The released Fed minutes show that most officials are backing a slower pace of interest rate hikes. Markets reacted positively but this is false optimism as the terminal Fed Funds Rate may eventually be higher. The 3Q reporting in the US is also coming to a close and 75% of corporates experienced downgrade in earnings. Have the cut in earnings by analysts been adequate or will there be further downside, with 2023 outlook still uncertain? For answers, we speak to Tony Nash, CEO, Complete Intelligence.
Transcript
BFM
BFM 89 Nine. Good morning. You’re listening to the Morning Run at Thursday. It’s Thursday, the 24 November November Friday, junior, as we like to call it. Here. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. As always, let’s kickstart the morning with a look at how global markets closed overnight.
All key US markets showed gains as most members of the Fed said the pace of rate hikes will slow down. So the Dow was up 0.3%. The S&P500 was up 0.6%, and Nasdaq was up 1%. In Asian markets, the Nikkei and Hang Seng was up by 0.6%. The China Composite was up by 0.3%. The Straits Times Index was down by 0.1%, and our very own FBMKLCI was up by 0.2%.
Joining us on the line now for more on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Hi, Tony. Good morning. Now, let’s start with just some reactions on the Fed minutes that were released. It showed that most officials are backing a slower pace of interest rate hikes, but that the terminal rate might need to be higher. What do you think? Are we seeing a relief rally? And is that sustainable in the short term?
Tony
Yeah, I think the ultimate destination is probably the same, but the pace of getting there is slower than many people thought a couple of weeks ago. So I think what it means is we’ll see more, say, 50 and 25 basis point hikes. That’s the expectation. It’s still possible we’ll see a 75 if Powell really pushes hard for December, but we’re still going to see a 5, 5.5 terminal rate, depending on really how things end up for CPI and PPI next month. But it’s just the pace and markets are more comfortable with a gradual adjustment to higher rates than the continued kind of shock treatment.
BFM
And Tony, the US reporting period is coming to a close. How would you assess the quality of corporate earnings release so far? How well have they tracked market expectations?
Tony
They’re OK, they’re pretty weak, actually. Compared to 2021, we had, I think, 25% earnings growth in ’21 about this time last year. They’re just over 3%. So it’s not even near where it was last year.
Something like 75% of companies are seeing estimates for their downgrade. So people expecting inflation to endure longer than they thought. If you remember a year ago, people were saying inflation was transitory, so they’re saying inflation will endure longer and rate hikes will continue.
So with credit tighter, businesses and consumers are not expected to spend as much.
So going forward, there is a fear that wallets will be more closed than they are now and earnings will continue to be tight.
BFM
Which just confuses me, Tony, because if the Fed stops their rate hikes at least decelerates the pace of it. And at the same time, corporate earnings aren’t going to be as robust as ever. Then why is the S&P500 above 4000 and the Dow Jones at 34,194 points? I mean, they’re just in fact, the Dow is only down 6% on a year to date basis and the S&P down 15%. Shouldn’t markets be actually more bearish than they are now?
Tony
Well, I think there are a couple of things happening there. I think first, there really is consumers have continued to spend and businesses have continued to spend in the US. Although we’ve seen economic growth slow dramatically, we’ve had spending continue to push forward. So if the Fed slows its tightening cycle, and keep in mind, they haven’t really started quantitative tightening, meaning getting things out of their balance sheet. They’re only, I think, $200 billion off of their high.
But if the Fed continues to tighten at an accelerated pace, then markets are worried. But again, if they slow it down, the feeling is that spending will move in stride. It won’t necessarily be too shaken up.
Also, on inflation, don’t forget inflation didn’t really start on an accelerated basis until November of ’21. So we had inflation, but fairly muted inflation then. And so what we get after November, well after this month, is what’s called a base effect.
So we’ll likely continue to see inflation rise, but not necessarily at the pace that it’s been over the past, say six to nine months. So does that mean inflation is peak? No, not at all. But it means the pace of the rise of inflation is likely going to slow on base effects.
So if that happens, we’ll have a lot of people declare victory over inflation, but I think that there is an expectation that that rate will slow as well.
BFM
Can you look at the prospects of retailers like Best Buy? We see Abercrombie and Fitch. These names are defying inflationary trends and higher rates to post better results than expected. So why has this sector been the exception to the norm?
Tony
Yes, the quick answer is most of those guys have been pushing price. So they’ve been passing along their higher labor and goods costs onto consumers.
Now they’ve been pushing price while sacrificing volume. So they’ve been pushing 8 to 10 to 15% price hikes in many cases. But they’ve had fewer transactions between one and say 6% fewer transactions.
Regardless, they’re earnings have risen. So they’re not as worried about fewer transactions. They’re focused on keeping their margins up.
And so when you look at retailers like Walmart, which has mixed, say, general goods and food, they’ve done very well. They had a very difficult Q2, but they did very well this past quarter.
Home Depot, which is a DIY store, has done very well because they pushed price Cracker Barrel has done very well.
Cracker Barrel. These are not these are not retailers that are at the high end of the market either. These are mid and even, say lower end companies, but they’re pushing price on the middle and lower end of the market.
Higher end of the market? They’re doing great. So it’s tough to be a consumer in this market because price definitely continues to be pushed and we expect price to continue to be pushed through probably Q2 of next year.
BFM
And Tony, with potentially slower pace of interest rate hikes, how do you expect the technology sector to do? Is there more pain to come for the likes of Amazon and Meta?
Tony
For sure. Amazon, Meta and technology companies generally do very well in very low interest rate environment, where the money is effectively free or negative real interest rates.
As you have to pay for that money, it becomes tougher for those companies to do well because their core investment is in technology. And we had things like Mark Zuckerberg at Meta really went off the rails with some of his spending and investment.
It’s not to say that the Metaverse investment is not ever going to happen, but much of that stuff really went way overboard. Same thing with, say, Amazon with some of their infrastructure investments and delivery investments.
So we do expect HP today, I think announce 6,000 jobs to be lost over the next, I don’t know, twelve months or something. So we do expect much more pain in tech. We expect that to continue until at least the end of Q1, if not a little bit further.
BFM
And Tony, let’s talk about oil because WTI for futures delivery in January, $77 a barrel. And we know that there’s an upcoming OPEC meeting in December. What are your expectations in terms of oil price then?
Tony
Yeah, it’s tricky, right? Because oil prices are kind of in that zone where a lot of people are comfortable. And so the question is, is this acceptable to OPEC members? So Saudi Arabia, UAE, Iraq and Kuwait have already come out and said they’re going to stick to the current plan, the current cuts that were already announced last month.
But we have things like the Russian price caps coming into play. And you know, our view is the price caps are pretty meaningless actually, because Europeans are pretty good at circumventing the kind of emotional embargoes they put in place.
I’m sorry to put it that way, but they put these laws in place and then they circumvent them pretty well. A lot of this is theater. So that’s not the price caps are not going to have as much of an impact as many people thought. So it’s possible if we get into next week and crude prices start coming back pretty strongly, or sorry, if we get into next week and crude prices are as weak as they are now, we may see a 500,000 barrel per day cut. I think that’s a possibility, but it’s likely they’ll stay on what’s already been announced.
BFM
Tony, thanks very much for speaking with us. And since it’s Thanksgiving eve. Happy Thanksgiving to you. That was Tony Nash, CEO of Complete Intelligence, giving us his take on the trends that he sees moving markets in the days and weeks ahead.
All eyes, of course, on that all-important inflation number and how that will affect how the Fed raises hikes moving forward.
I think the key takeaway for me was he mentioned that 75% of corporates in the US had downgrades, which I feel it’s a good thing as it brings expectations lower and more in line with future expectations and it also gives perhaps some room to surprise on the upside.
Yeah, well, markets seem to be at crossroads, but a little bit cheered by the fact that the Fed isn’t going to raise rates as aggressively as they have in the past. But I want to keep my eye on corporate earnings. I think that if you see continuous downgrades by the analyst community, you see the messaging coming out of US corporates that things aren’t looking as rosy as they are, then it’s just going to be hard for the Dow, S&P500 to actually break through their current resistance levels. So I think it’s something we have to keep an eye on.
All eyes will be on the US CPI data as it gives us an indication of the quantum and pace of rate hikes. But is the Federal Reserve too slow to see if inflation is coming down when there is anecdotal evidence of slowing car and home sales? Tony Nash, CEO of Complete Intelligence tells us.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station BFM 89 Nine. Good morning. You are listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. 07:00 a.m on Thursday the 13 October. Let’s kickstart the morning with a recap on how global markets closed yesterday.
BFM
Looking at US markets, all three key indices close in the red S&P 500, down zero 3%. The Dow and Nasdaq down zero 0.1%. And I think that the S&P has been down for six consecutive days already. Moving to Asian markets, and the Nikkei down marginally 0.02%. Hang Seng down 0.8%. The Shanghai Composite Index back the trend. It’s up 1.5%. Straights Times Index down 0.7%. And our very own FBM KLCI is down 0.5%.
BFM
So for some thoughts on where international markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Now, US CPI data is due out on Friday. What are your expectations for that figure? And how much of this do you think will determine the quantum of the next Fed rate hike?
TN
Everything rests on CPI right now. So I think if it comes in line or higher than expected, it’s just bad news for markets for the next few days. So people are hoping for a lower number because it would provide some relief and some proof that inflation has maybe peaked or is at least slowing down. I think it’s possible that we have it come in slightly under, but given the PPI reading that came today, it’s not a good a sign. So we may see CPI continue to rise in tomorrow’s trading day in the US.
BFM
Okay, Tony, we have a history of the Fed being late to the game, right, when it came to inflation. They kept saying “transitory, transitory,” and we know it wasn’t transitory at all. Do you think that they are also late to the game in recognizing that inflation has been brought under control? Because when I look at some of the data points, one of which is used car sales, that’s dropping. New car sales are also dropping. House sales, home sales are also dropping. Is it possible that inflation is being overstated?
TN
Well, you’re 100% right on the Fed being late to the game, both to recognize inflation and to impact it. The problem that we’re seeing with, say, used cars is, although the unit volume is slowing, the unit price is still rising for, say, used cars, for eating out, for these sorts of things. There’s still been upward pressure on these because of the factor input costs and supply chains and labor and others. So it does feel in the US like things have not that prices have gone back down, but that the rate of rise has slowed. That’s what it feels like at the consumer level, except for petrol, gasoline, which has started to rise again over the past week.
BFM
Let’s take a look over at the UK, where George Bailey, the Bank of England Governor, said that the BoE would end support for UK Gilts by the end of this week. What does this mean for the Pound specifically and other sterling-denominated UK assets like equities?
TN
Oh gosh, we’re likely to see more devaluation of the Pound. There’ll be pressure on the Pound. Well, maybe not devaluation, but depreciation of the Pound. UK pension funds and other guiltholders will likely have to sell assets if the BoE is stopping their intervention in that market. They’re likely to likely to see downward pressure on those prices. So holders of those assets, like big pension funds, will have to use other assets to pay for their collateral for those investments. So it’s going to be ugly all around once the BoE stops because the market for guilt is so weak.
TN
And we’ve seen for the Bank of Japan, we’ve seen for the Fed, for different auctions, different government debt auctions, there have been zero takers for government debt auction. And that tells me they’re not paying enough. The interest rates for that debt has to rise because people feel like inflation and interest rates are going to rise. So these governments need to offer their debt out at a higher rate so that people can make a profit with it, given the inflation environment.
BFM
And Tony moving on to China with a Party Congress meeting happening very soon, and with Xi Jinping set to win an unpresented term, what economic implications would that have for China? And with growth slowing down across the world, how will they aim to achieve the goal of common prosperity?
TN
Yeah, Common Prosperity as a definition can be really taken as raising people up, or it can be taken as pushing kind of those achievers down. Okay. And if you look at China’s history in the late 50’s and the 60’s, as you know, Mao Zedong really pushed those achievers down through the great famine and all this other stuff. So my fear is that as Xi Jinping has consolidated his power, he’s going to start well, he’s already started a couple of years ago, pushing some of those economic overachievers down like Jack Ma and other people.
TN
So I really do worry coming out of this Party Congress that we get a much more restrictive Chinese economy. We’ve already seen foreign investor sentiment sour on China, and we’ve already seen with code lockdowns, with supply chain lockdowns and other things, there has been a functionally more restrictive environment and with sentiment souring as well.
TN
I’m not optimistic, at least in the short term. The Chinese government, whether it’s Xi Jinping or other elements of the Chinese government, they’re going to have to do something to reassure the world that they are a good faith partner in global supply chains and for manufacturing. It’s not going to make them happy to do that. But if they want to continue growing at the rates they have grown, they’re going to have to do that.
TN
So when I say I’m not optimistic about China, I’m not saying China is going to crash. I’m saying I think they’re going to have some pretty mediocre growth rates in the coming years because of the economic environment, regulatory environment and market environment that they’ve cultivated of late.
BFM
OK, Tony, I want to stay in Asia and I want to look specifically at Japan because the Yen weakened to a fresh two-decade low, hitting 146 to the US dollar. What do we make of this? Is this really on the back of Corona vowing to maintain its very accommodative monetary policy?
TN
Well, they have a choice. They can either support the yen or they can buy government bonds. And they’ve continued buying their bonds. So I think they’ve made a choice not to support the currency. And with the strong US dollar position and Janet Yellen made some comments today saying, again, saying that it’s really not the US’s responsibility to maintain the currencies, economies of other parts of the world. It wasn’t those exact words, but it was similar. That will likely push the dollar even stronger and we’re likely to see even more depreciation of the Japanese yen.
TN
So there is a lot of pressure on Japan right now, and the Bank of Japan really has some decisions to make about how they’re going to approach that. Maybe they’re okay with depreciating their currency, but it will fundamentally change things like their imports of energy. They’re very dependent on imported energy. They’re very dependent on imported, say, raw materials like metals for their manufacturing. So this really changes their approach to managing those imports.
BFM
Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
BFM
Yeah, I like his comments on the yen. Right. At what point does it then become really painful for the Japanese economy? Net energy imported, clearly LNG from Malaysia is one of the key imports. What does this then mean for inflation? But it’s one country where inflation has been ultra low, almost as low as ours, I think barely 2-3% for them. But for them it’s a bit of a shocker because they’ve been in a deflationary period for more than ten years.
BFM
Yeah, and his comments on China, I think he said that growth would likely be slow over the next couple of years, and I guess Xi Jinping and China will unlikely dial back on its Zero Covid policy next week. It looks very unlikely at this point.
BFM
I mean, everyone’s hoping to see some kind of announcement to that vein. But again, lots of things to look out for in the weeks ahead.
BFM
We just heard headlines coming out Shanghai, parts of it under even more lockdown.
BFM
Well, very quickly, let’s take a look at some good news. I guess that’s coming out of Australia. We have contest airways. They said their first half year profit will jump to as much as 1.3 billion Australian dollars as travel demand accelerates and the airline stabilizes operations after a prolonged and bruising period of cancelations and delays. This ends a streak of five consecutive half yearly losses totalling 7 billion Australian dollars.
BFM
It said that the frequency of scrap flights, late departures and loss backs are all improving. CEO Alan Joyce said it’s been really challenging time for the national carrier, but the announcement shows that how far the airline has actually improved, and they’ve seen big improvements in their operational performance and acceleration in financial performance as well. And this takes some pressure off Joyce.
BFM
Well, if I look at the street, they like this stock. Twelve buys, three holes. One sell. Contest at close was $5 and 17 Australian cents. Tucker price, 653.
BFM
All right, 718 in the morning. We’re heading into some messages. Stay tuned. BFM 89 Nine you have been listening.
BFM
To a podcast from BFM 89 Nine, the business station. For more stories of the same kind, download the VSM app.
The SPX was down 4%, WTI was up 2.8%, and the 10-year yield was down 2.9%. Intraday vol has been an issue all week. What’s going thru an institutional trader’s mind in this market? Sam Rines explains.
On the commodities market, wheat was down 6% this week. Corn ended this week down about 1%. We’ll help you understand ag and fertilizer markets with Tracy Shuchart.
The dollar (DXY) is down a bit this week, about half a percent. Are global central bankers worried about a rising dollar and is there anything they can do about it? Albert Marko gives his insights on this.
Key themes:
1. How are institutions trading the intraday vol?
2. Ags and fertilizer: Demand Destruction vs Supply Shortages
3. $USD 💪 – 🙂 or ☹️
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This is the 19th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
TN: Hi everyone, and welcome to The Week Ahead. I’m Tony Nash, joined as always by Sam Rines,
Albert Marko, and Tracy Shuchart. Before we get into it, please, please like and subscribe. Please like and subscribe.
Also, we just started our new CI Futures promo. You get your first three months free. Get global markets, currencies commodities economics with CI Futures. Check it out at completeintel.com/2022Promo
So guys, this week S&P was down 4%. So I think some people are relieved it wasn’t down more. WTI was up almost 3% and the 10-year yield was down 2.9%. So I think it was a little more tame, at least by the end of the week than some people thought it might be, which probably not helpful to everybody, but I think it helped people a little bit, just kind of get a grip on things.
So our key themes this week, first, how are institutions trading this market and more specifically kind of Intraday Vol?
For AGS and Fertilizer. Is it demand destruction or supply shortages or both? How are those playing out?
And for the US dollar strength? Are global central banks happy about it or sad about it?
So today for our first segment, Sam, if you can help us understand this. Intraday vol has been an issue all week and for the past couple of weeks. What’s going through an institutional traders mind in this market We’ve got a tweet and there was a great thread from Kris Sidial. I definitely recommend reading it. So can you walk us through that a little bit, Sam, what they’re thinking about and what institutional traders are doing?
SR: Sure. I would say what they’re thinking about is not losing money, particularly after you had the target earnings, Walmart earnings. There were some landmines out there in individual retail land. That brought up some call it concerns about the consumer. It brought volatility into places you hadn’t really seen volatility recently. So staples began to really get a little more volatile. In particular, they were more volatile than the S&P500 for the back half of the week. So you began to see call it the volatility spread on underlying issuer basis, but not necessarily really spiking at the headline index level.
TN: So traders are trying to keep it flat, right?
SR: They’re keeping their risk very tight. There’s quite a bit of blood in the streets, so to speak, particularly those trading rates and individual equity names. So yeah, I would say it didn’t look like it was that volatile, but the intraday vol was incredible and it took a lot of the risk out of the system. It’s worth noting that a lot of the risk managers out there aren’t looking at day to day vol. They’re looking at Intraday Vols, PNLs. So you’re likely to get a shoulder tap Intraday if you’re playing these markets with too much leverage.
TN: You tap out at like 2:00 PM or something because of your positions? Is that what happens?
SR: Or you just have to unwind one that you like. Right. If you put on a S&P future trade early in the morning and you get 100 point move Intraday in the S&P, you’re going to get blown out of that position pretty quickly. Right. You have to have really tight stop loss limits. That’s it.
TN: Albert, what are you seeing?
AM: Well, the Fed has done a marvelous job of erasing excess wealth out there, excess money. Not just from retail. Retail is dead in the water right now. But even institutional wise, a lot of funds just been obliterated for the past month and a half now? The problem becomes liquidity. And where is it? I’m looking at the order book on the e-minis, and it’s just there’s nothing there. There’s nothing on the buy side,
nothing on the… Nothing. So these massive 100 point moves, I mean, of course, we’ve never seen anything like this, but if you look at the problem with liquidity there, it makes perfect sense.
TN: So, Albert, from a hedge fund world perspective, do you think we’re going to see some hedge funds cleaned out? Obviously, Melvin, we know that story. But are we going to see some issues there with some funds?
AM: Without question, you’ll see a lot of them unwinding by the end of the year. I know a few personally that have closed up shop or in the process of closing up shop. And I can’t imagine there’s at least 25% more that’s out there that are in some serious trouble. I mean, redemptions will start taking off clients that were sold, big tech names in a zero rate economy, they’re gonna be calling every single day what’s
going on for returns, and there’s none to be found right now.
TN: Yeah.It’s tough to get things out right now. Okay, good. Thanks for that. Let’s move on to our second topic.
Tracy, wheat was down 6% this week. Corn ended down about 1%. We got an interesting viewer question from Thomas Sieckmann, who’s a regular viewer. Can you help us understand AG and fertilizer markets. Thomas is saying, “love to hearyour thoughts on AG commodities. Demand destruction versus supply shortages, fertilizer prices and shortages, drought, lots of cross currents.” Can you help us understand kind of those markets a bit better?
TS: Sure. Well, first, I don’t think you’re going to see demand destruction even at higher prices,
because people need to eat. Right.
TN: Eating is good. Yeah, right. We can agree on that.
TS: The thing is what I think we’re going to see a structural shift in the market, whereas you’re going to see different crops being produced over other crops. In other words, if we look at, say, wheat, for example, what’s happening right now is that wheat crops are being produced more because it’s easier to do, less energy intensive, and that’s going to make a problem on the corn market. Not necessarily in the United States. I would single out the United States as it is kind of a different market altogether?
But if we look at the global markets, where I think this is headed. We’re going to see shortages in areas where you didn’t think so. Right.
We’re all scared about wheat because of obviously Ukraine and Russia and then being major producers, et cetera. But that is going to, in turn, affect the corn market, global production and what those crops are, what crops are being produced globally, if that makes sense. I think that’s what we need to be on a lookout for.
And things like rough rice. Rice. Rice is going to, because nobody wants to put wheat and corn into, say, animal food anymore. Right. Rice is much cheaper. So I would look for rice to go much higher because
they’re going to use that to replace something like animal feed.
TN: Interesting. Okay.
So we’ve seen political instability in Sri Lanka, especially over the past couple of weeks, and part of that is just terrible government. Part of that is weak currency and food affordability. How far do you think this goes? Does it get extended to a lot of other countries, or is there a few other countries that this gets exposed to? Both you and maybe Albert, if you guys can both jump in on this.
TS: Yes, I think it extends. We’re already seeing that name around. Right. We’re already seeing protests in Iran, and I think that this is going to continue, especially in emerging markets. Right. So I think this is nothing new. I think we should expect more of this and be reminded of when we saw the Arab Spring. It all started because of food. Right. So that’s something that we need to pay attention to, in my opinion.
AM: Yeah, I agree with Tracy. Some of the emerging markets are going to be the most hardest hit. It’s funny, because four or five months ago when my client and I were sitting there discussing what countries to look at to invest in, and one of the key components is which ones are stable in their food supply.
I mean, the United States. But France is actually quite stable. I think that they can actually make quite a play for the European Union’s leadership over Germany going forward, specifically because they’ve got enough food to sustain themselves.
As for the other countries…
TN: That’s a good point, Albert. I hadn’t thought about that. But that’s a really good point about France.
AM: Yeah. Well, I mean, they got their own food. They have a big agricultural industry, they’re
top in the world, and they’re self sufficient. And they have water from the Alps, too. So they have everything they need for themselves. So they’re pretty isolated from this.
But you look at Spain, they’re in trouble. North Africa, they’re in significant trouble. Sri Lanka won’t be the first looking for at least a dozen more instances of that happening around the world.
TN: So we have a summer of new government.
TS: I’m looking towards Brazil and Argentina, even though everybody kind of hates those markets right now, is if we look at their agriculture? Their agriculture is robust. And so I think that in the end, that will serve them from an investment standpoint if you’re looking to invest in.
AM: But the only problem with Argentina is so I mean, their government is just absolutely atrocious. And then the Brazilian. High risk. And Brazilians have a big election coming up, and that’s going to be extremely contentious. So I would stay away from those two until after those elections happen and whatnot.
But yeah, I mean, Brazil, they have fertilizer, they have fruits, they have sugar cane, a lot
of chicken, a lot of soybeans, a lot of meat.
TN: Okay, perfect. Let’s move on to the next topic. Albert, we got a question from Gary
Haubold, who’s a regular viewer. He’s talking about the dollar and how central banks. There’s gossip that central banks are getting nervous about a strong dollar. So dollars up or down, sorry, a little bit this week, but how worried are global central banks about the dollar?
Of course, you have, say, the North African or Brazilian or other kind of fairly shaky monetary markets. But if you look to, say, European or developed Asia or some of those other markets, how worried are those central bankers about a strong dollar?
AM: Well, I just want to isolate this between just the United States and Europe right now, because that’s only really what matters to the market back in the United States. A strong dollar for the Europeans is not good. It’s just absolutely not good. It would be good if the Euro was falling. They had exports to send to China, but they don’t have that anymore. So now they have dollar liabilities that are getting out of control. And I think that the Europeans, I’ve heard whispers inside the Fed and treasury that they’re worried about a European financial crisis. And it makes perfect sense. If they want to get the markets down, blow up Europe, that’s the best way to do it.
TN: But I thought we’ve had a financial crisis in Europe since about 2012.
AM: Yes, but we have it every five or ten years because Europe is a welfare state. It’s a welfare state that lives on Fed swaps. Right. That’s all it is. And I don’t want to insult the Europeans on here, but let’s just get real here. Without Chinese exports, they’ve got nothing.
TN: Sam, what do you think about that?
SR: Yeah. If China doesn’t open up soon, it is going to be extremely problematic for Europe. That would be the saving grace in a lot of ways to Europe for a strong dollar. Other than that, there’s going to have to be some sort of interesting talk down to the dollar, either from treasury or some hawkish comments coming out of the ECB. And you’d begun to hear the ECB be a little bit more hawkish recently. If they really want the dollar to abate, they’re going to have to get more hawkish.
TN: Yes, for sure. And on your China point, I saw a story this week that the Shanghai Port was at about a 90% capacity at some point this week. Whether that’s true or not, I don’t know. But I saw it in a legitimate newspaper so let’s see how long that lasts.
TS: I was going to ask you, Tony. From a China perspective, how do you look at this opening? Do you think Shanghai is really opening like they say it is or is this hearsay or, can you give us a little bit of insight on kind of the China situation right now because that makes a huge difference in demand for energy and materials?
TN: Sure. Absolutely. So I sure want it to open because I want both China and the rest of the world to thrive but because of a lot of domestic considerations, COVID or monkey pox or whatever it is. I don’t know. They’re just lifting it slowly.
But we talked about this in detail on last week’s show but I really don’t think they’re going to open to any interesting degree until mid summer. Maybe later. I wish they would open tomorrow but they won’t. I think for a lot of reasons they’re kind of getting in their own way and I’ve said this many times China needs to be saved from China. It’s just such terrible management of the country and has been for 50 or more years
and they’re potentially going back into the great famine type of environment which I worry about a lot and that would be detrimental to everybody around the world.
TS: That makes sense.
TN: So on that happy note, thanks so much for taking time for the show, guys. Really appreciate that. Have a great week ahead. Thank you very much.
In this week’s episode, we look at the CPI numbers from last week, the inflation cycle, and will the Fed stop QE on their Monday meeting? What do you have to expect on the metals market in the longer term? Will the demonstrations around the world push the US to bring out fiscal stimulus again — and can they? What does this mean to the Democrats on November US Election? And lastly, what you should know to thrive and survive this coming week?
This is the sixth episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
For those who prefer to listen to this episode, here’s the podcast version for you.
TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And we’re joined by Nick Glinsman, Albert Marko. And today we’re joined by Sam Rines for the first time. Tracy Shuchart could not make it this week. She’ll be back next week.
So before we get started, I’d like to ask you to subscribe to our YouTube channel. It obviously helps us with visibility and it gives you a reminder when a new episode is out. So if you don’t mind, please take care of that.
Now, a lot has happened this week. We saw CPI slightly higher than expected, which is what we talked about on the show last week. Consumer sentiment out on Friday, slightly lower than expected. And there were a few things that we said last week that will remind you of the ten-year cross, too. Nick pretty much nailed that. Crude went sideways. Tracy said that we would see a slight pull back in sideways move in crude. The S&P have a slight down bias, which is what we talked about. And the Dow had a slight upward bias, which is what we talked about. So good week all around. Thank you guys for being so on the spot for that.
Let’s start with CPI. And Sam, since you’re the new guy, it’s surprised high. So what really jumped out for you and what do you expect to see with CPI prints going forward?
SR: Basically, the entire print jumped out to me. I don’t think there was a single thing that was actually positive on the inflation front. There was no positive news that we could extrapolate from there. Whether you’re looking at the actual headline number, the core number, three month annualized accelerating, et cetera, it was a pure CPI hot. It was just hot. Cupcakes and cakes were the worst news in there. Both of those up. I think it was like 2.2%. 2.3% on a month over month basis. The only thing that was a little bit lower, that kind of offset, that was ice cream. So dessert got more expensive for most of us.
I think generally the way to look at CPI right now is we were supposed to have this really interesting hand off from goods to services. And what we really had was no hand off from goods and services begin to start running. You had people begin to go outside of their homes, but they’re also working at home. So you need more stuff. If you have an office and you work from home, you need two computers, you need two microphones, you need two cameras.
That’s really what we’re beginning to see is the confluence of the end of COVID restrictions, but not really the end of COVID all at the same time. That’s a big problem.
TN: So the durable good cycle is we’re late in that cycle, right. So it’s not as if we’re redoing our homes anymore. Most of that stuff is gone. It’s more consumption, right?
SR: Yeah, it is consumption to a certain degree. But also you haven’t really seen a slowdown in people buying homes. When people buy homes, when people build homes, they need to put stuff inside of them. They need couches.
TN: That’s fair.
SR: So I would say we’re probably not at the end-end of the durable good cycle, we might be in the fifth or 6th inning. Okay. But millennials still on homes, right? Millennials figured out that when you can’t go to a really cool restaurant in New York City, it’s not really worth living in 1000 square foot apartment or smaller with a kid. Right. They’ve decided that they really want to go make a household somewhere, buy a house.
So I think we’re more call it mid innings of durable good cycle. And on the services front, we’re just beginning to see the re emergence there. You’re just beginning to see housing costs, housing and rent, et cetera.
TN: Okay, so this inflation cycle is something that Nick and Albert have been talking about for over a year. You started talking about this in August of ’20 or something like that?
AM: Yeah, something like that. I mean, it was evident that the supply chain stresses is going to cause inflation. When the demand starts to tick up and there’s no inventory, of course, it was inevitable at that point.
TN: So when does it end? Obviously, this isn’t kind of the transitory inflation we’ve been told, and that’s been said many times. But do you see this continuing through, let’s say all things equal. There’s no rises from the Fed, nothing else. How long does this go before it works itself out? Nick?
NG: I’m sorry, Albert, do you want to?
AM: No. From my perspective, wage inflation is a problem. So until that gets sorted out, inflation is going to be sticky.
NG: Yeah. With Atlanta Fed wage price level, it was 5% I think it was, came out for the first time in 20 years. Actually, I’m going to be slightly contrarian. I think we’re at that peak. Whether we can go up, we can still go up a bit more, but I think there’s a peak. The trouble that people have got to get their minds around is if we’re peaking, it could take several months. Where do we come down to? And my suspicion is we come down to a level that’s still significantly above the 2% Fed targets.
The other thing that I think is really important, you’ve got the conventional wisdom. Feds behind the curve, Feds behind the curve. And now all these forecasts from the street have sort of come like this. Goldman have now joined Bank of America on seven.
The key thing to understand in a zero rates environment, they introduced forward guidance, and that was their technique to try to suppress volatility in the market. Well, now that things have shifted around so rapidly and we’re moving to a rate hiking cycle, they’re actually not going to be suppressing volatility. By definition, they can’t you hear this in Europe as well? Data dependency. We’re dependent on the data. Well, they’re dependent on the data in Europe because their forecast is so terrible. Haven’t been much better in the US either. Right.
So you’re going to have much more volatility. So what we’ve seen in the last couple of weeks, which if you traded, if you ran money through 2008, it’s sort of nothing. But what we’ve seen in the last couple of weeks, get used to it. And I suspect going back to what we mention last week and I even put it on a tweet. Newton’s law of gravity is going to start to impose itself on those stocks without the high dividends, those stocks that don’t have the earnings, those stocks that are over owned.
I know we’ve got witching out next week or OpEx not clear whether the market is long or short delta. Just not clear to me because actually a couple of days ago, Goldman came out with a chart that showed that short interest on the S&P is really low. So if that’s the case, and I maintain that we’ve got a lot of trap longs still there, this volatility is going to get worse.
I mean, you’re getting volatility in the treasury market. And remember, the treasury market, by definition, is zero rates, low rates environment, is long convexity. So the price moves to a couple of basis points are way bigger than they were back in the days when you had a decent coupon, back in those good old days where retirees would earn some money on their bank deposits.
TN: Yeah.
NG: So they’re not suppressing volatility anymore. Volatility cannot be suppressed, even if they sell VIX. We’re talking about broad systemic volatility. Is it a risk? Could be. But that’s gone. Those days have gone. Forward guidance. They’re not even going to forward guide. Powell’s last press conference. I’m going to be humble. I can’t give you whether it’s a 50 or a 25. He never said anything. No. When he was asked aggressive questions. So it’s sort of interesting.
TN: That is very interesting. I think not worried about volatility is a very interesting point, even if they just dial it down a little bit. It’s a very interesting point to me.
So let’s move in that direction, Nick. There was a lot of Fed speculation this week, obviously more intensive than even last week. Inter-meeting hike, 50 basis point hike, 25 basis point hike, all this other stuff. So what are you thinking about that and QT? I also want to get kind of your and Albert’s view and Sam, of course, on this thing going around on Thursday about an emergency meeting on Monday. So let’s talk about all of that stuff with Fed and central banks.
NG: I just don’t think this Fed has it in them to do something shocking. So the first order of business, if they were to do anything intermeeting, is stop QE. That’s absolutely absurd that that’s still going on. Right. So you stop the QE.
Remember, this is a Fed that’s built on… Most of these members are built on the gradualist approach of the Fed. They’ve been suppressing volatility. They don’t want to shock anybody. So I think there is a valid discussion to have between 25 basis points and 50. It’s a discussion they need to have and they need time to think about it.
Interesting Bollard came out as hawkish, given he used to be a Dove and we’d forecasted actually everything he said. We got a little experience of deja vu, but I’m suspicious of this intermeeting situation. The only thing I can think of really would be stopping QE. That’s where their first… If you watch the Main Street media, that was their first part of call with the “experts”, and they’re still doing QE, which is why they’re still doing QE. I think they need a proper… Right now, given it’s a new hike, first hike in the whole process, they need to have a proper meeting.
TN: So you think there’s a greater than zero possibility that they’ll stop QE on Monday? I’m not saying you’re saying it will, but you’re saying it’s greater than zero.
NG: That would make sense to me, but it would be a bit dramatic given all the huff and puff that’s been in the since last night about this secret meeting, which is also right. I would be surprised if they do an intermeeting.
I’m still trying to figure out whether they’re biased towards 25 and 50. Remember, the market is giving them 50, but when is the last time the Fed taken what the market is giving it?
TN: Albert, what do you think about Monday, the speculation about the meeting on Monday?
AM: Well, yeah, everyone’s talking about this meeting that popped up all of a sudden, and some people are starting to dismiss it’s procedural and whatnot. But realistically, they got together over the weekend to discuss what’s really happening. The last time they did something like that was pre-COVID in 2020.
Right now, the Fed and actually the Biden administration together are looking at problems with the Russian invasion of Ukraine looming, trucker rally, actually in the United States and France and Australia that are looming. I mean, any more supply chain shocks is systemic problems of the economy. And I think they have to address it one way or another.
Whether it’s a 50 basis point hike in Monday or March or something, you’re going to have to do something against inflation.
TN: So you think it’s possible that they can take some action on Monday? You don’t think this is just a procedural meeting?
AM: I don’t think it’s a procedural meeting whatsoever. I think something’s wrong with the system and they’re working to address it.
TN: So if you had to say they’re going to stop QE or they’re going to announce a rise, which is more likely on Monday.
AM: I think they’re going to announce a rise. Well, to think about it, they’ll probably stop QE before they actually do a rate hike. I think the rate hike will definitely come in March.
NG: That’s the sequence.
TN: Okay.
SR: And just to add something there, I think it’s really important to remember that effective Fed funds right now is eight basis points, right? Eight to nine basis points. It bounces around a little bit but we hike in ranges now, right? So we’re going to hike from zero to 25 to 25 to 50 or 50 to 75 and they don’t have to put it at the midpoint right? So going to ranges, so to speak, is not the only way to look hawkish.
If you raise one range of 25 to 50 and set it at 40, 45 towards the top end of the range, you can do one “rate hike”, but be pretty hawkish within that range, you can show your intention pretty quickly there which would match pretty closely to what the market expectations are when you kind of extrapolate down to actual basis points what the market is giving the Fed. So I think it’s really important to pay attention to not just where the range ends up, but where they decide Fed funds goes within that range.
TN: It could be incremental. They could be a Chinese central banks type of like 37 basis points or it’s 38 basis points or something?
SR: Exactly. Exactly. And I think that’s going to be the kind of “the shock” and all that they can use. They can have call it a very hawkish one hike. They don’t need to do two hikes to be overly hawkish.
TN: So what do you think, Sam, on Monday? Do you think it’s a procedural or do you think it’s possible that there could be some sort of policy change?
SR: I think it’s procedural.
TN: Okay. Interesting. It would be interesting to come back in a week and see what’s happened with that. I like the differences there. Sorry. What’s that?
NG: You get the coin out and heads at something.
TN: Right? Exactly.
NG: One thing it can be, it can be a hike without stopping the QE.
SR: Yes.
TN: Right. Okay. That’s a good point. So speaking of inflation, before we get onto the truckers and other stuff, Nick, you guys put out a piece last week about the metals market. And I’m really curious. It looks like there’s a view that there’s longer term rises in metals, industrial metals especially. Can you give us a little bit of color on that and help us what to expect in metal markets?
NG: Sure. It was a longer term view. It’s not really a short term trading view. The view is, I have the thesis that some of the greatest trades attached to some of the biggest traders in time have arisen because of policy mistake. Whether the policy is benefiting or whether the policy was just maligned. And right now we’re in this net zero push, which is the new neurosis and there’s no transition plan.
So the first thing, if we were to look to commodities right now, where is it? The most obvious place that it’s hit? European energy. Right. The German is getting rid of nuclear. It’s just a complete nano mess. But it’s actually in the metals market where over the next couple of years it’s going to be really keenly felt.
There’s been a lack of capex like energy. There’s been a lack of capex in metals. They learned what lessons? We don’t know. Lessons from 2011 when prices were very elevated. And with that lack of capex and they’re paying high dividends, they’re rewarding shareholders, means the supply cannot be flexible enough, elastic enough on the upside to meet all this huge demand.
So we put the blocks together. China. China, give or take, is still there as a big user and consumer of the metal. Now you add on the rest of the world, plus China, additional China on net zero products. EV cars, right. All the wind farms, solar panels. All this stuff needs metal. Some of it needs fossil fuels as well.
And I got triggered a couple of weeks ago. There was a report in France that said in the next two years, the available supply of copper, not new finds, or not new mines. The available supply right now would have been used up. Yes or no. But the point is that’s the direction. Nickel, even more so. And then you think about nickel and the geopolitics of Russia having a huge nickel company. What we’re about to go through, potentially with sanctions?
All this geopolitics grinds against the need for these metals in terms of net zero. So basically you’ve got those two forces against each other which squeezes everything up in terms of price. And from the point of view, we have no transition plan. So if there was none of that, we needed a transition plan anyway.
So our view, you can go through the metals. Aluminium has been making new multi year highs this week.
TN: Right.
NG: Aluminum being the cheaper copper.
TN: Okay. Yeah. And I think as a medium, longer term plan, as a strategic placement, I think that’s very interesting.
Let’s move on to other components of uncertainties with what seems to me is a resurgence of populism with these trucker strikes and other kind of demonstrations.
Obviously, the Canadian trucker strike has stolen the headlines this week, but there are things happening across Europe, and they have been for a year. Australia has been happening for six months, something like that. Demonstrations. You see sporadic demonstrations in the US with talk about truckers striking at the Super Bowl or something like that. So what do you guys think about that? Is that a real risk, and is that a risk that will flow into markets?
AM: I think it absolutely is a risk. If you’re talking about adding more stress to the supply chain, of course it’s going to be a systemic risk. I won’t even put it past some foreign actors propelling it through social media campaigns to stress the United States, France and Australia.
TN: Okay.
AM: I certainly would if I was Russia or China. I would definitely do that.
TN: Okay. So what does that do if there is this kind of wave of populism that is pushing back against kind of COVID restrictions? Do you think that puts more stress on, say, the US government to get fiscal spending out there to kind of placate people?
AM: There’s no way we’re getting fiscal. The reasons that the Fed has been doing all the shenanigans behind the scenes is because there’s no fiscal that’s happening.
TN: Okay.
AM: Rumors are that they’re even buying oil futures.
TN: Okay. So it makes things complicated, right? I mean, if you can’t send fiscal out to the people, then it makes kind of populism even more complicated.
AM: Of course.
TN: And more acute. Right. So what does that say for November in the US? Does that mean that it’s going to be tougher than we had thought on Democrats?
AM: Oh, absolutely. I mean, they sent out a memo to all the Democratic governors with all the warning flags. If you don’t lift off these COVID restrictions, we’re going to get massacred in November. So all of a sudden you saw this week like a dozen Democratic governors lift all the mask mandates.
TN: Okay. But do you agree if they had room for fiscal, it would solve some of these populist issues?
AM: That’s a tough question, Tony. I mean, possibly, but then the talk of new stimulus checks comes out and then the inflation probably gets worse. What are we doing?
TN: It’s a complex problem, which is why I’m asking the question.
NG: Didn’t Germans should make it pretty clear though, this week? They said I’ve been… Last year with the last fiscal. I said inflation. Inflation, inflation.
TN: Yes.
NG: Clear as you can be. But he’s a swing vote in the Senate. He just said we’re not getting inflation.
TN: Inflation tramps fiscal is what you’re all saying, is inflation tramps fiscal regardless of what happens with populist.
AM: Sorry, Sam. Let’s make a quick real quickly. Inflation is a nuclear football for politicians.
TN: Well, especially at 7.6%. Right. So fuel inflation of 40% year on year. I mean, this is crazy.
Okay, let’s move into what we expect for next week. What are you guys looking for next week?
SR: The flattening on the 210s curve will continue until the Fed breaks something and has to go the other way.
TN: Okay.
SR: I think that to me is the easy trade out there right now. It’s 210 flatten and done.
NG: Put a health warning on that.
SR: Yeah.
NG: If the Fed wimp out, I even think 25 basis points and non hawkish statement. If they whimp out, that long end is going to get hit because the idea of a flattening curve.
Remember, the sequencing is wrong here. That curve flattens after they’ve well into hiking cycles because of the potential for a recession. 13 out of the last 14 hiking cycles have led to a recession. That’s why I curved bear flat. Okay. It’s already doing it.
But the point is it’s because they think it will be enough. If the Fed given the narrative now, don’t go ahead with this. And I’m still anxious about the Fed, even though Powell warned back when the QE three was being launched, you’re going to create a whole lot of problems. Ironically, he got all the problems.
I’m just still nervous about this Fed because.
TN: I think everybody is Nick. I think that’s why we’re seeing the volatility because no one’s getting a clear signal. And we saw some Fed governors out on Friday saying that 50 basis points is too much and putting 25 basis points into question.
So I’m not sure if there’s a consensus.
NG: Actually, there’s a great trade to be had. Great trade in some of the markets. You buy a struggle, you buy volatility effectively. Make it, usually pay up for premium, but you make it completely not dependent on direction.
TN: Is what you’re saying for the next several weeks.
NG: Because they’re not going to suppress volatility anymore. It’s reversed. So everything they do now is by definition going to be creating more volatility. We’ve been zero rates, forward guidance. Let’s just cruise.
And the balance sheet is pushing stocks up. The other thing you need to watch, by the way, is the level of reserves.
TN: Right.
NG: Because I actually think if back in 19 there was that Reserve issue with the repo. I think that slightly could be problematic if something like that happens again.
TN: Okay, great. Good to know. So let’s go one by one. And what do you guys see say in equity markets next week? Is your bias for equity markets? Do you have a downside bias in equity markets? Sorry, Albert, go ahead.
AM: So I was just going to say next week, I think it’s going to be all about the Federal Reserve’s narrative building. It’s going to be a choppy session in equities all week. They’re preparing you, they’re sending out boulerd with ridiculous 100 point basis comments, and they’re just preparing you for a 50 basepoint rate hike.
TN: Right.
AM: So that’s what I think is going to happen. So we’ll just be choppy on next week.
TN: Okay. Sam?
SR: I like SPX more than I like the Dow, and I like the queues less than I like the Dow.
TN: Amid the volatility, you believe in tech?
SR: No. Okay. I don’t like any of them. Okay. And I prefer the S&P to the Dow. And I prefer the Dow to the queues.
TN: Okay.
SR: Yes, exactly. And I don’t like any of them. But if you had a gun to my head and made me buy something, it would be SPX and shorting queues against it.
TN: So there’s a slight downside bias in markets next week, equity markets? Okay, Nick, same?
NG: Yes. I think, as I said, I like what I wrote. News is law of gravity. As these rates come up, it starts to put gravity on the equity market and gravity will bring it down.
TN: Okay.
NG: One provisor, though. If we get some, along the path that we’re going, we get some serious shake outs. I do think what could be interesting is some of these commodity related starts, because actually commodities do quite well during a hiking cycle. Okay. That again, fits with our thesis anyway.
AM: Of course, gold has been on a tear for the last four trading days.
NG: Confusing everybody, right?
AM: Yeah, of course.
TN: Sam, do you agree with that commodity during the hiking cycle?
SR: I think oil is great during a hiking cycle. If you look back over hiking cycles, oil tends to do pretty well. I actually like the long oil short gold trade.
TN: Okay. So you bring us into a good point. Oil was my last stopping point. So, Albert, Nick, do you guys sit in the same place with oil? You think in the short term, say next week oil is looking good, or you think it continues to trade sideways?
AM: I think it goes up. I know. Rumors are Fed buying oil futures. I think it’s going to go up to 110. Not next week, but over the next week.
TN: Even with the inflationary pressure? Even with, which is unbelievable for me to say that. Even with the dollar rising. It’s unbelievable for me to say this.
NG: Albert just made a great point. These commodities are all at new levels and really the dollar hasn’t collapsed yet.
TN: Okay?
NG: Can you imagine what would happen if the dollar sells off some of these commodities?
TN: Yeah, we’re going to have to wrap it up there. So thanks very much, guys. This has been great and have a great week ahead.
