- This week should mark the high on US CPI, albeit at close to 6% YoY vs 4.7% forecast
- However, our concern is the longer-term consequences of recent M2 and fiscal largess
- In the last 55 years, we haven’t seen anything close to this degree of combined stimulus
- As a result, our model suggests that into 2023, the result will be far, far higher core CPI
Internally, we believe that increased talk of Fed tapering is premature and mostly kabuki, designed to hold bond markets in check by talking the talk instead of actually delivering tighter policy. However, feign or not, there is no question that it is weighing on reflation trades. This move accelerated after the blowout ADP data and makes tomorrow’s employment report even more important. Very simply, if we get another substantial number, we suspect that we won’t be the only ones who will have to reassess our risk profile.
The last time we flagged emerging markets was towards the end of last year (“Chart Point: EM Breakout” 5th Nov 2020). Back then, our model (below) suggested a sharp catch-up trade in the EM equities, and currently, it is pushing to new highs…
- This last months ISM provides some remarkable insight into US strength and inflation
- Perhaps one of the few areas of concern where affordability is set to hit activity
- In markets we remain concerned about bonds and hence US momentum stocks
- New trades this month in Gold, GDX, Silver, Short Sterling and ITB
- The dollar is also approaching key support, which needs watching carefully
- ISM price readings are about to peak, which will embolden the inflation naysayers
- However, with core prices still robust, the debate will shift to the issue of “transitory”
- Some supply bottlenecks will peak in 6-9 months, but many are structurally engrained
- Add in OER, wages, fiscal spending & weaker dollar leaves us worried about prices in 2022
A month ago, on April 19, we suggested putting on dollar shorts vs GBP and EUR. We knew we were a little early but didn’t want to miss the trade. At the time, one of the charts we included was the Trade Weighted Index of the Dollar. We like using TWIs because they cut out the noise. This particular Deutsche index also has the added advantage of being live (TWI USSP Index). Looking at the chart, you can see that in the last month, the dollar has rolled gently lower and is currently flirting with critical levels, which in the past acted as support/resistance. We have yet to break the 2018 low close at 77.20. But if we do, it’s not hard to imagine a relatively quick move because there’s an air pocket to the 2014 lows, which are about 10% lower.
On 14th April, we made a case for shorting Short Sterling. We specifically highlighted the Dec 2023 futures contract at 99.33 with a target of about 98.50. Since then, in price terms, nothing much has happened; the contract continues to track sideways in a consolidation.
At the end of last year, we first raised our concerns about the sustainability of the booming US housing market and associated equities (“MI2 Chart Point: Homebuilders” 26th October). We did get a 10% dip in these names at the time, but then they ripped. However, this has done nothing to assuage our concerns. Namely, once the Covid-induced flight of urban buyers from the plague zones slowed, would their less well-heeled peers be able to pick up the baton? At the time, what worried us was the divergence between Mortgage Applications for Purchase vs the Mortgage Availability Index, and subsequently, this has narrowed. The bad news is that it has occurred via falling applications, not easing credit, which isn’t good! After all, outside the mega-wealthy, don’t most Americans need a mortgage to buy a home?
Since enthusiasm for precious metals peaked last August, we have seen an extended period of price consolidation and position reduction, especially in gold. Indeed, the only stand out trade has been in platinum, which fits well with the global “greening” infrastructure story. However, our sense is that the dynamics for precious metals are turning more favourable on numerous levels.
- The drop in the headline Manufacturing ISM Index suggests activity has peaked
- But in reality, the weakness is a function of input shortages, not weak demand
- Customer inventory and order backlogs suggest demand will remain robust into 2022
- Wages and input costs are a real problem. To offset margin pressures, prices must rise