Category: Morning Markets Brief

Summary and Price Action Rundown

Global risk assets were mixed overnight as sentiment steadies ahead of tomorrow’s potentially pivotal US inflation figures. S&P 500 futures are pointing to a slightly higher open after the index recouped early losses on Friday to gain 0.2% and pare the week’s losses to 1.1%, taking its gain on the year to 6.5%, though the Nasdaq lost 0.6% for weekly downside of 2.4% to cut its early 2023 rally to 12.0%. EU equities are registering a moderate advance, while Asian stocks were mostly lower overnight. Longer-dated Treasuries are attempting to stabilize, with the 10-year yield holding at 3.73%, while the growth-sensitive Treasury yield curve remains deeply inverted, conveying a grim recession warning. The broad dollar is slightly stronger as it continues to fluctuate well below the two-decade highs of late September. Oil prices are reversing a portion of last week’s rebound, which was extended by Russia’s production cut, with Brent crude slipping back to $86 per barrel.

US Inflation in Focus

Traders are tentative ahead of tomorrow’s US Consumer Price Index (CPI) reading for January amid concerns of a disproportionate market reaction to an upside surprise. Treasuries are steady this morning but suffered meaningful selling last week as market participants fretted about the upcoming CPI data in light of the stunning blowout in January jobs figures. Investors are concerned that if CPI similarly tops estimates, the Fed will make good on its threats to raise rates higher than fed fund futures currently are pricing and hold them there for longer than market expectations reflect.

 

CPI is expected to reaccelerate to a 0.5% month-on-month (m/m) pace from 0.1% m/m in December, while Core CPI is forecast to remain steady at 0.4% m/m, equaling the prior month’s cadence. These readings would translate into annualized CPI and Core CPI readings of 6.2% and 5.5%, respectively, versus 6.5% and 5.7% in December. The Producer Price Index (PPI) for last month is due on Thursday of this week and is similarly expected to pick up on a monthly basis but cool further on an annualized basis.

 

Meanwhile, TIPS breakevens, the key market-based gauges of inflation expectations, moved higher last week but remain at generally subdued levels. Specifically, breakevens on 5- and 10-year TIPS are now trading at 2.51% and 2.34%, respectively, significantly lower than their cycle tops of 3.73% and 3.03% last March and April. – MPP view: Our anticipation is that easing inflation, hopes for a soft landing, and the conclusion of the Fed’s tightening cycle leads to an “eye of the hurricane” period of market calm though roughly Q1. We doubt that this tentative optimism will be the start of a new bull market, as we see improvement in inflation stalling and price pressures remaining sticky at above-target levels while the global economy continues to slow into broadly recessionary conditions by midyear, with scant prospect of either monetary or fiscal stimulus sufficient to jumpstart the engines of growth.

 

As we noted in Looking Ahead – More Than Words (https://conta.cc/3YCGuLI), recent major macro events, data, and earnings, posed a potential challenge to the continuation of our “eye of the hurricane” thesis for Q1, particularly as investors begin to reduce their bets on Fed easing later this year. But on balance, we think that the broadly positive market tone can continue until crystalizing recession risks later this year, alongside the Fed’s stubborn unwillingness to ease policy, bring stormy conditions back to risk assets.

 

Mixed Earnings Season Wraps Up This Week

Fourth quarter (Q4) earnings season has offered little direction to overall indexes and has done little to clarify the outlook. With 346 of the S&P 500 companies having reported, 55% have topped sales estimates and 70% have beaten earnings forecasts with divergent price reactions to the early results. Peak earnings season is now considered over, but this week still features some reports from industry bellwethers including Coca-Cola, Deere, Shake Shack, Shopify, and Zillow. Palantir is the most prominent company reporting today, with its results due after the closing bell.

 

Broadly speaking, Q4 earnings season as brought nothing too dire or distressing but few major positives to cheer about either, and has reassuringly indicated that corporate America is not seeing recessionary conditions on the horizon. Corporate management is broadly wary of consumer fortitude later this year, and banks are preparing for deterioration in their credit books, but this cautious outlook is far from universal, with some sectors and companies expecting some very upbeat quarters ahead. – MPP view: Nothing in the results so far is a smoking gun for a recession or a wholesale downgrade of broader earnings expectations (though we believe that is impending later this year), so macro factors have remained the main driver of stocks at the index level. So with Q4 earnings season providing little overarching direction and raising as many questions it answered, we maintain our baseline view that Q1 will feature a broadly reflationary and optimistic dynamic that will prove supportive of a risk asset rebound that probably goes on longer than it should given the gathering recessionary winds that will blow through the economy later this year.

Additional Themes

Geopolitics Remain Tense Amid Reports of Downed Objects Over North America – Following the matter of the Chinese spy balloon, headlines over the weekend indicated that more objects have been detected and shot down by the US Air Force. Fewer details have been provided about the latest series of objects that were downed. Meanwhile, this morning, Chinese official media has alleged that multiple US spy balloons have been detected over China in recent years, keeping the heat under simmering US-China tensions.

 

Looking Ahead – This week’s macro calendar centers around the highly-anticipated US Consumer Price Index figures for January, with the Producer Price Index also due. US retail sales and industrial production data for last month will be scrutinized for any signs of additional slowing. UK inflation and retail sales are also on the calendar, along with EU industrial production, Australian business and consumer confidence, and Japan GDP.

 

Latest Macrocast: America runs on trucking – On today’s Macrocast, hosts Meghan Pennington and John Fagan are joined by Loren Smith of Skyline Policy Risk Group to discuss the latest on the IRA and infrastructure spending, permitting reform and its impact on energy production, the debt ceiling, and more. Tune in here! https://marketspolicy.com/podcast-2/

 

MPP 2023 Outlook Video – In our first video of the new year, Brendan, John, and Bob discuss the MPP financial market and policy outlook for 2023, which calls for a return to stormy conditions after the more placid conditions of Q1 deteriorate as the Fed withholds rate cuts despite a deepening recession. Markets Policy YouTube Channel Watch Here

 

Russell Napier: 2023 – 2038 Forecast for Financial Repression / New Rules for Investors – We hosted a very revealing, compelling, and entertaining macro strategy session with macro legend Russell Napier on Friday, January 29, 2023. Russell is predicting an era of financial repression that reverses many of the characteristics of successful investing – we think this will be very worth your time. The full interview is on the Markets Policy YouTube Channel Watch Here

 

Summary and Price Action Rundown

Global risk assets are mixed this morning as the ongoing US stock rally pauses to digest Fed communications ahead of more consequential earnings this week. S&P 500 futures are indicating a 0.2% lower open after the index rose 4.3% last week, building on monthly gains and bringing its year-to-date performance to -13.3%, while the Nasdaq also increased 4.7%, reducing year-to-date losses to 20.8%. EU equities are posting solid gains, and Asian stocks were broadly higher overnight. Longer-dated Treasury yields are flat after last week’s decline, with the 10-year yield holding at 2.65%, while the growth-sensitive yield curve remains deeply inverted, which is a classic recession signal. The broad dollar index is continuing to settle below mid-July’s multi-year peak, which was around its early pandemic high. Oil prices are turning lower ahead of this week’s OPEC+ meeting, with Brent crude sliding back toward $102 per barrel. – MPP upgrades US equities / downgrades the dollar: Our base case for topping inflation and slowing (but not crashing) growth with a downshifting Fed is the recipe for a second half 2022 tradable risk asset rally. With this past week’s developments increasingly aligning with this view, **we are upgrading stocks from neutral to 70% overweight and downgrading the dollar to a tactical sell, though we are still neutral on the Treasury market and curve. ** We still believe that summer markets will be choppy, and we just had a very positive week and a meaningful July rally, hence we are leaving some headroom to go further overweight if upside catalysts, like peaking CPI figures, materialize between now and the September FOMC decision.  If this is an ordinary market cycle, then we would probably also assume that the bottom of this bear market is nearly in place. Our longer-term outlook, however, centers on the view that a second half 2022 relief rally will run into challenging realities in 2023, as the Fed is unable to cut rates in the face of persistently elevated energy prices and fears of backsliding in their inflation fight.

Fed Communications Downplay a Policy Downshift

After last week’s jumbo rate hike by the FOMC was balanced by signs of increasing sensitivity to slowing growth and hints of a potential deceleration in the pace of rate hikes over the coming meetings, Minneapolis Fed President Kashkari struck a hawkish posture in his Sunday interview. On CBS’s Face the Nation yesterday, Kashkari reiterated that the Fed is “committed to bringing inflation down” and that they are “a long way away from achieving and economy that is back at 2% inflation.” This comes after Fed Chair Powell’s post-meeting press conference was taken by market participants as opening the door to a slower pace of hikes, after the Committee upped the policy rate by 150 basis points (bps) over the past two meetings. Though Powell indicated that another 75bps is certainly on the table for the September 21 decision, the data between now and that meeting would provide direction. Kashkari, like Powell, downplayed the characterization of the US economy in recession but acknowledged that suppressing inflation may come at the price of growth contraction. Futures markets are now pricing in an additional 100bps of tightening through year end, with 50bps seen as the most likely outcome in September and two more 25bps hikes in November and December, respectively, but that being the top of the cycle, with rate cuts priced in by spring 2023. – MPP view: We understand that Fed officials want to rhetorically push back on building market optimism, as it works counter to their objective of tightening financial conditions. But we think that evidence will continue to build that an inflation peak will occur in the second half of the year, given all the signs pointing in that direction over the past couple of months. Fed rate hike assumptions had been contemplating 150bps over the July and September meetings and 3.75% by year-end, a level consistent with the terminal median rate in 2023 according to the FOMC projections (the dot plot) published at the June meeting, but we have anticipating that the Fed would move more gradually and futures markets have been shifting toward our view.

According to futures, the Fed is now seen being more likely to end the year at 3.50%, or below, with maybe 100bps of tightening over the next three meetings (Sept 21, Nov 2, Dec 14). We think there is still room for this to come down as easing growth and topping inflation allows for a more balanced FOMC policy posture.

Earnings Season Continues After Impressive Reports from IT Giants Last Week

The tone of second quarter (Q2) earnings season has turned increasingly positive and supportive of stocks after Amazon, Apple, and Microsoft all topped estimates last week, buoying equities to their best week since November 2020. Shares of Apple rose 5.5% last week after the tech giant’s Q2 figures, which it released after Thursday’s closing bell, topped revenue and earnings estimates. The key category of iPhone sales outperformed projections and CEO Tim Cook touted “our resilience and our optimism” in the face of a “cocktail of headwinds.” Amazon also issued impressive Q2 results on Thursday evening, handily topping revenue expectations, sending its share price 10.2% higher last week. The upbeat Q2 figures were accompanied by encouraging guidance for the coming quarter of as much as 17% revenue growth. Lastly, Microsoft posted similarly impressive sales for the quarter, which propelled its stock 7.8% higher last week. Big Oil also outperformed last week, with Exxon Mobil and Chevron shares soaring 11.4% and 13.6%, respectively, last week as the pair registered new record profits.

On the negative side, Facebook, Qualcomm and Intel saw their shares sink 6.0%, 5.6%, and 7.4%, respectively, after issuing disappointing results and sober guidance.

This week’s earnings calendar features less prominent companies but a heavy concentration of reports from diverse industries, with results from Aflac, Caterpillar, Cigna, ConocoPhillips, CVS Health, Electronic Arts, Eli Lily, Lyft, Marathon Petroleum, Marriott, MetLife, PayPal, Prudential, Starbucks, and Yum! Brands. Of the 280 S&P 500 companies that have reported thus far, 61% have topped sales expectations while 73% have beaten earnings projections, which are somewhat lower than recent levels though equity price reactions have tended to be positive if somewhat uneven. – MPP view: We had expected more mixed results from the tech majors but this week’s encouraging releases from Google, Amazon, Apple, and Microsoft have tipped the scales toward this being a supportive earnings season for stocks in the face of grim expectations.

Additional Themes

Downbeat Chinese Purchasing Managers’ Indexes (PMIs) – China’s official PMI composite metric slid from 54.1 to 53.5 in July, with the manufacturing gauge sliding into contraction at 49.0 versus expectations of a tepid but stable 50.3 after June’s 50.2. For context, PMIs above 50 denote expansion in the sector. The service PMI was better but also slightly missed expectations and declined from the prior month’s 54.7 to 53.8. The privately-compiled Caixin manufacturing PMI was modestly better at 50.4 but also undershot the consensus forecast of 51.5 and June’s 51.7. The renminbi slipped 0.2% versus the dollar overnight but remains rangebound around its weakest level since fall of 2020.

Uncertainty Over Speaker Pelosi’s Taiwan Trip – Taiwan equities lagged the region but registered only modest losses, while the Taiwan dollar dipped to its weakest level versus the dollar since May 2020 amid confusion over Speaker Pelosi’s upcoming Asia trip itinerary. Her trip schedule that was published last evening made no specific mention of Taiwan, but reports this morning citing US and Taiwanese officials indicate that she is expected to visit the island sometime this week. For context, the planned trip has been met with discomfort by the White House and furious opposition from Beijing. Chinese officials have suggested a possible military response to what they would consider a hostile act.

Latest Macrocast: Breaking Down the Fed’s Big Week with Howard Schneider – On today’s Macrocast, Tony, John, and Brendan welcome Howard Schneider, Federal Reserve reporter at Thomson Reuters, to the show. As an expert on all things Fed and monetary policy, Howard breaks down the Fed’s latest rate hike and inflation’s impact on food consumption. Plus, the group analyzes the concerning PCE and GDP data released this week. Tune in here! https://marketspolicy.com/podcast-2/

Read Howard Schneider’s recent piece on food prices and rising hunger here.

Find more of Howard’s work here.

Read HPS’ Q2 GDP Fact Sheet here.

Macrocast Special: A Conversation with Megan Greene on the Anti-Inflation Toolkit – In this special edition of the Macrocast, Tony and John welcome Megan Greene, Harvard Kennedy School Senior Fellow and Kroll Institute Global Chief Economist, to the show. Megan expands on her recent column in the Financial Times, where she makes an important point few pundits have acknowledged: There’s not much policymakers outside the Federal Reserve can do about inflation. The group walks through various policy responses to inflation and the supply- and demand-driven forces behind rising prices. Plus, the group discusses energy prices, the methodology for measuring inflation, and more. Tune in here! https://marketspolicy.com/podcast-2/

Read Megan’s Financial Times column here.

Read the rest of Megan’s FT columns here.

Read Megan’s bio and check out her site here.

Looking Ahead – This week’s macro calendar features the US nonfarm payroll figures for July, which is expected to reflect continued resilience in the US labor market with 250k jobs and steady unemployment at 3.6%. Other notable data includes global Purchasing Managers’ Indexes (PMIs), EU and Australian retail sales, German factory orders and industrial production, and Turkish inflation figures. The Bank of England and Reserve Bank of Australia have decisions. OPEC+ conducts its monthly meeting on supply curbs and earnings reporting season continues with an array of industry bellwethers reporting (see above).

Summary and Price Action Rundown 

Global risk assets are moderately lower this morning as the US and EU add to their sanctions regimes against Russia and more central banks pivot to a tighter stance. S&P 500 futures indicate a 0.3% lower open after the index advanced 0.8% yesterday, paring year-to-date losses to 3.9%, while the Nasdaq outperformed on notable tech stock news to improve 2022 performance to -7.1% thus far. EU equities are retracting some recent gains, while Asian stocks were mixed overnight. Longer-dated Treasury yields are moving higher after their recent slide, which has featured an inversion of the closely-watched 2-year/10-year segment of the yield curve, a traditional signal of impending recession. The 10-year Treasury yield is climbing back to 2.47%, which is slightly below the 2-year yield. The broad dollar index is holding steady below its recent 2022 peak, which was its strongest level since July 2020. Oil prices are extending yesterday’s rebound, with Brent crude climbing back above $108 per barrel amid tightening US and EU sanctions on Russia.  

Central Banks Tilt More Hawkish in the Face of Persistent Price Pressures 

The Reserve Bank of Australia (RBA) held policy steady but signaled a pivot toward interest rate hikes at upcoming meetings, while the Bank of Japan (BoJ) is reportedly set to jawbone against yen weakness. Though the RBA maintained its policy rate at 0.10%, it dropped language in the accompanying statement suggesting a wait-and-see posture and indicated that rate hikes could begin over the summer. Analysts are focused on the June meeting as the timing for liftoff, but May could be on the table. Governor Lowe noted that “additional evidence will be available… on both inflation and the evolution of labor costs” in the coming months, implying that no decision has been made, but flagged that there are already “some areas where larger wage increases are occurring.” This represents a pivot from the determinedly dovish policy stance of the RBA, and brings it closer to alignment with the Fed, as futures markets are pricing in seven to eight 25 basis point rate increases for the RBA though year end versus eight to nine more for the Fed after liftoff last month. The Australian dollar is 1.2% stronger versus its US counterpart this morning, extending the comeback of the currency to its strongest point since June of last year. Rising commodity prices have helped bolster the Australian dollar versus its developed market peers, with its 5.1% year-to-date appreciation the strongest by far in the G-10. 

Meanwhile, BoJ Governor Kuroda overnight remarked that recent moves in the yen had been “somewhat rapid,” though this gentle jawboning did little to hoist Japan’s flagging currency overnight. For context, the yen has weakened 6.4% versus the dollar this year amid a widening monetary policy divergence as the BoJ has maintained its ultra-dovish settings and even augmented its bond buying in recent weeks to tame the upside in the 10-year Japanese government bond yield. These bond market interventions, in particular, have exerted significant pressure on the yen versus the dollar. – MPP view: We expect that increasingly hawkish and urgent rate hikes by the Fed will keep the divergence from the RBA, ECB, and BoJ relatively wide, keeping the dollar supported and tightening global financial conditions. 

Prospect of Tighter Sanctions Amid Russian Atrocities in Ukraine 

With the news conveying evidence of war crimes discovered in the wake of retreating Russian forces in Ukraine, western leaders are preparing to expand their sanctions against Russia. Specifically, the White House is now blocking use of US banks to make dollar payments on Russian bonds, a move that is intended to force the Kremlin to drain domestically-held dollar reserves. Additional sanctions are reportedly in the works. For its part, the EU is reportedly debating imposition of a ban on coal, wood, chemicals and other imports from Russia, semiconductor and other high-tech exports to Russia, prohibitions on Russian use of EU transportation infrastructure, and further measures against Russian oligarchs, politicians, and military members and their families. Tighter prohibitions against transactions with Russian banks are also said to be on the table. – MPP view: Our base case is that the US administration policy is to force Russia into sovereign default, if possible. Meanwhile, the EU has come further and faster than many had expected on Russia sanctions, and we had not anticipated that a full oil embargo would yet be in the cards, nor do we think Russia will cut off EU gas if they don’t pay in rubles. But with the conflict grinding on and potentially turning even more grim (chemical weapons, further atrocities), the embargo will probably be revisited.   

Additional Themes 

Supply Chain Pressures in Focus – The latest reading of the Logistics Managers’ Index, which is compiled by five US universities and published by Colorado State, registered a record degree of pressure, hitting 76.2 for March after posting 75.2 in February. The New York Fed’s newly created supply chain showed a modest improvement in February but is also expected to reflect re-intensifying frictions in March amid reverberations from China’s COVID containment lockdown and Russia’s invasion of Ukraine. – MPP view: For additional color on the state of logistics bottlenecks, please see Sunday’s latest edition of the Skyline Supply Chain Risk Radar 

SEC Chief Discusses Crypto Regulation – SEC Chair Gary Gensler said in a speech at the Penn Law Capital Markets Association’s annual conference that the SEC is pursuing several initiatives to better regulate cryptocurrency markets and protect investors, signaling a new era of oversight in what is now a $2 trillion market that has been riddled with scams and extreme volatility. “Any token that is a security must play by the same market integrity rulebook as other securities under our laws,” Gensler said. “There’s no reason to treat the crypto market differently just because different technology is used… We already have robust ways to protect investors trading on platforms. We ought to apply these same protections in the crypto markets.” Specifically, Gensler said the SEC will work to make sure “issuers of crypto tokens that are securities… register their offers and sales of these assets with the SEC and comply with [its] disclosure requirements,” and will explore whether crypto platforms should be treated like traditional retail exchanges. Additionally, Gensler said the SEC will collaborate with the Commodity Futures Trading Commission to oversee platforms that trade both crypto-based security tokens and commodity tokens and will take steps to regulate the $183 billion stablecoin market, which he said has raised concerns over potential conflicts of interest within crypto platforms that own large quantities of stablecoins and the potential use of stablecoins to facilitate illegal activity. – MPP view: Consumer protection in crypto is a key policy goal of this administration, but the fragmented interplay between agencies and Congress means a patchwork approach will remain in place. We continue to think that the US legislative process has little chance of producing a comprehensive bill that meaningfully confronts this issue, but we are watching the potential for stablecoin regulation more closely – this is still likely to be a post-midterm agenda item.   

Summary and Price Action Rundown

Global risk assets are steady as investors await today’s pivotal Federal Reserve decision and look ahead to key US labor market data. S&P 500 futures indicate a slightly lower open after the index added 0.4% yesterday, registering another all-time high and upping year-to-date returns to 23.3%, while the Nasdaq kept pace. EU equities are slightly higher, while Asian stocks were mixed overnight. Longer-dated Treasury yields are holding steady ahead of the Fed, with the 10-year hovering at 1.53%, which is still in the upper half of its 2021 trading range. Meanwhile, the ongoing rebound in the broad dollar index is stalling below its recent year-to-date highs. Crude prices are reversing lower ahead of this week’s OPEC+ output decision, with Brent crude sinking back toward $83 per barrel. President Biden has continued to call on the cartel to up supply in order to restrain crude prices, which are at multi-year highs.

Pivotal Fed Decision Awaited

Treasury markets have steadied in recent days ahead of what market participants expect will be an announcement of the details of the Fed’s plan to reduce its asset purchases (aka quantitative easing or QE) over the coming months. Fed Chair Powell is expected to reveal the timeline and trajectory for the tapering of QE, with the markets pricing in an immediate start to the process at a pace of roughly $15 billion per month. Importantly, communications by Fed Chair Powell and other FOMC members have emphasized that the tapering process is independent of the decision to hike interest rates, given the different preconditions set forth for these policy moves, with the bar being considerably higher for the latter than the former. However, financial markets appear unwilling to accept the Fed’s attempted de-linkage of the two, pricing in rate hikes starting as early as June or July next year, almost immediately upon the anticipated conclusion of the tapering process, with another full rate hike priced in before year-end. This is more aggressive than the median FOMC interest rate projections (aka the “dot plot”) and aligns with the three most hawkish Committee member dots for next year, and the market-implied projection remains on the hawkish side of the median for 2023, before leveling off in 2024. Analysts are pondering whether Fed Chair Powell will attempt to reassert the median dot plot trajectory, similar to the dovish rhetoric on interest rates from European Central Bank President Lagarde this morning (more below) and Reserve Bank of Australia Governor Lowe the prior day. – MPP view: If the Fed wants to push back rate hike expectations and steepen the yield curve, similar to what ECB President Lagarde is doing, they can accomplish this by putting the start date of the taper in December – this would be a signal to the markets that the current dot plot is still operative, and we think this is an attractive and likely policy option. This approach would also help put a floor under the yield curve and show that the Fed hasn’t completely thrown in the towel on its “transitory” thesis, which we think is still a very credible narrative for most of the ongoing price pressures.

We are skeptical that rate hikes will swiftly on the heels of the conclusion of tapering, particularly since we retain the out of consensus view that the Fed Chair position will go to Governor Brainard but also due to our expectation of easing inflation rates over the coming quarters, as public health improvements feed through to improving economic activity.   

First in a Trio of Key US Labor Market Readings Due Today

After two successive months of disappointing nonfarm payroll tallies, this weeks’ string of jobs data for October are expected to yield relatively more encouraging figures. However, today’s estimate of new private sector jobs in October, complied by employment services giant ADP, is seen easing modestly from 568k in September to 400k last month. For context, the ADP jobs reading for September was considerably more upbeat than the nonfarm payroll headline number, which dramatically undershot expectations of 500k with a tepid print of 194k, although the unemployment rate continued to fall faster than anticipated, declining to 4.8%. Friday’s October nonfarm payroll reading is expected to improve to 450k and the unemployment rate is projected to dip to 4.7%. Lastly, tomorrow’s jobless claims total for last week is expected to mark another new low for the pandemic at 275k from the prior week’s 281k.

Meanwhile, overseas, the EU-wide unemployment rate dipped to 7.4% in September, in line with estimates, from 7.5% in August. This is the lowest jobless rate in the bloc since April 2020, though data shows there are still 600K fewer people employed than before the onset of the pandemic. European Central Bank President Lagarde reiterated this morning that the conditions for beginning to hike interest rates are unlikely to be satisfied next year, pushing back on financial market pricing of liftoff by October 2022.

Additional Themes

China’s Service Sector Holds Up – After yesterday’s release of China’s October manufacturing Purchasing Managers’ Index (PMI) reading showed the continued impact of power shortages and other headwinds, remaining in contractionary territory, the non-manufacturing PMI figures overnight reflected ongoing strength. Specifically, China’s official service sector PMI for October beat estimates, registering a solid 53.8 versus expectations of 53.1 and the prior month’s 53.4. For context, PMI readings below 50 denote contraction in the sector’s activity. Later today, US service sector ISM PMIs are expected to show continued strength with a consensus forecast of 62.0 following 61.9 in September. – MPP view: Our expectation is for downbeat manufacturing and property investment growth in China over the next few quarters before the government begins to get more serious about stimulus in the leadup to the National Party Congress next October, where President Xi and the powers that be will want positive atmospherics around his ascent to a historical third term.

Earnings Season Remains Supportive of Stocks – The generally upbeat tone of earnings reporting for the third quarter (Q3) has continued to provide a tailwind to US equities despite US fiscal and monetary uncertainty, as concerns that supply bottlenecks, high input prices, and labor shortages would sap corporate profitability have been generally allayed. Today, CVS, Marriot, and Norwegian Cruise Lines report before the opening bell, while figures from Qualcomm, EA, and Allstate are due after the close. With 363 of the S&P 500 companies having issued Q3 results, the figures have been impressive, with reporting companies beating sales and earnings estimates at rates of 66.9% and 82.1%, respectively. – MPP view: With Q3 earnings season pretty much in the books, the margin squeeze/bottleneck/input costs/labor shortage dogs didn’t do as much barking as feared and we expect increasing signs of easing some of the snags and shortages over the coming months.

Democrats Grope for Consensus as Political Heat Rises – Reports this morning indicate that Congressional Democrats are continuing to bargain over the terms of the reconciliation bill, which needs to pass with an elusive level of nearly unanimous support across the caucus given the lack of GOP support. Specifically, Democrats are said to be considering an expansion of the minimum tax concept from corporations to the wealthy, which would be balanced against the lifting of the state and local tax (SALT) deduction cap imposed by the Trump administration. This comes after news last night that an intraparty compromise had been reached on lowering prescription drug prices. As the votes on both bills in the House, which Democratic leaders had hoped could be held as early as last night, slip further into the future, political developments are raising the temperature on the party. The Trump-linked Republican candidate Glenn Youngkin beat party mainstay Terry McAuliffe in the Virginia governor’s race, while the New Jersey’s gubernatorial election remains too close to call this morning. Democratic candidates had been favored in both races for much of the campaign. – MPP view: On balance, we expect that the disheartening results for Democrats in these gubernatorial races will help focus minds in the caucus on getting these bills over the line, but there is still no clarity on the timing of the House vote. While there remains a sense of momentum and we think the odds of near-term passage remain relatively high, if timeline for a vote slips into mid-November or later, the odds worsen markedly. 

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.

Summary and Price Action Rundown

Global risk assets are tentatively higher this morning as corporate earnings reporting season kicks off in earnest today with megabank results, while investors await more key US economic data tomorrow. S&P 500 futures point to slightly higher open after the index rose 0.3% yesterday, posting a new record high and upping year-to-date gains at 10.3%. EU equities are posting modest upside, while Asian equities mostly rallied overnight. Longer-dated Treasuries are holding most of their recent gains, with the 10-year yield trading at 1.63%, which is toward the bottom of its three-week trading range. Meanwhile, the broad dollar index is flat around its lowest level since mid-March. Oil prices are extending this week’s rebound, with Brent crude climbing toward $65 per barrel, amid a continued sideways trading pattern.

Treasury Market Equanimity Continues Ahead of More Key US Economic Data

Longer-dated Treasuries have evidenced encouraging stability in the face of upside inflation and labor market metrics over the past few weeks, though the tests to this newfound placidity will continue. Yesterday’s highly-anticipated data release indicated that the US Consumer Price Index (CPI) rose 0.6% month-on-month in March, up from 0.4% in February and above consensus expectations of 0.5%. Gasoline prices were the biggest contributor to the monthly gain, surging 9.1% in March and responsible for about half the overall CPI increase. Gasoline is up 22.5% from a year ago, part of a 13.2% increase in energy prices. Food was up 0.1% overall, with food away from home the largest contributor at 3.7%. The shelter component also came in above expectations at 0.3%. This pushed the annual rate up to 2.6%, above expectations of 2.5% and well above February’s 1.7%, as the base effects of the pandemic take hold. Furthermore, Core CPI, which excludes the more volatile food and energy components, rose 0.3% m/m and 1.6% y/y, both above expectations of 0.2% and 1.5%.

Despite headline CPI growth of 0.6% marking the fastest increase in consumer prices since 2012, investors were seemingly cognizant of base-effect and other distortions in the data, which Fed officials have repeatedly flagged, as both equity and Treasuries rallied notably following the CPI numbers. Adverse headlines regarding Johnson & Johnson’s Covid-19 vaccine may have also added to the bid for safe haven Treasuries, with solid demand also evident in the afternoon’s auction of $24 billion in 30-year notes.

The next test for the newfound stability of the Treasury yield curve will be tomorrow’s retail sales data and, to a lesser extent, industrial production figures for March, with both expected to surge after a weather-related setback in February. Today’s import and export price figures will be noted, along with commentary from the Fed’s Beige Book report, but none of these are expected to elicit a market response. – MPP view: We still believe that the current Treasury equanimity will run into questions about a taper over the summer, amid an accelerating recovery, unless the Fed begins to message more forcefully about the continuation of QE over the coming months rather than focusing on rate hikes, as the two are inextricably linked and the taper fires the starting gun on the process of accommodation withdrawal. Some analysts are predicting an announcement of the taper as early as the June meeting, whereas we expect the Fed over the next few months to begin to ramp up its signaling of a steady path of QE to year-end.

Mega-Bank Results Mark Official Start to Earnings Reporting Season

The first quarter (Q1) is projected to feature robust earnings growth, but analysts are questioning whether the good news is already reflected in equity prices, while today’s reports from leading US banks will be scrutinized for margin improvement amid rising interest rates. Earnings reporting season kicks off in earnest today, with JPMorgan, Goldman Sachs, and Wells Fargo announcing their results before the opening bell, along with Bed, Bath & Beyond and First Republic Bank also reporting today. Thus far, JPMorgan’s figures have topped estimates but its shares are trading lower in the pre-market as investors ponder the nuances of the report. Yesterday, Fastenal stock lost 1.4%, though off the lows of the morning, after the industrial fastener giant and manufacturing bellwether lagged sales expectations and cited rising production costs and the challenges of meeting a shifting demand preference for mainstream product lines at the expense of safety products in Q1. Tomorrow features a continuation of mega-bank results, including Bank of America and Citi, with other industry mainstays like BlackRock, Delta Airlines, UnitedHealth Group, PepsiCo, Rite Aid, Alcoa, and JB Hunt reporting. Overall, Q1 is estimated to feature earnings growth of 24.5% but analysts anticipate that actual results will better this rate to rival the torrid 26.1% pace in Q3 2018, with a statistical lift from the comparison to last year’s challenged start to the year amid the onset of the pandemic. But with expectations already elevated, the bar to impress investors is higher and analysts have flagged the risk of shrinking profit margins from higher production and operating costs. – MPP view: The last few earnings seasons have delivered quite nuanced price reactions during the course of reporting but have not durably altered the broad equity market trends, and we anticipate that this will pattern will repeat. More traditional economy stocks, which have outperformed in anticipation of the post-Covid recovery, will be more impacted by rising input prices than the tech sector, for instance. Overall, it may be hard for equities to establish clear directionality amid all the noise and crosstalk from these results and management guidance, but we do not think that anything will amount to a gamechanger for either the bull market or the relative advantage of value stocks as the economic recovery builds momentum.    

Additional Themes

Bitcoin Surges Ahead of Coinbase Public Trading Debut – Coinbase, the leading cryptocurrency exchange, will be listed on the Nasdaq today, with analysts noting the expected valuation of approximately $100 billion and noting the somewhat rare direct listing approach, as opposed to the typical IPO process. Meanwhile, increasing the buzz over the Coinbase debut, Bitcoin, the flagship cryptocurrency, is registering an all-time high this morning above $64K. Though anticipation of increasing mainstream acceptance and demand for digital assets is fueling interest in the Coinbase listing and optimism for further upside in cryptocurrency valuations, some analysts express wariness over the heightened regulatory scrutiny that will inevitably follow. Treasury Secretary Yellen has made broadly balanced statements on Bitcoin and cryptocurrencies, but has been consistent in her concerns over their use for tax avoidance and illicit funding purposes. – MPP view: So far, Bitcoin has weathered the 2021 storm for momentum-driven assets admirably, displaying a lack of correlation that investors/speculators are certainly taking note of – the ARK Innovation ETF, Tesla shares, and the SPAC index all remain well off their highs from earlier this year.  

Mixed EU Economic Data – Industrial production for the EU contracted 1.0% month-on-month (m/m) in February, bettering expectations of a 1.3% retrenchment but deteriorating from the 0.6% the prior month. This translates into a -1.6% year-on-year pace, highlighting the persistent challenges to the regional recovery during a period of Covid-19 resurgence and reintroduction of containment measures in various areas. This comes after yesterday’s ZEW economic expectations survey for the EU reflected deterioration in April, slipping from 74.0 the prior month to 66.3, though this remains at the high end of the survey range. Germany’s ZEW outlook reading showed a similar pattern of backsliding, though overall levels remained high. The euro has managed a roughly 2% rally versus the dollar this month as the ongoing uptrend in longer-dated Treasury yields paused, removing a key source of lift for the greenback. – MPP view: We expect the widening economic divergence between the US and EU over the coming months will rekindle dollar strength against the euro to some degree, with the Fed’s decision to taper or not to taper (that is the question) over the summer offering the most salient catalyst for renewed upside pressure on longer-dated Treasuries and the greenback. 

Summary and Price Action Rundown

Global risk assets are building on last week’s gains as optimism continues to build for an impending economic recovery amid upbeat growth signals, upsized US fiscal stimulus, and expanding Covid-19 vaccine distribution. S&P 500 futures indicate a 0.3% higher open after the index advanced 4.7% last week to put gains for the year at 3.5%. Equities in the EU are also continuing upward, while Asian stocks posted robust gains overnight. A broad dollar index is hovering below its recent two-month highs, while longer-dated Treasury yields are continuing to edge higher, with the 10-year at 1.19%. Brent crude prices are extending their gains above $60 per barrel amid rising optimism over demand.

 

Secretary Yellen Advocates Bold Pandemic Relief Bill

The Biden administration and Congressional Democrats move ahead with unilateral approach to the American Rescue Act as Treasury Secretary Yellen makes the case for super-sized stimulus. Investors are noting Secretary Yellen’s strong advocacy for the $1.9 trillion plan on Sunday’s news programs, in which she indicated that a return to full employment would be possible next year with this degree of muscular fiscal support. This follows a series of maneuvers designed obviate the need for GOP support for the program and some high-profile criticism from ex-Treasury chief Larry Summers, who expressed concerns that overdoing stimulus would overheat the economy and spur inflation. Late last week, the Senate approved 51-50 a measure, with minor amendments, allowing Democrats to pass Biden’s relief plan through budget reconciliation. Votes for the measure fell strictly along partisan lines, with Vice President Harris casting the tie-breaking vote. Small amendments, including holding off on minimum wage increases and ensuring that wealthy Americans do not receive the $1400 stimulus payments, were added during the session, though none remain binding. The measure now returns to the House for a vote on the amended measure and, if passed, will proceed to the indicated committees for finalization by March. On Friday, President Biden emphasized that the Covid-19 relief bill stands as a higher priority than bipartisanship, offering his strongest criticism of Republican lawmakers since taking office and indicated that the Democrats would go it alone. if necessary, to get needed aid to struggling Americans. Speaker Pelosi has stated that the budget resolution will be brought to the floor later today and that committees will begin working on the specifics of the bill starting today. – MPP view: Though not every penny is likely to make it through, the Biden administration has strongly committed to the upper end of its stimulus spending range and put the marker down that it will aggressively pursue its legislative agenda, and so far it appears that Dem moderates like Senator Manchin are disinclined to stand in the way, all of which is positive for stocks and growth.

Economic Optimism on the Rise Despite Tepid Payrolls

Although this week’s data calendar is relatively light, market participants are increasingly on the lookout for signs that the US recovery is getting a head start. In January, the US economy added 49K jobs, missing the consensus estimate of a 100K rise but still representing an improvement on December, while the unemployment rate dipped from 6.7% to 6.3%. The nonfarm payrolls print was preceded last week by Thursday’s initial jobless claims tally, which showed that 779K Americans filed for unemployment benefits in the last week of January, a significant decrease to from the previous week’s level of 812K, and also well below market expectations of 830K. It marked the third straight week of falls in claims and the lowest amount since the last week of November but remains far above pre-pandemic levels of around 200K. And on Wednesday, payroll provider ADP estimated that private businesses hired 174K workers, handily outpacing market expectations of an increase of 49K, and recovering from a 78K decline in December. Other US data last week was also solid, with January Purchasing Managers’ Indexes (PMIs) and December factory orders and durable goods reflecting robust activity. January consumer price (CPI) data and weekly jobless claims figures will be in focus this week. Regarding the former, recent inflation readings have been punchier than expected though January’s CPI reading is expected to show little change from December. Market-based gauges of inflation expectations are at multi-year highs, however, revealing investor expectations of rising price pressures. – MPP view: We think inflation data will be noisy after the distortions of 2020 but that the pandemic will, over the medium to longer term, have an inflationary sting in the tail. We expect the Fed to hold to its commitment to be permissive rather than proactive in its policy posture toward the first wave of post-pandemic price pressures that are likely to materialize in the second half of this year. We expect that, around the summer or fall, the Fed passing the test of its new inflation targeting policy will restrain dollar appreciation and keep the Treasury yield curve biased toward steepening.   

Additional Themes

Earnings Season Continues to Provide Little Direction for Stocks – Fourth quarter (Q4) corporate results continue to be overshadowed by overarching market themes, like the GameStop episode and the brightening growth outlook, and today’s calendar is light. This week features the last major concentration of reports, with Twitter, GM, Coca-Cola, Disney, and Expedia among the most high-profile. With 295 of the S&P 500 companies having reported Q4 results so far, 74.5% have topped sales expectations and 81.0% have beaten earnings estimates, continuing the pandemic trend of overly conservative analyst forecasts. To this point, however, upside surprises on these quarterly figures have provided scant support for stock prices, though last week featured broadly more upbeat price action amid the waning volatility in short-squeeze stocks and better-than-expected growth data.

Latest Podcast – On this week’s Macrocast, we unpack the complicated jobs report, discuss the Biden stimulus package and its critics, and take a moment to review the Trump economy — including discussing how the jobs numbers would have played out in an alternate universe with no pandemic. We also chat about the potential for a pandemic-related baby bust and its economic impact. Latest Macrocast

Tom Terrific – In his first year with the Tampa Bay Buccaneers, Tom Brady won his seventh Super Bowl in a lopsided contest last evening against the Kansas City Chiefs. He now has more Super Bowl wins than any franchise in the league, with New England and Pittsburgh having six each. – MPP view: Patriots Nation is strongly represented at MPP and we were rooting heavily for Brady, which was slightly bittersweet but far more sweet than bitter. 

Summary and Price Action Rundown

Global risk assets are steadying this morning as the long-delayed US pandemic relief package heads to the President’s desk, Brexit negotiators soldier on despite more setbacks, and vaccine rollout continues apace. S&P 500 futures indicate a 0.2% gain at the open after the index closed with a modest 0.4% loss yesterday after being down nearly 2% in the morning, shaving year-to-date gains to 14.4%. Meanwhile, the Nasdaq continued its outperformance trend amid the Covid-19 resurgence. Equities in the EU are retracing a portion of yesterday’s steep loss, which was spurred by fears of the mutated Covid-19 strain in the UK and Brexit concerns, while Asian stocks were mostly lower overnight. A broad dollar index is holding above its recent multi-year low and longer-dated Treasuries are flat, with the 10-year yield at 0.93%. Brent crude prices are retreating toward $50 per barrel as OPEC+ considers its supply cut trajectory.

 

US Pandemic Relief Bill Finally Passes Congress

The House and Senate approved the $900 billion compromise relief package late last night alongside a spending bill to fund the government through the fiscal year, with President Trump set to sign it today. This long-awaited pandemic relief bill features $600 in direct payments to individuals (adults and children), which Secretary Mnuchin said yesterday could be sent to bank accounts as early as next week. Additionally, the package includes expanded and extended unemployment benefits of $300 per week through March 14^th, $325 billion in support for small businesses, extended eviction moratorium and $25 billion in aid to renters, $15 billion for airlines, and assistance for schools, childcare, and vaccine rollout. The total includes $429 billion in unused funds from the CARES Act and the entire package will be appended to the $1.4 trillion omnibus spending bill that will fund the government through the end of this fiscal year. Both President-Elect Biden and House Speaker Pelosi indicated their belief that more stimulus will be needed next year, particularly given the relatively brief period granted for additional unemployment benefits. The provision to prevent the Fed from restarting any of the five CARES Act lending programs, or create similar ones in the future, had become the main sticking point last week once the two most controversial elements, direct funding for state and local governments and liability protections for businesses, had been omitted. While GOP Senators asserted that the provision would exclusively target the five Fed programs, Democrats accused Republicans of trying to hamstring the incoming Biden administration and limiting the ability of the Federal Reserve to respond to economic distress in the future. The final version of the bill is said to narrow the restriction on the Fed to identically reproducing the CARES Act programs, thereby allowing novel formulations of Fed emergency lending facilities in the future. – MPP view: Better late than never. And with the Democrats and Republicans both falling short of their two “must-haves” in this bill (state and local government aid, and corporate liability limits, respectively), we expect a resumption of negotiations after the inauguration.

Brexit Negotiation Bog Down in Waning Days Before the Deadline

The pound is extending its decline from recent highs against the dollar and euro as the UK and EU remain deadlocked over the stubborn sticking point of fishing rights, with the deadline looming next Thursday. Having missed yet another artificial deadline on Sunday, Brexit talks remain stalled this morning after the UK’s proposed compromise on fishing rights remained unacceptable to the EU. The pound, which has acted as a barometer for the fortunes of Brexit, at one point yesterday was down nearly 2% versus the dollar and euro, with the latest pandemic developments adding to the pressure, but steadied in later trading as the UK gave more ground on this challenging issue, and analysts note that more concessions may be forthcoming. With a reimposition of total lockdowns in southeast England and freight stoppage between the UK and France as the fraught backdrop, Prime Minister Johnson is reportedly set to decide in the coming days whether to accept EU terms on fishing and other outstanding issues or opt for a no-deal departure from the single market at midnight on December 31^st. In the absence of a firm UK decision, however, reports suggest that talks could continue straight up to the deadline. – MPP view: We are retaining our out-of-consensus call for a hard and/or disorderly Brexit at year-end, as fishing rights remain intractable and the timeline is dwindling. But with both sides seemingly ready to continue talking past the deadline, Brexit may seem, from a market perspective at least, less like an acute shock and more like a chronic condition. 

Additional Themes

Possible Easing of OPEC+ Output Cuts – Russia gave indications today that it intends to support OPEC+ raising output by 500,000 barrels a day at next month’s meeting. The hike would take place in February, matching the increase already agreed for January. 500,000 barrels is the maximum monthly incremental supply hike allowed by the cartel’s agreement in early December. OPEC+ shifted their schedule to monthly meetings in order to be able to adjust their production more rapidly to changes in the market. The new stance from Russia came after Brent crude had already dropped toward $50 a barrel due to the UK implementing a new full lockdown in London and southeast England to combat a more contagious strain of Covid-19 that is spreading rapidly. Furthermore, a host of nations around the globe limited travel to and from the UK. Brent fell 2.9% today. – MPP view: Like stocks, oil prices have been in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. As we had expected, the latest OPEC boost provided short-term support to prices, and US stimulus expectations seem to have given some additional lift, with rising tensions (and increasing incidents) in the Gulf and dollar weakness adding to the upside impetus. Still, we have expected the dismal demand dynamics of the coming quarters to keep prices capped and see OPEC+ commitment to output cuts as difficult to maintain in the coming months. Today’s development is aligned with our base case expectation that oil prices will have a hard time making significant headway from here. 

Traders Eye Georgia Runoffs – Market commentators are noting options activity in the Treasury market in anticipation of the two Senate runoff elections scheduled for January 5^th, though early and mail-in balloting is well underway with a reported 1.5 million votes already cast. For context, traders would expect to see longer-dated Treasury yields jump and the dollar slump in the event of a Democrat sweep of the two contests, which would deliver control of the Senate and facilitate a far more expansionary fiscal stance in the first time of the incoming Biden administration. Betting lines and a popular prediction market are reflecting odds of the Republicans achieving at least a split in the two races and retaining Senate control at over 70%. – MPP view: Our base case is aligned with consensus but we expect odds to tighten into polling day on January 5^th and investors will not be able to take a GOP win for granted, which will keep longer-dated Treasury yields biased upward and will remain a headwind for the dollar. Though the potential for a Dem sweep might give rise to concerns over taxation at the margin, enthusiasm for a less constrained pro-growth and fiscally stimulative Biden economic program would, we expect, render that result a comfortable net positive for equities.

Summary and Price Action Rundown

Global risk assets are mixed this morning after stellar month-to-date performance, with US equities registering record highs last Friday, as investors assess the latest China-related developments and await a key OPEC decision tomorrow. S&P 500 futures indicate a 0.2% lower open after the index edged to a new record high in Friday’s holiday-shortened session, gaining 0.2% to up its year-to-date gain to 12.4%, while the Dow Industrials has slipped a bit after crossing 30,000 for the first time last week. Equities in the EU are consolidating their recent gains as well, while Asian stocks were mostly lower overnight. A broad dollar index is descending to a new multi-year low, at a level last seen in April 2018, while longer-dated Treasuries are generally steady, with the 10-year yield ticking up to 0.85%. Brent crude is paring its recent upside, dipping below $48 per barrel, ahead of a pivotal OPEC meeting (more below).

 

China Headlines in Focus

Solid purchasing managers’ index (PMI) figures overnight reflected the robustness of China’s recovery but more potential additions to the US trade blacklist highlight ongoing US-China tensions. China’s official PMI figures for November topped estimates across the board overnight, with the composite reading registering a solid 55.7 versus October’s 55.3. For context, PMI readings over 50 denote expansion. The manufacturing reading accelerated to 52.1, outpacing the consensus forecast of 51.5 and the prior month’s 51.4. Services were even more impressive at 56.4, topping estimates of 56.0 and October’s 56.2. Nevertheless, the People’s Bank of China added liquidity to the financial sector as analysts cited proactive management of year-end cash needs. This positive data has helped support the renminbi near its strongest level versus the dollar since June 2018, which takes pressure off the incoming Biden administration on the currency front, but other key US-China sources of tension persist, with the outgoing Trump administration obviously intent on keeping up the pressure in its final weeks. Reports overnight indicated that the White House is preparing to add more Chinese companies to its trade blacklist due to ties with China’s military, including chip giant SMIC and oil major CNOOC, shares of which fell 2.7% and 14.0%, respectively, on the Hong Kong exchange overnight. Analysts have been pondering the extent to which the Biden administration will continue President Trump’s hardline policy direction against China. – MPP view: We believe the Biden administration will take a more multi-lateral approach to confronting China, focusing more on using its human rights transgressions to marshal international pressure on officials and businesses, while still maintaining the segments of the Trump China policy that cover national security, IP, property rights, and investments. We expect trade and currency to be de-emphasized, or perhaps more accurately, dealt with in a more subtle fashion.

OPEC+ Members Lack Consensus Ahead of Pivotal Meeting

With the cartel and its allies meeting today and tomorrow, traders are highly attuned to signs of disagreement over the key issue of whether or not to extend supply caps into 2021. The full cartel meeting will commence later today following headlines indicating that informal interactions among members revealed rifts over the potential extension of price-supporting output restrictions beyond their scheduled expiry in January. Oil prices are retracing a portion of their recent upside this morning, but remain close to multi-month highs, as caution sets in over the possibility of a less ambitious extension or even a deadlock. For context, prices of international benchmark Brent crude and US benchmark WTI both reattained levels from early March last week amid a confluence of bullish factors, including the brightening demand outlook stemming from the encouraging Covid-19 vaccine developments, a weakening dollar, and indications that Saudi and Russia were set to push their fractious OPEC+ allies to hold to their supply curbs well into 2021, with a three-month extension the consensus expectation. Reports now suggest that the timeframe could be limited to two months or feature a gradual tapering of the curbs over three to four months. The UAE is said to be one of the key holdouts and had reportedly threatened to withdraw from OPEC earlier this month over dissatisfaction with other members’ uneven compliance with the cartel supply cuts. Nigeria and Iraq are the two OPEC members that have struggled to implement the curbs and have been pushed for compensatory cuts. – MPP view: Like stocks, oil prices are in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. This will make cartel discipline harder to maintain into 2021, but Russia/Saudi should succeed in securing one last supply curb extension at their meeting this week. As we have expected, anticipation of this last OPEC boost will provide some short-term support to prices, and post-election US stimulus dynamics (when they materialize) should provide some additional lift, but we expect the dismal demand dynamics of the coming quarters to keep prices capped, though this short-term rally has exceeded our expectations. This burst of optimism in oil markets increases the risk that OPEC fails to deliver meaningful additional support to the market in this week’s pivotal meeting, as member discipline will be questionable.   

Additional Themes

Black Friday Spending Shows a Resilient US Consumer – US consumers spent $9 billion online on Black Friday, up 21.6% on a year ago. Adobe had originally forecast sales of between $8.9 billion and $9.6 billion. The figure makes Black Friday the second-largest online spending day in US history, after 2019’s Cyber Monday. The National Retail Federation (NRF) has predicted that holiday sales during November and December will increase between 3.6% and 5.2% this year from 2019 to a total of between $755.3 billion and $766.7 billion, up from last year’s 4% gain that totaled $729.1 billion. Of that amount, NRF expects that online and other non-store sales will increase between 20% and 30% to between $202.5 billion and $218.4 billion, up from $168.7 billion last year. Nevertheless, holiday sales metrics can often contrast with overall consumption figures, and the disappointing October retail sales reading suggested a degree of deterioration in demand as the pandemic intensifies into its second winter season.

Signs of Progress Keep Brexit Deal Hopes High – The pound is turning higher again this morning, though remains below recent multi-month highs versus the dollar and euro, amid upbeat assessments of the prospects for an agreement this week between the UK and EU to avoid a disorderly year-end Brexit. The thorny matter of fishing rights apparently remains the key sticking point, though UK Foreign Secretary Raab expressed optimism that a compromise could be found, and indicated greater clarity on possible resolution of UK state aid and “level playing field” issues. – MPP view: Our base case remains a hard and/or disorderly Brexit at year-end, though the renewed pressure from the pandemic is adding further impetus for PM Johnson to compromise and secure a deal, while the sidelining of arch Brexiteer Cummings also suggests a possible softening of the UK position. We do not expect the EU to give much ground from here.

Summary and Price Action Rundown

Global risk assets are subdued this morning after yesterday’s losses as investors continue to weigh the grim near-term outlook for the pandemic and the global economy against upbeat medium-term prospects for stimulus measures and eventual vaccine rollout. S&P 500 futures indicate a 0.1% lower open after the index retreated further from Tuesday’s record high yesterday, dropping 1.2% to reduce its year-to-date upside to 10.4%. Equities in the EU are lagging as regional leaders ponder further coronavirus containment measures, while Asian stocks were mixed overnight. A broad dollar index is up slightly from its recent multi-year low, while longer-dated Treasuries are firm, with the 10-year yield dipping to 0.86%. Brent crude is hovering around $44 per barrel despite some bearish signs of OPEC disunity ahead of its pivotal month-end meeting.

 

Investor Focus Shifts Back to Dire Near-Term Pandemic Dynamics Despite Vaccine Optimism

The announcement of school closures in New York City yesterday due to the accelerating coronavirus outbreak highlighted the downside risks to the economy over the coming quarters before widespread vaccine availability. US stock futures are still in the red this morning after equity losses accelerated yesterday afternoon following the announced closure of schools in New York City due to rising infection rates across the metropolis. The specific trigger was the weekly average rate of positive tests rising over 3%, which some analysts had thought might occur as early as last weekend. Mayor de Blasio characterized the closure as temporary but gave no indication of the timeline for reopening and cautioned a decline in the positivity rate alone may not be sufficient to send city students back to the classrooms. Although President-Elect Biden’s public health advisors have declined to support a strict lockdowns like the one imposed in South Australia this week, or even partial shutdowns like those instituted in Germany and France late last month, more state and municipal leaders are tightening restrictions and calling for families to stay home for the Thanksgiving holiday. Most recently, Kentucky announced statewide school closures this morning as well as a ban on indoor dining. Near-term concerns over the pandemic and its economic fallout are overbalancing more upbeat vaccine news, this time from AstraZeneca and Oxford University. Specifically, this vaccine is said to be highly effective in older adults, who are more vulnerable to this coronavirus and would be a higher priority for immunizations. – MPP view: We expect renewed US fiscal stimulus negotiations in December to be challenging and result in only a mini-deal before year-end (if that) and disabuse more optimistic investors of the notion that a GOP-controlled Senate will go higher than $500 billion for the post-transition pandemic relief deal (minus any amounts agreed next month). This puts the spotlight on the Fed, and we think they will not shy away from signaling augmented asset purchases at their December meeting.   

US Jobs Data in Focus Amid Rising Concerns of Double-Dip Recession

Analysts will be attuned to this morning’s jobless claims data for any signs of backsliding after weeks of improvement. After US retail sales for October signaled a warning about consumer fortitude ahead of what is increasingly likely to be a challenging winter from both a public health and economic standpoint, with large swathes of the US beset by the ongoing seasonal Covid-19 surge, labor market dynamics will be a key focus for market participants and policymakers alike. Initial jobless claims for the week ending November 14^th are expected to improve slightly to 700K after the prior week’s tally showed that 709K Americans filed for unemployment benefits, down from the previous week’s revised level of 757K and below market expectations of 735K. This is the lowest number since late March but still well above pre-pandemic levels. Also, there were more than 298K new applicants to the Pandemic Unemployment Assistance (PUP) scheme, which covers workers that do not qualify for initial claims, compared with 362K in the previous period. So combined, 1.007 million claims were filed in the last two weeks. Furthermore, 6.79 million Americans filed continuing jobless claims in the week ended October 31^st, comparing favorably with market expectations of 6.90 million and marking the lowest level since the pandemic began. All told, as of October 24^th, 21.157 million Americans are receiving some fort of Federal assistance, down from 21.531 million in the previous week.

Additional Themes

Fed Nominee Shelton Faces Tough Odds – With the Senate now on recess until November 30^th, and the potential for the balance of the Senate to shift with Democrat Mark Kelly being sworn in that day to replace Martha McSally after winning the race in Arizona, Judy Shelton’s nomination to the Fed Board is in jeopardy. For context, the process to confirm her was stalled in the Senate on Tuesday after Vice President-elect Kamala Harris returned to the chamber to cast a key vote today as two key Republicans were absent because of exposure to Covid-19. The other nominee under consideration, Christopher Waller, has broad support and is expected to be confirmed. Analysts have begun to speculate about which candidates the incoming Biden administration might consider if Shelton’s nomination falters and they have the chance to fill the vacancy. – MPP view: This would be a windfall for the Biden White House, particularly given the importance of Fed-Treasury coordination going forward. Even if her nomination fails, the Shelton precedent remains a signal to future administrations to get “your people” onto the FOMC to have your back.   

Turkish Lira Spikes on Rate Hikes – Turkey’s volatile currency is up 1.8% versus the dollar this morning, extending its recovery from late September’s all-time low, as the newly installed central bank governor implemented a 475 basis point interest rate hike to 15% at his inaugural meeting. President Erdogan has sent mixed messages regarding his support for the program of the newly installed economic team, and has a track record of interfering with central bank independence and advocating unorthodox economic theories. – MPP view: Emerging market assets have generally received a positive impetus from the Biden win, as he is assumedly more constructively engaged in international cooperation and development goals, along with the boost from a weaker dollar (please see our Market Viewpoints piece on EM from November 8^th).