THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

Commentary

Monday saw the S&P500’s largest one-day gain since June, +2.4%. 92% of index components were up on the day as the market responded positively to global vaccine progress, a new vaccine approval for Johnson & Johnson as well as strong manufacturing PMIs and positive developments toward the passage of a new US fiscal package. What’s more, the RBA doubled their daily bond purchases to demonstrate their commitment to the 0.10% yield cap for their 3 year rate. If that had been all that happened last week, it would have been considered a busy one. But on the week, the average daily range for the S&P500 and Nasdaq was 2.3% and 2.9% respectively. On Thursday, the benchmark Nasdaq ETF (Ticker: QQQ) logged its largest single-day volume in history with 138.5mln shares. The VIX volatility index started the week at 23, peaked at 32 and closed at 24.5. Fed chair Powell stuck to the script, literally, oftentimes reading pre-written responses to questions in an interview with the Wall Street Journal. Market participants continue to see the Fed’s sanguine response to rising rates as a greenlight to sell treasuries. 10 and 30 year Treasury securities rose approximately 10 basis points in yield this past week (1.55% and 2.29%, respectively). Federal Reserve members continue to view the rise in rates as a positive development and a foreshadowing of economic strength. Members are now in their blackout period where they are not permitted to comment publicly any more until after the committee’s March 17th press release. 

Chart of the Week

Fed Hikes are Being Priced In

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ECONOMIC DATA 

The Atlanta Fed’s GDPNow forecast for Q1 growth is currently tracking at 8.3%, down from 8.8% last week.

The New York Fed’s  Nowcast forecast for Q1 growth is currently 8.6% down from 8.7% last week.

US non-farm payrolls in February rose 379k last month, well above the 200k forecast by the street. January revised up from +49k to +166k. Unemployment rate down to 6.22% and the labor force participation rate steady at 61.4%.

• Total jobs are down about 8 million from pre-pandemic levels and the primary source of weakness is within leisure and hospitality. 4 million workers have left the labor force due to the pandemic and another 4.1 million report being unemployed for more than 6 months.

• February saw what may be a turning point for these COVID- sensitive serivce sectors, leisure & hospitality +355k jobs added. Specifically, restaurants accounted for most of the gain. 2.25mln people are still on temporary layoffs, we see this as low-hanging-fruit for further strong payroll gains in the months ahead as reopening continues

• Construction employment fell 61k because of weather related effects. 

• Average hourly earnings were up 0.23%m/m and 5.26%y/y

US ADP private payrolls came in much weaker than anticipated, +117k versus +205k street forecast.

• “The labor market continues to post a sluggish recovery across the board...We’re seeing large-sized companies increasingly feeling the effects of COVID-19, while job growth in the goods producing sector pauses. With the pandemic still in the driver’s seat, the service sector remains well below its pre-pandemic levels; however, this sector is one that will likely benefit the most over time with reopenings and increased consumer confidence.”

Fed’s Beige Book (Summary of Commentary on Current Economic Conditions): “Economic activity expanded modestly from January to mid-February for most Federal Reserve Districts.” 

• Every Fed District reported economic growth over this reporting period

• Business optimism has improved over the past 6-12 months

• Consumer spending is mixed and leisure/hospitality sectors still not close to normal

• Employment rose “slowly” over the reporting period and that labor demand was still drastically different across industries and skill levels. 

• Supply chain disruptions met with strong demand continued to cause higher input costs. 

US ISM manufacturing 60.8 for February, ahead of expectations of 59

• New orders, production and employment all rose, with employment reaching post-COVID highs. 

• Prices paid surged 4 points to 86, highest level since 2008

• Of the 18 manufacturing industries, 11 reported employment growth for February

  • “The Employment Index grew for the third month in a row Continued strong new-order levels, low customer inventories and an expanding backlog indicate potential employment strength for the rest of the first quarter. For the sixth straight month, survey panelists’ comments indicate that significantly more companies are hiring or attempting to hire than those reducing labor forces”

Euro area January retail sales -5.9% m/m versus consensus expectations for -1.1% m/m decline

• The miss was largely the result of lockdowns. Expect Europe to rebound as their vaccine distribution develops

The euro zone aggregate final manufacturing PMI in line with flash estimate at 57.9

• UK manufacturing PMI to 55.1 for the final release for February

• Sweden manufacturing PMI down to 61.6 in February from 62.5

  • Employment component rose to a new high 

• Norway’s manufacturing PMI for February 56.1, the highest in two years

  • Almost all subcomponents strengthened for the month

Korea’s February exports +9.5% y/y, continue to show strong global demand for their products

• Auto shipments +47% y/y 

• Semiconductors +13.2% y/y

Australian house price growth for February was the highest monthly rate since 2003 at +2% m/m 

• Strong housing data has triggered discussions of macro prudential policy response from the RBA to slow down the overheating market but leverage and lending standards still look alright so our guess is that we’re a long way from any sort of response. 

• Australia’s 4Q GDP confirmed the strength of the economy coming in at +3.1% q/q, well ahead of expectations for +2.5%. Overall economic activity is now just 1.1% below December 2019 levels.

  • Government spending added 0.3 percentage points to growth. 

  • Consumer spending ripped higher, +4.3% for the quarter despite a 3% fall in disposable income. The savings rate fell from 19% to 12% for the quarter. 

• Why it matters: Several weeks ago we pointed to significant pickups in economic activity in regions of Australia where the economy had been re-opened. We hypothesized at the time that it would serve as a good barometer of what other developed markets would look like once restrictions were lifted. These developments foreshadow significant coming strength in OECD economies.

COMMODITIES

Saudi Oil facilities were attacked via bomb equipped drones and ballistic missiles on Sunday, leading to prices jumping to over $70 a barrel for brent crude, the global benchmark.

• “While Saudi Arabia’s ministry of energy said the attacks “did not result in any injury or loss of life or property”, and a person familiar with the matter said no production had been affected, the attacks have still unsettled oil markets that have rebounded strongly in recent months.”

• Attacks were claimed by Yemen’s Houthi fighters, allies of Iran. 

• Allies such as Russia have yet to flood crude oil markets, and barring any changes we expect these elevated prices to continue.

• International benchmark: Brent crude +2.9%, $71.28/barrel

• US benchmark: West Texas Intermediate also up, $67.98/barrel

• While there was no direct hit on oil supplies, traders and investors should still consider the market under threat. Price premiums are likely to continue as geopolitical threats loom.

GEOPOLITICS

US military presence in South Korea is getting a boost. A tentative deal has been reached to increase financial support for additional military presence in S. Korea following 2019’s unusual one year arrangement.

• “This proposed agreement, containing a negotiated meaningful increase in host nation support contributions from the Republic of Korea, reaffirms that the US-Republic of Korea Alliance is the linchpin of peace, security and prosperity for north-east Asia and a free and open Indo-Pacific region,” - State Department

• This action follows former president Donald Trump’s unpopular demands to increase the amounts S. Korea was paying to host US troops while simultaneously rebuking S. Korea for considering removal of US forces despite the growth of China’s military and the continued development of nuclear weapons in neighboring North Korea.

• “The Special Measures Agreement, the cost-sharing deal between the US and South Korea, was renegotiated every five years from 1991 to 2018. … In 2019, only a one-year arrangement was reached after the two sides failed to agree on a way to meet Trump’s demands. An ad hoc arrangement was reached to cover the final period of the Trump presidency and avoid disruptions to US bases in South Korea.”

CHARTS OF NOTE

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Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

Commentary

It was a week to remember for global government bond markets. The US 10 year treasury yielded 1.35% at the close of business on February 19th. This past Thursday, the 7 year treasury auction results came at 4 basis points cheaper than the pre-auction fair value; this is an historically large concession (“tail”) for the auction. What’s more, participation from money managers was bleak. The weak auction prompted a crescendo of activity that saw 10 year yields spike above 1.60%. Central bankers in Australia, Europe, the UK, New Zealand, etc. have demonstrated their awareness of rising rates in the bond markets and have said that they are watching how these moves will impact financial conditions. Their counterparts in the United States however have taken a more sanguine view; Federal reserve members have been unified in the expression of their belief that rising rates are a reflection of an improving economy and brighter prospects as a result of optimism surrounding the COVID vaccine and an impending pickup in activity. After Thursday’s frenzy, bond markets settled and the 10 year closed the week at 1.46%. Stocks did not respond well to the dramatic moves in rates, the S&P500 finished the week down 2.5% while the tech-centric Nasdaq was down 5% for the week. Below, you’ll find a slightly abridged summary this week. 

Chart of the Week

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ECONOMIC DATA 

The Atlanta Fed’s GDPNow forecast for Q1 growth is currently tracking at 8.8%, down from 9.5% last week.

The New York Fed’s  Nowcast forecast for Q1 growth is currently 8.7% up from 8.3% last week.

The share of the population having received a first COVID vaccine for various countries:

• Israel: 53.1%, UK: 26.9%, US: 13.6%, Spain: 4.4%, Germany: 4.3%, Italy: 4.1%, France: 3.9%

• Daily pace of new doses administered is at 1.5mln in the US.

• Covid-19 cases have declined by 73% from the Jan 11 peak.

  • The number of persons hospitalized is down 55% from the peak peak to 58.4k. 

Job Postings on Indeed.com are 5% above Pre-COVID levels

December S&P Case-Shiller home price index rose 0.8% for the 20-City index. This is a new record and follows a 1.1% increase in November. The seasonally adjusted annualized pace for December is in the 97th percentile of all months.

• All of the 20 cities surveyed posted 12-month gains, with nine showing double-digit rises.

• Related data point: FHFA House Price Index for purchases rose 3.8% from Q3 to Q4, the largest quarterly gain on record. Prices rose in all 50 states.

• New home sales +4.3% m/m in January, 923k-unit pace, consensus expectations was a 1.7% rise.

  • December had a significant upward revision, from 1.6% m/m to 5.5% m/m

  • Prior 3 months were all revised higher bringing the average to 896k annualized units from 873k.

US Durable goods orders +3.4% in January, well ahead of consensus that was looking for  +1.1%. 

• 9th consecutive monthly increase and December revised up from +0.5% m/m, to +1.2% m/m. 

• Orders rose broadly almost across all components, but core capital goods orders were slightly weaker than expected at +0.5% m/m, below consensus expectations of +0.8%. 

German IFO business climate index up to 92.4 from 90.3.

• Beat was primarily driven by the expectations component. Had the largest monthly rebound since July.

• “The German economy is looking towards recovery again” -Klaus Wohlrabe, Ifo Economist

• Confirms the strong forward looking sentiment for the German economy that was expressed in last week’s ZEW survey.

• Bottom Line: While current conditions are poor because of lockdown effects, optimism regarding the near future is incredibly strong.

US Conference Board Consumer Confidence had an upside surprise with a boosted outlook in the current labor market and economy’s progress. The index is at a three-month high of 91.3. The highest level in 2020 was 132 pre-pandemic.

• Strength was led by survey on present situation which rose 6.5 points to 92.

• Jobs plentiful minus jobs hard to get improved from -2.5 to 0.7, the highest level since November. Despite the strength, keep in mind that this labor market differential figure was 32 in February 2020.

• This upbeat sentiment aligns with the recent developments we have seen with the $1.9tln economic stimulus package and steady increase in vaccine distributions.

CENTRAL BANKS

Fed Chair Powell testified before the House, “the economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.”

• Regarding rising rates, “In a way, it’s a statement of confidence on the part of markets that we will have a robust and ultimately complete recovery.”

• Emphasized that accommodative measures would remain in place until “substantial further progress” was achieved and that the labor market’s recovery, thus far, was insufficient toward the objective.

  • The economy, “has not made substantial further progress in the last 3 months.”

• Acknowledged that the Fed anticipates a pick up in inflation this year as a result of base effects and pent-up demand but does not believe “that those effects should either be large or persistent.”

  • “Inflation dynamics do change over time, but they don’t change on a dime.”

  • “There really hasn’t been [a strong connection between budget deficits and inflation.”

  • Inflationary risks are, “[weighted to] the downside for a long time.”

ECB President Lagarde delivers keynote speech at opening plenary session of the European Parliamentary Week.

• Fiscal and monetary policies can reinforce each other to address “shielding and transforming” the euro area economy during the pandemic crisis. 

  • “Fiscal policy can help brighten economic prospects for firms and households, thereby strengthening monetary policy transmission... people who consider government support to be more adequate display less precautionary behaviour. Those people are in turn more likely to respond to favourable financing conditions and increase their consumption.”

• ECB intends to continue supporting the economy, “the overall policy mix, however, remains essential...firms and households will only be able to take full advantage of favorable financing conditions if national policy measures are deployed to help monetary policy unfold its full potential.”

• “Risk-free overnight indexed swap (OIS) rates and sovereign yields are particularly important...Accordingly, the ECB is closely monitoring the evolution of longer-term nominal bond yields.”

The RBNZ leaves the monetary policy stance unchanged as expected. Their QE problem is to buy NZ$100b of bonds by the end of June 2022.

• Forecasts were upgraded as expected, but unemployment rate still expected to rise again over H1 2021. 

• Highlighted the “unevenness” of the recovery’s significant uncertainty about the outlook.

• Operationally able to take rate negative if necessary.

The Reserve Bank of Australia purchases AUD7bln of 3 year bonds in order to defend their 0.10% target rate for the maturity. 

• The RBA now holds more than 60% of the target April 2024 bond. 

ECB Chief Economist, Lane, “We will purchase flexibly according to market conditions and with a view to preventing a tightening of financial conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation.”

BOE Chief Economist, Haldane, “There is a tangible risk inflation proves more difficult to tame, requiring monetary policy makers to act more assertively than is currently priced into financial markets.”

Richmond Fed President Barkin, “Inflation is not a one- or two-month spike in prices; inflation is a change in expectations for the medium and long term.”

• “There are disinflationary pressures that are quite profound & seem to be continuing. As long as you’ve got those disinflationary headwinds, it’s just going to be hard for businesses to believe that you’re going to have the market power to increase prices.”

St. Louis Fed President, Bullard, “Growth prospects improving and inflation expectations rising; the concordant rise in the 10-year Treasury yield is appropriate.”

Federal Reserve Vice Chair Clarida, “downside risk to the outlook has diminished.”

• “The settings of monetary policy are entirely appropriate not only now, but – given my outlook for the economy – for the rest of the year.”

Kansas City Fed President, George, “Most of the rise in the 10-year Treasury this year appears to reflect an increase in the real yield that is the interest rate controlling for inflation compensation. Much of this increase likely reflects growing optimism in the strength of the recovery and could be viewed as an encouraging sign of increasing growth expectations.”

EU calls on financial leaders of the G20 (the world’s top 20 economies) to be careful not to withdraw economic stimulus and accommodation too early. The message was agreed to by all EU countries.

• “Fiscal policies should remain supportive as long as necessary, and not be prematurely withdrawn.”

• “The fiscal response going forward should continue to be carefully calibrated and regularly reviewed, in light of the uncertainty associated with the pandemic...and the need to avoid policy cliff-edge effects.”

PUNDITRY

Goldman: “investors ask whether the level of rates is becoming a threat to equity valuations. Our answer is an emphatic ‘no’...the 300 bp gap between the S&P 500 forward EPS yield of 4.6% and the 10-year US Treasury yield ranks in the 42nd historical percentile.

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Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

What you need to know in 60 seconds

• Retail spending up as stimulus checks land, and e-commerce continues it’s rapid expansion (15.5% of total consumer spend now, up from 12.9% pre-COVID)

• Housing: Home renovation spending up, building permits up, prices up - the housing market shows no signs of slowing down

• Central banks: Steady as she goes as we wait for inflation to kick in

• Stocks: 79% of reporting stocks have had a positive earnings surprise

• What we’re wondering: When will the rise in the US 10-year yield (1.35%) matter for equity markets? See FIXED INCOME, CURRENCIES, COMMODITIES, & EQUITIES in this weeks issue for what seems to be a reasonable guesstimate.

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ECONOMIC DATA 

The Atlanta Fed’s GDPNow forecast for Q1 growth is currently 9.5%

The New York Fed’s  Nowcast forecast for Q1 growth is currently 8.3%

US Industrial Production +0.9% m/m in January, beats consensus expectation of +0.4% 

• Another strong month after December’s +1.3%m/m change

• Manufacturing accounts for 75% of industrial production and was up 1%m/m. This is all a catch up to make up for lost production during COVID. Spending on goods has been above pre-COVID levels for several months (+5% as of December) but manufacturing production is still 1% below February 2020 levels. 

US Manufacturing PMI 58.5, in line with expectations 

• Output to 57.7 from 60.5, new orders down to 57.3 from 59.9

• Employment up slightly

• Supplier deliveries index at a record low of 26.8, indicating slow delivery times

• Input and output price indices are at all time highs

US Producer Price Index (PPI) big upside surprise for January at +1.3% m/m vs. consensus +0.4%

• Core +1.2%m/m versus +0.2% expected

US retail sales in January, +5.3% m/m, the largest monthly percentage rise in 9 months and well above the consensus. Stimulus checks began to be delivered in January and it looks like they had the desired impact

• Every store type reporting gains and e-commerce saw an 11% rise, “Of every dollar spent at U.S. retailers in January, 15.5 cents was spent online; before the pandemic that share was 12.9 cents.”

• Building materials & garden equipment +4.3% monthly gain. This is a proxy for home renovation spending. Now 20% higher than pre-COVID levels! 

US Housing starts -6.0% m/m (1.58mln unit pace). Single-family starts -12.2% m/m, reverses a +12%m/m gain in December. Probable cause of the fall in single family was due to good weather in December that pushed starts forward, this was likely a reversion of that effect

• December starts were revised up to 8.2% from 5.8% was upwardly revised from 5.8%, to 8.2%. 

• Building permits +10.4% m/m, to a 1.881mn unit pace vs. +4.2% in December. 

• Bottom Line: Building permits are now at their highest level since June 2006, that’s a better indication of what’s to come versus the housing starts data which can be noisy month-to-month. See home sales below.

US, existing home sales +0.6% m/m in January, beats expectations. This was the highest sales rate for January since 2005! Housing market continues to be one of the strongest ever

• The median existing-home sales price: $303,900, +14.1% from a year ago

• Housing inventory down to 1.04mln units -25% y/y

• At the current pace there is just 1.9 months supply of homes down from 3.1 a year ago

UK CPI inflation +0.7% y/y in January slightly higher than consensus of +0.6 % y/y

• Core stays steady at +1.4% y/y 

Euro area PMIs 48.1, in line with expectations and still below 50 which indicates contraction in activity

• Manufacturing at 58 is now at a 3 year high, the weakness is being driven by service sector that is being held back because of COVID related restrictions. 

• Given the divergence we think manufacturing is the better indicator of what’s to come when restrictions are lifted. Expect there to be a significant catch up in services over the coming months

• “One concern is the further intensification of supply shortages, which have pushed raw material prices higher. Supply delays have risen to near-record levels, leading to near-decade high producer input cost inflation. At the moment, weak consumer demand – notably for services – is limiting overall price pressures, but it seems likely that inflation will pick up in coming months.” -IHS

The February German ZEW economic sentiment survey up to 71 from 62 and beats expectations for 60. 

• “The financial market experts are optimistic about the future. They are confident that the German economy will be back on the growth track within the next six months...Consumption and retail trade in particular are expected to recover significantly, accompanied by higher inflation expectations” -ZEW

Australian monthly employment +29k, driven by 59k addition of full time jobs

Jobs are now just 64k (0.5%) below February 2020 pre-COVID levels  0.5% 

CENTRAL BANKS

US Fed released minutes for last meeting and there were no surprises in the release 

• In line with Chair Powell’s press conference responses after the meeting

• Regarding fiscal support, participants at the meeting said that it had, “led them to judge that the medium term outlook had improved”

San Francisco Fed President Daly: “I am not thinking we have unwanted inflation right around the corner”

Boston Fed President Rosengren, “would be very surprised if we see a sustained inflation rate at 2% in the next year or two with labor markets as disrupted as they have been”

• “[asset purchases] will continue until there is substantially more progress in lowering unemployment and raising inflation”

Richmond Fed President Barkin, “we plan to stay the course on asset purchases until substantial further progress is made to our goals”

New York Fed PresidentWilliams, “wait and see mode” + “not concerned about stimulus being excessive right now”

ECB released minutes for their last meeting, “some Governing Council members thought the intensification of the pandemic posed some downside risks to output in the first quarter of 2021”

• Measures put in place in December were appropriate in view of the current outlook. General council reiterated its commitment to maintain a steady presence in markets to ensure accommodative financial conditions.  also highlighted the commitment to maintain a steady

• Regarding the euro’s recent strength, the GC noted that the nominal effective exchange rate was at historically high levels and had already had a negative impact on inflation

FIXED INCOME, CURRENCIES, COMMODITIES, & EQUITIES

10 Year US Treasury yields have risen approximately 40 basis points year to date and are 1.35%. Despite the rising rate environment, the S&P500 is up 4%, the Nasdaq is up 5.5% and the Russell 2000 is up nearly 15%. This leads us to wonder, at what level of 10 year rates will the stock market begin to react? Strategists from Citi and Bank of America have tackled the question over the past several weeks using different methodologies. Each of these thought experiments independently arrived at a similar rate, approximately 1.70%.

• In 2018, it was an approximate 50 basis point rise in real yields, from their trough, that triggered equity markets. Assuming a 2.25% breakeven inflation rate, that would get us to approximately 1.7% on the 10 year in 2021

• As of February 8th, 70% of S&P 500 stocks sported a dividend yield above the 10 year yield. 1.70% is the approximately the rate at which less than half of S&P components’ yields would be higher than the 10 year. 

• Since 2008 periods of sustained market turbulence have coincided with the nominal 10 year yield rising above the blended cost of the US’s debt. The relationship is not immediate but it has served as a rough warning signal for when things start to get tricky for equities. Today’s blended cost of debt: 1.7%. 

Via Factset: 83% of the S&P 500 components have reported earnings for Q4'2020

• 79% of companies have reported a positive EPS surprise thus far, and the overall growth rate for earnings has been 3.2%. Of companies that have provided earnings guidance, 63% have issued positive guidance. This compares favorably versus a 5-year average of 33% issuing positive guidance.

• 77% have reported a positive revenue surprise with an aggregate revenue growth figure of 3%

Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

Quote of the Week

“Good morning, Jamie. Just very quickly, I just want to say that the most interesting thing that's happening is the rate at which demand has increased. We've never seen an increase in demand happened as quickly. And that combined with COVID and the pandemic has really stretched the supply chain. Mark mentioned, we did have elevated freight costs in the fourth quarter of last year. And as he said, we expect those to continue through the first half. We are working with all of our suppliers. The supply base is generally tight, not just semiconductors, which has gotten a lot of press, but many of our components, are on longer lead times. Our suppliers and we are struggling with absenteeism due to COVID. And we are working very closely with our customers to remain connected and to continue to supply them as best we can. We are working through all of these issues on a daily basis, and the cost that we expect are included in our guidance. And we expect to be able to supply what we believe our market forecast is that Mark said earlier.” 

-Tony Satterthwaite, President and Chief Operating Officer of Cummins Inc.

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ECONOMIC DATA 

“Healthy jump in indeed.com US job postings: +2.4% above pre-pandemic baseline as of Feb 5. Was +0.7% one week earlier, on Jan 29. Accelerating improvement! 1.7 %pt weekly gain is similar to last summer's recovery pace.”

-Jed Kolko, Chief Economist, indeed.com

In the United States, as of February 14, 38.3mln people had received at least one dose of the COVID-19 Vaccine. 

• Daily doses averaged 1.7mln per day. At the current pace, approximately 75% of the 16 & older population would be fully vaccinated by early September. 

• To date, approximately 36% of the 65 & older population have received at least one dose, an 8 percentage point increase week-over-week. At the current rate, more than 50% of the 65+ population will have received at least one dose by the end of Feb.

• New daily confirmed cases of COVID-19 are down 22% versus a week ago and 60% from their peak while the positive test rate has halved in the past 6 months. 

US consumer price index (CPI) for January +0.26%, y/y +1.37%.

• Excluding food and energy, core CPI came +0.03% and +1.4% y/y.

• Rent and owners' equivalent rent measures +0.11% m/m, in line with it's December increase.

• Core goods prices +0.14% on the month.

• Core services prices were flat on the month. Many of these are categories that remain weighed down by COVID developments (recreation services, airfares, and hotels) and we can expect an acceleration once broader vaccine distribution has been achieved. 

• Bottom Line: While market’s expect rising inflation rates over the course of this year, it’s still too soon to see signs of sustainably higher inflation. 

China’s headline CPI for January -0.3% y/y versus unchanged expected.

• Core CPI printed negative, -0.3%, for the first time since 2009.

• Cause of the low print is weak travel activity and softness in healthcare and family services consumption.

US JOLTS Job Openings 6.64mln at the end of December, higher than consensus and up from 6.572mln for November.

• Job openings were led by a pop in professional and business services (+296k).

• The quits rate rose to to 2.3%, the highest level since the pandemic started.

The NFIB Small Business Optimism Index at 95, down 1 point from December.

• The 47-year average is 98.

• “Owners expecting better business conditions over the next six months declined seven points to a net negative 23%, the lowest level since November 2013.”

• “The net percent of owners expecting better business conditions has fallen 55 points over the past four months.”

• Percent of owners thinking it’s a good time to expand, 8%.

• Sales expectations over the next three months declined 14 points to a net negative 4%.

• Despite some fall in sentiment and expectations, the employment measures remained strong

German industrial production was lower than expected +0.0% m/m (0.3%exp). Lockdown measures are weighing on industrial activity. 

UK GDP +1.2% m/m for December, ahead of expectations of +1.0% and grew 1% q/q for Q4’20.

• The UK economy is now around 7% below pre-COVID levels. 

• Manufacturing remained resilient while services saw a solid bounce back. 

• Household spending contracted in the quarter but was offset by government consumption and investment.

Mexico’s January CPI print above consensus +0.86% m/m (+0.77% m/m expected). 

• Annual rate is now +3.54% y/y but core inflation remains broadly unchanged. 

CENTRAL BANKS

ECB President Lagarde spoke at the at the plenary session of the European Parliament.

• “In this environment, an accommodative monetary policy stance remains essential.”

People’s Bank of China (PBOC) published their Q4’20 monetary policy implementation report.

• Will prioritize policy stability with no sharp turns. 

• Will adhere to normal monetary policy, stable central bank balance sheet along with lower leverage and credit growth compared to the post-2009 period.

Fed Chair Powell: “We are a long way from a strong labor market.”

• “Achieving and sustaining maximum employment will require more supportive monetary policy.”

• Called for, “society wide commitment” to maximum employment.

Cleveland Fed President Loretta Mester said the Fed is, “going to be accommodative for a very long time.”

Dallas Fed President Kaplan:

• Mass vaccination and additional fiscal stimulus will increase output, put downward pressure on unemployment, and temporarily lift inflation but the upward price pressures will not be persistent. 

Sweden’s Riksbank kept policy unchanged and projects no changes in rates through 2024.

• Reiterated that rate cuts are still possible if needed. 

• Expects the economy to return to normal levels in Q3’21, a quarter earlier than previously forecast. 

• Pace of bond purchases will slow to SEK100bn in Q2 (from SEK 120bln currently).

EQUITIES

Alibaba (Ticker: BABA), reported 3Q earnings in early February, the stock is up roughly 21% from a year ago and 18% ytd.

• Sales rose 37% in 3Q, with cloud computing, retail and commerce leading. Cloud computing saw its first positive EBITA margin.

• Alibaba reported 779 million active consumers in Q3.

Pfizer (Ticker: PFE), announced it will grow revenue 6% in 2021, excluding Covid-19 vaccine sales.

• Sales were 3.3% lower than the consensus and EPS missed by 18%.

• 2021 Sales guidance of $59.4 - 61.4 billion was above expectations, but the midpoint EPS goal of $3.15 was below consensus due to much lower gross margin, decreased profit from the BioNTech profit share agreement and higher R&D costs.

Amazon (Ticker: AMZN), reported strong fourth quarter results on the back of increased online shopping and additional stimulus checks.

• Q4 Sales rose 44%; online stores +46% and third-party seller services increasing 54% following strong holiday demand and moving Prime Day to the fourth quarter.

• Amazon Web Services jumped 28% q/q.

• Q1’21 revenue guidance of $100-106 billion, which is above consensus.

• Management expects Covid-19 related costs to decline 50% to $2 billion q/q.

Google (Ticker: GOOGL), reported Q4 results in early February. The stock is up 21% ytd and 38% from a year ago.

• Revenue surprised estimates by 5%, coming in at $46.4 billion, Adj. EPS for the quarter was 15.5 vs the consensus of 17.6. GAAP+ EPS was 19.24, a 23% positive surprise from the consensus.

• Analysts believe YouTube Ads may benefit from a secular shift in brand advertising from traditional TV spending.

• Cloud segment could see accelerated revenue growth in 2021 with increased enterprise usage.

Twitter (Ticker: TWTR), shares are up nearly 25% for the week after reporting strong Q4 earnings.

• Analysts expect top-line growth to accelerate in 2021, mostly driven by increased advertisement spending as live events resume.

• Revenue growth beat expectations by 8%, ending the quarter at $1.29 billion. GAAP EPS came in at 0.27 vs the consensus of 0.163, a 65% positive surprise.

• Ad revenue gained 31% y/y driven by impression growth and price stabilization. 

• Monetizable daily active users grew by 1 million to 37 million in Q4.

Uber (Ticker: UBER) Q4 earnings highlighted a slow demand recovery for ridesharing and continued reliance on subsidies for an expanding delivery segment.

• The company continues to cut costs and will divest from its unprofitable Freight business in an attempt to increase cost saving measures.

• Revenue was $3.16 billion for the quarter which was 1.59% below expectations. Uber reported a net loss of $1.034 billion in the Q4, a 50% negative surprise from analysts.

Lyft (Ticker: Lyft) Q4 Revenue and Net Income beat consensus.

• Q4 revenue of $569 million vs an estimated $561 million. Net Loss for the quarter was $180 million, beating estimates by 19%.

• Ride volume continues its slow recovery, which may be down 40-50% in Q1. Lower driver incentives and continuous reduction in fixed costs could help the company achieve its goal of breakeven EBITDA in the second half of the year.

Walt Disney Company (Ticker: DIS) closed the week at a new all-time high $190.91. The company has experienced remarkable strength in their streaming platform.

• Q1’21 EBITDA beat the consensus of $878 million by 148%, coming in at $2.2 billion.

• The recent rise in the stock price can be attributed to Disney+, which shows no signs of slowing. The first quarter of fiscal year 2021 saw 21.2 million new users bringing the total number of subscribers to 94.9 million. The upcoming price increases may boost top line growth.

• The Disney Parks operating income fell an additional $2.6 billion on limited capacity and extended closure in Paris and California. This news did not come as a surprise and with the vaccine rollout and pent up demand, analyst expect demand to pick up in the 2H.

Canopy Growth Corp (Ticker: CGC), reported strong Q3 earnings on Tuesday the 9th. Shares ended the week down 6.5% but not after being up 25% at one point. News organizations have dubbed this week's volatility a “reddit” fueled mania.

• Net revenue has beat expectations for the third straight quarter, increasing 23% from the prior year, ending the quarter at $152 million

• Recreational marijuana usage saw gross revenue increase 15% in Q3 from the prior year to $70 million and Medical marijuana usage saw an increase of 10% at the end of the third quarter from a year ago to $45 million

• Non-GAAP Gross Profit was $40 million and EBITDA was -$68.4 million, a 3.8 percent positive surprise

GEOPOLITICS

The United States Senate has voted to acquit former President Donald Trump in his second impeachment trial on Saturday. With a vote of 57 yays and 43 nos, the final steps in the impeachment process have fallen short of the two-thirds required for conviction. 

• Former President Trump was charged with inciting the January 6th riot at the Capitol. Seven Republican Senators joined the Democrats in finding Trump guilty this time compared to just one in the first impeachment trial.

• The second impeachment vote has the most Senate support since president Andrew Johnson’s 1869 impeachment trial. 

• The acquittal leaves the door open for Trump to make a 2024 presidential run. After already promising retribution in 2022 against Republicans who crossed him, polls show him damaged but still the front-runner among republicans.

Nobel prize winner and State Counselor Aung San Suu Kyi was arrested on Feb 1 by the Myanmar (aka: Burma) military (aka: Tatmadaw), citing alleged fraud surrounding the elections held in November of last year.

• The coup came abruptly to most observers, seeing as Aung San Suu Kyi was somewhat of an ally to the military despite tensions, even personally defending the military mass killings of the predominantly Islamic Rohingya minorities during her International Court of Justice appearance in late 2019.

• “The international community has repeatedly gotten Myanmar wrong … We got it wrong in the late 2000s when we thought the military had no intention to transfer authority to a civilian government; we got it wrong when it came to Aung San Suu Kyi and her authoritarian tendencies and attitudes toward ethnic minorities; and it seems we got it wrong when it came to this, too.” - Aaron Connelly, South-east Asia specialist, International Institute for Strategic Studies.

• Approximately 384 of those in favor of the National League for Democracy Party have been arrested since and continue to be arrested in the face of mass amnesties of ex-convicts in Yangon. It is believed the move is to empty jail cells in preparation of further opponent crackdown.

• In similar fashion to the 80’s and 90’s, protests have erupted, and civilians continue to resist despite being met with warning shots, water cannons, and largely unpredictable night time arrests.

• The United States has issued sanctions, targeting a number of military generals, limiting US assets benefitting the Myanmar military as well as strong export controls and preventing access to the $1bln in Myanmar government funds being held in the US.

Mario Draghi has officially been sworn in as Italy’s next Prime Minister. Taking the oath on Saturday Feb 13, along with his 23 Cabinet ministers which consist of economic experts and various other career politicians spanning the political spectrum. 

• Draghi, 73, an MIT trained economist who led the European Central Bank from 2011 to 2019. Most famously known for leading the ECB through the euro-zone crisis in 2012. 

• The former Prime Minister, Giuseppe Conte lost control of the party after mis-handling the Covid-19 response. 

• Italy’s tourism accounts for roughly 13% of the country's gross domestic product, as the pandemic has taken a significant chuck from the economy. Draghi’s government will appoint a tourism Ministry from the previous culture ministry. 

PUNDITRY

Marko Kolanovic, JP Morgan's head of quant and derivatives strategy,: "Commodity Supercycle and Related Equity Flows" 

• 4 Commodity supercycles in the past 100 years. The last one started in 1996 and peaked in 2008.

  • The most important driver of that cycle was the rise of China and emerging markets.

  • During the period, USD weakened and commodities were more widely financialized. As a result, institutional investors embraced it as a new asset class that could diversify portfolio exposures.

• JPM believes that 2020 marked the end of the commodity contraction and that we have now entered a new commodity super cycle. “Mostly it will be the story of a post- pandemic recovery (‘roaring 20s’), ultra-loose monetary and fiscal policies, weak USD, stronger inflation, and unintended consequences of environmental policies and their friction with physical constraints related to energy consumption and production.”

• Inflation hedging characteristics: For the past decade, the global economy has experienced low growth and low inflation. The result was a bull market in bonds, bond proxies and secular growth stocks.

  • As inflation dynamics change and the theme of a resurgence in inflation becomes more widely accepted, JPM expects multi-asset portfolios to turn to commodities as a diversifying solution.

• There are two drivers of the equity-bond correlation: volatility and inflation. All else equal, a regime of lower volatility and higher inflation weakens this correlation. This is what appears to be occurring as the world recovers from the COVID shock.

• “In the period from 2010 to 2015, the Energy sector had a 10.6% allocation in equity portfolios. This has steadily declined to a 3.1% weight currently”.

  • During this period active managers reduced their allocation from 7% to 1.5%. The current US equity fund asset base is approximately $14trln. A re-allocation towards the energy sector would result in significant inflows and re-pricing.

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Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

Commentary

Underneath the headlines regarding meme-stocks and the runaway rally in the stock market has been a significant improvement in the COVID situation America. The number of people hospitalized with COVID in the US has declined rapidly to 92,880, approximately 40,000 lower than the peak hospitalization rate that was recorded on Jan 5th. As of Jan 31st, 25.2mln Americans had received at least one vaccine dose - that represents approximately 7.5% of the population. Some estimates show that approximately 22% of the 65 & older population of the country has received at least one dose, 8 points higher than the prior week. 49 out of 50 states saw a decrease in hospitalizations. The outlier, Vermont, saw a one-person increase in hospitalization

• The most recent data showed that the daily dose rate was approximately ~0.4% of the population, a 60% improvement versus 2 weeks prior. 

  • At the current pace, more than half of the 65+ population will have received a first vaccine dose by the end of February.

  • Already, high frequency data reflecting activity in the travel, leisure and hospitality industries has shown a bump in engagement and spending.

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ECONOMIC DATA 

Nonfarm Payrolls Total +49k in January, weaker than consensus estimates for +105k. Revisions for past months were also disappointing at -159k. Unemployment rate fell to 6.3% from 6.7% but only because the labor force shrunk to 61.4% from 61.5% in December. 

• Private +6k, Goods -4k, Services +10k, Gov +43k.

  • Leisure & hospitality -61k jobs in January after -536k loss in December.

• Job loss relative to February 2020 stands at 9.9mln which means that the US has only regained 56% of the COVID job losses.   

• “The workweek lengthened by 0.3 hours. As a result, aggregate weekly payrolls, a proxy for total wage and salary income, jumped 1.1%, the fastest pace in four months.”

• While the report was poor, the ADP report (below) and ISM jobs components bode well for employment figures over the coming months. As vaccine roll-out gets more traction it’s worth keeping in mind that approximately 45% of the private sector payrolls decline since February has been in the leisure & hospitality sector so the snap back could be a lot more intense than currently envisioned. Already, high frequency data is showing significant improvement (see spending chart above).

January US ADP employment +174k vs +50k expected. Previous month was revised higher by 40k jobs.

• Composition: Small business +51k, Mid-size +84k and large +39k.

  • Goods +19k, Services +156k.

• “The labor market continues its slow recovery amid COVID-19 headwinds. Although job losses were previously concentrated among small and midsized businesses, we are now seeing signs of the prolonged impact of the pandemic on large companies as well.”

US ISM manufacturing for January 58.7 down from 60.5  in December. Of the 18 manufacturing industries, 16 reported growth in January.

• New orders down to 61 from 67 drove much of the decline but still, this is a very strong print.

• Employment up almost 1 point to 52.6, this is the highest level since the pandemic and the employment component only started to grow in November. US manufacturing employment still has 540k fewer people employed than February 2020.

• Prices paid at 81.2,  the highest reading since 2011 and it is the first time since 1978 that no firm reported lower prices. 

• Supplier delivery times at 68.2. Firms reported “labor shortages, strong demand and delays in supply chains.”

• The US economy has been resilient despite COVID restrictions. Europe has had a more difficult time keeping the economy going. Composite and services PMIs for the Euro area were in contraction (sub-50) at 48 and 45, respectively. 

  • German new manufacturing orders index fell 1.9%m/m in December. First fall in 7 months. Their retail sales fell 9.6% for December and it’s the steepest monthly decline since 1994. Both are further evidence that lockdowns across Europe are starting to have an impact on industrial activity and the broader economy.

US Services PMI 58.3 in January ahead of expectations for 56 (Dec was 55). 

• 2nd sharpest upturn in output in six years.

• Strong increase in employment component to 55.2, the highest level since February 2020 reinforces strong trajectory of employment growth for services going forward. All of this was despite continued weakness in hospitality and leisure sectors that are still hampered by COVID restrictions.

US total construction spending +1.0% in December to $1.49trln, in line with street’s expectation.

• Core construction spending, let by strength in single family housing, +1.1% for December in addition to upward revisions for prior months. It’s the 6th increase in the past 7th month. Total residential construction was up 21% y/y.

• Since May, total construction spending has been rising an average of 1.2% per month and is now above pre-pandemic levels and the highest levels since 2002!

• Bottom Line: There is still no end in sight to the housing market’s strength.

US light vehicles up to a 16.63mln annualized rate in January (estimate was 16.3mln) up from 16.2mln in December.  

• At the nadir, sales were 8.7mln rate in April and for context January 2020 sales were 16.9mln. 

China's official manufacturing PMI prints 51.3 for January, the 11th consecutive month of expansion but down from 51.9 in December. The decline was a result of a slower expansion in large and medium-sized firms.

• Official services PMI fell 4 points down to 51.1 as a result of a pickup in COVID cases and a resulting closure of hotel and entertainment sectors. Railway passenger traffic for the first 3 days of Spring Festival season was down 70% y/y.

Oxford Economics: “Businesses remain concerned over global economic prospects, despite some improvement in sentiment over the past month. Based on our latest survey of risk perceptions, almost half of respondents see activity in their business remaining below pre-pandemic levels throughout 2021.”

CENTRAL BANKS

Reserve Bank of Australia, in a surprise move, doubled its bond buying program and made clear that accommodative policy is here to stay, “Australia will need very significant monetary support for years.”

• Will buy additional AUD100bln after the current 100bln program is done in April. Pace of purchases will remain at 5bln per week. 

• Benchmark rate and the target yield on the 3-year bonds (0.10%) left unchanged.

• Governor Lowe pledged to maintain rates at the current levels until inflation has reached the 2-3% target “in a sustainable manner.”

  • Their current forecasts do not see this occurring until 2024 “at the earliest.”

• “In terms of what other central banks are doing, many have recently announced extensions of their bond purchase programs. This is relevant to us, because we live in an interconnected world. If we were to cease bond purchases in April, it is likely that there would be unwelcome upward pressure on the exchange rate.”

US Federal Reserve Comments:

• Minneapolis Fed’s Kashkari, very dovish, ““we are not even close to being at the right time to even think about adjusting the balance sheet size.”

  • “The key now is for the Fed to keep our foot on the monetary policy gas until we really have achieved maximum employment as we call it."

• Cleveland Fed’s Mester, “It is now clear that the adverse effects of the pandemic have not been evenly distributed and there are wide disparities in the recovery across business sectors,geographic areas of the country, and demographic groups.”

• St. Louis Fed’s Bullard, the vaccine combined with fiscal and monetary policy should lead to a “very strong” recovery and positive real GDP growth in 2021. 

  • Rising inflation is still in line with the Fed’s new policy framework and as inflation approaches and exceeds the 2% target, it would be a welcoming “[...] development for the FOMC, as inflation has generally been below target for many years,”. 

Bank of England Comments:

• The Bank of England will give lenders six months to prepare for negative interest rates, anything sooner “would attract increased operation risks”. Banks will begin updating their IT systems to reflect the new policy.  The PRA is set to ask banks for their readiness regarding negative rates in six months time, but reiterated that “such a request could be misconstrued as a signal that the MPC setting a negative Bank Rate was in prospect, or even imminent” further adding that “This was a signal that the Committee did not wish to send.” 

• Andrew Bailey, Governor, on negative rates: 

  • “Particularly when you go negative, the transmission is much less clear because it does change the whole calculus of how the banking system works. We do not know with any confidence how that would work. However, there are experiences of other countries.” 

• Andy Haldance, Chief Economist, is cautiously optimistic on the economic recovery following the pandemic: 

  • “If we get that recovery that I expect to start coming on stream, probably at the rate of knots from the second quarter, that will hopefully then eat away and improve the prospects of reemploying those million people who have lost their jobs.”

  • As members look to the future, “I feel much more confident about the second half of 2021 than I do about the first quarter of 2021, which is unusual but should be encouraging.”

Does the National Debt Matter? David Andolfatto, Senior Vice President at the Federal Reserve Bank of St. Louis doesn’t seem to believe it’s a dire situation.

• The national debt grew to $20.5 trillion or 105% of GDP by the middle of 2020 from only $5.3 trillion or 35% of GDP in 2008. That is a 400% increase in just 12 years. David believes it is incorrect to view the national debt through the lens of a household, where unsustainable debt will bankrupt a household, a nation doesn’t face the same constraints.

• On the topic of ‘Debt Issuance’, a household has a finite lifespan whereas a government can continually refinance its debt indefinitely. Government debt is much different than household debt because it mainly consists of marketable securities issues by the U.S. Treasury as bonds. In fact, from 1862-1971, the Treasury department issued some of its securities in the form of small-denomination bills which are indistinguishable from currency issued by the Federal Reserve today.

  • When interest comes due, the U.S. can print additional U.S. or Federal Reserve Notes (a legal tender), this technically means a default can only happen if the government permits it.

  • This makes the U.S. Treasury securities highly desirable for investors seeking a safe haven asset.

• Domestically held debt creates domestic private sector wealth. Increasing the national debt makes individuals feel wealthier. Investors value the securities that define the national debt in the same way individuals value money - a safe store of wealth. David argues if the national debt is a form of money, wherein lies the concern?

• If the interest rate on the national debt was on average less than the growth rate of the economy, the government can indefinitely run a budget deficit, using the debt to finance programs designed to enhance the productivity of the nation.

• Presumably there is a limit to how much the market can handle Treasury securities for any given price level or inflation rate but right now, no one knows how high the debt-to-GDP ratio can get. David argues that we will only know once we get there.

• Consistent debt issuance must be met with corresponding economic growth, otherwise inflation will corrode private wealth. As long as inflation stays in check, there should be little concern to the national debt. Since the 2008-09 recession, Personal Consumption Expenditures (PCE) inflation rate has averaged around 1.5%, this reinforces the idea that inflationary pressures have stayed in check as debt-to-GDP has grown exponentially.

• To conclude, direct checks, PPP and credit market support is a necessary step to support individuals and businesses that have been affected by Covid-19 and the sharp increase in government debt may result in a one-time increase in price levels. A spike in inflation is not a signal to tighten monetary or fiscal policy as long as the spike is temporary. The higher price level that would accompany this event should be understood as the mechanism through which purchasing power is redistributed over the course of the pandemic.

FIXED INCOME, CURRENCIES, COMMODITIES

Last week we highlighted that, “Prices for commodities are surging. From aluminum (+39% since March) to scrap steel (up 60% since November) to corn (up 43% since Aug)... The cause of rising commodity prices are the COVID related supply chain disruptions that were not met with a subsequent fall in demand for many commodity intensive products.” The United Nations food agency highlights the negative aspect of this reflationary theme, food prices have now risen for 8 consecutive months and are at their highest levels since 2014.

• The Food and Agriculture Organization (FAO) reported that their cereal price index rose 7.1%m/m in January, with maize rising 11.2%. Corn prices are now 42% above where they were a year ago. “China was importing unexpectedly large quantities of maize this season, which was having a significant knock-on impact on estimates for world utilization and stocks.”

  • Wheat prices +6.8%, “driven by strong global demand and expectations of reduced sales by Russia when its wheat export duty doubles in March 2021.” 

  • Sugar +8.1%

  • The vegetable oil price index +5.8% and now at the highest level since 2012 as a result of falling production in Indonesia and Malaysia. 

  • Dairy prices +1.6% and the meat index posted +1.0%.

  • “At this level, the world stocks-to-use ratio of cereals would decline from 29.7 percent in 2019/20 to 28.3 percent in 2020/21, marking a seven-year low.”

EQUITIES

“As of end of January, 47% of S&P 500 stocks had forward P/E greater than 20; slightly off recent peak in December but still higher than any level during dotcom era” Liz Ann Sonders, Charles Schwab.

As of the end of this week, 59% of S&P 500 have reported results for Q4’20

• 81% have reported earning above wall street forecasts and in total earnings havec come in 15% ahead of estimates, thus far.

• 79% of the companies that have reported have beat revenue estimates. In aggregate total revenue has come in 3.4% above the estimates,

• Bespoke Investment Group highlighted a quirky dynamic that has been going on during earnings season, ““The S&P 500 is up over 2% since earnings season began in January, but stocks that have reported earnings this season have seen an average decline of 1.15% on their earnings reaction day.  So even though the broad market is trending higher, the gains are not a result of big earnings moves.  We also note an absolutely fascinating result from the current reporting: companies that beat EPS estimates have underperformed names that missed EPS on their earnings reaction days!  As shown below, stocks that have beaten EPS estimates have fallen 1.22% on their earnings reaction days this season.  Stocks that have missed EPS estimates have only fallen 0.81%.  It’s not just that investors aren’t rewarding EPS beats, it’s that they’re practically punishing them!”

• 77 S&P500 components will be reporting earnings in the coming week.

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Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

Commentary

“Upcrash. A gain so fast and rapid, that it might previously have been thought to be impossible. And it is, weirdly, kind of a crash. I mean, whoever heard of the SEC putting out a statement on market volatility because stocks were going up too much? Whoever heard of hedge funds having to quickly reduce their overall market exposure because some stocks were doing too well? It's new and weird!” -Joe Weisenthal, Bloomberg

Last week was one for the history books. It may have marked the culmination of a frenzy of activity, instigated by a reddit forum, that has driven some of the most heavily shorted individual stocks higher this year. Gamestop, the most followed of the stocks, finished the month of January up 1,625%. Meanwhile, the major equity indices all finished this past week lower by 3% and the benchmark for volatility, VIX index, rose from 21 to 33. Despite the broader equity sell-off and the pursuant reduction in risk exposures by market participants, US Treasury yields finished the week largely unchanged; an uncharacteristic outcome for the safe haven asset that typically rallies substantially during periods of market volatility and dislocation. While high flying meme stocks captured the world’s attention, The IMF upgraded its 2021 forecast for world growth upward to 5.5% from 5.2%. They see US economic growth at 5.1%. In October they had forecast 3%. Wall Street’s consensus for the US is approximately 4%. If the IMF’s new forecast turns out to be accurate it will mark the strongest growth for the US since 1984!

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ECONOMIC DATA 

US GDP for Q4’20 printed +4% q/q annualized, slightly weaker than expectations but significantly lower than the Atlanta FED GDPNow tracker that was projecting 8%.

• Personal consumption +2.5%, thanks to strength in services but it was softer than expected given expectations of pent-up demand as a result of excess savings throughout the year for the holiday season.

  • The personal savings rate rose to 13.7% in December. Estimates are that a return of the savings rate to Q4’19 levels over the course of 2021 will add ~$1.1trln to consumption growth this year.

• Fixed investment spending +18% led by residential investment (+33.5%), and business investment +13.8%. Rebuild of inventories added a full percentage point to the headline figure.

• Bottom Line: GDP is below trend and output is significantly below the high water mark of Q4’19. While there may be a pickup in inflation pressures this year as a result of temporary disruptions caused by COVID, they will be transitory. There’s a significant amount of slack in the economy relative to the pre-COVID trend which gives the Fed significant cover to be patient in removing accommodation. 

US durable goods orders +0.2% in December, weaker than expected but 8th consecutive monthly increase. The miss was largely because of transportation which fell 1% but excluding transportation, orders were up 0.7% (versus +0.5% expected) and are now above pre-COVID levels.

• November orders were bumped up to a 1.2% from +1.0%.

• Shipments +1.4% versus the prior 0.4% increase.

• “With money not spent on travel, consumers have instead been spending on durable goods. An unwinding of this dynamic is a potential headwind for manufacturing this year, although we expect that to be more than offset by the positive effects from the reopening of the economy once vaccinations return economic activity to something closer to normal.” -Wells Fargo Economics

Dallas Fed Manufacturing General Business Activity Index for Jan fell 3.5 points, to 7.0. Street was expecting a 2 point rise.

• The production index fell from 26.8 to 4.6; 13 of 17 indices for current conditions fell month over month.

• Prices paid index up to 55 from 50.8, the highest level since 2011.

• While the level still indicates growth, it is the lowest level since Aug.

The S&P CoreLogic Case-Shiller National Home Price Index +9.5% for the year ending Nov 2020. Highest annual growth rate for home prices since 2014.

New home sales for Dececember came lower than expected, +1.6% m/m (3.5% expected).  842k unit pace.

• The median sales price +3.5% m/m (+8% y/y) to $355,900.

• Supply of homes slightly increased from 4.2 to 4.3 months but the increase was all the result of homes still under construction or homes where construction has not yet started. Completed home inventory is at an all-time low.

• Overall sales for 2020 concluded at 811,000 units, an 18.8% gain versus 2019 and the highest total for any year since 2006!

CENTRAL BANKS

On Wednesday the Fed left monetary policy unchanged, as expected. There were no consequential changes to the FOMC statement. In his press conference, Chairman Powell reiterated that the Fed has not yet even begun to consider removing accommodation from the economy. 

• One sentence was added to the statement recognizing the recent slowdown in activity as a result of COVID, “the pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.”

• Why does this matter? The most recent virus case surge is moderating and some states are re-opening. Some high frequency consumer data is showing a pickup in activity. There’s a chance that the minor changes by the Fed could be a precursor to larger changes in their tone when vaccine roll-out and the resulting return to normalcy picks up. That was expected to reach critical mass in the spring but most projections now think summer is the base case. We are keeping an eye out for an upgrade to the Fed’s economic forecast in March.

FIXED INCOME, CURRENCIES, COMMODITIES

Prices for commodities are surging. From aluminum (+39% since March) to scrap steel (up 60% since November) to corn (up 43% since Aug). Having been underweight the sector for much of the past couple of years, Fund managers have chased the performance higher and now have their highest exposure to the sector in over 10 years. 

• The cause of rising commodity prices are the COVID related supply chain disruptions (factories shut, transportation disrupted) that were not met with a subsequent fall in demand for many commodity intensive products (cars, home appliances, furniture, etc). 

US petroleum total stocks of crude oil and products, excluding the strategic petroleum reserve, fell by 12 million barrels last week. They are now down 130 million barrels since the middle of 2020 and have fallen in 24 out of the last 30 weeks.

• Petroleum inventories are now 6% above the pre-pandemic five-year average, this is down from their June 2020 high of 14% while crude oil inventories are now 9% above the average versus the high of 19%.

EQUITIES

According to Dealogic, US listed companies have done 80 follow-on equity offerings for $16.4bln through January 22. That’s the most raised for follow-ons through this time of year since Dealogic began tracking the data in 1995. It’s a symptom of the seemingly insatiable demand investors have had for equity offerings. 

• Last year there were 862 follow-on equity offerings that raised $257bln; a single year record.

• The IPO market was just as hot. In 2020 there were 454 initial offerings that raised $167bln, beating the record from 1999 for the most ever in one year. Of the $167bln, $82bln were raised by SPACs (We touched upon the SPAC boom in our January 9th summary).

• The raising is not limited to just equities. High-yield bond issuance reached $40.3bln so far for January, already more than any other January in history. 

  • Last week was the 6th busiest on record for high yield; there were 20 deals worth $16.4bln

Goldman Sachs’s basket of the 50 stocks with the highest short interest were up 25% year-to-date, through Jan 22nd. Last week, things went ballistic: the 100 most heavily shorted stocks averaged a gain of 22.6% and are now up 70% year to date, according to Dow Jones. The median S&P 500 stock has just 1.6% of its market capitalization sold short, the lowest for the 16 years that Goldman has been measuring this metric.

• Day traders, largely fueled by Reddit’s subreddit r/wallstreetbets, are also using options to drive up the shares of the heavily shorted stocks that still remain.

  • To put the size of the retail trading community in perspective, consider that Charles Schwab had 30 million active brokerage accounts as of the end of 2020 and ETradeadded 900k accounts in 2020. The number of users at r/wallstreetbets grew from 2.8mln to ~6mln by Friday morning. 

  • Retail order flows accounted for 20% of total stock market volume in 2020, up from approximately 10% in 2010. The average daily number of retail trades at ETrade in 2020 was 952k, triple the previous high. 

  • This past week saw an especially large surge in retail trading. The frenzy caused trade delays or outages at Fidelity, ETrade, Schwab, Vanguard, and Robinhood. More than 24bln shares traded in the US on Wednesday, the most ever for a single day (the previous high was in October 2008) and a record 57mln options contracts were traded. 

• “What is happening to the equity market this week is purely technical as all of a sudden short interest has been the only factor that has mattered to stock performance. Broadly, high profile short squeezes have caused some degree of a cascading effect of covering heavily shorted names across the index, and selling consensus longs as some market participants are forced to de-lever, and many market participants are choosing to de-lever because they know that some will be forced to.” -Travis McCourt, Raymond James

• “In our opinion, the market implication from this week’s events is not arising from the short covering on certain small stocks or potential losses inflicted on certain hedge funds, but more from a potential slowing of the overall retail flow that had been an important driver of the risk market rally since November. The sharp rise in volatility and margin requirements for stocks popular with retail investors could inflict losses on the same retail investors that have been profiting from the positive momentum of the previous weeks” -JP Morgan Global Quantitative and Derivatives Strategy

Jefferies Retail Speculative Index

Why did Sears and Blockbuster soar this week, returning 40% and 1304%, respectively? Lily Francus, PhD Candidate in Bioinformatics at the University of California San Diego, dives into the behavioral aspects of the events that unfolded this week on her blog, “Nope, it’s Lily.”

• “Associations can be made through time and space — There is no trivial way to map for instance, BLIAQ and GME. At least to a computer that is. In fact, it’s quite likely no post mentioned them together (pre-rally) in the same sentence online. This is a uniquely human phenomenon — we are designed to see patterns, even when the pattern may not exist. A savvy speculator can connect the dots here in ways that perhaps a computer can’t (at least not yet, to my knowledge).”

• The semantic association between stocks, see semantic network, explains why the human mind tends to favor these well known brands. Regardless of their risk-return profile, companies in bankruptcy soared this week.

• “A god meme, in this paradigm, is the epicenter of the narrative, which usually follows (or sometimes sets) a theme and starts the trend. Two fantastic and simple examples of the god meme are Tesla and Gamestop. In Tesla’s case, while cultural shifts towards ESG have been an undercurrent for years, Tesla’s rise as the reigning meme stock of 2020 dramatically accelerated the zeitgeist. Tesla effectively was the nuclear bomb which in its blast radius (success) led to cash inflows (and therefore price increases) throughout its semantic network, to varying degrees.”

While retail investors are amidst a buying frenzy, company directors are selling. Via Mark Hulbert, “The percentage of companies with any director or officer transaction in a given month in which there were more purchases than sales. For the month of January to date this proportion is just 10.8%. That’s the lowest level of the past decade.”

• This is a little over 2 standard deviations below the 10 year average and something you’d only expect to see 2% of the time. For small-cap companies the data is more extreme where the figure shows that net buying is 3.4 standard deviations the 10 year average.

• Around the March 2020 stock market lows, the ratio rose to an extreme high at 62.5%.

Ed Yardeni highlights that the S&P500’s forward P/E ratio has climbed 20% year-over-year to 22.7 as of January 21st. This is among the highest forward readings since March 2000. 

• “The forward earnings multiples on all of the S&P 500 sectors—except for Consumer Staples and Utilities—have expanded over the past year. Here are the S&P 500 sectors’ current forward P/Es and where they stood a year ago: Real Estate (53.5, 44.4), Consumer Discretionary (36.8, 22.5), Energy (27.8, 16.7), Information Technology (27.6, 22.8), Industrials (24.2, 17.4), Communication Services (23.3, 19.6), S&P 500 (22.7, 18.8), Materials (21.3, 18.0), Consumer Staples (20.1, 20.5), Utilities (18.8, 20.7), Health Care (16.9, 16.4), and Financials (14.3, 13.2).”

Royal Dutch Shell will purchase the largest public electric vehicle charging network in the UK, Ubitricity.

• 2700 charge points, which represents approximately 13% market share

• In April 2018 we discussed, at length, the shifting strategy of big energy companies. Back then we made the following points: 

  • With the growth of renewable energy and electric vehicles Big Oil companies are betting on electricity.

  • Oil majors are huge companies with massive balance-sheets. Customer-facing utilities are small by comparison. E.g. Centrica, the biggest of Britain’s Big Six, is worth $10.8bn while Shell’s market value is ~$260bn. 

  • Utilities often operate in only one or two national markets and have to deal with onerous regulations.

  • [In Mar 2018] Shell completed the acquisition of First Utility, a midsized British gas and electricity supplier and have plans to do something similar in Australia. 

  • In 2017 Total started to supply gas and green power to households in France [Total Spring].

  • Both companies have invested in renewable energy and are installing EV charging points in their gas stations. 

  • Oil majors aim for returns on capital on big oil and gas developments of 15%, renewables provide returns of 7-9%.  British energy retailers aim for profit margins of 4-5%.

  • Shell aims to generate electricity returns of 8-12%. How? Rely on energy trading experience to take advantage of higher volatility of power markets.

  • To become material to Shell, the electricity business would need to grow to $50bn-100bn [size of its current gas business]. 

  • So is it oil’s Eastman Kodak moment? Electrification is already causing upheaval. 

    • “The challenge, as with Kodak, is whether you can spot where the returns will be.” 

GM pledged this week to stop selling non-commercial gas and diesel cars by 2035. 

• GM expects that 40% of its lineup will be electric by 2025. It  plans to launch 30 battery-only vehicles before 2025. It had previously announced  plans to invest $27bln toward the development of EVs and self-driving vehicles in order to achieve these goals.

2020 was financially the worst year ever for airlines. Southwest Airlines had its first loss since 1972 having lost $3.1bln for the full year and $900mln in the fourth quarter alone. American Airlines suffered a $9bln loss for the year and $2.2bln in the fourth quarter. 

With everything going in with some smaller stocks that have captured the crowd's attention it's easy to forget that we are in the middle of earnings season. So far, 37% of S&P 500 companies have reported results for Q4. 

• 82% of have beat their EPS estimates (versus a 5 year average of 74% beat rate).

• Companies have reported earnings that are 13.6% above what was forecast, twice the historical average. 

• To date, earnings have declined 2.3% y/y from Q4'19 to Q4'20. 

• Revenues have also been remarkably strong. 76% of companies that have reported so far have beaten estimates (5 year average beat rate is 62%). And, in aggregate, revenues have come in 3.2% ahead of expectations and they are actually up 1.7% year-over-year for Q4'20. 

• The coming week will be the busiest of earnings season with 110 S&P 500 components scheduled to report their results. 

Johnson & Johnson (Ticker: JNJ): Reported Q4 earnings on Tuesday morning. The stock ended the week down a little over 1%

• 4Q Sales came ahead of estimates at +3.7% with Pharma’s group +7%; Consumer sales increased a modest 1.4%.

• EPS grew 2% but largely as a result of a reduced tax rate

• Medical-Device Sales Were Flat vs. Q4’19, But Pharma Was Up 16%

3M (Ticker: MMM): reported earnings before the bell on Tuesday. Organic sales rose 5.5% in 4Q, and full year sales fell only 1.7% (better than expected)

• Transportation & Electronics Turn Positive, Up 1.4% in 4Q, Yet Virus-Affected Businesses Still a Risk.

• 3M Increased Respirator Production Fourfold With Capacity to Build 2.5 Billion Units Annually.

Advanced Micro Devices (Ticker: AMD): Adjusted EPS beat expectations at $0.52 vs the consensus of $0.47.

• Revenue finished the quarter up 3.244B vs the streets estimate of 3.028B.

• Continuing expansion in server CPU share, a favorable PC backdrop and a gaming console refresh cycle could push AMD sales higher than its guided 37% growth in 2021.

• “Our 2021 financial outlook highlights the strength of our product portfolio and robust demand for high-performance computing across the PC, gaming and data center markets”

Microsoft (Ticker: MSFT): Adjusted EPS for the quarter was $2.03 vs the streets estimates of $1.65.

• Adjusted Net Income beat expectations of $15.5bln vs consensus of $12.44bln.

• Sales increased 15% to $43.1bln driven by demand for cloud services

• LinkedIn Sales +22%, Driven by advertising demand and the company’s marketing solutions unit.

• Gaming continued its strong performance driven by stay at home trends +50% driven by Xbox hardware sales

Boeing (Ticker: BA): reported Q4’20 earnings before the bell on Wednesday. The stock ended the week at 194.19, down almost 5% from the previous week. 

• Adjusted EPS of -$4.175 vs consensus -$2.11, net Income -$2.4bln vs -$1.4bln estimated. The company took a surprise $6.5bln charge related to its 777X program. This is Boeing’s newest model 777. The first delivery is expected to be in 2023, before the pandemic first deliveries were expected this year.

• Boeing Cash Burn Dropped to $4.3 Billion, From $5.1 Billion in Q3.

• Commercial Revenue Fell 37% vs. Q4’19, to $4.7 Billion, on 59 Deliveries; Adjusted Operating Loss Improved to $700 million.

Apple (Ticker AAPL): reported strong Q1’21 results. EPS 1.68 vs 1.42 consensus. 

• Apple's 17% growth in iPhone sales in Q1 was aided by more unit shipments and a richer mix.

• Services, the other key growth and margin vector, posted 24% growth.

• China’s 57% growth shows its pent-up demand for 5G iPhones and its wide 5G infrastructure availability. We expect U.S. Q1 growth of 12% to accelerate. Our scenario sees sales of $341 billion in 2021 with $65 billion from services sales, 40% gross margin and $4.72 in EPS. - Anand Srinivasan, Senior Analyst at Bloomberg

Tesla (Ticker: TSLA): reported Q4’20 earnings on Wednesday. 

• Adjusted EPS came in lower than expected at 0.8 vs 1.026 estimated. The miss was largely a result of Q4 gross margins which fell to 20.7% from 24% in Q3.

• Regulatory Credit Revenue accounted for 70% of Q4 Operating Income. For the full year 2020, Tesla generated $1.6bln in revenue selling these credits.

• Production for Models 3 and Y Surges 90% Year-Over-Year as Models S and X Go in Reverse.

• Revenue Surpasses $10 Billion threshold for First Time.

TE Connectivity (Ticker: TEL) an industrial components supplier whose sensors and connectors are used in a wide range of products, from automobiles to medical devices, reported sales of $3.5bln for Q4, up 11% y/y and ahead of analyst estimates for $3.3bln. 

• Adjusted EPS $1.47 versus $1.29 conesusus

• Approximately 65% of TE's sales come from transportation end markets and TE said it expects global car production in 2021 to remain below 2019 levels.

• The company did not provide full year guidance due to uncertainty associated with the economic recovery. 

GEOPOLITICS

President Xi Jinping has long led an anti-corruption campaign, paying special attention towards China’s financial systems believed to be a threat to its economic stability. The latest casualty was Lai Xiaomin, head of Huarong Asset Management, who was executed following a corruption conviction by the city of Tianjin. 

• He was found guilty of taking bribes over the course of 10 years in the amount of approximately Rmb1.8bln, or roughly $280mln, causing “serious losses to the interests of the nation.”

• “Verdicts such as that handed down to Lai should be considered “political determinations'', given China’s judiciary functions to serve the interests of the Chinese Communist party … It is unclear whether he had access to counsel of choice, whether he had access to family members, whether he had access to the evidence as presented against him — this is a government that still has something like a 99% conviction rate.” - Sophie Richardson, China head of Human Rights Watch

• “China executed 2,000 people in 2018, by far the most in the world, down from 5,000 in 2010 and 12,000 in 2002, according to estimates from Dui Hua Foundation, a rights group.”

German payment processor and financial services company, Wirecard, announced last year that €1.9bln went missing from its accounts and quickly declared insolvency. Creditors were defrauded of approximately €3.2bln. BaFin, Germany’s financial regulator, has fallen under fire ignoring the early red flags associated with Wirecard’s fraud. Heads Felix Hufeld and Elisabeth Roegele have been dismissed.

• After initial acknowledgement of ineffective handlings, Felix Hufeld, head of Bafin at the time, retconned his statements and defended BaFin’s handling of the affairs. 

• It has also come to light that a BaFin employee has also been accused of insider trading with Wirecard shares around the time the fraud allegations came to light in June of 2020.

• After continual regulatory failures at BaFin despite organizational changes, Hufeld has been dismissed alongside his deputy Elisabeth Roegele, who was dismissed for her part in the ban of short-selling Wirecard shares. This move followed BaFin’s roundabout suggestion that Wirecard was the victim of short sellers and not their balance sheet discrepancy.

PUNDITRY

Deutsche Bank asks, “Is there a bubble in financial markets?”

“No doubt that in aggregate US equity valuations are at, or close to, all time highs..”

“Excess equity yield doesn’t suggest as strong an overvaluation… or is it only relative not absolute?”

“Low yields justify higher valuations... but how high???”

For now funding costs and financial conditions are extremely accommodative supporting all risk assets….

“Little doubt central banks have helped pushed markets higher, especially since March... but the trend was there pre- pandemic.…”

Equities very ‘cheap’ vs bonds outside of the US

Volume of global negative yielding debt close to record highs….

Credit spreads tight but they typically spend long periods very tight before intense spikes higher in recessions/crises....

10 Mega-cap growth stocks (c.30% of S&P 500) propelling market in recent years. Other 490 only just ahead of Stoxx 600 over last 6 years….

Tesla’s rise remarkable.... Is it justified? Is Tesla a sign of bubble like tendencies in “growth” US equities? Or the start of a new era? It is now in top 6 biggest companies in the world and c.80% the size of the entire US, EU and Japanese Auto markets (ex Tesla).

Sign of the times... a very small Texan healthcare company went from a $7mn company to nearly a billion dollar company in 36 hours of trading on the back of one misinterpreted tweet.…

And then there’s the, “other” Zoom

The return of retail... good or bad news? Will next stimulus checks increase this further?

Valuations are extremely high regardless of measure….

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Commentary

Over the last year, we have covered the rapid rise of technology, accelerated by the Covid-19 pandemic. In recent news, Taiwan’s exports have rapidly risen, with technology and semiconductor exports up 30% over the prior year in each of the last two months. Investors are taking notice, with US semiconductor stocks up 10% in 2021 alone.

Morgan Stanley’s Chairman of Global Semiconductor Investment Banking, Mark Edelstone, is focused on a few key trends, highlighted below:

• Acceleration of the move by companies from their own computer infrastructures to cloud services is expected to continue post-pandemic. “We are only about 10 percent of the way there in terms of what can move to the cloud.”

• “I think [post-pandemic] we will increasingly see semiconductors as a core competency for companies. They start with software, develop a chip to drive it, and go to market as a systems company.”

What We’re Watching: Who’s investing in R&D, are those investments in next-gen technologies, and have they continued to invest. As Gordon Moore, Intel’s co-founder once said, “You can't save your way out of a recession,” and we take the same view for this industry with the current pandemic. Slowing down means falling behind, and we’re closely following those who aren’t.

Chart of the Week

McKinsey Semiconductor Segment Revenue - Pre-Covid and Current Forecasts

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ECONOMIC DATA 

Goldman Sachs, “The Re-opening at a Glance”, % change y/y for week ending January 17th

US Existing Home Sales increased +0.7% to 6.76 million in Dec 2020, beating forecasts of 6.55 million. 

• Median existing-home price was $309,800, +12.9% YoY. 

• Total housing inventory was 1.07 million units, -16.4% from November and -23% YoY. 

• Unsold inventory remains at an all-time low. 

• Existing home sales hit 5.64 million, the highest level since 2006, for all of 2020. 

• Lawrence Yun, NAR's chief economist: "This momentum is likely to carry into the new year, with more buyers expected to enter the market. Although mortgage rates are projected to increase, they will continue to hover near record lows at around 3%. Moreover, expect economic conditions to improve with additional stimulus forthcoming and vaccine distribution already underway." 

US Markit Manufacturing PMI indicator for January up to 59.1 from 57.1 in December, 3 points higher than the consensus forecast.

• Output increased to 60.5 from 58.3.

• New orders to 59.5 from 56.5.

• Employment up to 54.8 from 52.2.

• Services PMI rose to 57.5 in January from 54.8 also stronger than expectations of 53. 

Philadelphia Fed manufacturing surprises, rising 15 points in January to 26.5. Consensus was for an unchanged reading.

• The rise was broad-based. New orders +28 points, employment +17 points, prices paid + 20 points, shipments +11 points, inventories +5 points, delivery times +13 points. 

  

Australian consumer sentiment -4.5% m/m retraces previous month's gain.

• Despite the retracement the index is still above its long-run average level and consumer sentiment remains at positive levels. 

• The weakness reflects a combination of increases in virus cases in Dec/Jan and the resulting economic restrictions.

German’s January ZEW indicator of economic sentiment was stronger than forecast, 62 vs 59 expected. 

• Current conditions were -66 due to continued impact of COVID restrictions.

• Participants expect better economic environment for the next 6 months.

• Germany's vaccine rollout recently reached 1 million doses administered.

Taiwan’s December export order growth +38.3% y/y and now at a record high of $60.6bln.

• Tech product demand +30%y/y after +30%y/y in November.

• The Ministry of Economics sees January export orders rising between 44.5% and 48.7% y/y.

• In the past two weeks we have covered the remarkable strength in Asian exports which indicates a significant pickup in economic activity in Q4.

Retail sales in Canada +1.3% m/m in Nov 2020, the 7th consecutive monthly gain.

• Led by sales of food and beverages +5.9% and e-commerce sales at +2.7%. 

• Motor vehicle and parts dealers sales -0.9%, down for the first time since April. 

• Core retail sales (excludes gas stations) +2.6%. 

CENTRAL BANKS

Reuters reported that The Bank of Japan (BOJ) will discuss ways to scale back their ETF purchase program as well as review its yield curve control (YCC) policy that caps interest rates across the government bond market. Under the YCC program, the BOJ guides short-term rates to approximately -0.1% and buys enough government bonds to keep the 10-year yield around 0%.

• Policymakers’ are reportedly concerned about the size of the bank’s ETF holdings which currently stand at $337bln. This accounts for 80% of the country’s ETF market. 

• The BOJ will also consider allowing super-long interest rates to rise more.

• The changes being considered are all intended to give the BOJ more flexibility and ammunition in the event of an economic downturn. With risk assets performing so well, the bank has internally discussed whether such significant ETF purchases are currently needed in order to provide accommodation.

• “The move highlights how years of heavy-handed intervention has left the market reliant on the BOJ, essentially making the central bank a victim of its own success in terms of controlling market moves.”

• Sources for the article who are familiar with the BOJ’s thinking said that, “Prolonged easing has made markets rigid and complacent, so the BOJ needs to change that.” 

  • “The key is to heighten flexibility in the BOJ’s policy so it can respond to any big shock effectively.”

  • “There are questions on whether the BOJ needs to buy so much ETFs when stock prices are booming.”

  • “There’s room to make the BOJ’s ETF buying more flexible.”

  • “The BOJ wants to give itself more leeway on policy and dispel market concern its policy is unsustainable...But the communication strategy will be tricky.”

The ECB monetary policy decision was boring with no changes to policy and no surprises.

• Rates were unchanged, the asset purchase program will continue at €20bn per month, and no changes to PEPP or TLTRO commitments.

• Economic outlook was broadly unchanged but noted positive developments from Brexit deal and vaccinations. 

Bank of Canada (BoC) leaves interest rate policy unchanged (as expected) and made no modifications to the asset purchase program. 

• Economic projections in its January Monetary Policy Report improved, in line with expectations.

• While the economic outlook improved in the most recent economic forecasts, the BoC believes that the necessary conditions for a rate change would not come, "until into 2023."

The 4Q 2020 Euro area bank lending survey showed a net tightening of credit standards for loans to firms and households.

• Primarily driven by banks’ perception of uncertainty surrounding the economic recovery restrictions.

• Banks’ cost of funds and balance sheet situation did not contribute to the tightening.

FIXED INCOME, CURRENCIES, COMMODITIES

Major dry ice manufacturers are predicting a US dry ice shortage as vaccines take priority over standard uses.

• COVID-19 vaccines have been developed. The next hurdle is efficient and safe distribution. Part of the safe distribution is making sure the vaccines are stored at their respective optimal temperatures: Pfizer-BioNTech at -70°C (-94°F) and Moderna -20°C (-4°F). The best method for doing so (so far) has been through freezers and dry ice.

• This shortage can have a heavy impact on unexpected commodities, including cheeses and other perishables. “One of the things that's specifically a concern for Minnesota and the Midwest and Wisconsin is dry ice is used extensively to ship cheese cultures.” -Tim Walz, Minnesota Gov. 

• Small businesses focusing on fresh or pre-prepared food deliveries as well as other, less urgent, pharmaceuticals, may also suffer from the shortage.

EQUITIES

Earnings season has had a strong start. As of this writing, 13% of S&P 500 components have reported earnings.

• 86%  have reported a positive EPS surprise and 82% have reported a positive revenue surprise. Total upside surprise for earnings has been +22% relative to expectations. 

• Total revenue for the companies that have reported were +0.7% y/y but total earnings, so far, are down 4.7% y/y for Q4. 

• A strange dynamic at play so far this earnings season, via Factset, “Companies that have reported positive earnings surprises for Q4 2020 have seen an average price decrease of -1.2% two days before the earnings release through two days after the earnings release...companies that have reported negative earnings surprises for Q4 2020 have seen an average price increase of +0.2% two days before the earnings release through two days after the earnings.”

• The next two weeks will be the most active for earnings releases. 36% of S&P500 components will be reporting this week and 21% will report during the week of February 1.  

The Nasdaq reached new all time highs, again, this past week. US Semiconductor stocks are leading technology higher. Those companies’ shares are up approximately 10% so far in 2021, outperforming the S&P 500 by almost 8%. The key drivers of the notable performance are:

• Taiwan Semi announced a 54% y/y increase in capital expenditures. This amounts to a $28 billion investment to increase the capacity at its plants. This is a significant nod of confidence from TSM regarding their belief for the demand outlook going forward.

  • “Usually, historically, when you see TSMC’s capital expenditure numbers, it’s a good leading indicator of how they are seeing demand...they are very conservative about their capital expenditures number. They’re not going to be overly aggressive.” -Vontobel Asset

• Global chip shortages:  Vendors have highlighted chip shortages with lead-times for supply in excess of 9 months. Microchip and NXP have alluded to potential price increases in order to pass on costs to customers. 

• Market is anticipating more favorable tax and China policies from the new Biden administration toward foreign manufacturers of chips.

IBM dropped ~10% after missing analysts’ expectations.

• IBM has had four straight quarters of declines following a transition to their new cloud-focused business model. 

• Revenues -6% to $20.4bln, Gross margins improved, up to 51.7%.

• IBM expects its free cash flows to improve up to $12bln during 2021 following continued business line restructuring. It’s expected that their ‘managed infrastructure services’ should be generating sustainable revenue to some degree before the end of 2021.

GEOPOLITICS

After criticizing the Chinese government, Jack Ma has resurfaced for the first time in three months. He can be seen briefly speaking during a virtual event held on Wednesday. 

• Regulators suspended the initial public offering of his fintech company Ant Group Co. after Ma spoke about Chinese leaders and the “old men” of the global bank community. 

• Shares of Alibaba, the e-commerce giant that Ma co-founded jumped 8.5% in Hong Kong and were up a similar amount pre-market in the U.S. 

The Prime Minister of Mongolia, Khurelsukh Ukhnaa has submitted his resignation and a proposal to dissolve his own government on Thursday. 

• This news comes on the back of protests in Ulaanbaatar by citizens unhappy with the government's Covid-19 response. 

• A new cabinet to be formed the week of 1/24/2021. 

A controversial law has been passed in China that will allow the coast guard to use more aggressive tactics in the Western Pacific. 

• The law grants the coast guard more freedom to fire on foreign vessels and will take effect on February 1st.

• China stated that the law is aimed at “safeguarding national sovereignty, security, and maritime rights,” and grants the coast guard to take “all necessary means” including the use of weapons, to stop or prevent threats from foreign vessels in Chinese waters. 

PUNDITRY

Citigroup sees 5 potential drivers for higher inflation in 2021:

1. Arithmetic base effects: Prices dropped to very low levels in April and May as a result of a halt in economic activity. Comparing April ’21 prices to April ’20 means there will be large year-on-year changes but these are likely to be temporary. 

2. Bounce back in depressed prices: Categories like hotel stays, airfares and apparel are well below normal levels and are likely to rebound once demand picks-up (travel) and excess inventory clears (apparel).

3. Demand confronting limited supply.

4. More general firming in rents: Measured shelter prices (direct and imputed) have continued to increase and house prices are rising rapidly.

5. Inflation expectations can support longer-term inflation: “Fed officials now emphasize the important of expectations around the 2% target in generating mandate consistent inflation. The move higher in both market and survey based expectations is therefore suggestive that inflation closer to 2% can be obtained.”

Morgan Stanley’s 3 Key Calls for 2021:

1.  Return to pre-Covid-19 path: We expect the global economy to enter the next phase of its V-shaped recovery by reaching its pre-Covid-19 GDP path (i.e. where GDP would have been absent the Covid-19 shock) by 2Q21. We see upside risks to this view, given the prospects of further fiscal stimulus in the US. We see limited scarring effects on private sector risk appetite. As warmer weather sets in alongside the vaccination of the vulnerable segments of population, demand will rebound sharply from March/April, especially for Covid-19-sensitive sectors.

2. Return of EM growth cycle: EM growth will rebound on the back of both domestic and external tailwinds. Domestically, macro stability is in check and growth will get an uplift from the monetary easing that was undertaken last year. Externally, demand is being supported by stronger growth impulses in the US and China and rising commodity prices. Moreover, with the US current account deficit widening and US real rates remaining low, it will provide a conducive external backdrop for EMs. Five key factors supporting EM growth:

   1. More manageable Covid-19 challenge.

   2. Macro stability – inflation and current account – is in check.

   3. US reflationary policies will widen its current account deficit, easing EM financial conditions.

   4. China’s growth impulse will have positive spillover effects to EM.

   5. Rising commodity prices will boost terms of trade for EM commodity exporters.

3. Return of US inflation: We expect US core PCE inflation to reach 2%Y by year-end, and cross it sustainably from 2022 onwards. With the growth recovery gathering momentum, and further fiscal stimulus in the works, the US economy could return to its pre-Covid-19 path even earlier than the 4Q21 timeline we envisage in our base case. Meanwhile, macro policies will remain very reflationary despite this growth backdrop, setting the stage for a rise in inflation.

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Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

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ECONOMIC DATA 

Goldman Sachs, “The Re-opening at a Glance”

US headline retail sales for December weaker than expected, -0.7%m/m versus consensus at 0.

• Core retail sales were even weaker, -2.3%m/m.

• The bright side is that retail sales are still 2% above their February 2020 (pre-COVID) levels.

US CPI for December came in line with expectations, core CPI +0.09% m/m and 1.6% y/y.

• Headline CPI +0.4%m/m and +1.4% y/y.

• Why it matters: The Fed is committed to keeping the funds rate at 0 until they are able to average 2% inflation for some period of time. Still no price pressures although some base effects and disruptions are expected to create a transitory pickup in inflation later this year.

US JOLTS Job Openings little changed from November and in line with consensus at 6.53mln. 

• Quits rate unchanged at 2.2%, while the layoffs and discharges rate increased from 1.2% to 1.4%.

Number of Unemployed Persons per Job Opening

German first estimate of GDP -5.0% y/y for all of 2020 .

• Suggests that the economy did not contracts in the 4th quarter despite a rise in restrictions.

Japan core machinery orders were very strong, +1.5%m/m versus -6.5%m/m expected, this follows a 17% rise in October.

• Non-manufacturing orders (construction and telecommunications) were big contributors to the positive surprise.

Korea’s first 10-day average exports for January, +5.8%y/y.

• Last week we highlighted the strength of December exports that confirmed strong economic trends in Asia. 

China Export Growth +18%y/y in December versus +15% expected.

• Stronger shipments to regional trading partners.

• Imports +6.5%y/y vs +5% expected let by growth in high tech products and mechanical/electrical products.

• Annual Foreign Direct Investment inflows for China will reach a record high in 2020.

   Foreign investors doubled their investment into China’s bond market to RMB 1.1trln in 2020.

  China’s exports to the US grew by 8% in 2020 after a 12% decline in 2019 due to the trade war. 

  2020 is the second year that the EU replaced the US as China’s largest export destination.

  “Amid all the noises on de-coupling and de-globalization, somewhat unexpectedly, the pandemic has deepened the ties between China and the rest of the world.” -Macquarie Bank

  

  

Australia’s November retail sales +7.1% m/m and up 13% from a year ago. 

• Why it matters: Victoria saw sales up 22%m/m as a result of economic re-opening. During the country’s shutdown, Australia had a savings rate of 20%. The remarkable boom upon re-opening could be a preview of what will happen in the US where consumers have also seen a significant amount of excess savings during COVID shutdowns.

Outook for Australia:

Similar to our general economic outlook, we expect Australia to see a boom in 2021 despite the dip into recession territory in Q2 following wildfires and coronavirus lockdowns. That said, there are some underlying data points that may hinder a strong recovery.

• In a first in nearly three decades, Aussie GDP saw a contraction of -3.8% between Sep 2019-2020. 

• November saw rates cut to record low of 0.10% by the Reserve Bank of Australia.

• While an extended recession was avoided for 2020, serious trade tensions with China increase risk going into 2021.

  • Despite this, BoA expects major fiscal support and household consumption following the reopening of the domestic economy will keep Australia positive in the coming year.

  • Following the UK, Australia has also implemented foreign investment rules, recently blocking a Chinese AUS $300M takeover of a domestic building contractor, CSCEC, in the name of “national security.” Such scrutiny of a smaller acquisition will likely send a message to Beijing that Canberra will be enforcing its new merger regulations.

• While annual GDP numbers have been overwhelmingly positive, government spending has allowed GDP to stay afloat despite less YoY growth in the private sector since 2013. 

  

• Household consumption growth in Australia has been well under the 25-year average, starting from 2013. 

  

CENTRAL BANKS

Federal Reserve’s Beige Book, “Most Federal Reserve Districts reported that economic activity increased modestly since the previous Beige Book period.” 

• Strong shift from in person to online shopping this holiday season. 

• Auto sales weakened since the last report.

• The energy sector expanded for the first time since the pandemic began.

• Residential real estate remained strong. 

• “A growing number of Districts reported a drop in employment levels relative to the previous reporting period. Labor demand was strongest in the manufacturing, construction,and transportation sectors.” 

Fed Governor Brainard: “outcome-based forward guidance communicates how the policy rate will react to the evolution of inflation and employment. It makes clear that the timing of liftoff will depend on realized progress toward maximum employment and 2 percent average inflation.” 

• Regarding asset purchases, “the December guidance clarifies that the pandemic asset purchases will continue at least at the current pace until substantial further progress is made on our employment and inflation goals. In assessing substantial further progress, I will be looking for sustained improvements in realized and expected inflation and will examine a range of indicators to assess shortfalls from maximum employment.”

• "The economy is far away from our goals in terms of both employment and inflation,and even under an optimistic outlook, it will take time to achieve substantial further progress. Given my baseline outlook, I expect that the current pace of purchases will remain appropriate for quite some time." 

Other US Federal reserve comments:

• Fed Chair Powell: “now is not the time to talk about [ending asset purchases] ... when it does become appropriate for the committee to discuss we will let the world know.”

• Kansas City Fed President George: “It is too soon to speculate about the timing of any change in policy.”

• St Louis Fed President Bullard, regarding tapering bond purchase: “We are not close to that yet.”

• Cleveland Fed President Mester: “A slowdown in the economy in the first part of the year along the lines I am expecting would not require a change in monetary policy so long as the medium-run outlook remains intact.”

• Boston Fed President Rosengren: “for those whose incomes were not interrupted there is significant capacity to make expenditures once the pandemic is over ... we are likely to see a significant pick up in consumption.”

  • “It will be a while before we talk tapering.”

• San Francisco Fed President Daly: “math of inflation would suggest that we’ll see some spikes in the middle of the year… [but] not at all worried that there’s this run-up in inflation around the corner that we will need to preemptively stave off.”

Market implied 1 month US treasury rate in 30 years time

Bank of England Governor Andrew Bailey shared his perspective of the potential for the BoE to implement negative rates.

• He was skeptical of negative rates saying, “there are lots of issues with it”. Among those cited are the adverse impact on bank profitability which could curtail credit creation. 

• Sees the true unemployment rate at 6.5% in the UK versus 4.9% reported. 

FIXED INCOME, CURRENCIES, COMMODITIES

Treasury rates were mostly unchanged on the week as a result of relatively strong 10 year and 30 year treasury bond auctions. 10 year  yields are still up 18 basis points in the first 15 days of 2021. The lack of follow-through for higher rates this week was despite President-elect Biden’s release of a $1.9trln stimulus proposal for additional COVID relief. The proposal was called, “step 1”. In February, Biden will release “step 2” which will be focused on infrastructure spending.

• The proposal promotes $1trln in income support via unemployment benefits and direct stimulus payments.

  • $1,400 stimulus checks cost ~$450bln. These are in addition to the $600 that was passed in December 2020.

  • Extension of enhanced unemployment benefits ($400/week) through Q3.

  • $15 per hour minimum wage.

• $400bln for COVID-19 management.

• $350bln of aid for state and local government.

• $130bln for schools. 

Crypto Outlook for 2021:

Cryptocurrencies have been a hot topic coming into the new year after a strong run in 2020. It’s clear that crypto and blockchain are not going away any time soon. At the time of this writing, the global crypto market cap stood at just over $1tln and Bitcoin, the world’s largest digital currency, had a market cap of $660bln. A $10,000 investment made in bitcoin in July 2010 would be worth over $5.8bln as of December 31, 2020

• With high returns, comes high volatility. Bitcoin has experienced 15 negative-return quarters since its inception. The largest pullback was an 84% drop between December 2017 and December 2018. The table below illustrates bitcoin's quarterly and full-year returns ranging from 2010 to 2020.

  

• Until recently, bitcoin has had little correlation with other major assets. The following charts illustrate the low correlation between bitcoin and other risk asset classes since 2017. The light green band highlights correlation levels between -0.25 and 0.25. Dark green band highlights the range between -0.10 and 0.10 (considered negligible)

  

  

• Crypto has achieved substantial institutional support over the past several months. Major financial institutions, large endowments, leading companies and central banks have expressed their support for the technology and in some instances have purchased cryptocurrencies for their investment portfolios.

• In 2020 the largest coins by market cap did especially well: Bitcoin (BTC) was +305.07% and Ethereum (ETH) +563.72%. Moving into the new year, crypto assets will undoubtedly continue to stir conversation. With 2020 performance ending on a high-note for most crypto assets we wonder if this might be a year in which alt-coins receive a halo-effect from the institutional capital that has been deployed into the space.

EQUITIES

Small-cap stocks led the way higher for US equities this past week. The Russell 2000 was up 1.5% while the S&P500 fell 1.5%. The Russell 2000 is now approximately 40% above its 200 day moving average, a remarkable display of momentum. Concurrently, the short interest interest in the benchmark SPY ETF is now approaching the lowest levels of the last 10 years. This type of universal bullishness often serves as a contrarian signal.

Bank stocks got a drubbing on Friday led lower by Wells Fargo and Citi which were each down ~7%.

• Wells Fargo earned 64 cents per share on $18bln in revenue. Both of those figures were in line with estimates. 

  • Credit loss provisions down $823mln largely because of the sale of their student loan portfolio.

• Citigroup’s reported earnings of $2.04 per share on revenue of $16.5bln. The earnings were a beat versus estimates but the revenue number was a disappointment.

• JP Morgan earned $3.79 per share with $30.2bln of revenue versus estimates of $2.62 and $28.7bln.

• Why did bank shares fall on Friday if earnings were ok? Since November 8th, Citi and Wells Fargo’s shares had both risen 44% on the expectations of significant improvement of their businesses as a result of a sustained economic recovery and enhanced profitability due to a steepening yield curve (a steeper yield curve typically boosts banks margins). With so much excitement surrounding the shares and the industry in recent months, market participants were anticipating significant beats of earning expectations. 

Walmart is partnering with a financial-technology firm (Ribbit Capital) to create a new fintech start-up.

• Details on the venture are scarce but the goal is to, “develop and offer modern, innovative, and affordable financial solutions to customers.

• Ribbit’s current portfolio of fintech companies includes Robinhood, Credit Karma and Affirm.

Delta posted an earnings per share loss of $2.53 versus consensus expectation of a $2.50 loss. 

• Passenger revenue at $2.7bln in line with expectations (down 74% y/y).

• Delta President Glen Hauenstein, “The early part of the year will be characterized by a choppy demand recovery and a booking curve that remains compressed.” 

• The company expects to be cash-flow positive in the spring and reiterated that forecast on their call. 

GEOPOLITICS

Russia will be withdrawing from the international Open Skies Treaty.

• The treaty permits aerial surveillance over military sites in 36 countries that are party to the treaty.

• US formally withdrew in November citing repeated violations by Russia.

• “This reflects a larger dismantling of the international arms control system that has helped stabilize relations between Russia and the United States since the Cold War, with New START -- the two countries’ last remaining major nuclear arms control treaty -- also set to expire next month” -Stratfor

Outlook: China, Taiwan, and Hong Kong

China can be expected to maintain prior growth and investment levels assuming world economic activities begin to normalize throughout the year. We believe that certain elements of 2020 will continue well into the next year for the region:

• China has had no qualms with media censorship in 2020. The Alibaba probe coverage has since been restricted by Beijing officials as well as recent WHO officials that have made attempts to investigate coronavirus origins. The mysterious disappearance of Alibaba founder, Jack Ma, may serve as a precedent for Beijing to probe other major tech companies that speak out against the CCP. 

• Chinese crackdown on pro-democracy in Hong Kong will continue well into 2021 as city lawmakers loyal to the CCP remain unopposed. 

  • In enforcement of Chinese national security laws imposed on HK last year, 53 pro-democracy politicians were arrested in the latest purge. With little opposition following a mass pro-democracy lawmaker resignation and waves of arrests, this latest iteration has been a clear escalation of what many have considered to be a threat to the freedoms promised in the change of hands from the UK to China in 1997. 

  • In his final days in office, Donald Trump has imposed new sanctions on Beijing, condemning its treatment of HK. This follows a number of attacks against China including the blacklisting of several Chinese companies, preventing Americans from investing in those securities. Steven Mnuchin has pushed for China’s big three to be spared: Alibaba, Tenecent, and Baidu, in a revision to the original bill. 

• Taiwan made great strides to come out from under China’s watchful eye in 2020. We expect to see continued pushback from Taiwan while China tries to politically reign Hong Kong back in.

  • Recent pork trade has not gone well due to perception of US food regulations. Such perceptions have led local pork prices to skyrocket and thus price increases at restaurants and blowback on Tsai Ing-wen. That said, Taiwan has made significant gains towards removing hurdles for a bilateral trade deal should the country wish to continue in that direction.

  • Taiwanese companies operating in China have performed well in recent years. As China’s nationalist policies become more limiting and labor becomes more expensive, Taiwanese companies will likely move their operations from the mainland to create more jobs at home.

    

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Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

Commentary

In the United States, democrats now have control of the Senate (via a tie-break by the new Vice President). The completion of the, “Dem Sweep” reduces the likelihood of legislative gridlock and clears the path for significant fiscal expansion. On Friday, President-elect, Joe Biden, repeated his call to boost stimulus payments for Americans to $2,000 from the $600 that was passed in the stimulus bill from December. Soon-to-be Senate majority leader, Chuck Schumer, confirmed the likelihood of the boost in stimulus payments after he called it a priority for his agenda. Economist forecasts are estimating another $1trln of stimulus to be passed in the coming months, this is in addition to the $900bln passed in December. In response, the stock market continues to boom led by the Russell 2000 which is up nearly 6% so far for 2021. Our chart of the week shows a significant pickup in COVID related lockdowns globally as the virus’s spread and hospitalizations reach a new peak. Why are risk assets looking through this? Having dealt with a first wave and having become accustomed to COVID’s economic impact, countries have found ways to continue to operate with a work from home environment. In fact, in the United States, the unemployment rate for those earning over $60k per year has gone down since February 2020.

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ECONOMIC DATA 

Atlanta Fed GDPNow is currently tracking at 8.7% for the fourth quarter of 2020. The BEA will release their first estimate of the official Q4 2020 GDP estimate on Jan 28.

New York Fed GDP Nowcast is currently tracking at 5.5% for Q1 of 2021.

US Nonfarm payrolls -140k versus +50k expectations. Unemployment rate unchanged at 6.7%. The shortfall in jobs was the result of significant weakness in COVID sensitive sectors. Excluding leisure and hospitality jobs, payrolls rose by 403k in December with a decent breadth of industries adding jobs. It appears that the jobs lost were more permanent than temporary.

• The prior two months saw upward revisions that totaled 135k and permanent unemployment fell in December by 348k, the largest one-month decline since Dec 2010.

• Restaurants -372k, hotels -24k, recreational industries -92k.

  

US December ADP employment saw a -123k decline in private employment, a significant disappointment versus expectations of a 75k increase.

• The decline was wide spread across manufacturing (-21k) and service-providing jobs (-105k).

US ISM services at 57.2 points in December, up from 55.9 in November and stronger than expectations for 54.5. 

• The data corroborates the strength in services employment we saw from the employment situation report.

• 14 out of 18 sectors are in expansion and those in contraction are COVID sensitive.

US December ISM manufacturing report rose 3 points to 60.7 in December (Forecast was 57.5). 8th consecutive month of expansion and the highest reading since Aug 2018. 

• Employment back above 50 at 51.5 versus 48 previously.

• New orders now at the highest level since 2004.

• Prices paid now at the highest level since May 2018.

• “It is not shocking that the ISM figures would attain such heights in 2020, as the economic rebound after the lockdowns in the spring was unprecedented. However, it is stunning that the December figure was the highest of the year, exceeding the initial bounceback in the spring and summer and surging in the face of the intensifying virus spread.” - Stephen Stanley, Amherst Pierpont

Sweden’s manufacturing PMI for December 64.9 versus 59.8, the highest level in 10 years, export orders printed the strongest reading since 2004.

Switzerland’s manufacturing PMI +3 to 58.0, the highest level since Sep 2018.

• Why these matter: The combination of strength from Sweden and Switzerland’s manufacturing PMIs suggests the recovery in Asia continues to be strong and bolstering export oriented countries in Europe. 

Korea’s December export growth +12.6% y/y versus +6% expected. Confirmation of the aforementioned strength in Asia.

• Semiconductor exports +30% y/y, highlighting strength in the sector.

German new factory orders +2.3% m/m versus consensus expectations of -0.5%, the country has seen persistent strength in its industrial sector. This is additional confirmation of the narrative seen above regarding Asian economic strength.

• Germany’s imports and exports came in stronger than expected in November, +4.7%m/m and +2.2%m/m respectively.

November euro area retail sales -6.1% m/m, below the expectations of -3.4% on the back of reintroduction of lockdowns. 

CENTRAL BANKS

St. Louis Federal Reserve Chairman, Jim Bullard, delivered a presentation entitled, “The Pandemic Endgame Begins”.

• US total fiscal policy response was valued at about $3.148trln while the actual shortfall in US real GDP will likely be closer to $400bln - $500bln. There’s an additional $900bln of stimulus that was just signed into law that will be enacted in 2021.

• As a result of the fiscal policy response, personal income was at an all-time high in the second quarter, the opposite of normal recession dynamics.

• It appears that Apr 2020 will prove to be the lowest point of the crisis and that Q3'20 real GDP growth was the fastest on record. 

• For the Q4 2020, GDP looks to have grown above-trend pace

• Employment has rebounded more rapidly than expected. This supports the idea that many layoffs were temporary as firms adjusted to the pandemic.

  • “If all those unemployed identifying as ‘on temporary layoff’ are simply recalled and nothing else changes, the official unemployment rate would decline to 5.0%.”

  • “If the ‘on temporary layoff’ category returns to a normal value (~1mln workers) and nothing else changes, the official unemployment rate would still decline to 5.6%”

• “TIPS-based breakeven inflation, based on CPI inflation measures, could move considerably higher and still be consistent with a PCE inflation outcome modestly above the 2% target”

The ECB released the details of its asset purchase program (APP) purchases for December. Net purchases were €21.1bn.

• The Pandemic Emergency Purchase Program (PEPP) net purchases were €57.2bln for December bringing the total for the program to €757bln.

• The two programs combined have approximately €1.4trln of remaining purchasing power through Mar 2022.

Fed Vice Chair Clarida delivered a speech entitled, “U.S. Economic Outlook and Monetary Policy”.

• “While the recent surge in new COVID cases and hospitalizations is cause for concern and a source of downside risk to the very near-term outlook, the welcome news on the development of several effective vaccines indicates to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished.”

• “My economic outlook is consistent with us keeping the current pace of purchases throughout the remainder of the year” and “I myself would have no inclination or think there’s any need to think in the near term about adjusting the duration of the maturity of our purchases”

FIXED INCOME, CURRENCIES, COMMODITIES

The US 10 year yield rose above 1% for the first time since the beginning of March 2020. It finished the week at 1.13% up from 0.93% on 12/31/20. The 30 year yield also rose 22 basis points and finished the week at 1.87%.

• The rise is in response to prospects for significant additional stimulus as a result of the Georgia state election.

• The yield curve has steepened as rates have risen. The spread between the five-year and thirty-year treasury yield is the widest since Nov 2016. 

• Corporations are issuing debt at a blistering pace in the first days of 2021 as they attempt to get ahead of expectations that yields will continue to rise from here.

  • Already, $50bln of investment grade debt has been underwritten in January.

• Rising interest rates and a steeper yield curve have historically correlated with stronger bank stocks. The financial sector has risen nearly 5% so far in January versus the S&P 500’s 2% rise.

Bitcoin is rallying. Again. This past week it reached new all time highs. Again. The world’s most popular cryptocurrency rose above $40,000 on Thursday.

• The value of every cryptocurrency combined, including Bitcoin, Ethereum, Tether, etc. now have a total market value of exceeding $1 trillion.

• This milestone market value comes on the back of continuous institutional adoption of crypto as an asset class

  

 Oil rose $4/barrel (~8%) this past week as stockpiles declined after a busy holiday season and energy companies shuffle around their oil in storage to avoid tax bills. 

• Oil & Gas traders believe a Biden administration will crack down on US oil production, increasing regulations. Driving the price of oil up, Brent crude is now trading near $54.74 a barrel.

• This past week, OPEC, Russia and other producers agreed to keep production steady while Saudi Arabia agreed to voluntarily cut oil production by 1 million barrels per day (bpd) in February and March. 

• Energy stocks are up just over 9% to start 2021.

EQUITIES

From the Wall Street Journal: "U.S. special-purpose acquisition companies (SPACs), which are publicly traded shell companies that use the money raised from an initial public offering to merge with another company, raised $82 billion in 2020—more than all the funding previously raised by SPACs."

• 9 days into 2021 the SPAC market has already seen 28 deals, marking it the 5th largest year out of the previous 13 years. That's 5.6 SPAC deals a day for the first 5 trading days of 2021.

Micron Technology, Inc. reported Q1 results for fiscal year 2021. Topping analysts estimates, the stock rose 1.5% after hours, after a 2.6% rise during normal trading hours to $79.11. 

• Micron’s main products are DRAM and NAND memory chips. DRAM is commonly used in PCs and servers, while NAND chips are used in smaller devices such as USB drives or digital cameras.

• Revenue of $5.77 billion versus $6.06 billion for the prior quarter and $5.14 billion for the same period last year.

• Net Income was $803 million, or 71 cents a share compared to $491 million, or 43 cents a share, a year ago.

• Chief Executive Sanjay Mehrotra said: “Cloud is the long-term secular demand driver for our industry and, again, it is the trend of AI and ML and the workloads that are requiring more memory.”

On Wednesday, the New York Stock Exchange announced it will move ahead with plans to delist shares of three Chinese state-owned phone carriers under an executive order from the President. 

• China Telecom Corp. Ltd., China Mobile Ltd., and Hong Kong Ltd., will be suspended on Jan 11th. 

• The executive order signed by Trump restricts Americans from investing in securities issued by companies deemed to be linked to the Chinese military.

• The Chinese government said the executive order was unjustifiable and limits competition. China warned that Trump’s order would hurt U.S investors domestic and abroad.  

GEOPOLITICS

It’s been reported that 53 pro-democracy politicians and activists were arrested in Hong Kong. 

• The biggest crack down so far under the new national-security laws imposed by China in June. 

  • Police also arrested an American human-right lawyer, John Clancey. He had been a critic of the recent laws and actions taken by the mainland to dissolve the long standing, “one country, two systems” policy for Hong Kong.

• Billionaire and Alibaba founder, Jack Ma, is rumored to be missing. He has not been seen publicly for months in the aftermath of a speech he gave in October pushing back on criticism from Chinese financial regulators. 

  • President Xi Jinping is rumored to have called off Alibaba’s IPO of its affiliate, Ant Group, in what was believed to be a push to align private companies with the states’ goals and interests.

Trade tensions continue to rise between Australia and China as Chinese cities go dark and Australian economy continues en route to contraction.

• An unofficial ban on Australian coal has led to a sharp increase in the local coal price. China previously asked its power plants to limit coal imports for pricing control, a restriction that was eventually lifted with an exception in place for Australia, leading to city blackouts across mainland China. 

  • China is the world’s largest coal consumer, its greatest source being Australia. 

• Australia’s economy was badly hit in 2020. Last year began with massive wildfires across the country followed shortly after by the pandemic. Australia now faces up to a 2.8% (Source: Capital Economics) contraction following these escalated trade tensions against China, one of its largest trading partners.

  • Highlights: China makes up 39.4% of goods exports, 17.6% of services exports (2019-2020), and is Australia’s second largest buyer of thermal coal.

  • The goods and services on China’s expanding tariff radar form nearly a quarter of Australia’s exports to China. 

PUNDITRY

Goldman Sachs, “Risks to Global Growth from the New Virus Strain”

1. “Likely rapid spread in many countries. The new contagious strains are likely to spread quickly in most countries that do not have very strong prevention and containment strategies in place.”

2. “High virus spread for longer. The more infectious variant could increase virus spread in coming months in many countries. Looking further ahead, it could keep virus spread high for longer than previously expected.”

3. “Mixed effect on vaccination speed. A more contagious virus has an ambiguous effect on vaccination speed.”

4. “Near-term risk of additional restrictions and a higher vaccination bar to ease restrictions. A recent study in the Lancet estimates that offsetting a 0.5-0.6 increase in the reproduction number might require a “hard lockdown” consisting of school and workplace closures, bans on public events and gatherings of more than 10 people, internal movement limits, and stay at home requirements.”

5. A higher bar for herd immunity.

6. “Some downside tail risk of forced re-vaccination campaigns over the longer term. While coronaviruses mutate relatively slowly, evolutionary pressure from widespread transmission (and possibly plasma- and antibody treatments) implies that we cannot rule out a downside tail scenario where countries would be forced to rapidly re-vaccinate their populations with adjusted vaccines at some point if the efficacy of existing vaccines against new strains dropped sharply.”

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Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

Commentary

The S&P500 has gained 2.4% for December, thus far, bringing its year to date total just shy of 17%. The tech-centric Nasdaq 100 is up a remarkable 47%. All of this is occurring while several major economies, including the US, are experiencing a second wave of COVID infections and a new peak in deaths and hospitalizations as a result. In November we dubbed it, “Two Americas”. In risk assets, sentiment measures are stretched. The stock market looks expensive relative to historic valuations whether measured by trailing earnings or forward-looking measures. At his press conference this past week, Jay Powell addressed equity prices, “If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at.” He came just shy of saying the four most dangerous words in markets, “this time it’s different”. The most recent edition of Bank of America’s fund manager survey showed that cash holdings were now at the lowest levels in 2020 at approximately 4%. This also marks the first time that respondents in the survey have been underweight cash since May 2013. In October we asked, “There seems to be plenty of worry in the markets but does anyone think that the stock market can rally furiously again in the 4th quarter?” This week we ask the inverse question, with valuations stretched, markets rallying furiously and animal spirits alive, does anyone think that US markets can fall while the global economy continue to improve?

Chart of the Week

2020 Holiday Season

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ECONOMIC DATA 

Atlanta Fed GDPNow is currently 11.1%, down slightly from last week’s 11.2% for Q4.

New York Fed GDP Nowcast is currently at 2.36% Q4 down from 2.45% last week.

Goldman Sachs US Financial Conditions Index

Morgan Stanley Business Conditions Index

US Jobless Claims hit a 3-month high to 885k up from 862k the prior week, this is the highest claims number since early September.

• About 455K people applied for the Pandemic Unemployment Assistance program, vs 415K the week prior.

• Pandemic Emergency Unemployment Compensation beneficiaries +268k on the week as of the most recent data from November 28. The highest increase since the middle of October. Currently there are a staggering 20.6mln individuals receiving unemployment benefits. The key question is: How much of this is temporary? 

US  November retail sales report below expectations. Headline -1.1% m/m (-0.3% expected).

• Excluding autos, -0.9% m/m (+0.1% expected).

• Core retail sales (retail sales & food services excluding autos, gas, and building materials) -1% m/m.

• October’s figure were revised lower to indicate a month-over-month decline. 

• Some of the categories with the steepest declines were ones where people do their heaviest holiday shopping such as department stores (-7.7%), clothing stores (-6.8%), sporting goods stores (-0.6%).

• E-commerce only saw a +0.2% gain for the month. 

• The silver lining in all of this is that sales are 4% higher y/y and above their pre-COVID levels:

US Housing Starts continue their strong run. November surprises to the upside with upward revisions for October.

• +1.2% m/m to 1.547mln in November 2020, highest level since February (1.53mln expected).

  • October was revised upward by 1.4 points for a m/m change of 6.3% from September.

• Single-family housing starts +0.4% to 1.186mln, units in buildings with five units or more +8% to 352k. 

• Regionally, housing starts +58.8% to 135K in the Northeast, +8.2% to 407K in the West. In contrast, housing starts -4.9% to 196K in the Midwest and -6% to 809K in the South.

• US Building Permits hits 14-year high. +6.2% MoM to a seasonally adjusted annual rate of 1.639mln in November of 2020.

• Single family authorizations +1.3% to 1.143mln and permits for buildings with five units or more +22.8% to 441 thousand. 

• Permits up across all US regions: Northeast +12.9%, Midwest +3.8%, South +4.7% and West +8.3%.

US Industrial production +0.4%m/m vs +0.3% expected. Details were strong but industrial production is still 5 points below February 2020 levels and down almost 8% y/y. 

• Capacity utilization increased to 73.3%. Low print was 65% in May. Pre-COVID utilization was 77%.

• Manufacturing production +0.8%m/m vs +0.4% expected.

  • Durable goods +1.5%m/m, 7th consecutive monthly increase.

• We look for Industrial production to get back to pre-COVID levels once vaccines are more widely distributed, so some time around summer 2021.

China November industrial production +7.0% y/y, in line with forecasts.

• Fixed Asset Investment growth now stands at 2.6% driven by manufacturing capex.

• Retail sales growth +5% in line with expectations. The bounce in retail sales is being led by discretionary consumption on items such as cosmetics, jewelry, and mobile phones. 

The US composite PMIs (flash reading for December) still in expansion at 55 but down 3 points from November.

• Manufacturing surprises to upside by 1 point to 56.6.

• Services PMI came in 1 point below consensus at 55.

European preliminary December PMIs stronger than expected. Composite PMI at 49.8 is pretty much neutral. Surprising strength given the second wave of lockdowns across Europe. 

• Manufacturing 55.5 vs 53 expected.

• Services PMI 47 vs 42 expected. 

UK retail sales for November -2.6% m/m versus consensus -4%, another sign of resilience in the European economy. 

• Overall retail sales are still above pre-COVID levels.

• Clothing sales -19% m/m because stores have been shutdown on back of COVID.

Manhattan apartment landlords in NYC see lowest rent prices since October 2010. 

• Median rental price dropped 22% in November y/y to $2,743 per month.
  

  

Canada's October 2020 government budget deficit widened to CAD18.51bln up from CAD3.25bln in October 2019.

• Due to a combination of economic downturn and temporary setbacks due to COVID. 

• Revenues -$1.4bln, (-5.5%) to CAD24.07bln.

• Public debt charges -$0.2bln, (-11.6%) to CAD 1.58bln, reflecting lower interest on Canada treasury bills, pension, etc.

Russia's GDP -3.7% from November 2019, following a revised -4.5% drop in October. YTD 2020, the economy contracted 3.5%.

COVID-19 Update: The number of infected across the world has surpassed 75 million amid positive news and distribution of vaccine (nearly 50k people have been vaccinated in the US).

• At least 1.66 million people have died, 42.4 million have recovered. 

• Europe’s new infections for last week:

  • In Germany, a new record high of 33,777. 

  • UK also recorded a new record 35,383.

  • France new infections rose by 18,254, the most since November 20th.

  • Italy recorded 18,233 and Spain 12,131.

CENTRAL BANKS

US Federal Reserve delivers no change in level or composition of monetary stimulus. 

• Fed projects a stronger economic picture for 2020 - 2022 while maintaining Fed Funds rate at 0 through at least 2022 (see chart below).

• No strict guidelines were delivered regarding how long they will keep accommodation via asset purchases but said that they will continue "until substantial further progress has been made toward the Committee's maximum employment and price stability goals." 

  • Why it matters: While not strict, this guidance is more specific than before. Most importantly it permits the FOMC tremendous flexibility to keep policy accommodative for the foreseeable future even if there is a significant improvement in the economic landscape. 

• 10 participants ranked the risks to the outlook as balanced in December, up from 4 in September.

• Despite the pick-up in expectations for economic performance only 5 members (versus 4 in September) see a rate hike in 2023. The market implied first rate hike is in 2024 (see chart below)

• “In effect, the FOMC projection rates on hold with inflation beginning to reach 2.0% and the unemployment rate below 4% at the end of 2023 underscores a message from the FOMC of just how patient they plan to be in firming rates.” -Morgan Stanley

US Federal Reserve Vice Chairman, Richard Clarida in CNBC interview on Friday: “We think we are providing very ample support for the economy with the combination of our guidance and the purchases which are at a very very robust pace...we think that the current constellation of policies is exactly where we want it to be.”

• The rising number of COVID cases is, “clearly impacting the economy,” and he expects the next couple of months to be “rough.”

• Regarding the vaccine’s rollout, “makes me individually very optimistic about the economy as we get into 2021.”

• “The path of policy will be dictated by the path of the economy. This will be a different cycle than past cycles because of our new monetary policy framework...policy is going to remain accommodative longer to give the support the economy needs to achieve our dual mandate goals on a sustained basis.”

Bank of Japan (BOJ) December Monetary Policy Meeting, bank remains accommodative. 

• Short-term interest rate to remain at -0.1% and 10-year Japanese government bond yield also unchanged at around 0%.

• Japan's consumer prices -0.9% y/y in November. The bank intends to conduct an assessment to explore further effective and monetary easing measures to deal with deflationary pressures. The results of the assessment will be made public in the March 2021 meeting.

• No changes to yield curve control or quantitative easing programs, “it has been working well to date, and the Bank judges that there is no need to change it."

• A standout change: the BOJ will extend the additional purchases of CP and corporate bonds until the end of September 2021, with an amount outstanding upper limit of approximately JPY 20 trillion. The BOJ stated, "economic activity and prices are projected to remain under downward pressure for a prolonged period due to the impact of COVID-19.”

The Bank of England (BOE) also voted to maintain current operations in a laissez faire approach to the current uncertainty around a Brexit trade deal and COVID-19. 

• Bank Rate to remain at a record low of 0.1%, bond-buying program to remain at £875bln.

• Inflation target of 2% also remains unchanged. Given the uncertainty of the year ahead, officials pledged to take whatever action necessary to sustain growth and employment, including exploring negative interest rates (as mentioned in our Elevated Volatility and While the Going is Good issues).

Bank of Canada Governor, Tiff Macklem: “there is room for cautious optimism that international trade will recover more quickly from the pandemic than it did from the global financial crisis.”

• Warned that the recent appreciation of the Canadian Dollar is “hurting the competitiveness of Canadian exporters in our largest market.”

• The comment about the recent CAD appreciation is strange to us, the Canadian Dollar has been largely range bound for several years, on a trade-weighted basis (see chart below).

The Swiss National Bank (SNB) kept rates unchanged at -0.75%, continues to call the Swiss Franc “highly valued” and “remains willing to intervene more strongly in FX markets.”

• Expects the economy to grow 2.5% - 3% next year. 

• SNB was recently labeled a currency manipulator by the US Treasury.  SNB Chair Jordan repeated that they are not currency manipulators and that their FX interventions are necessary to achieve monetary policy objectives.

FIXED INCOME, CURRENCIES, COMMODITIES

The UK unemployment rate rose less than expected, 4.9% versus 5.1% consensus.

• More than 800k jobs have been lost since February, ⅓ of jobs lost are from the hospitality sector.

• Bank of England’s Monetary Policy Report sees a peak in the unemployment rate at 7.7% in Q2'21.

• Why it matters: The better than anticipated unemployment trajectory permits the BoE to avoid additional monetary easing measures. This has translated into a strengthening GBP. It was the 3rd best performing currency in our matrix this past week. 

• What we’re thinking about: Is this the beginning of a sustained move for GBP to its pre-COVID level versus the EUR?

India sees record-setting outflows ($14bln) from their bond market . 

• This has coincidentally aligned with Chinese bonds attracting record foreign inflows highlighting the investor sentiment toward India’s pace of capital-market reforms led by prime minister, Narendra Modi. 

• China has seen over $119bln of inflows this year; mainly facilitated by China’s efforts in recent years to dismantle the barriers for foreign investors to access their onshore bond market.

Foreign holdings of Indian bonds are just under 2% at the end of November.

• India’s strict restrictions on foreign funds and failure to join China in global debt indices has severely limited the country’s capital mobility. 

• “We are now carrying out the process and institutional changes needed to allow all participants to be able to buy and sell rupee Indian bonds without difficulty,” said Sanjeev Sanyal, a principal economic adviser in the finance ministry.
  

Bitcoin extended its rally this week setting a new high on Thursday of $23,770 on higher-than normal daily volume. By Saturday, bitcoin had surpassed $24,000

• Trading volume for the currency in recent months has spiked aligning with the enormous amount of public interest it has received this year. 

• Volume on Thursday across the eight major exchanges as tracked by CoinDesk was over $4.0bln.

Monthly exchange volume shows a different story (see below). Exchange balances for December will most likely not top November’s tally, potentially hinting fatigue in the recent bull run.

In light of the recent interest surrounding cryptocurrencies, the Chicago Mercantile Exchange (CME) announced Wednesday it will launch a futures contract for ether, the second-largest crypto by market value.

• Futures will be listed on February 8, 2021; more than three years after Bitcoin futures went live.

• Recent spike in institutional demand for the coin pushed the CME to become the second-largest Bitcoin futures platform by number of open contracts as of October. 

• Macro hedge fund manager, Brevan Howard recently emerged as a significant partner for One River Asset Management who recently acquired $600mln worth of cryptocurrencies.

EQUITIES

Coinbase announced on Thursday the filing of an S-1 with the SEC indicating its intention to IPO. Coinbase, founded in 2012, is the largest U.S. cryptocurrency exchange. 

• In 2018, Tiger Global led a funding round that valued Coinbase at more than $8 billion. The company has 35 million verified users in more than 100 countries and more than $25 billion in assets on its platform.

Investors go risk-on and global: Flow data from Arbor Research, as of December 1, shows that investors continue to pour money into equities increasing with the share of flows into domestic and global equity markets increasing relative to other assets categories

Logica Funds, Policy in a World of Pandemics, Social Media and Passive Investing: A research report presented by the volatility hedge fund explores how markets dynamics have changed since passive investing was introduced in the 70s.

• The market no longer moves on collective decision making or the efficient market hypothesis, instead strategies that include passive investing and synthetic attempts to generate yield by systematically selling volatility now are the primary reasons why the market moves

  • “In particular, the simultaneous rise in ‘yield enhancement strategies’ which sell volatility across asset classes, especially equities, in order to generate additional income. These strategies have exploded in popularity since the Global Financial Crisis and the associated collapse in traditional fixed income yields to historical lows. The provision of this volatility by market participants to broker dealers creates conditions under which localized volatility is minimized. As long as dealers remain net long volatility, what is referred to as ‘long gamma’, then dealer hedging activity dampens volatility. When dealers find themselves short gamma, as occurs when markets have been subjected to an outside force like the XIV ETF blowup in February 2018, the US-China trade war escalation in Q4-2018 or the COVID-19 pandemic, then volatility can rise sharply as dealers rush to sell more of the index into the already falling markets in order to hedge their exposure.”

• The depth of the market has also fundamentally changed because passive investors do not react to external factors like active investors do. When active investors are met with an external event, they will attempt to reduce risk, i.e. selling. Passive investors do not have the same reaction function. 

  • “In 2013, it was possible to execute nearly 9,000 S&P futures contracts ‘at the front of the book’ (light blue line below). In recent days, that number has fallen to only 9 contracts. In dollar terms, in 2013 it took a $750MM order to “move the market”… today it takes a $1MM order. [The market is] not just less liquid, [but] orders of magnitude less liquid.”

GEOPOLITICS

Rockefeller Foundation, established more than a century ago by oil tycoon John D. Rockefeller, has announced plans to divest from fossil fuels in an effort to allocate more towards green investments. 

• The plan, which has already begun, will cut its more than half fossil fuels allocation to less than 1% in the near future, with no official timeline given at this time. 

• Chun Lai, Rockefeller’s CIO said in an email: “We actively narrowed the resources portfolio to less than a handful of managers who place strong focus on ESG integration and avoided dedicated investments in the heaviest emitting fossil fuels.”

U.S. Blacklists more than 60 Chinese Firms in an effort to protect ‘U.S. national security’. These companies will join firms like Huawei Technologies, a list that denies the companies access to U.S. technologies such as software and hardware.

• The Commerce Department said in a statement: “This action stems from China’s military-civil fusion doctrine and evidence of activists between SMIC and entities of concern in the Chinese military industrial complex.”

PUNDITRY

Morgan Stanley, “Bull Market Could Have a Long Way to Run.”

• 4 Reason to remain bullish:

1. “New bull markets have begun with a recession and have typically run for years not months.

2. The health crisis has brought unprecedented monetary and fiscal stimulus that is likely to become structural in nature—a policy regime shift.

3. Economic data surprises and positive earnings revisions support our V-Shaped recovery and higher equity prices. 

4. Operating leverage should drive meaningful upside to consensus earnings next year.”

• Operating Leverage Is Underappreciated. “Speed and depth of unemployment cycle and cost cutting should drive unprecedented operating leverage next year.” 

  • The average stock in the S&P 500 could outperform the broader index by 2:1 so MS prefers equal weighted indices versus market cap weighted.

Equal Weighted Index Typically Outperforms Market Cap Weighted Coming Out of Recessions

Morgan Stanley Forecast of US GDP Path

Fiscal Policy Is Different this Time and Suggests “Helicopter Money” Is Here

Greater Fiscal Has M2 Growth at Unprecedented Levels―What’s the Cost? 

Small Caps Have Typically Outperformed Large Caps Coming Out of a Recession

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Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

Commentary

Pfizer and BioNTech’s mRNA-based vaccine has been approved for use in the United Kingdom, Canada, Bahrain, and Saudi Arabia, and has received emergency use authorization on December 11th from the FDA in the United States. In US trials, “less than two weeks after the first dose, the vaccine started protecting [recipients], and the second dose three weeks later boosted their immune response.” Vaccinations for front-line workers and high-risk groups are expected to start this coming Monday in the US and Canada, and have already begun in the UK. 

As more research into the vaccines are being published, the percentage of US adults who would get a vaccine if it was available today is rising, with 60% saying that they would definitely or probably get the vaccine, up from 51% in September 2020, but down from 72% in May 2020. 75% of US adults have a fair amount or a great deal of confidence that the R&D process in the US will produce a safe and effective vaccine, however only 37% of respondents indicated that they would be comfortable being among one of the first groups to receive the vaccine, highlighting the safety and efficacy concerns that will need to be addressed by public health authorities.

Why it matters: We expect that the rapid vaccine progress, accommodative central bank policies, and rapid corporate/private sector adaptation to be the key drivers behind a strong rebound in overall economic growth and activity in 2021 and 2022.

What we’re watching: Progress towards herd immunity will be a key area to watch for the year ahead, as it will heavily influence the timing of business re-openings as well as government and central bank policy choices.

Chart of the Week

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ECONOMIC DATA 

Atlanta Fed GDPNow remained unchanged from last week at 11.2% for Q4.

New York Fed GDP Nowcast is currently at 2.45% for Q4 down from 2.52% last week.

US Consumer Price Index +0.2% m/m, +1.2% y/y vs 1.1% expected.

• Staples like food and gas experienced declines m/m following a 0.2% increase in October, -0.1% and -0.4%, respectively.

• Transportation services and apparel ticked up m/m, +1.8% and +0.9%, respectively.

• Inflation does not appear to be a threat to investors or the economy as of now; the vaccine’s rollout and success might play a vital role in next year’s inflation tracking.

October JOLTS released Wednesday was little changed potentially signaling that the labor recovery from the pandemic was slowing.

• +6.65mln job openings from +6.49mln in September, increasing job openings rate to 4.5% from 4.4%.

• Hiring fell to 5.81mln from 5.89mln in September, lowering hiring to 4.1% from 4.2%.

  • Hiring experienced its biggest hits in wholesale trade and federal government.

The November Small Business Optimism Index shows small business owners remain uncertain after election.

• NFIB Optimism Index -2.6% m/m to 101.4 vs 102.5 expected, remaining above the 47-year historical average of 98.

The University of Michigan’s Consumer Sentiment report highlighted a rise in US consumer sentiment and confidence in late November and early December.

• Consumer sentiment +4.5 m/m to 81.4 vs 75.5 expected in the two weeks ended December 9, 2020.

• Recent stock market performance and developing news on the coronavirus vaccines may help explain U of Michigan’s index gains.

US October consumer credit in October +$7bln vs $15.5bln expected

• Smaller increase than $15bln in September. The shortfall is attributable to a $5.5bln decline in revolving credit. Non-revolving credit was +$12.7bln

China’s Consumer Price Index fell into negative territory in November for the first time since 2009.

• November Headline CPI fell to -0.5% after a 0.5% rise in October.

• CPI deflation mainly driven by improvements in food supply specifically pork and increased imports of the main source of protein for China.

• “November’s CPI decline was driven by pork prices and should be short-lived…” said ANZ Economist Xing Zhaopeng.

CENTRAL BANKS

News of viable vaccines generating positive moves in the market is currently shifting economists’ views of recovery support including those of the European Central Bank (ECB), which has decided to launch a fresh stimulus policy on Thursday, laying very sensible groundwork for long-term support as we move into 2021. 

• €500bn increase (€1.35tn to €1.85tn) in its Pandemic Emergency Purchase Program (PEPP) as well as duration extension to the current policy by an additional nine months to March 2021

• “Ms [Christine] Lagarde justified the nine-month extension to the stimulus programmes by the expectation that “we will have reached sufficient herd immunity to hope that by the end of 2021 the economy will function under more normal circumstances”. Analysts, however, interpreted the additional stimulus as a commitment to more long-term support and an admission that extraordinary policy could be needed for years. The ECB forecasts that inflation in 2023 will still be below its 2 per cent target.

• The ECB has also extended its negative interest rate financing of banks (at rates as low as negative 1%) provided that they maintain the flow of credit. In effect, this policy pays the banks to borrow money and increase the availability of credit, as long as they don’t reduce lending. Internally at the ECB there are differing views between its governing council members - the initial proposal was to increase targeted longer-term refinancing operations (TLTRO) to 60% of the banks loan books (up from 50%), however the council eventually compromised at 55% (€300bln increase).

• Perception of the decisions was “underwhelming” and a sign of “compromise between dovish and hawkish members of the governing council” per Frederik Ducrozet, a strategist at Pictet Wealth Management.

• The ECB has cut its eurozone growth forecast for 2021 to 3.9%, based on the assumption that there would be no trade deal between the EU and the UK post-brexit.

The Financial Times this week posed the question “How long will the [US Federal Reserve] continue its extraordinary run of bond buying to keep interest rates down and support the economy in an effort to push inflation higher?”

• As we’ve discussed in depth in the Weekly Macro Summary, Powell’s tolerance of inflation above the current 2% target has broader implications for the market, with much more downside risk associated with higher interest rates than there is remaining upside with accommodative policy.

• “Already, market expectations of inflation are on the rise as the global economy pulls out of 2020’s shock on the back of enormous fiscal and monetary stimulus. In the US, long-term inflation expectations implied by the bond market have rebounded sharply from pandemic lows to their highest in 18 months.” (Financial Times)

• The rising inflation expectations paired with depressed treasury yields has pushed down real yields well below zero, which, while good for risky assets like equities tends to usually put downward pressure on the dollar which we’ve seen recently.

  

FIXED INCOME, CURRENCIES, COMMODITIES

MicroStrategy, Inc., software company or Bitcoin fund? On Monday, the company announced its plan to offer $400 million of convertible bonds in order to buy more cryptocurrencies. On Friday, Michael Saylor, MicroStrategy’s CEO, tweeted that they raised $650m notional of a 0.750% Convertible Senior Notes Due 2025. The additional amount raised was due to strong demand for the offering.

• This announcement comes only a few days after the company finalized the purchase of additional bitcoins. The company now has 40,824 on its balance sheet.

• MassMutal Life Insurance Co. announced the purchase of $100 million or a 0.4% allocation in Bitcoins using their general investment fund. The 169-year-old life insurance company is the latest mainstream company to announce an allocation to cryptocurrency. 

  • MassMutual also announced a $5 million dollar minority equity stake in NYDIG, a subsidiary of Stone Ridge, a firm that provides cryptocurrency services to institutions. NYDIC, which has roughly $2.3 billion in crypto AUM, will provide custody services for MassMutual’s Bitcoins. 

On Thursday, the Bloomberg Commodity Spot Index rose 1.3% to its highest since 2014 on the back of vaccine approval news worldwide.

• Demand for oil has strengthened due to the expectations that people will resume driving and traveling once a vaccine is widely distributed. 

• Soybeans and corn have increased sharply after dry crop weather in South America and Europe hit yields, all the while China is buying up massive quantities of farm goods from the U.S. 

EQUITIES

Uber sells its driverless car business to Silicon Valley start-up company, Aurora.

• The move is in response to Uber’s desire to finally become a profitable company.

• In addition to the sale of the unit, Uber will get a 26% stake in Aurora for $400mln.

JD.com spun-off and took public its online health-care unit on Tuesday. Raised $3.5bln on a $34bln valuation.

• Largest health-care IPO ever for Asia and shares rose 56% in their debut. 

• Shares offered to individual investors were 420x oversubscribed, those offered to institutional investors were 31x oversubscribed.

• Monthly online consultations during COVID rose from 200,000 to 2mln.

• JD’s valuation went from $7bln to $28bln during that time

Hyatt plans to add over 20 hotels to its existing European portfolio that currently consists of 63 properties. This is a vote of confidence from the company towards the prospects for the travel industry post-COVID. It also demonstrates a belief in the narrative that there is significant pent-up demand for leisure travel.

• The planned expansion will focus on hotels geared toward leisure travel.

• The first 20 hotels will cost approximately EUR900mln.

• “We believe there is a pent-up demand to travel. Once we get the therapeutics, we get the vaccines and so forth there will be growth.” 

• The company currently operates 950 hotels worldwide.

Software valuations at All Time Highs, currently trending 300% higher than average

The Federal Trade Commission of the US is suing Facebook for years of “anti-competitive conduct,” i.e. the acquisitions of Instagram (2012) and WhatsApp (2014). While different in specific allegations, this follows the recent antitrust litigation from the US federal court against Google (covered in our Vaccines, Volatility, Asymmetry, China, and Bitcoin issue).

• Per FT: “Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition,” said Ian Conner, director of the FTC’s bureau of competition. “Our aim is to roll back Facebook’s anti-competitive conduct and restore competition so that innovation and free competition can thrive.”

Exchange-traded funds (ETFs) have added roughly $466bn, marking it the largest year of inflows to date. If the current trend continues, passively managed equities will surpass actively managed funds by the year 2022.

GEOPOLITICS

Britain began administering a covid-19 vaccine produced by Pfizer and BioNTech, two pharmaceutical companies. The first recipient was a 90-year-old woman in Coventry. A further 800,000 doses are to be dispensed in the coming weeks, with priority given to the over-80s and health and care staff. Meanwhile, Britain’s government announced that a different vaccine manufactured by Oxford University and AstraZeneca, another pharmaceutical company, was delayed due to manufacturing problems. Just four million doses will be available before January.

The UK intends on suspending tariffs against the US regarding their prior aircraft subsidies dispute (covered in our Two Americas issue) in order to prepare for trade talks with Washington in the face of a high probability of a “no deal” at the EU talks to be had today, Sunday Dec 13. 

• Given the UK’s departure from the EU, it was always unclear whether they would have maintained the EU’s aviation tariffs following Dec 31.

• “With a no-deal outcome looming, the pound fell in choppy trading on Friday. Sterling slipped as much as 1.2 per cent in afternoon dealing, before trimming its losses to about 0.4 per cent to trade at $1.3241. It has shed 1.5 per cent over the past week in its biggest slide since September.”

EU planning new sanctions against Turkey during this period of increasing tensions in the Greece v. Turkey conflict in the Mediterranean. While initially the EU leaders intended to focus on the individuals linked to energy drilling off Cyprus, the list could be expanded.

• “Turkey faces retaliation because it has carried out “unilateral and provocative activities in the Eastern Mediterranean” since EU heads of state and government warned Ankara in October about its behaviour, the summit document says. It invites EU member states to add to an existing sanctions list comprising two executives at a Turkish state-owned oil company “and, if need be, work on the extension” of the punitive measures.”

Indian farmers are up in arms over a new agriculture law, gathering in large protests in Delhi. Thousands of farmers have been protesting this week, pressuring the government to repeal the three recent agriculture laws and demand assurances of a minimum price for their crops. 

• Over 40% of India’s workforce is employed within the agriculture industry.

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Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

Commentary

The S&P500 had one of its best single-month performances of the past 40 years in November; it finished up 11%. The Russell 2000 closed up 18% and the US equity markets were led higher by a 28% and 16% rally in energy stocks and financials, respectively. So, what now? Work done by Bespoke Investment Group shows that in the last 40 years, when the S&P 500 has been up 10% or more year to date through the end of November, the market has averaged another +2.25% in December. You could successfully argue that the stock market’s performance and valuations are detached from the current underlying economic fundamentals. Alternatively, you could argue that the stock market is forecasting a tremendous rebound in economic growth and activity in 2021 and 2022. We tilt toward the latter. We’ve highlighted the worrisome disparity of recovery for low-wage versus high-wage income earners this year. This past week a couple of Federal Reserve officials articulated an acute awareness of the unevenness in the economic landscape. What does it mean? The Fed Funds rate will be at 0 for a long time to come.

Chart of the Week

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ECONOMIC DATA 

Atlanta Fed GDPNow is currently tracking at 11.2% for Q4, up from 5.6% on 11/20.

New York Fed GDP Nowcast is currently at 2.52% for Q4 down from 2.86% on 11/20.

Goldman Sachs Tracking the Recovery, Week of Dec 2:

US nonfarm payrolls +245k vs +470k expected and +610k in October. A few worrisome underlying data points:

• Labor force participation declined, 400k fewer people working or actively seeking a job. This caused a “bad” fall in the unemployment rate to 6.7% from 6.9% in the prior month.

• Couriers +82k were ⅓ of the month’s gains, Storage & Warehousing accounted for +37k... these two industries are being driven by increased online sales as well as holiday shopping.

  • The Wall Street Journal reported on Wednesday that UPS placed shipping limits on several large retailers, including Gap and Nike, in order to manage a surge in e-commerce. Stricter COVID restrictions caused an online shopping boom and that led to capacity constraints. “The National Retail Federation estimated that online shopping jumped 44% over a recent five-day stretch that included Black Friday and Cyber Monday.”

• -93k in the headline figure was the result of layoffs of temporary census workers

• Leisure & hospitality were a huge disappointment with +31k versus 270k average the past 3 months. Restaurant employment was also week, it fell for the first time since April (-17k).

• Retail trade payrolls -35k, according to BLS this was the result of, “less seasonal hiring in several retail industries.”

• Average hourly earnings +0.3%m/m and average weekly hours held steady at 34.8 hours.

• 2.76mln people still remain on “temporary unemployment” which could provide a significant boost to job growth in the coming months if the economy can stay afloat during the most recent lockdown measures taken in parts of the country in response to a spike in COVID hospitalizations.

  

  

US ADP Employment falls short of expectations +307k vs +440k expected.

• October was upwardly revised higher to 404k from 365k.

• Small and medium sized business posted largest gains, +110k and +139k respectively.

• Service industry +276k jobs, Leisure and hospitality +95k, a positive sign as this was a sector of the economy that had experienced the most severe job losses.

US ISM Manufacturing 57.5 in line with expectations - 7th consecutive month of expansion.

• “Of the 18 manufacturing industries, 16 reported growth in November” (15 reported growth in October).

• New orders, production, employment, and inventories fell versus October.

• Employment component shows contraction, 48.4.

China’s November official manufacturing PMI 52.1 vs 51.5 expected.

• Recovery is being led by new orders and production. Increase in total new orders exceeded export new orders, suggests domestic demand catching up to international demand. 

• Business expectations now at a five-year high.

New Zealand business confidence rises to a 3 year high.

• Activity Outlook index now back to pre-COVID levels. 

• House prices in NZ rose 9.2% y/y, the fastest appreciation in 3 years. 

  • Housing confidence survey showed New Zealander expectations for house price appreciation is now at a 24-year high. 

Australian Q3 GDP higher than expected at +3.3% q/q  (2.5% expected). Was -7.0%q/q for Q2.

• Consumer spending is driving the rebound, +8%q/q versus -12.5% in Q2.

• Despite the rebound, economic output is still almost 4% below last year’s levels.

• Retail sales for October also bounced +1.4%m/m in October versus -1.1%m/m in September.

Japanese Industrial Production index has 5th consecutive monthly rise, +3.8% m/m. 

• Index now at its highest level since March (95), pre-COVID level was 99.5 in February. 

• Production was up in 12 of 15 industries.

• Autos at the the highest level since September 2019. 

• Shipments highest since February and inventories down for the 7th consecutive month.

Sweden manufacturing PMI rises to 59.1 in November, surprises positively versus expectations of 58. 

• This is the highest reading for the data since December 2017.

• New orders at the highest since September 2017.

• On the downside, employment subcomponent still in contraction at 49.5.

• Sweden services PMI for November also surprised higher, rose to 58.6, the highest level since end-2018. 

Korean November exports +4% y/y lower than 7.5% expected but better than October’s -3.6%. (C: 7.5%; Oct: -3.6%).

• Exports to China +1.0% y/y, exports to the US+ 6.8%, EU +24.6%.

German factory +2.9%m/m in October.

• Foreign orders are the key driver, surmise from other data points that China is the biggest catalyst. 

CENTRAL BANKS

Fed Chair Powell testified at the Senate Banking Committee on Tuesday, 12/1, to discuss the CARES Act. 

• Regarding the recent expiration of programs and the call from the Treasury for the return of unused capital, “The CARES Act assigns sole authority over its funds to the Treasury Secretary, subject to the statute's specified limits. The Secretary has indicated that these limits do not permit the CARES Act-funded facilities to make new loans or purchase new assets after December 31 of this year. Accordingly, the Federal Reserve will return the unused portion of funds allocated to the lending programs that are backstopped by the CARES Act in connection with their termination at the end of this year. As the Secretary noted in his letter, non-CARES Act funds in the Exchange Stabilization Fund are available to support emergency lending facilities if they are needed." 

• During the testimony he warned that downside risk of small businesses closures are elevated.

• Unemployment rate among low-income earners is still a substantial risk to the economic recovery. 

• Fed Governor Brainard also commented on the disproportionate effects of the pandemic on low-income households and emphasized the importance of additional fiscal support, “additional fiscal support is essential to bridge past COVID's second wave in order to avoid labor market scarring, reductions in crucial state and local services, and bankruptcies. Such additional support is critical to turn this K-shaped recovery into a broad-based and inclusive recovery that is stronger overall.” 

SF Fed President Daly presents “2020 Lessons, 2021 Priorities.” 

• Three lessons from 2020: 

  • 1. “We are all interconnected”

  • 2. “The impact of economic shocks does not fall equally”

  • 3. “Persistent and pervasive differences in outcomes limit our economic prosperity”

• Five priorities for 2021:

  • 1. “Help to bridge the economy across disruptions caused by the virus”

  • 2. “Return to full employment and sustainable 2% inflation”

  • 3. “Remember that the Fed’s tools are powerful”

  • 4. “Ensure that the Fed can finish”

  • 5. “Ensure that the Fed’s work helps everyone”

ECB President, Christine Lagarde writes article in “L’ENA hors les murs” magazine, “The future of money – innovating while retaining trust.”

• Use of physical cash will decrease moving into the digital age.

  • Highlighted the significant increase in digital transactions during the pandemic. 

• “The ECB wants to ensure the euro remains fit for the digital era.” 

• Use of crypto assets may represent a threat to financial stability and monetary sovereignty, expressed concern about crypto asset class’s ability to act as store of value.

  

The Reserve Bank of Australia left monetary policy unchanged at its December meeting. Their current bond purchase program is AUD$100bln over 6 months that ends in May of 2021. 

• Emphasized that the bank's actions have lowered borrowing costs, lowered the value of the AUD and are supporting asset prices.

• Asset purchases are the preferred method of further stimulus if warranted, "the Board will keep the size of the bond purchase program under review." 

• Expects the economic recovery to be "uneven and drawn out...dependent on significant policy support." 

• On the topic of financial stability risks, on Tuesday RBA Governor Lowe said that in the current environment “a protracted period of high unemployment” is more of a risk to financial stability in than excess borrowing.

The Reserve Bank of India (RBI) has kept its repo rate unchanged at 4% and will commit to maintaining an ‘accommodative stance’ for as long as necessary. Inflation is projected to hold steadily in around the 5.8% range for the fourth quarter of fiscal year 2021. 

• Shaktikanta Das stated “Financial sector entities like banks and NBFCs should give the highest priority to quality of governance, risk management and internal controls.” 

The Senate narrowly confirmed the nomination of Christopher Waller to the Federal Reserve’s Board of Governors on Thursday, with a vote of 48-47. Waller has a Ph.D in economics from Washington State University and will remain on the board until January 2030. 

• As an executive vice president of the St. Louis Fed, Waller’s research has focused on how the Fed’s communication affects financial markets and on the benefits of an independent central bank. 

• Christopher Waller will be Trump's fourth addition to the Board of Governors.

BoJ Deputy Governor Masayoshi Amamiya, “Recovery in overseas economies is expected to be varied and is likely to remain dependent on the course of COVID-19. Thus, it is necessary to continue closely monitoring developments in overseas economies, taking into account downside risks.” 

• Regarding Japan: “As the impact subsides globally, the economy is projected to keep improving further with overseas economies returning to a steady growth path. That said, this baseline scenario of the economic outlook entails high uncertainties and risks are skewed to the downside.” 

• BOJ Board Member Suzuki reiterates his view that, “It is desirable for the yield curve for super-long-term JGBs to become steeper at a moderate pace with the Bank keeping 10-year JGB yields at around 0%, in that financial institutions can improve profits on their investment and the Bank can achieve financial system stability while monetary easing is prolonged.”

FIXED INCOME, CURRENCIES, COMMODITIES

Bitcoin touches another new high this week at $19,914. Previous all time high was $19,511 from December 2017. In 2020, Bitcoin has rallied 150%. The value of bitcoins outstanding currently sits at $500bln!

• Billionaire hedge fund manager, Paul Tudor Jones becomes the latest institutional investor to embrace bitcoins potential. He told Yahoo Finance that he expects bitcoin to go “substantially higher” as the trend for digitalization continues. He also believes that cryptocurrencies could trade like the metals market, with bitcoin trading as a precious metal and other cryptocurrencies trading like industrial metals. 

Oil rose for the fifth consecutive week in response to a new OPEC+ deal. The committee agreed to add 500k barrels a day to the market next month and then hold monthly meetings to determine subsequent moves.  

• “The fact that February’s production levels are still under discussion puts more uncertainty ahead for the coming OPEC+ meetings.” -Rystad Energy

• OPEC+ had previously been expected to maintain cuts until at least March but with the speedy approval of a vaccine, several producers expect that to be lifted sooner rather than later.

• Energy stocks have rallied another 10% through the first 4 days of December after returning 28% in November!

The House of Representatives passed a landmark bill that would decriminalize marijuana at the federal level. The bill aims to remove it from the Controlled Substance Act, as well as expunge some marijuana-related convictions.

• The law authorized a 5% sales tax on marijuana products and provides micro loan opportunities for small marijuana businesses. This comes after legal cannabis sales soared to a record level over the Thanksgiving weekend. (See Weekly Summary from Oct 11, 2020 for a market perspective)

EQUITIES

The Financial Times published a column entitled: "Robo-surveillance shifts tone of CEO earnings calls: Trading algorithms leave a mark with deeper focus on the spoken word". The piece outlines the evolving nature of the language that CEOs choose to use on earnings calls as a result of AI-driven hedge funds that respond instantaneously to key phrases used by management when reporting their results.

• High-speed hedge funds have implemented natural language processing algorithms that instantaneously respond to earnings calls, social media posts and regulatory documents for information that could be market-moving.

• “Natural language processing is a form of artificial intelligence where machines learn the intricacies of human speech. With NLP, quant hedge funds can systematically and instantaneously scrape central bank speeches, social media chatter and thousands of corporate earnings calls each quarter for clues."

• Luke Ellis, the CEO of publicly listed asset manager, Man group, says that "Machines can pick up a verbal tick that a human might not even realize is a thing.” Ellis is in a unique position to understand the structural shift that's occurring. His company is publicly listed, so he leads earnings calls, and they are also the operator of one of the largest hedge funds in the world. 

• The number of machine downloads, scraped by such strategies, of quarterly and annual reports in the United States has risen from 360k in 2003 to 165mln in 2016 and has likely grown significantly since the last report.

• Authors of a recent research study that explored this dynamic write that, “More and more companies realize that the target audience of their mandatory and voluntary disclosures no longer consists of just human analysts and investors... a substantial amount of buying and selling of shares [is] triggered by recommendations made by robots and algorithms which process information with machine learning tools and natural language processing kits.”

  • The paper also found changes in tone expressed by management on earnings calls, “Managers of firms with higher expected machine readership exhibit more positivity and excitement in their vocal tones, justifying the anecdotal evidence that managers increasingly seek professional coaching to improve their vocal performances along the quantifiable metrics.” 

  • “The paper found that companies have since 2011 subtly tweaked the language of reports and how executives speak on conference calls, to avoid words that might trigger red flags for machines listening in.”

• Industry experts suggest that the investor relations departments of publicly listed company are running different versions of their releases through such algorithms internally, before releasing them publicly, to see which versions perform the best.

November concluded as a reversal month for several sectors within the S&P after the index rose 10.8% m/m, marking the biggest monthly gain for the index since April.

• Russell 2000 +18.3% in November, recording its best monthly performance.

• Dow +11.9%, the best monthly gain since January 1987 and its best November since 1928.

• Nasdaq +11.8%, its best November since 2001.

This has been the most volatile year for U.S. stocks since 2009 as measured by the VIX index. 

• Options activity (see below) combined with economic uncertainty have been key drivers for the persistent elevated vol level.

  

  

Options trading is more popular than ever. Options market continued its boom going into December with the 20-day moving average hitting a record high of over 20mln option contracts. 

• Over 35mln call options were exchanged the day before Thanksgiving, another record high.

  

Pfizer Inc. (NYSE: PFE) is now planning to distribute up to 50mln doses of its vaccine, down from the original estimate of 100mln due to a slower-than-expected manufacturing scale-up and raw material shortages. 

• Pfizer’s currently expects to produce 1.3bln doses in 2021

• Important to note that the distribution cut is only expected for 2020. Estimates for 2021 have not been revisted lower

Airbnb is scheduled to IPO on December 10, 2020 with a $35bln valuation. Implies a price range between $44 - $55 per share. Their most recent valuation was $18.1bln in April of this year. 

• Airbnb lost $696.9mln for the first nine months that ended in September 2020 on a revenue base that fell 32%y/y at $2.5bln

• According to the company’s S-1 filing, there are 4mln users in over 220 countries as of November 16, 2020.

• At the peak of the pandemic, gross bookings fell 127% y/y (that number is more than a 100% decline because of refunds).

• The pandemic appears to have altered consumer behavior regarding their travel patterns. Airbnb has realized a higher average spend on individual bookings: Gross booking volumes are down 28% y/y but gross booking value is down 17%

Warner Bro. Entertainment announced that it will stream all of its 2021 movies on HBO Max, concurrent with their theater releases.

• The agreement is intended to last for only one year, but it begs the question about whether a permanent change in movie releases could be the end result.

GEOPOLITICS

Congress has set the stage for delisting a select number of Chinese stocks from US markets after the House of Representatives on Wednesday unanimously passed the Holding Foreign Companies Accountable Act.

• All foreign companies with US stock listings will have to comply with US audit oversight rules within a three-year window.

• Although this bill applies to any foreign company, the spotlight remains on China whose companies are notorious for lax oversight. The total market capitalization of US-listed Chinese stocks stands at $2.2tln.

  • An example of such fraud is Chinese EV company, Kandi Technologies who is accused of faking sales in order to receive a $160mln US investment.

PUNDITRY

Louis-Vincent Gave, Chief Executive of Gavekal: Are we due for a shift in the world's reserve currency?

Recent economic developments that have taken place as a result of the pandemic, especially in the Western world, have created trends and opportunities that Gave believes will set the stage for a switch in the reserve currency. 

The response to Covid has led to an increase in debt per capita in some countries significantly more than others: 

• Some of the most prominent increases include the US which has realized a $12,800 increase in debt per capita, $7,000 in Germany, and $5,300 in France.

• On the opposite side of the spectrum, China's debt per capita has only increased $1,200.

This type of evolution will more than likely hinder the Western world's arsenal of future policy options, forcing policy markets to embrace yield-curve controls and limit upward interest rate movement.

• Japan and Europe have already gone down this path.

Gave posits that managing the rising public debt levels will be critical policy issue the US will have to address in the near future.

• "…there are no historical examples, outside of Japan, where that doesn’t lead to massive and very fast inflation, massive currency debasement, or both."

China has been experiencing an influx of fintech solutions across Southeast Asia, the Middle East, and Africa through WePay and Alipay. 

• One of China's biggest roadblocks to a successful transition to a digital renminbi will be gaining the public's trust after decades of social instability.

The recent vote for the Holding Foreign Companies Accountable Act might play a critical role in facilitating the development of the digital renminbi.

• With US-listed Chinese stocks facing potential delisting, the Hong Kong market might attract lucrative investment and can be a key stepping-stone in the digital renminbi's internationalization.

• "Most Westerners saw the intervention as the death of Hong Kong, but China guaranteed Hong Kong would be China’s capital markets for the foreseeable future."

Bridgewater’s Karen Karniol-Tambour: The Biggest Investment Opportunity for Americans is China.

In order to get the economy moving when interest rates are at zero, and there has been an influx of printed money, there needs to be a coordinated effort when it comes to monetary and fiscal policy.

• The standard 60/40 stocks to bonds asset allocation will need to be reimagined if bond yields remain so close to zero.

• The US and Europe will need to shift toward a government-directed industrial policy to stay competitive with countries like China. That is achievable through nonpartisan politics and using fiscal policy as the most powerful level. 

• China’s dual circulation (an economic strategy that emphasizes increased domestic demand, self-reliance for high-tech goods, and selectively opening the economy to foreign companies) will be pertinent for investors to understand because there are significant opportunities to be had. 

• Diversifying into China will be the greatest investment opportunity post-Covid because of the country’s economic size, policies, and potential.

• The biggest investment opportunities will be in companies that solve global issues (i.e. climate change).

• Covid-19 will cause analysts to view tail risk with more scrutiny. For example, many don’t perceive climate change to be a key issue in markets but there are considerable tail risks involved. 

• GDP is no longer a good proxy to determine human well-being. Alternative data points will need to be analyzed to get a better understanding of prosperity. Such metrics include inequality, pollution levels and education. 

• ESG investing will continue to rise in popularity as investors look to profit from a sustainable future. 

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Legal Information and Disclosures

This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

Moreover, wherever there is the potential for profit there is also the possibility of loss.

This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.

THIS IS NOT INVESTMENT ADVICE. 

Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.

Commentary

Ahead of a shortened week in markets because of american Thanksgiving, we’re delivering an abridged summary. Once again, you’ll see a significant focus on the continued rise of the US housing market. As we noted during our October 25th newsletter, “housing is arguably the most important data point to watch in order to measure COVID’s impact on the economy as well as prospects for a recovery…there is a significant secular demographic tailwind driving the housing data. Coming out of the global financial crisis, household formations in the US were below historical averages for many years. It is only recently that the data has approached the historical average levels but the magnitude of the shortfall from 2008 - 2016 left an extraordinary amount of pent-up demand that still exists.”

Chart of the Week

From JP Morgan, “We have been surprised to see a quick rebound in overall spending in data through November 15, with our primary spending tracker jumping back to its highest levels since the bump fromAmazon Prime Days in mid-October.”

Thanksgiving Holiday

We will not be compiling a weekly macro summary next week. We will resume delivery on December 6.

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ECONOMIC DATA 

Atlanta Fed GDPNow is currently tracking at 5.6% for Q4, up from 3.5% last week.

New York Fed GDP Nowcast remained unchanged from last week at 2.86% for Q4.

US retail sales miss expectations in October. 

•  Retail sales +0.3% in October to $553.3bln vs +0.5% expected, slowest monthly gain in the post-pandemic period.

• Top performers y/y by kind of business: Nonstore retailers +29.1%, building materials +19.5%, sporting goods +12.4%.

• We wonder if the rebound is coming to a halt due to a.) restrained business activity as a result of a rise in coronavirus infections and a pickup in lockdown mandates and b.) extended unemployment benefits due to expire. 

US weekly jobless claims ticked up this past week breaking a four-week streak of declining claims.

• Claims +31k up to 742k vs 710k expected.

• Initial claims filed for the Pandemic Unemployment Assistance program +24k to 320k as of 11/14.

China’s economy continues its strong expansion. 

• Industrial production +6.9% y/y vs 6.7% expected.

• Manufacturing +7.5% m/m.

• Retail sales +4.3% y/y vs 5.0% expected; marking the third successive month of expansion for retail sales, up from 3.3% in September. Ex-auto +3.6% y/y. 

• Interesting data point: rural area consumption +5.1% vs +4.2% in urban areas.

• Fixed asset investment +1.8% YTD vs 1.6% expected, mainly due to a large increase in mining, farming, and quarrying investment.

US homebuilding continued its remarkable performance in October.

• Housing starts +4.9% m/m in October, +14.2% y/y.

• Single-family housing starts +6.4% to 1.179mln units, the highest level since April 2007 and marking the sixth straight month of increasing single-family starts.

• Building permits for future home building unchanged m/m at 1.545mln, +2.8% y/y.

October existing home sales posted their 5th consecutive month of gains.

• +4.3% m/m to 6.85mln vs -1.1% expected (+26.6 y/y).

• Median price of existing home sales +15.5% y/y to a record high of $313k.

• Total housing inventory declined to just 1.42mln which represents 2.5 months of supply - a record low.

• All four major regions realized m/m and y/y growth, with the Midwest experiencing the greatest monthly increase: 

  • Northeast: existing home sales +4.7% m/m, +30.4% y/y.

  • Midwest: +8.6% m/m, +28.1% y/y.

  • South: +3.2% m/m, +26.5% y/y.

  • West: +1.4% m/m, +22.8% y/y.

Number of US bankruptcy filings continue to spike surpassing the total for 2009.

• Bankruptcies for US companies with more than $50mln in liabilities that have filed for chapter 11 or 7 bankruptcy.

The Conference Board’s Leading Economic Index signals headwinds, rate of recovery has decelerated.

• The LEI +0.7% m/m to 108.2, “Downside risks to growth from a second wave of COVID-19 and high unemployment persist.”

Mortgage credit availability increased in October as reported by the Mortgage Bankers Association.

• The Mortgage Credit Availability Index (MCAI) increased by 2.3% to 121.3 in October; the first increase since July (increase in the index = loosening lending standards).

• The total number of loans now in forbearance decreased 20bps to 5.47%, the 11th week in a row of declines.

CENTRAL BANKS

US Treasury Secretary Steven Mnuchin instructed the Fed to close down its emergency lending facilities and return unused money designed to support small and medium sized businesses, and state and local governments, in a letter on Thursday to Fed Chairman Jerome Powell. 

• In the letter, Secretary Mnuchin requested the Fed return unused Treasury funding for 9 of 13 emergency facilities by December 31.

• “This will allow Congress to re-appropriate $455bln, consisting of $429bln in excess Treasury funds for the Federal Reserve facilities and $26bln in unused Treasury direct loan funds” - Mnuchin

• The Fed responded with a statement Thursday afternoon, “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”

91% of respondents in BAML’s fund manager survey are expecting a stronger economy over the next 12 months. The most bullish outlook from the survey for the economy since March 2002.

FIXED INCOME, CURRENCIES, COMMODITIES

IMF: Rising national debt is a recurring theme among developed economies

Copper closed the week at a two-year high on hopes for a continued global recovery

• TD: “Our real-time commodity demand indicator continues to print new yearly highs, suggesting the vaccine announcement catalyzed a new reflationary impulse in commodities.”

EQUITIES

Is Value Investing dead? Michael Mauboussin argues that value investing is alive and well and value factoring may be floundering. As Charlie Munger has always said “All good investing is value investing.”

• Fundamental value investors should focus on gaps between price and value for individual securities. The present value of future cash flows, not misleading multiples, are the source of value, says Michael. 

• Earnings and book value no longer mean what they used to. Tangible assets, such as factories, were the foundation of business value in Graham’s time. Yet intangible spending, such as research and development, has been on the rise for decades.

The Boeing 737 Max has been cleared to fly by the Federal Aviation Administration (FAA) after a twenty month hiatus. The Max was involved in two fatal crashes in Ethiopia and Indonesia, killing 346 people. In order to garner public support, FAA Administrator Steve Dickson said he’d be “100 percent comfortable with my family flying on it.”

• Boeing (NYSE: BA) closed on Wednesday 11/18 at $203.30. The stock has traded as low as 89.00 and as high as 373.77 in the last 52-weeks and still well below its all-time high on March 1, 2019. 

• The first return flight for the Boeing 737 Max will be an American Airlines route from Miami to NYC on December 29th.

Walmart (NYSE: WMT) reported their third quarter results. The stock closed the week at $152.12, just below its 52-week high of $153.40.

• U.S. Same-Store Sales excluding fuel are up 6.4% in 3Q20, while E-Commerce Sales jumped 79% on strong Grocery Demand and physical distancing precautions. 

• International Revenue expanded modestly at 1.3%, with the strongest growth coming from Canada at 7.7%.

Target Corp. (NYSE: TGT) reported strong third quarter results as the stock has returned 34.4% for the year. 

• Adjusted EPS expanded 105% in 3Q20, as revenue jumped 21% with same-store sales increasing 20.7% and transactional tickets increasing 15.6%. 

• Online Sales continues to highlight strong growth increasing 155% v.s. 31% a year earlier. Same-Day services grew 217%.

Lowe’s (NYSE: LOW) continues to benefit from the work-from-home trends, closing the week at $149.60. Shares are up 25% ytd

• Total Sales increased 28.3% in 3Q20 from a year ago, same-store sales +30.1%. Transactional tickets increased 13.7%. 

The Home Depot (NYSE: HD): Total Sales +23.2% from a year ago and same-stores sales +24.1% for 3Q20. The average transactional ticket rose 10%. 

• "Customers responded to our larger assortment of animatronics, inflatables, and yard decor, as evidenced by our 12-foot giant skeleton, which sold out before October, helping drive a record sell through for the eventq"

Making the House a Home: a study by the National Bureau of Economic Research (NBER) found that households spend on average $3,700 more in the months before and the first year following new home purchases. Is there a thematic trend here that continues to perform despite the ongoing pandemic? 

• The housing market has continually outperformed other sectors this year. The iShares U.S. Home Construction ETF (ITB), which seeks to track U.S. equities in the home construction sector has returned 27.53% through the end of September.

• The Consumer Discretionary SPDR Fund (XLY), which is made up of 93% consumer cyclical companies (Amazon, Home Depot, Lowes, Target and TJ Maxx make up a majority of the top holdings) has returned 17.19% through the end of September. 

• NBER’s research argues that new home purchases will further stimulate the market for durable consumption by increasing goods and services that complement the home. You can see the relationship in the chart below (the NHSLTOT Index is new seasonally adjusted single family home purchases). This begs the question: does correlation imply causation? 

Individual investors in US stocks are finally turning optimistic after eight months of gains

• November 12 AAII US Investor Sentiment hit its highest level since January 2018 at 55.84%

• November 19 reading fell to 44.35% but it’s the first time since February that optimism has been above its historical average 38.0%) for consecutive weeks.

GEOPOLITICS

Following up on our coverage of the Grand Ethiopian Renaissance Dam (GERD), Ethipoia is currently in a state of duress, with military and political conflicts on the rise. The GERD is at the center of the conflict, the project which will produce electricity from the Blue Nile River, has reached a critical stage. The Eastern Nile riparian states (specifically Egypt, Sudan and Ethiopia) most affected by the dam’s construction may go to war to resolve their disputes if peaceful cooperation does not emerge. 

• The United States has recently cut aid to Ethiopia worth $130 million on the back of a phone call with Sudanese Prime Minister Abdela Hamdock and Isreali Prime Minister Benjamin Netanyahu in October 2020, blaming Ethiopia for breaking ‘the deal’.

Russia intends to build a naval base in Sudan, an expansion announced a year after Russia’s first geopolitical summit.

• Would be the second naval base outside of former Soviet Union territory.

• Action follows a pattern of increases in arms sales and various investments in natural resource projects to gain a stronger foothold in Africa in competition with the US and China.

• Land will be provided to Russia for 25 years, with options to extend.

• Will be a huge boon for Russia’s naval presence as the country has historically lacked warm-water port access.

• Could be a bane to US as an executive order was recently signed to remove Sudan from the list of state sponsors of terrorism.

Last week Pervuvian political unrest led to the election of a third president in a week. A centrist technocrat, Franscico Sagasti will follow Manuel Merino, who was met with five days of mass protest until his resignation. Congress had impeached Martin Vizcarra and replaced him with Merino earlier that week following his anti-corruption campaign and poor handling of the COVID pandemic in Peru.

• Peru’s economy -30% in Q2, worst of any major emerging market, second highest COVID death toll per capita globally under Vizcarra.

• Current president Francisco Sagasti: an industrial engineer, former World Bank official, elected by congress. Verdict is still out on whether his centrist background will be able to command enough support to settle the masses.

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Commentary

On Monday, Pfizer announced that it had a vaccine ready for COVID-19 that had been shown to be effective in granting immunity to over 90% of patients in their trial with few side effects. It’s projected that by the end of the first quarter of 2021 enough doses will be available to protect 25 million Americans and by the end of Q2, the entire population.

We take care not to engage in hyperbole in our weekly summary but Monday's exuberant market reaction was one of the largest and most rapid rotations in the history of global markets. The S&P500 outperformed the Nasdaq 100 by the largest margin in over 20 years; The Russell 2000 traded “limit-up” pre-market; the 10 year Treasury yield rose 13 basis points; the KBRE regional bank index rallied 15.5%!; gold futures fell 5%, their largest single day decline since June 2013; Crude oil prices rose 8.5%; “Value” had a net return of 6.4%, the largest one-day gain since at least the mid-1980s; and the Long/Short momentum factor index fell 13.7%, its worst loss in history.

By Friday, with a vaccine on the horizon and the end of the pandemic in sight, the S&P 500 had achieved a new all-time high closing price. All of this occurred as COVID-19 cases and hospitalizations appear to be in the middle of a “2nd wave” in the US and Europe.

Chart of the Week

In the United States, as of September 24 2020, employment rates among workers in the bottom wage quartile decreased by 19.3% compared to January 2020 while employment rates for those earning over $60k have risen.

Source: Opportunity Insight

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SPECIAL SECTION: STATE OF THE US ECONOMY & COVID-19

On Friday morning, James Bullard, and the St. Louis Fed, presented an update on the state of the US Economy. This section is a distillation of that presentation. 

US macroeconomic news from May through October surprised dramatically to the upside.

• Business sector adjustment to the pandemic has been rapid.

• Monetary and fiscal policies have been exceptionally effective. 

• Downside risk remains substantial, national health policy will be critical to maintain economic momentum.

COVID-19 daily fatalities per 100,000 population have recently started to rise again despite being substantially below peak levels from March and April. As a result, US hospitalizations are rising.

• 12 states now have more than 10% of their hospital beds occupied by COVID-19 patients, a pandemic high. For now, no state is near the levels reached in the Northeast in April/May.

  • The most impacted state is Wisconsin with 15.5% of hospital beds occupied by COVID patients. In April, NY and NJ experienced 35-40%. In the summer, Arizona reached 27%.

  • The Midwest is the most impacted region. New cases rose 43% w/w through November 6.

• At the current trajectory, the latest IHME model projected 38 states will exceed ICU bed capacity by February 1st and that the daily death rate would reach approximately 1900 per day through the end of January - the current 7 day average is 998.

• US company second-quarter results demonstrated that, so long as simple precautions are taken, essential retail services can be provided with low risk which has allowed many firms to get back to business safely.

  • Going forward restrictions as a result of rising case counts are likely to be more targeted. We know a lot more about COVID-19 than at the beginning of the pandemic so, as a result, the impact on consumer confidence is likely to be much less severe than before. 

• National business restrictions in the US are not significantly different today from what they have been in recent months. The pick up in infection rates are probably coming more from personal interactions at the household level.

Source: St. Louis Federal Reserve

Source: JP Morgan

April 2020 is likely to have been the lowest point of the crisis.

• Since then there have been substantial upside surprises in macroeconomic data releases.

• Third-quarter real GDP growth, at an annualized rate of 33.1%, was the fastest on record.

• Employment has rebounded more rapidly than expected which indicates that layoffs were likely temporary as firms adjusted to the pandemic.

  • The temporary layoff category of unemployment has been more important in this recession compared with previous recessions.

  • The US labor market recovery is 48 to 50 months ahead of where it was following the 2007-09 recession.

  • If all those unemployed identifying themselves as, “on temporary layoff” are recalled and nothing else changes, the official unemployment rate would decline to 4.9%. 

Source: St. Louis Fed

The US fiscal policy response to the pandemic has been valued at $3.2trln which is approximately 14.5% of US nominal GDP in Q4 of 2019.  

• The size of this response drove personal income up to an all-time high in the second quarter, the opposite of normal recession dynamics.

• The actual shortfall in US real GDP for 2020 is likely to be approximately $500bln (2.5% of GDP).

• Considerable resources are still pledged to combat the crisis in 2021