Neil's Morning Summary - 10/29/21
Neil's Morning Summary - 10/29/21
Please excuse typos. Continuing to try to make this more digestible for those who are not as familiar with the markets, lingo, etc. Feel free to leave your thoughts in the comments section, they are appreciated. Also, I don't discuss crypto extensively as I don't consider myself knowledgeable enough to talk intelligently on the subject (and there are plenty of other sources for that).
A small glossary.
Here's the SPX futures this morning. Remaining just under ATH's.
In U.S. corporate news (Argus):
Asia
Major equity indices in the Asia-Pacific region ended Equity indices in the Asia-Pacific region ended the week on a mixed note. Japan's Nikkei: +0.3% (+0.3% for the week) Hong Kong's Hang Seng: -0.7% (-2.9% for the week) China's Shanghai Composite: +0.8% (-1.0% for the week) India's Sensex: -1.1% (-2.5% for the week) South Korea's Kospi: -1.3% (-1.2% for the week) Australia's ASX All Ordinaries: -1.3% (-1.1% for the week).
In news, PBoC injected a net 680 Bln yuan for the week, the biggest weekly injection in 21 months according to RTRS. Developer Evergrande made another interest payment just ahead of today's expiration of a grace period that would have triggered cross defaults on all of the company's international obligations. The grace period on another missed payment will expire on November 11. There were reports of diesel shortages at gas stations in China. There was more speculation about the Reserve Bank of Australia ending its yield curve control policy at next week's meeting as the country's 3-yr yield remains above target. More below.
In economic data, Japanese and S Korean Sept industrial production missed with contractions in both. S Korean and Australian retail sales for Sept beat, while the latter's PPI was above expectations.
Japan's September Industrial Production -5.4% m/m (expected -3.2%; last -3.6%) and September Housing Starts 4.3% yr/yr (expected 7.5%; last 7.5%). September Unemployment Rate 2.8%, as expected (last 2.8%). October Tokyo CPI 0.1% yr/yr (last 0.3%) and Tokyo Core CPI 0.1% yr/yr (expected 0.3%; last 0.1%). October Household Confidence 39.2 (last 37.8)
South Korea's September Industrial Production -0.8% m/m (expected -0.3%; last -0.7%); -1.8% yr/yr (expected 1.4%; last 9.7%). September Retail Sales 2.5% m/m (last -0.8%) and November Manufacturing BSI Index 87 (last 92)
Singapore's Q3 Unemployment Rate 2.6% (last 2.7%). Q4 Business Expectations 16.00 (last 20.00)
Australia's September Retail Sales 1.3% m/m (expected 0.2%; last -1.7%). September Private Sector Credit 0.6% m/m, as expected (last 0.6%). Q3 PPI 1.1% qtr /qtr (last 0.7%); 2.9% yr/yr (last 2.2%).
As noted, the Australian central bank again today did not offer any defense to the break of the yield of the April 20204 bond from its target, effectively ending YCC for at least that maturity. It is now almost eight times the target at 0.76% vs RBA target of 0.1%. Heisenberg Report.
“The lack of RBA intervention in the selloff has reinforced investors’ building expectations that an official policy shift will be announced as early as next week,” BMO’s Ian Lyngen and Ben Jeffery wrote. “The magnitude of the move was notable and speaks to the market dislocation risks associated with exiting QE.”
For obvious reasons, analysts are now adjusting their outlooks. National Australia Bank expects the RBA to scrap YCC next week. Another bank called the program “past its use-by date.” The forward guidance will have to be updated too.
Note that three-year Aussie yields are now up almost 100bps this month. That’s the largest monthly increase in more than a quarter century (figure above).
As of 8 am Eastern, major European indices trade in the red. STOXX Europe 600: -0.5% (+0.2% week-to-date) Germany's DAX: -0.8% (+0.2% week-to-date) U.K.'s FTSE 100: -0.3% (+0.3% week-to-date) France's CAC 40: -0.4% (+0.7% week-to-date) Italy's FTSE MIB: -0.5% (+0.7% week-to-date) Spain's IBEX 35: -0.1% (+1.3% week-to-date). If it can stay green for the week it will be the fourth straight gain for the STOXX 600.
In news, Eurozone's CPI increased at its fastest yr/yr (4.1%) pace since mid-2008 in the October reading. Policymakers at the European Central Bank are reportedly divided over their view of knock-on effects f rom inflation. British Prime Minister Johnson summoned the French ambassador over the ongoing fishing dispute. The G-20 summit is taking place in Rome this weekend.
Lots of economic data this morning. EU CPI came in above expectations increasing at its fastest yr/yr (4.1%) pace since mid-2008 in the October readings due to a huge surge in energy prices. Core inflation also was above expectations though breaching 2% at 2.1%. GDP for the EU came in slightly above expectations.
German and Spanish flash 3Q GDP and UK Sep consumer net credit came in below expectations although mortgage lending was well above estimates. French and Italian GDP came in above estimates. Spanish retail sales beat estimates while French missed.
Eurozone's October CPI 0.8% m/m (last 0.5%); 4.1% yr/yr (expected 3.7%; last 3.4%); CPI Core (Y/Y) Oct P: 2.1% (est 1.9%; prev 1.9%). Flash Q3 GDP 2.2% qtr/qtr (last 2.1%); 3. 7% yr/yr (last 14.2%)
Germany's flash Q3 GDP 1.8% qtr/qtr (expected 2.2%; last 1.9%); 2.5% yr/yr (expected 2.4%; last 10.3%)
U.K.'s September Mortgage Lending GBP9.52 bln (expected GBP6.00 bln; last GBP4.44 bln)
France's September Consumer Spending -0.2% m/m (expected 0.3%; last 0.7%). Q3 GDP 3.0% qtr/qtr (expected 2.1%; last 1.3%). October CPI 0.4% m/m (last -0.2%); 2.6% yr/yr (last 2.2%)
Italy's flash Q3 GDP 2.6% (expected 2.0%; last 2.7%); 3.8% yr/yr (expected 3.0%; last 17.0%). October CPI 0.6% m/m (expected 0.4%; last -0.2%); 2.9% yr/yr (expected 2.6%; last 2.5%)
Spain's flash Q3 GDP 2.0% qtr/qtr (expected 2.7%; last 1.1%); 2.7% yr/yr (expected 3.5%; last 17.5%). September Retail Sales -0.1% yr/yr (last -0.7%)
Swiss October KOF Leading Indicators 110.7 (expected 108.2; last 111.0)
As the ECB survey of professional forecasters increased estimates for inflation and GDP while decreasing unemployment.
In the ECB Survey of Professional Forecasters (SPF) for the fourth quarter of 2021, HICP inflation expectations stood at 2.3%, 1.9% and 1.7% for 2021, 2022 and 2023, respectively. Compared with the previous round for the third quarter of 2021, these were revised upward by 0.4 percentage points for 2021 and 2022 and by 0.2 percentage points for 2023. Respondents attributed the upward revisions mainly to higher energy prices and the impact of supply chain tensions. Regarding the near-term outlook, many respondents reported that they expected a further increase in the inflation rate in the final months of 2021 but continue to expect a sharp fall in inflation to below 2% during the course of 2022. Regarding the broader factors influencing the inflation outlook, respondents, on average, believed that underlying inflation pressure would gradually rise in line with the recovery in economic activity. Longer-term inflation expectations for 2026 stood at 1.9%, revised up from 1.8% in the previous round.
Regarding GDP growth, SPF respondents’ expectations were largely unchanged for 2021-2023. The apparent upward revision for 2021 mainly reflects the actual growth outcome in the second quarter, which was stronger than previously expected. Overall, the growth expectations continue to imply that economic activity will surpass its pre-pandemic level (fourth quarter of 2019) in the fourth quarter of 2021. Average longer-term expectations for real GDP growth were revised up slightly to 1.5% from 1.4% in the previous round.
The profile of unemployment has been revised down by between 0.2 and 0.3 percentage points for all horizons. SPF respondents expect the unemployment rate to decline from 7.8% in 2021 to 7.0% by 2026.
As following the ECB statement and press conference, traders kept on bets for a rate hike next year, as Lagarde dropped references to inflation as "temporary" and acknowledged they would last longer than initially expected. And when it comes to whether markets had gotten "ahead of themselves" she notably commented “Not for me to say.” BBG.
European Central Bank President Christine Lagarde’s bid to drive home a commitment to ultra-loose monetary policy fell short on Thursday as investors kept alive bets for interest-rate hikes as soon as next year.
Investors held onto bets that the ECB will have raised interest rates at least once come next September, a move that would amount to a dramatic switch in stance from the ultra-loose emergency settings that policy makers have pledged to keep in place until March.
And we noted European gas prices falling yesterday after Putin's comments. Here's more on that. BBG.
European natural gas and power prices dropped after more signals from President Vladimir Putin that Russia will send extra gas to the continent next month.
The Russian leader ordered Gazprom PJSC late Wednesday to focus on filling its European storage sites from Nov. 8, a day after it completes the process in Russia. He said the move should ease supply tightness in Europe, where high prices are squeezing industry and fueling inflation.
It’s the latest intervention in the market from Putin to talk down gas prices, even as some European officials suspect he’s been holding back supply to pressure Europe into approving Nord Stream 2, the controversial new pipeline linking Russia to Germany. Russia is also concerned that excessively high prices could destroy demand, and would like to see them fall by about 60%, according to people familiar with the situation.
Higher Norwegian gas flows and a drop in Chinese coal prices are also putting downward pressure on prices, Engie EnergyScan said in a note. Dutch front-month gas closed 11% lower at 77.032 euros a megawatt-hour. The U.K. equivalent declined 12% to 192.09 pence a therm. German power for next month and the first quarter of next year fell by 14% and 12% respectively. Carbon emissions also fell the most in a week, improving fossil-power generation margins.
Commodities/Currencies/Bonds
Bonds - Yields moving up again this. 2-year up three basis points to 0.53% (just under post-pandemic high), while the 10-year yield is up three basis points to 1.61%. This filled a gap on the 10-year chart.
Dollar (DXY) - After big drop yesterday has bounced off the 50-DMA getting back a lot of yesterday's fall. Currently at $93.73. Daily technicals remain tilted negative with MACD sell longs signal and negative RSI divergence.
Crude (/CL) - Again testing the uptrend line dating back to August. Currently at $82.19 WTI. Technicals remain negative on daily chart.
And ahead of the OPEC+ meeting next week, the JTC met this morning reducing estimates for the supply deficit in the 4th quarter. No change is expected to the 400kbd increase scheduled for December. BBG.
OPEC+ technical experts downgraded their expectations for how tight global oil markets will be this quarter, a week before ministers meet to decide production policy.
The global oil-supply deficit will be just 300,000 barrels a day on average in the fourth quarter, the coalition’s Joint Technical Committee concluded on Thursday, according to delegates. That’s much smaller than the 1.1 million barrel daily shortfall shown in figures initially presented to the panel, which revised its view using fresher data on demand, delegates said.
The Organization of Petroleum Exporting Countries and its partners gather on Nov. 4 to review their plans to gradually restore some more of the production they halted during the pandemic. The revision to the supply and demand figures could give support to the cautious position espoused by cartel-leader Saudi Arabia, which has resisted calls to increase output more quickly.
The JTC also adopted a more bearish outlook for 2022, because of stronger-than-expected growth in non-OPEC supply. There will be an average surplus of 1.6 million barrels a day next year, the committee concluded, compared with preliminary estimates of 1.3 million a day.
Canadian heavy crude’s price collapsed at the U.S. trading hub of Cushing as refiners shun heavy and higher-sulfur crude for lighter grades that are less expensive to process in refineries.
Western Canadian Select’s discount for December to West Texas Intermediate widened to $9 a barrel at Cushing as of Wednesday, the steepest in about two years, according to NE2 Group data. The discount is about $7 a barrel smaller than the price at the Canadian oil hub at Hardisty, Alberta.Refiners are seeking oil that’s less dense and has less sulfur to avoid processing it through units that run on hydrogen that’s made with natural gas, the price of which has surged in recent weeks and added as much as $6 per barrel to the cost of processing more sulfurous crudes, according to the International Energy Agency. The price has also weakened at Cushing after a newly-built oil export pipeline called Line 3 increased shipments of Canadian oil to the U.S.
US Data
So far this morning we've gotten Personal Income and Spending for September with PCE Prices for September. Spending and prices were in line (PCE) while income missed.
Headline below, I'll have a report out this morning.
- Personal Spending Sep: 0.6% (est 0.6%; prev 0.8%)
- Real Personal Spending Sep: 0.3% (est 0.3%; prev 0.4%)
US PCE Core Deflator (M/M) Sep: 0.2% (est 0.2%; prev 0.3%)
- PCE Core Deflator (Y/Y) Sep: 3.6% (est 3.7%; prev 3.6%)
- PCE Deflator (M/M) Sep: 0.3% (est 0.3%; prev 0.4%)
- PCE Deflator (Y/Y) Sep: 4.4% (est 4.4%; prev 4.3%)
US Employment Cost Index Q3: 1.3% (est 0.9%; prev 0.7%)
We'll get the final University of Michigan Index of Consumer Sentiment for October later this morning.
Random stuff:
As negotiations continue on the reconciliation and infrastructure bills. BBG.
Congressional Democrats began a new round of haggling on President Joe Biden’s $1.75 trillion spending framework as they worked to fill in details and deal with last-minute attempts to restore priorities that had been left out.
With Biden on his way to European summit meetings, House Democrats Thursday released a rough draft of legislation to enact the plan, but it likely will take days or even weeks before it might be ready for a vote. Neither the House nor Senate is scheduled to be in session Friday but negotiations were set to continue through the weekend.
In a setback for Speaker Nancy Pelosi, House progressives again blocked a vote on a separate infrastructure bill, a second piece of Biden’s agenda, until the larger package is ready. After she scrapped a plan to act on the infrastructure measure, the House passed another temporary extension for highway funding until Dec. 3, the same day as deadlines that could provoke a government shutdown and a debt ceiling default.But the Biden framework triggered movement forward in the House when progressives formally endorsed a bill that is half the size they originally wanted. Representative Pramila Jayapal, head of the Congressional Progressive Caucus, said the group’s endorsement of it means that even if other priorities like paid leave are not added, CPC members would vote for it.Still, the progressives’ move to put off an immediate vote on the infrastructure bill upset more moderate Democrats.
As the NRF expects best holiday seasonal gain in at least two decades.
As India fortifies its border with China. This is an area to keep an eye on. BBG.
India has deployed recently acquired U.S.-made weaponry along its border with China, part of a new offensive force to bolster its capabilities as the countries remain deadlocked over disputed territory in the Himalayas.
The buildup in India’s northeast is centered on the Tawang Plateau adjoining Bhutan and Tibet, a piece of land claimed by China but controlled by India. It holds historical political and military significance: In 1959, the Dalai Lama fled to India across nearby mountain passes to escape a Chinese military operation. Three years later, both sides fought a war in the area.
Now U.S.-manufactured Chinook helicopters, ultra-light towed howitzers and rifles as well as domstically-made supersonic cruise missiles and a new-age surveillance system will back Indian troops in areas bordering eastern Tibet. The weapons have all been acquired in the past few years as defense ties between the U.S. and India have strengthened due to rising concerns about Chinese assertiveness.
And a little more evidence of peak shipping issues.
To see more content, including summaries of most major U.S. economic reports and my morning and nightly updates go to https://seekingalpha.com/user/15085872/instablogs for more recent or https://sethiassociates.blogspot.com for the full history.
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