s and the individual investor. MPP Crypto Video

Latest Podcast – Well That Number Was Unexpected – Tony, John, and Brendan are joined by Stratton Kirton, Managing Director at HPS, to break down the surprising April jobs numbers. The gang discusses why predictions may have missed the mark and what the numbers mean for the state of economic recovery. They also discuss Treasury Secretary Janet Yellen stepping on the Fed’s toes and the implications of the Biden administration’s COVID-19 vaccine patent decision. Latest Macrocast

First Quarter (Q1) Earnings Season Wraps Up with Stellar Headline Numbers and Muted Market Reactions – The overarching theme of Q1 earnings season was the lack of apparent investor enthusiasm over blockbuster headline results, suggesting that much good news was already priced into stocks. A key subplot was management commentary on rising input costs and the potential for those increases to abate over the coming quarters as supply chains are reassembled. Overall, among the 438 of the S&P 500 companies that have reported, 70.7% have topped sales estimates and 87.0% have beaten earnings forecasts, which are historically high rates of upside surprises. Nevertheless, reporting companies have, on average, experienced a 0.2% decrease in share price in the trading session following the release of their results, and while the S&P 500 is up 2.2% since the start of earnings season.

Looking Ahead – Next week will be a major week of economic data, with the US consumer price index (CPI), the producer price index (PPI), retail sales, and industrial production, initial jobless claims, consumer sentiment, and small business optimism all due. Global inflation readings will also be in focus, with China’s CPI and PPI, along with CPI for Germany and France. Industrial production data for the EU is also on the calendar, amid a recent trend of upside surprises for regional economic figures. The barrage of Fed communications will continue, with Vice Chair Clarida, Fed Governor Brainard, and hawkish outlier Dallas Fed President Kaplan all delivering remarks. OPEC will also issue its monthly oil report with crude prices fluctuating at recent highs.