There is no cure for high prices, like high prices…
Starting today’s note with some thoughts on latest Manufacturing PMI’s which, have lead me to believe we may be at a point where supply side induced price spirals has begun to hurt global demand. For example South Korean PMI:
- headline number fell to 50.2 from 52.4, though maintaining expansion territory for a 13th straight month
- manufacturing output saw sharpest decline to 46.6 since July 2020, due to significant material shortages notably semiconductors and various electrical components
- New orders and export orders barely grew with respondents saying “slowing international demand and difficulties in sourcing freight/container capacity”
- Input prices rose at sharpest pace with factory gate inflation highest in 3-months
- Reduction in Staffing levels being seen for the first time in 8-months, in an effort to protect margins.
The “slowing international demand” response caught my attention as we know consumer spending has been very robust in the major economies. This makes me think supply chain induced price spirals is finally beginning to affect demand and if true, CB’s may turn out to be vindicated by staying steadfast with some of their transitory beliefs. Similar complexion in China PMI’s earlier today:
- Headline number rose slightly to 50.6 from 50
- New orders increased to a faster pace, but Export orders dropped for the 3rd straight month, signaling the expansion was driven by domestic demand.
- Suppliers’ delivery times increased at fastest pace since March 2020
- “Shortages of raw materials and soaring commodity prices, combined with electricity supply problems, created strong constraints for manufacturers and disrupted supply chains”
- Input costs surged at fastest pace since December 2016.
Surging input costs translates to higher production costs that eventually gets passed downstream to clients/customers and it appears we are seeing this affecting broader demand. This reminded me of a post by Lance Roberts of RIA:
CFNAI headed into negative territory in September being dragged down by production and income factors. I also suspect this is on theme with the above ‘supply issues beginning to hit demand’ arguments.
LAST WEEK’S ACTION
Risk-off sentiment seen in FX and futures markets but US equity benchmarks performed strongly.
EQUITIES
Risk appetite generally softer except for US and European markets which has outperformed on robust earnings being reported on both sides of the Atlantic.
Last week I noted that we are more likely to see some consolidation rather than a clean break higher having rallied back to a significant pivot area. We have done just that and the above charts are now displaying reversal signals. Further consolidation lower looks most likely purely on technical view.
US sector performance showing tepid signs of weakness last week after all sectors except Communications (XLC) traded in the green in the week prior.
Revisiting volatility metrics — still no sign of panic. We saw IV and protection premiums creep up last week but this appears consistent with patterns around earnings season. Skew has returned to elevated levels and along with Taildex and could be the ones to watch. DIX and GEX also being around prior week close is yet to indicate fear either.
COMMODITIES
Nothing new to add to last week’s “signs of exhaustion with momentum studies from last week’s close is suggesting a pivot lower with stochastics K closing below the D line” other than K deviating further below the D line.
RATES
Market expectations continues to shift closer pricing in as much 3 hikes next year! I touched on what was ostensibly an admission of error by Chairman Powell last week, and I think we could hear similar tones from CB’s making small adjustments on language and forward guidance.
TRADE IDEAS/VIEWS
Nordea highlights significant risks on the horizon: https://corporate.nordea.com/article/68902/nordea-weekly-aaaaaaaaaaah, and the recent volatility in STIR’s seems to be driving some risk aversion with USD cross-currency basis creeping up in recent weeks. Given how aggressively markets are pricing in hikes as well as signs of activity and demand for global trade becoming negatively impacted by supply induced price spirals, I think CB’s will be cautious and not to deviate too much from on-going rhetoric and quite possibly, pushback on market expectations. In view of NFP, I don’t think the headline number will do much to swing the FED as long as it is consistent with the ‘on-going recovery’, but strong AHE could give Hawks the fuel to argue Fed being too far behind the curve.
Still no change to last week’s views and I remain short GBP (vs EUR and USD), XAU, NDX. Took some off NOK longs last week but still retain a chunk as I’ve got an excellent entry back in July, and threat of higher Energy prices should keep Norges bank on a very hawkish trajectory which is already having to negotiate the surge in Oil prices.
Have a good week trading!
