Macro Dragon WK #38: US Inflation, US Infra Bill Discussions & US Debt Ceiling are key for the pre-FOMC wk ahead
Summary: Macro Dragon = Cross-Asset Quasi-Daily Views that could cover anything from tactical positioning, to long-term thematic investments, key events & inflection points in the markets, all with the objective of consistent wealth creation overtime.
Top of Mind…
- TGIM & welcome to WK #38 – Hope everyone had a brilliant wkd
- Risk off in the US last wk was most likely linked to debt ceiling concerns, with a warning from US Treasurer Yellen that the treasury would run out of money by Oct if the debt ceiling was not raised.
- Its worth noting the deadline passed wks ago & the US Treasury has been operating under extraordinary measures
- Whilst the US debt ceiling debate tends to be cyclically & always ends up with an eventual extension – it once again shows the tribalism between the democrats & republicans
- Back in 2013 with Obama in office, the debt ceiling debate went on for so long, that the US government had to shut down parts of its operations (National Parks, Museums, etc)
- This was basically the date that the republicans turned what was a signature bipartisan process, to rolling the dice with the credit rating, faith, clarity of US government debt
- The US government eventually got downgrade from a ratings agency, which ended up marking the low of the stress in the bond market
- Its worth noting that the debt ceiling crisis of 2013 lasted from c. Jan to Oct 17 2013, yet republican approval got decimated.
- KVP’s view is this time, its different. The zeitgeist of the average voter is of entitlement & for the government to do more. MMT has left the loonie house. And the average American voter, just has many other priorities than the US deficit in an economy that is still tackling Covid
Macro Dragon Reflections: Is it enough of the Hammer & Dance Strategy & time to just step through the imperfect Covid-Gateway?
- There should be a soft Sep 15 deadline to getting the terms of the bill squared off, with a hard deadline that the already agreed $500B needs to be greenlighted no later than Sep 29
- There is a debate about how much of the potential $3.5T is priced in, KVP’s view is not much… it looks like the mkt is potentially expecting at least +$2T… yet it’s also worth noting US earnings continue to be very strong
- So a passing of +$2T would be very bullish for risks (new highs in S&P, Tech & Cyclical names, as well as crypto), the fully $3.5T being passed is likely a small probability of 10% & would be mega bullish for stocks & bearish for bonds
- In a case of the $3.5T, the SPX is almost certainly to get to 5,000 from the 4,458 -1.7% of last wk
- Its worth noting the chart below that shows a high positive correlation between US PPI & CPI. US PPI came in last wk at +8.3%, this is ATH since the survey data from Nov 2010 (c. 11yrs)
- Its also worth noting that similar to Average Hourly Wages, we’ve had 5 consecutive months of inflation beats in the US
- We also have inflation figures out of the UK-CA-EZ, as well as RS out of the US & UK
- Monthly growth numbers out of China are due, given that the Caixin PMIs are both in contraction, the deceleration of the
Chinese economy is likely continuing. This is actually potentially bullish for CH & HK stocks, as it likely raises the probability & magnitude of accommodative policies from the government into year end
- 2Q GDP figures out of NZ on Thu 1.1%e 1.6%p. RBNZ swear that they will be hiking at the next mtg on Oct 6, yet they blinked at the last Aug 18 meeting when they were expected to hike.
Macro Dragon: RBNZ blinks as it keeps rates on hold at 0.25%, following the nation-wide lock-down announced on Tue over one covid-case in NZ
- Aussie jobs data also due on Thu, with a big contraction expected (-80.0k e +2.2k a) given the lock-down & restrictions around the delta variant that have been a big theme in their 3Q
- Apple lost the case again EPIC games, on keeping people out of its app store & taking a default +30% of revenue – According to our equity strategist Peter Garnry, this is likely going to be taken as a warning shot against all US tech platforms
- Its worth noting the Apple monopoly app business model, is also probably one of the easiest cases to make against big tech (i.e. Amazon is going to be a lot trickier than say Google or Facebook)
- KVP would focus on the prices doing the talking, rather than bother with the ambiguous task of seeing if we’ve hit peak regulatory concern & uncertainty. One thing is for sure, the sentiment is still super bearish, poor & feels like maximum uncertainty
- Its worth remembering that making a bottom or a top is a process…
- Sep 20: Canada Federal Elections
- Sep 26: Germany Federal Elections
- Sep 29: Japan LDP Leadership Election (eventual general elections likely in October)
-The Fed is likely to be a wash, with the press conference focused on tapering structure & whether it’s still a 2021 affair (hint it will be clearer for the Fed post knowing where we sit on the $3.5T infra bill).
-Norges bank should be up for what the RBNZ could not, set the bell-curve by being the first G10 CB to hike rates. KVP still loving the long NOKSEK 0.9952 +0.98% – the easy move is to 1.03/1.04. We were 1.05/6 lvls pre Covid & the thesis is simply NO > SW in hawkishness & inflation.
-Turkey as always has tail-risk to a cut, despite rampant inflation, Core readings came in better than expected. And some comments from the central bank governor (the 3rd in sub 3yrs & an Erdogan man), may suggest that they could be looking to ease in 4Q from the current 19.0%
-Brazil should continue their hiking regime to 6.38%e 5.25%p, as inflation is still rampant at +9.7% & elections are due next year.
Start<>End = Gratitude + Integrity + Vision + Tenacity | Process > Outcome | Sizing > Position.
This is The Way
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