Weekly Note 2022.11.21
Another storm on the horizon
Took almost 2 weeks out that concluded with a very memorable trip around Ha Long Bay in Vietnam. A truly magical place where the beauty and serenity of the bay takes hold of your senses to the point that there isn’t a single thought in mind. Nothing but a pure and calming sense of awe. It served me a good reminder that we should all seek to find such moments in our lives, regularly.
- NY Fed Empire State Manufacturing Index rose sharply in November — New orders decreased slightly, while shipments expanded modestly, Labor market indicators pointed to a solid increase in employment and a longer average workweek. Input prices increased at about the same pace as last month, while selling price increases picked up. Firms expect business conditions to worsen over the next six months.
- Philly Fed activity index declined at a steeper pace to -19.4 from -8.7 in October — lowest level since May 2020.
- PPI increased less than expected in October as services fell for the first time in nearly two years — offering eveidence dinsiflation is underway.
- US Retail Sales Rise Most in Eight Months — consumers are continuing to prove largely resilient and suggests the economy got off to a good start in the fourth quarter. Even though some price pressures are easing, retailers are still seeing the impact of inflation in earnings.
- U.S. Home Sales Fell for Ninth Straight Month in October — Higher mortgage rates driven by aggressive Federal Reserve interest-rate increases are pushing buyers out of the market (WSJ)
- Bullard: rates needed to rise to at least a range between 5% and 5.25% to be “sufficiently restrictive” to curb inflation.
- Collins: with little evidence price pressures are waning policymakers may need to deliver another 75 basis-point rate hike to get inflation under control.
- Kashkari: not stopping rate hikes until inflation peaks — “I need to be convinced that inflation has at least stopped climbing, that we’re not falling further behind the curve, before I would advocate stopping the progression of future rate hikes,” “We’re not there yet.” Recent data showing consumer and wholesale prices cooled in October provide “some evidence that inflation is at least plateauing, but we cannot be overly persuaded by one month’s data.” “It’s an open question of how far we are going to have to go with interest rates to bring that demand down in the balance,”
- Brainard: Fed should “soon” bring its string of supersized interest rate increases to an end — “We’ve done a lot, but we have additional work to do both on raising rates and sustaining restraint to bring inflation down to 2 per cent over time,” she said, adding that while October’s better than expected inflation data was “reassuring”, it was only “preliminary”
- Daly: “terminal rate of at least 5 per cent is probably likely”. “Pausing is off the table right now, it’s not even part of the discussion,” “Right now the discussion is, rightly, in slowing the pace.”
- Waller: ways to go before pausing; more comfortable with smaller hikes “but I won’t be making a judgment about that until I see more data, including the next PCE inflation report and the next jobs report”
- ‘Canary in the coal mine’: slower used car market points to cooling US inflation — Price gains ease to 2% annually, with implications for the industry, customers and wider economy (FT).
- Nancy Pelosi to step down as top House of Representatives Democrat — Departure of towering figure in US politics follows her party’s loss of its majority in midterm elections (FT). Elon Musk Reinstates Donald Trump’s Twitter Account After Online Poll (WSJ).
- U.S.-Europe Trade Booms as Old Allies Draw Closer — U.S. has imported more goods from Europe than from China this year, a big shift from the 2010s when China emerged as America’s dominant trade partner. From Swiss watches to German machinery and Italian luxury items, money and products are flooding across the Atlantic as never before. Germany’s exports to the U.S. surged by almost 50% year-over-year in September alone. The weak euro is giving European firms an extra edge in the vast U.S. market. European companies are also pouring resources into North America, including Mexico, lured in part by access to cheap energy. (WSJ).
- Rising Interest Rates Put Small Business Owners’ Plans on Hold — Some firms are cutting back on borrowing or delaying expansion, while others brace for indirect impact like weaker customer demand (WSJ)
- ECB begins great cash mop-up as banks repay 296 bln euros of loans — less than the roughly 500 billion euros many analysts expected for the first voluntary repayment window of the ECB’s TLTRO. ECB has given banks an incentive to get rid of those loans by taking away a rate subsidy last month. It was its first move to mop up cash from the banking system and the first step towards unwinding its massive bond purchases. ECB policymakers will look at how the market digests this sudden drop in cash to gauge how fast they can proceed with reversing the ECB’s 3.3-trillion-euro Asset Purchase Programme, which they will discuss at their Dec. 15 meeting. (RTS)
- Ukraine’s Kherson Win Shifts Dynamics Across Whole Front With Russia — Kyiv’s recent recapture of the southern city enables it to target Russian supply lines running to the Crimean Peninsula, while Moscow strives to redeploy withdrawn troops to Donbas (WSJ). Russians struggle to make sense of Ukraine war after Kherson retreat — Amid the drumbeat of state propaganda, the mood is one of low-level anxiety, according to independent poll (FT). Poland’s Exposure to Ukraine War in Spotlight After Missile Blast — the stray missile that killed two Polish nationals and prompted high-level discussions within the North Atlantic Treaty Organization, puts the spotlight back on a country that has been Ukraine’s biggest champion in Europe and is at the greatest risk should the conflict spill over into a wider war (WSJ).
- Europe Predicts Milder Winter, a Boost for Its Energy Security — one of the continent’s most prominent forecasters is expecting a mild next few months (WSJ). Eurozone edges away from risk of deep winter recession — downturn will be more moderate than previously feared. Greater fiscal support from governments, lower gas prices and a mild autumn have all helped to improve the bloc’s outlook (FT).
- U.K. Inflation Hits 41-Year High as Recession Looms — Consumer prices rose 11.1% in the 12 months through October (WSJ). UK households face largest fall in living standards in six decades — OBR expects 7.1% drop in real disposable income over two years (FT
- Higher Taxes, Spending Cuts to Follow in Other Countries, U.K. Chancellor Says — The U.K. on Thursday became the first Western economy to say it would sharply curtail its spending growth, even as a recession begins to take hold. Mr. Hunt announced £55 billion of budget cuts and tax increases aimed at convincing investors that the U.K. government is serious about tackling its rising debt load and combating inflation running at 11.1% (WSJ)
- UK Eurosceptics warn Sunak over Swiss-style trading relationship — Senior government figures have talked about the UK-EU relationship evolving over time so that friction on trade is minimised, citing the relative ease with which trade flows between the EU and Switzerland. (FT)
- China Dials Back Property Restrictions in Bid to Reverse Economic Slide — Partial easing of housing-sector rules comes as Beijing also seeks to lessen economic toll of strict Covid controls (WSJ). China Continues to Relax Covid Measures Even as Local Officials Battle Record Cases (WSJ). Covid Zero Returns to Chinese City Rumored to Be Reopening — Shijiazhuang tells residents to stay home; orders mass testing, Beijing reports deaths over weekend, complicating easing push (BBG). China’s New Daily Covid Cases Jump Above 24,000 (WSJ).
- Wall Street Wants Xi’s Money-Minting Markets to Come Back — “From Morgan Stanley and Bank of America to TCW, Fidelity International and Franklin Templeton, some of the biggest players in global markets are turning increasingly bullish on Chinese assets. It’s a stark contrast from just last month, when foreign firms pulled an estimated $8.8 billion from the nation’s slumping stocks and bonds, and analysts were predicting more gloom ahead.” (BBG). “From Morgan Stanley and Bank of America to TCW, Fidelity International and Franklin Templeton, some of the biggest players in global markets are turning increasingly bullish on Chinese assets. It’s a stark contrast from just last month, when foreign firms pulled an estimated $8.8 billion from the nation’s slumping stocks and bonds, and analysts were predicting more gloom ahead.” Citigroup Upgrades Hong Kong Stocks, Boosting Buy China calls (BBG) — reopening along with support for the porperty sector to help stabilize China EPS downturn and support investor sentiment. “China coud offer an attractive domestic-driven recovery story even as other major economies are slowing sharply”.
- ‘A remarkable job’: how Russia and China buckled in the face of a united G20 — Economic hardship from Ukraine invasion helped sway the developing world to isolate Moscow — Many worried that developing countries with strong ties to Russia, such as India and Saudi Arabia, would simply reject any language condemning the conflict, meaning the US, EU and their allies would have to settle for weak conclusions or none at all. But they left Bali with not just a joint statement with clear criticisms of the war’s economic fallout, but also evidence that the developing world’s leading countries were prepared to isolate Russia. It also stoked hope that Beijing was open to moderating its backing for Moscow. (FT)
- U.S. Official Says China Is Uncomfortable With Russia’s Rhetoric, Activity in Ukraine — “I think there is undeniably a discomfort in Beijing about what we’ve seen in terms of reckless rhetoric and activity on the part of Russia,” the U.S. official said in a briefing with reporters on Monday. “I think it is also undeniable that China is probably both surprised and a little bit embarrassed by the conduct of Russian military operations.” (WSJ).
- Biden-Xi Talks Mark Shift in U.S.-China Ties Toward Managing Fierce Competition — The meeting, arranged through weeks of back-channel negotiations, helped establish new guardrails as differences between the countries widen (WSJ).
Global equities came to hard stall after an explosive 10% mtd rally.
China has been the laggard in recent weeks as they struggle to reopen/relax ZCP. Charts printed a negatively divergent reversal bar last week while daily-tf also pointing to a reset lower.
SPX stalled at the top-end of my range with a weekly reversal print while momentum indicators have reset back around the 50 mid-line, while momentum has been rolling the past week.
While the index is looking heavy, the price action of the top-4 market cap stocks suggests resilience and higher daily high and close could carry the broader market higher.
XLY/XLP ratio continued its slide reflecting the defensive sentiment but what I find interesting is that we are back at the bottom-end of this range with a weekly sequential 9 count printed last week, which has done a decent job historically at marking the pivots in the ratio.
Looking at the individual charts however (e.g. AMZN TSLA MCD HD vs PG PEP KO COST), it doesn’t look as though the we will see a turn in the XLY/XLP ratio which therefore, in my view, makes it an interesting indicator to keep an eye on this week as a sentiment gauge.
Bloomberg commodities index is now trading well below the trendline exposing more downside this week.
RATES & FX
Bond volatility remains elevated. Rally in bonds stalling alongside equities is likely to keep risk on the weakside.
Higher front-end nominals and real yields also points to a tough week for risk assets and return of king Dollar.
Major USD charts pointing to return of dollar strength as a result.
The tactical positioning wash-out trade looks done for now given the magnitude of moves across assets in short space of time.
Though I still think we could rally much further as we start to see signs of disinflation and before economic data really starts to scream recession/doom/gloom, the price action across the charts is telling and I go into the week with a bearish bias looking for a pullback to next major support zone in Equities and against the Dollar.
- Short Equities
- Long USDJPY / Short Gold
- Short GBPUSD EURUSD
Also have short NZDUSD and NZDCAD on the radar this week should it spike around the RBNZ meeting.
Have a safe week trading.