supply shortages in Europe and dependence on volatile global markets are
contributing to record gas prices across the continent. In the US, the latest
inflation data is further testing the US Federal Reserve’s hypothesis that
inflationary pressures are transitory in nature.
COVID-19 – A brighter picture?
daily new Covid-19 cases have continued to fall and are now at
around 410 000 per day.
However, high levels of infection rates, while no longer
translating to the same degree in deaths, continue to have an economic impact.
Evidence of this came in the US September payrolls report,
based on data collected in mid-September when the Delta wave was near its peak.
Job growth in leisure and hospitality businesses was particularly subdued.
Antiviral treatment – A potential game changer?
Late-stage clinical trials have shown that a leading US
pharmaceutical company has developed an antiviral pill that could halve the
risk of hospitalisation and death. The company has applied for emergency use
authorisation from the US Food and Drug Administration. Treatment involves
twice-daily pills, prescribed for five days to patients diagnosed with
Antiviral treatments have advantages over other treatments.
They are simple, easy to administer, cheaper, and manufacturing is less
complicated. In addition to vaccines, an antiviral treatment could transform
Covid into a manageable disease, moving it from a ‘pandemic’ to an ‘endemic’
phase. There are also potential benefits for emerging economies whose
vaccination rates are low.
Winter is coming
There are early signs of a new wave of infections in eastern
Europe with caseloads starting to rise in countries where vaccination rates are
low. There is clearly the potential for a new outbreak as the approach of
winter in the northern hemisphere coincides with a rising risk of breakthrough
infections as vaccine efficacy across the population wanes over time.
In countries with high vaccination rates, the fact that
vaccines remain highly efficient against hospitalisation combined with boosters
for vulnerable people should help contain any pressure on health systems. A
return to tough restrictions therefore appears unlikely now.
Stagflation is a loose term that means different things to
different people. A broad definition, however, would be a period of rising
inflation and slowing growth because of higher energy prices.
Stagflation talk is getting louder (see exhibit 1) because
natural gas prices have tripled in the last three months. The price of liquid
natural gas (LNG) has soared from about USD 5 per metric million British thermal
units (mmBtu) a year ago to more than USD 30 today, having briefly spiked above
USD 50 last week.
Gas in the spotlight
In the past, oil prices were the dominant force in energy
markets. However, natural gas, which until recently was mainly priced off oil
contracts, has moved to the centre of the energy complex. A global squeeze in
supplies has been driving prices higher (see exhibits 2 and 3). Europe is
particularly dependent on the global market for gas.
Oil prices have been rising too: Brent crude oil reached its
highest level in three years last week at USD 83 a barrel. So far, the Opec+
group has not been prepared to accelerate production. Under these
circumstances, with demand for oil rebounding hard as economies reopen after
the pandemic, prices are likely to remain high. Crude prices could also be
affected by the shortage of gas as some sectors envisage replacing gas with oil
Gas demand differs from oil in that it is more seasonal with
stronger demand in winter due to the central role gas plays in domestic
Among the reasons for Europe’s current gas shortages
- Domestic European gas fields and storage
facilities have been run down as the continent’s focus has shifted to renewable
- In the global gas market, Europe now competes
with Asia, where demand for LNG has risen by 50% over the last 10 years. Cold
weather in China, the world’s biggest importer of LNG, raises prices in the
- Russia supplies around 30% of Europe’s gas. The
focus now is on whether Russia can meet Europe’s gas needs in the event of a
cold winter. However, Russia-Europe export volumes may not return to pre-Covid
levels until early-2022; firstly, Russian gas exports have increasingly shifted
towards Asia; secondly, Russia’s domestic inventories are also low, leading to
local stockpiling. Finally, certification of the Nord Stream 2 pipeline to
Europe has been complicated by the delays in the formation of a new German
- Gas is seen as a bridge fuel during the energy
transition. It produces around half the CO2 of coal when burnt. However,
methane emissions from gas during extraction and transportation have arguably
discouraged new investments, again restricting domestic supplies in Europe.
We are monitoring developments closely. As uncertainty
persists around supplies, European high-yield credit markets are vulnerable,
given their greater exposures to sectors that are sensitive to energy price
US prices – Housing sector inflation picks up
US core inflation data was in line with market expectations
in September, up by 0.2% month-on-month. That left the annual rate at 4%.
At first glance, this data supports the hypothesis that the
surge in inflation in late spring/early summer would be ‘transitory’. Price
pressures in used vehicles, hotels and transportation – all segments clearly
connected to Covid-related supply chain stress and post-vaccine re-openings
– were robust earlier in the year, but
netted out at almost zero in September, in part due to the resurgence of Covid
in late summer.
Instead, the main contributor to US core inflation was
housing rents. Housing is by far the largest component in the core index (CPI)
and a segment where inflation often persists month-to-month: Strength (or
weakness) in one month’s data tends to be followed by further strength (or
The rebound in rental inflation is mainly seen in cities in
the Midwest and south of the US, which is consistent with the notion of people
looking for more space in relatively cheaper markets.
If rent inflation does continue to rise into 2022, it will
increase the challenge the Federal Reserve faces in balancing the employment
and inflation sides of its mandate.
Even allowing for the smaller weight of rents in the PCE
(personal consumption expenditures index), the measure of inflation the Fed
targets, sustained housing rental inflation at 5% or more is unlikely to be
consistent with core PCE inflation slowing to 2.3% by end-2022, as forecast by
the Fed three weeks ago.
Yet it also looks unlikely that the US will return to
pre-pandemic labour market conditions by the end of next year. That would
require new payrolls to average around 700 000 a month for the next 15 months
in a row.
With the Fed’s forward guidance on the timing of the first
rate rise requiring both ‘maximum employment’ and 2% inflation, there is set to
be intense debate between the hawks and the doves at the Fed over the
definition of ‘maximum’ employment. Which side wins will determine when the
first rate increase happens.
US bond yields steady
Yields of the benchmark 10-year US Treasury note slipped
back in the wake of the latest inflation data to around 1.54% after hitting a
four-month high at the start of the week.
A USD 24 billion auction of long-dated 30-year government
bonds met with strong demand. Indirect bidders, which include foreign buyers of
US government debt, took up roughly 71% of the amount on offer, marking the
highest percentage at a reopening of that maturity since July 2020.
This strong demand from overseas buyers may partly counter
the effects of the Fed’s expected taper of its USD 120 billion a month in asset
purchases in November.
Any views expressed
here are those of the author as of the date of publication, are based on
available information, and are subject to change without notice. Individual
portfolio management teams may hold different views and may take different
investment decisions for different clients. The views expressed in this podcast
do not in any way constitute investment advice.
The value of
investments and the income they generate may go down as well as up and it is
possible that investors will not recover their initial outlay. Past performance
is no guarantee for future returns.
Investing in emerging
markets, or specialised or restricted sectors is likely to be subject to a
higher-than-average volatility due to a high degree of concentration, greater
uncertainty because less information is available, there is less liquidity or
due to greater sensitivity to changes in market conditions (social, political
and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Writen by Andrew Craig. The post Weekly investment update – Stagflation chatter appeared first on Investors’ Corner – The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.
US Economy Remains On Track For Strong Rebound in Q4
With the end of the year in sight, the US economy continues to show signs of a sharp pickup in growth in the fourth quarter, based on several nowcasts….
With the end of the year in sight, the US economy continues to show signs of a sharp pickup in growth in the fourth quarter, based on several nowcasts.
The US Bureau of Economic Analysis is expected to report in late-January that output rose 5.4% (annualized real rate) in Q4, via the median of several nowcasts compiled by CapitalSpectator.com. The estimate marks a dramatic upside reversal from the slowdown in Q3 that cut growth to a modest 2.1%.
Although roughly a third of the fourth quarter’s economic data has not yet been published, the available numbers to date suggest that the final quarter of 2021 will deliver upbeat news for the US. The fact that recent nowcast revisions have been relatively steady at the 5%-plus level strengthens the outlook that output has accelerated. Today’s revised median 5.6% nowcast is up from 5.0% in the Nov. 16 update.
Recent survey data aligns with the firmer expectations for Q4 economic activity. “The US economy continues to run hot,” observed Chris Williamson, chief business economist at IHS Markit, on Nov. 23, citing the consultancy’s US Composite Output Index, a GDP proxy. “Despite a slower rate of expansion of business activity in November, growth remains above the survey’s long-run pre-pandemic average as companies continue to focus on boosting capacity to meet rising demand.”
Supply-chain and worker-shortage issues continue to create headwinds, but a rebound in economic activity overall appears increasingly likely when the government publishes its initial Q4 GDP estimate next month.
The main question is whether the rebound proves fleeting? Looking ahead to 2022 suggests that economic activity could slow in the new year due to potential blowback from the omicron variant of the coronavirus, higher inflation and other factors.
Goldman Sachs, an investment bank, recently cut its forecast for US growth in the new year. “While many questions remain unanswered, we now think a moderate downside scenario where the virus spreads more quickly but immunity against severe disease is only slightly weakened is most likely,” says Joseph Briggs, an economist at the firm.
This week’s update of the UCLA Anderson Forecast has also trimmed the outlook for early next year, revising its Q1 2022 growth estimate down substantially to a 2.6% gain from the 4.2% predicted in September. The key assumption: the omicron variant “might be disruptive, while acknowledging that its effects cannot be predicted.”
Perhaps, but the good news is that economic momentum looks set to deliver a strong tailwind going into 2022.
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The US Business Cycle Risk Report
Markets stay booster’ed
Equities rally continues US markets managed to maintain omicron is weak, buy everything rally overnight, albeit at a much less frenzied pace than the day…
Equities rally continues
US markets managed to maintain omicron is weak, buy everything rally overnight, albeit at a much less frenzied pace than the day before. That sits nicely with my V for Volatility outlook for December and readers should not be fooled into thinking the risks of whipsaw price have now disappeared. I’ll say it again, volatility will be the winner in December, not directional plays.
Having said that, I am not calling for the end of days for the 21-month stock market rally, merely that we can now expect a lot more two-way volatility going forward. A case in point is the Nasdaq, which has once again bounced off its mighty March 2020 trendline support and will probably be a classical technical analysis case study for years to come. Here’s what CFD from OANDA looks like, the actual physical chart is even sexier, and I’ll leave readers to draw the lines on that one themselves.
Another sign that we may need to wait for next week’s FOMC meeting to climb aboard the taper trade again comes from currency and bond markets. The Australian dollar, the risk sentiment indicator to rule them all, rallied powerfully overnight. Even the euro managed to recover, and the US dollar generally had a tough day at the office. That came as US 10-year yields rose back above 1.50% to 1.53%.
The divergence in price action is a warning sign for tomorrow night’s US CPI. It suggests that the street is positioned for a “risk-off” taper move. With the US 10-year rising around 20 basis points over the last few sessions, reversing recent losses, there may not be much juice in the tank at a 7.0% CPI print. Quid pro quo, US dollar selling and equity buying hint that a 7.0% CPI is increasingly priced in. We likely need to see a print much higher than 7.0% to revive the taper trade in the near term and it wouldn’t surprise me if an on-expectation CPI release sees US yields fall, the US dollar fall, and equities jump once again. Remember what I said about V for Volatility and whipsaw price action?
Helping things along, although with a gentler market impact, were comments from Pfizer and Moderna suggesting a third shoot would do the job against omicron. Given that the US and Europe can’t even get 65% of their populations to have even two shots, let alone a third, we can assume two things. Omicron will yet have a role to play in surging cases over the winter, and vaccine hoarding by rich countries will continue until 35% of their populations stop taking advice from social media and saying me, me, me, instead of we, we, we. That means that the poor in the rest of the world will be waiting longer, thus allowing a higher chance of more nasty variants to arise. And thus, the cycle continues, sigh…
Today’s data calendar in Asia is thin. New Zealand Manufacturing Sales in Q3 fell a dismal 6.20%, suffering from the Auckland Covid lockdown hangover. You can’t buy anything in New Zealand these days anyway; it’s either too expensive thanks to the RBNZ, or there’s none of it left thanks to Covid-19. The New Zealand dollar continues to underperform its Australian cousin, thanks to being another 2,250 kilometers (1,400 statute miles for non-decimal dinosaurs) east of Australia, and the RBNZ hitting the W for Wimp button at its last policy meeting.
On a brighter note, Japan’s Large Manufacturing Index QoQ for Q4 outperformed, rising by 7.90%. Some Q3 baseline effects are in there, but overall, it bodes well for next week’s Tankan survey and suggests that Japan is recovering after it Q3 delta wave. Services may have a more difficult time as the country shut its borders to Johnny Foreigner again this month.
China’s Inflation data has proved benign as well, giving regional markets a small sigh of relief. YoY Inflation for November rose to 2.30% (2.50% exp), while MoM Inflation rose by 0.40% (0.70% exp), giving markets a nil-all draw. That should provide more relief to local equity markets which despite the bad news pouring in from the property developer space this week, is taking their pleas for debt restructuring as meaning the government will facilitate “something.” At least Kaisa suspended trading of their stock in Hong Kong, I’m surprised Evergrande still is. A debt restructuring is not usually good for stock prices, even if they have already fallen by 90%.
The rest of the day’s calendar globally is second-tier. Some regional inflation measures from Europe and Germany’s Balance of Trade. The focus will be on US Initial Jobless Claim with markets hoping for sub-200k prints to resume. Overnight, US Jolts Job Openings for October jumped to 11 million unfilled jobs. That doesn’t really compute with US Non-Farms falling to 210,000, or even a Household Survey suggesting 1.1 million jobs, or unemployment falling to 4.20% with a 61.80% participation rate.
The Federal Reserve may have shot itself in the foot with its unlimited free money we’ll backstop the dumbest investment decisions monetary stimulus which should have been a short term “shock and awe,” and not a monetary Vietnam. Macroeconomics is a beautiful thing when the orchestra all plays in tune, but too often, sticking your finger in one leak sees another pop up nearby. By enriching substantially, any American who owns a home, crypto, a meme or any other stock, they have created a situation where people don’t have to go back to work or have retired. The inflation trade may waver this week, but don’t put it to bed just yet. If James Bond can return from his most diverse and politically correct movie ever (the end credits said he would), inflation sure can as well.
FT-IGM US Macroeconomists Survey for December
The FT-IGM US Macroeconomists survey is out (it was conducted over the weekend). The results are summarized here, and an FT article here (gated). Here’s…
For GDP, assuming Q4 is as predicted in the November Survey of Professional Forecasters, we have the following picture.
Figure 1: GDP (black), potential GDP (gray), November Survey of Professional Forecasters (red), November SPF subtracting 1.5ppts in Q1, 05ppts in Q2 (blue), FT-IGM December survey (sky blue squares), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
In the figure above, I’ve used the SPF forecast of 4.6% SAAR in 2021Q4; the Atlanta Fed’s nowcast as of yesterday (12/7) was 8.6% SAAR. A new nowcast comes out tomorrow.
Interestingly, q4/q4 median forecasted growth equals that implied by the Survey of Professional Forecasters November survey (which was taken nearly a month before news of the omicron variant came out).
The q4/q4 forecast distribution for 2022 is skewed, with the 90th percentile at 5% growth, the 10th percentile at 2.5%, and median at 3.5%. I show the corresponding implied levels of GDP (once again assuming 2021Q4 growth equals the SPF ).
Figure 2: GDP (black), November Survey of Professional Forecasters (red), FT-IGM December survey (sky blue squares), 90th percentile and 10th percentile implied levels (light blue +), my median forecast (green triangle), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
On unemployment, the median forecast is for a deceleration in recovery,
Figure 3: Unemployment rate (black), November Survey of Professional Forecasters (red), FT-IGM December survey (sky blue square), 90th percentile and 10th percentile implied levels (light blue +), my median forecast (green triangle). NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
The survey respondents also think that the participation rate will take a long time to return to pre-pandemic levels.
Source: FT-IGM, December 2021 survey.
On inflation, the median is higher than the November SPF mean estimate for 2022 of 2.3% (and Goldman Sachs’ current estimate).
Source: FT-IGM, December 2021 survey.
The entire survey results are here.
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