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Neil's Morning Update - 12/10/21

Dec. 10, 2021 9:12 AM ET
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Cbus Neil's Blog
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Seeking Alpha Analyst Since 2013

Managing Partner of Sethi Associates, Ltd., a family owned investment manager specializing in investments in real estate, public markets, and venture capital with a current focus on esports investments. You can view my LinkedIn profile here. https://www.linkedin.com/in/neil-sethi-31204051. Started the blog at the request of friends who wanted an easier way to follow my thoughts on the markets and economic data, and now I share the articles on Seeking Alpha. Feedback always welcome!

Neil's Morning Update - 12/10/21

Please excuse typos. Mornings are tilted more international, evenings more U.S. 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). As are reminder, this is a free blog I put out to try to help people get information, so no editors, etc.

A small glossary.

SPX = S&P 500

Naz = Nasdaq Composite

NDX = Nasdaq 100 (100 largest stocks in the Naz)

RUT = Russell 2000 (smaller stocks)

DMA = Daily Moving Average (the moving average over the given time period (20, 50, 100, 200 days normally)).

MACD = Moving Average Convergence Divergence (basically a trend indicator)

RSI = 14-day Relative Strength Index (basically what it sounds like)

BBG = Bloomberg

WSJ = Wall Street Journal

Also, on my charts, the lines are 20-DMA (green), 21-DEMA (red), 50-DMA (purple), 100-DMA (BLUE), 200-DMA (brown)


US futures trade positively this morning, getting a leg up following a mostly as expected CPI report (the headline m/m figure came in a tenth hotter than expected), which did show the highest y/y headline reading since 1982. Bond yields also trade modestly higher. Asian shares closed down while European shares are mixed. Most commodities are trading positively. In the US, RUT is leading to the downside, indicated down around seven tenths of a percent, NDX down four tenths and SPX down a little less than that.

Here's the SPX futures this morning. In sort of a three-day downtrend. Hopefully it can push over that line today. MACD did cross over to a cover shorts positioning, which is positive.

In U.S. corporate news (Argus):

Broadcom (AVGO 625.00, +41.58): +7.1% after beating EPS estimates, guiding fiscal Q1 revenue above consensus, increasing its quarterly dividend by 14%, and announcing a new $10 billion share repurchase program. Oracle (ORCL 98.85, +10.08): +11.4% after beating top and bottom-line estimates and increasing its share repurchase program by $10 billion. On a related note, the stock was upgraded to Buy from Hold at Deutsche Bank. Costco (COST 534.2 0, +9.87): +1.9% after beating EPS estimates. lululemon athletica (LULU 411.00, -5.92): -1.4% after guiding Q4 revenue slightly below consensus, although the company did beat EPS estimates. Tesla (TSLA 991.89, -11.91): -1.2% as CEO Elon Musk continued to sell shares as previously committed and joked on Twitter about leaving his job to become an influencer.


Major equity indices in the Asia-Pacific region ended the week on a lower note. Japan's Nikkei: -1.0% (+1.5% for the week) Hong Kong's Hang Seng: -1.1% (+1.0% for the week) China's Shanghai Composite: -0.2% (+1.6% for the week) India's Sensex: UNCH (+1.9% for the week) South Korea's Kospi: -0.6% (+1.4% for the week) Australia's ASX All Ordinaries: -0.3% (+1.7% for the week).

In news, Japan's PPI increased at its fastest yr/yr pace since 1981 in the November reading. A Bank of Japan official said that steelmakers are optimistic about a rebound in production this month. The Japanese government approved a tax reform plan for FY22, as expected. China will hold a 2.5 day central economic work conference, starting Wednesday. The Bank of Japan is expected to decide as early as next week to scale back emergency funding deployed last year to combat a pandemic-induced cash crunch, sources say, following other central banks in gradually phasing out crisis-mode policies.

And we noted yesterday that China was trying to bring down the yuan, which had strengthened to its highest levels since 2018. They've been signaling their displeasure for a couple of months now, and yesterday raised a foreign currency reserve ratio. This morning they set the yuan at the biggest discount to expectations since BBG started tracking to further push against the "one way bets". We'll see if this is enough. If not, we could see more moves by the Chinese. BBG (first chart from Heisenberg Report).

Already fighting economic fires on a number of fronts, China is rushing to clamp down on speculation in its strengthening currency before it gets out of control. Rapid inflows raise the risk of asset bubbles, which could burst should the money start pouring out.

In the midst of managing a property slowdown and two of the country’s largest-ever corporate debt restructurings, the last thing Beijing needs is a rapidly appreciating yuan. China’s central bank attempted to ward that off this week, first forcing banks to hold more foreign currencies in reserve, then setting the daily reference rate far weaker than estimates. It may need to do more.

The country’s pivot toward easier policy this month has sent hot money flowing into stocks and government bonds, helping push the yuan to the strongest in more than three years. Overseas investors bought $3.4 billion of yuan-denominated stocks on Thursday alone, just shy of an all-time high, while foreigners hold a record $375 billion in government bonds.

The PBOC has a history of pulling on the currency’s levers in both directions in a “managed float” system. The so-called fixing -- long seen as a policy signal on the Chinese exchange rate -- has for five straight days been set at levels weaker than average estimates in Bloomberg surveys.

In economic data, Japanese PPI came in hotter than expected (which is what they want right?).

Japan's November PPI 0.6% m/m (expected 0.3%; last 1.4%); 9.0% yr/yr (expected 8.5%; last 8.3%)

New Zealand's November Business NZ PMI 50.6 (last 54.3). November Electronic Card Retail Sales 9.6 % m/m (last 10.0%); 2.9% yr/yr (last -7.6%)


As of 8 am Eastern, major European indices trade near their flat lines, making for a quiet finish to the week. STOXX Europe 600: -0.2% (+2.9% week-to-date) Germany's DAX: +0.1% (+3.2% week-to-date) U.K.'s FTSE 100: UNCH (+2.8% week-to-date) France's CAC 40: -0.1% (+2.0% week-to-date) Italy's FTSE MIB: -0.1% (+3.3% week-to-date) Spain's IBEX 35: -0.4% (+1.5% week-to-date).

In news, British Prime Minister Johnson may be facing a no-confidence vote from his party after the reimposition of coronavirus restrictions. Today is the deadline that was set for the U.K. and France to solve their fishing dispute, but the situation remains unresolved.

In economic data, German November CPI came in as expected decelerating slightly m/m, while UK, Italian, and Spanish October industrial production all came in weaker than expected, contracting from September levels. UK GDP also missed expectations.

Germany's November CPI -0.2% m/m, as expected (last -0.2%); 5.2% yr/yr, as expected (last 5.2%); German Cabinet To Pass Supplementary Budget On Monday To Inject +EUR60 Bln Into Climate Fund – RTRS Sources

U.K.'s October Industrial Production -0.6% m/m (expected 0.1%; last -0.4%); 1.4% yr/yr (expected 2.2%; last 2.9%). Manufacturing Production 0.0% m/m (expected 0.1%; last 0.1%); 1.3% yr/yr (expected 1.7%; last 2.8%). October Construction Output -1.8% m/m (expected 0.2%; last 1.3%); 3.2% yr/yr (expected 5.0%; last 7.2%). October trade deficit GBP13.93 bln (expected deficit of GBP14.06 bln; last deficit of GBP14.74 bln). Q3 GDP 4.6% yr/yr (expected 6.6%; last 5.3%)

Italy's October Industrial Production -0.6% m/m (expected 0.4%; last 0.1%); 2.0% yr/yr (expected 3.3%; last 4.5%)

Spain's October Industrial Production -0.9% yr/yr (expected 0.7%; last 0.4%)

As ECB officials look to what to do with the "regular" asset purchase program when the emergency version expires in March.

FRANKFURT, Dec 9 (Reuters) - European Central Bank policymakers are homing in on a temporary increase in the regular bond purchase scheme that would still significantly reduce overall debt buys once a much larger pandemic-fighting scheme ends in March, sources told Reuters.

The move, to be discussed at a meeting of the Governing Council on Dec. 16, would aim to keep bond yields in check even after the ECB's 1.85 trillion euro ($2.09 trillion) Pandemic Emergency Purchase Programme ends, while not committing too much firepower at a time when inflation is already high and the growth outlook is uncertain.

Conversations with six sources with direct knowledge of the debate indicate that a compromise is forming around beefing up the long-running Asset Purchase Programme (APP) but there would be limits on the size and time of the commitment, leaving policymakers with the usual flexibility to tailor policy later.

While the details of this boost are still open, the sources said that the ECB could do one of two things. It could approve a purchase envelope until the end of the year, with the caveat that not all of it must be spent. Alternatively, it could lift the buys for a shorter period with the pledge that the purchases would still continue thereafter, but their size would be discussed later and would likely fall, if the economy develops as expected. In any case, the bond buys from April would be significantly smaller than the combined volume of the emergency and legacy programmes used now.

Under the likely options, the ECB's commitment would not reach beyond 2022, a key issue for conservatives, or hawks, who fear that inflation might not fall below the 2% target, as now expected.


Bonds - Yields pushing higher on the slightly higher than expected CPI report. Bond yields are up two basis points to 0.71%, a post-pandemic high, while the 10-year is also up two basis points to 1.51%.

As many fear the combination of reduced auction sizes and Fed tapering will lead to liquidity issues in some "off the run" Treasuries (which make up the vast majority of the market). BBG.

When markets seized up last year, liquidity in most Treasuries vanished, forcing the Fed to embark on massive asset purchases and other measures to avert a full meltdown. Now, the U.S. central bank is scaling back that buying, which has targeted the least-liquid Treasuries, and is poised to quicken the wind-down. At the same time, new government borrowing is ebbing, with the combination setting the stage for more fireworks.

“Treasury is cutting the amount of the most liquid Treasuries and the Fed is stopping its buying of the least liquid,” said John Briggs, global head of desk strategy at NatWest Markets. “And what we’ve seen overall in the Treasury market is that liquidity is more of a mirage. The Fed still is basically the only real balance sheet in town.”

The past month’s bout of heightened volatility in Treasuries shows the stakes all too clearly. The crosscurrents of persistently high inflation and the pandemic’s refusal to go away have caused large daily swings in yield, indicative of poor liquidity, stirring memories of previous pain.

The central bank buys mainly older notes and bonds, “off-the-runs” that make up 95% of the $22 trillion market but are less frequently traded. Meanwhile the shrinking auction sizes mean a smaller pool of the newest, “on-the-run” securities that everyone wants, and serve as benchmarks for most other bonds globally.

The combination “is a mechanism for more bouts of illiquidity and volatility,” said Praveen Korapaty, head of interest-rate strategy at Goldman Sachs Group Inc. “If the Fed is not there, others in the market will be less willing to provide liquidity in off-the-run securities. And at the same time the Treasury is cutting on-the-run issuance.”

What Bloomberg Intelligence says: Unless regulators shift bank supplementary leverage ratio (SLR) rules to exclude certain assets like bank reserves, off-the-run Treasury security liquidity may remain challenged. As the Fed steps away from the market, dealers will have to perform traditional intermediation functions with a market much larger than balance sheets can handle. Though we don’t think the market will seize up as it did in March 2020, two or three bouts of less-liquid markets may cause yields to move considerably more than with typical daily volatility. -- Ira F. Jersey, chief U.S. interest rate strategist

Dollar (DXY) - Trading around flat levels as it remains just above the rising 20-DMA. Currently at $96.31. Remains in intermediate-term uptrend. Daily technicals remain tilted negative.

VIX - Back under 20 at 19.47, lowest since 11/24. Think easiest path is down until Wednesday with the CPI print in the background now.

Crude (/CL) - Up this morning as it bounces between overhead resistance and support of the 200-DMA. Currently at $72.18 WTI. Daily technicals remain mixed but very close to turning positive (MACD did get "cover shorts" signal this morning).

Nat Gas (/NG) - After stabilizing on Monday, continues to trade just under the 200-DMA for a fifth day. Currently at $3.84. Daily technicals tilt negative.

Gold (/GC) - Continues to remain in the range of the last couple of weeks below resistance. Currently at $1780. Daily technicals mixed.

Copper (/HG) - Continues to trade in the middle of the range of the past couple of months. Daily technicals are neutral. In longer term uptrend.

US Data

We had out the Consumer Price Index for November, which came in a tenth hotter than expected m/m but as expected y/y (hottest since 1982 if you hadn't heard). Core came in as expected (also very hot). Later this morning we'll get the the preliminary University of Michigan Index of Consumer Sentiment for December.

US CPI (M/M) Nov: 0.8% (est 0.7%; prev 0.9%)

CPI (Y/Y) Nov: 6.8% (est 6.8%; prev 6.2%)

CPI Ex Food And Energy (M/M) Nov: 0.5% (est 0.5%; prev 0.6%)

CPI Ex Food And Energy (Y/Y) Nov: 4.9% (est 4.9%; prev 4.6%)

Also yesterday we had the Fed's "Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts" for the third quarter. I know, quite a mouthful. Basically is the financial standing of various areas of the United States. Here was the summary:

The net worth of households and nonprofits rose to $144.7 trillion during the third quarter of 2021. The value of directly and indirectly held corporate equities decreased $0.3 trillion and the value of real estate increased $1.4 trillion.

Domestic nonfinancial debt outstanding was $63.7 trillion at the end of the third quarter of 2021, of which household debt was $17.6 trillion, nonfinancial business debt was $18.2 trillion, and total government debt was $27.9 trillion. Domestic nonfinancial debt expanded 2.4 percent at an annual rate in the third quarter of 2021, down from an annual rate of 6.5 percent in the previous quarter. Household debt increased 6.2 percent at an annual rate in the third quarter of 2021. Consumer credit grew at an annual rate of 5.3 percent, while mortgage debt (excluding charge-offs) grew at an annual rate of 7.8 percent. Nonfinancial business debt rose at an annual rate of 3.9 percent in the third quarter of 2021, up from a 1.8 percent annual rate in the previous quarter. Federal government debt decreased 1.3 percent at an annual rate in the third quarter of 2021, down from a 9.6 percent annual rate in the previous quarter. State and local government debt expanded at an annual rate of 1.7 percent in the third quarter of 2021, after expanding at an annual rate of 3.2 percent in the previous quarter.

And from @calculatedrisk:

The first graph shows Households and Nonprofit net worth as a percent of GDP.

With the sharp decline in GDP in Q2 2020, net worth as a percent of GDP increased sharply. This reversed somewhat in Q3 as GDP bounced back (even as net worth increased). But now net worth as a percent of GDP is just below the all-time high set in Q2.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.

In Q3 2021, household percent equity (of household real estate) was at 68.8% - up from 68.3% in Q2. This is the highest percent equity since the 1980s.

Mortgage debt is up $800 billion from the peak during the housing bubble, but, as a percent of GDP is at 49.6% - up slightly from Q2 - and down from a peak of 73.3% of GDP during the housing bubble. The value of real estate, as a percent of GDP, increased in Q3, and is well above the average of the last 30 years.

And, relatedly, Corelogic noted that "U.S. homeowners with mortgages (which account for roughly 63% of all properties) have seen their equity increase by 31.1% year over year, representing a collective equity gain of over $3.2 trillion, and an average gain of $56,700 per borrower, since the third quarter of 2020."


Random stuff:

And it wasn't always an "either/or market".

As while BBG reports more on the apparent mildness of S African Omicron cases...

South African hospitalizations from the omicron coronavirus variant are rising at a slower rate than surging case numbers, while severe disease is limited and there’s only a small uptick in deaths.

Data presented by the government on Friday reinforces theories that while omicron spreads more rapidly than earlier strains, it exhibits less pathogenicity, or the ability to make people very ill.

Previous waves showed an increase in hospitalizations before a dramatic rise in case numbers, said Michelle Groome, the head of health surveillance for the country’s National Institute for Communicable Diseases. Now, “we first saw the increase in cases and then started seeing these hospitalizations, so early indications are that we may be starting to see a disconnect,” she said.

... as we noted last night, Delta + holidays = filling hospitals in some parts of the US. BBG.

After months of warnings that vaccinations would ward off a Covid-19 disaster, the U.S. is sailing toward a holiday crisis.

Cases and hospital admissions are rising amid a season of family gatherings. Most victims have shunned inoculations. The situation is especially dire in the chilly Northeastern states, but doctors in many places report a grimly repetitive cycle of admission, intensive care and death. There are shortages of beds and staff to care for the suffering.

“We’re in desperate shape,” said Brian Weis, chief medical officer at Northwest Texas Healthcare System in Amarillo, the state’s worst hot spot.

In 12 states and the nation’s capital, the seven-day average of admissions with confirmed Covid-19 has climbed at least 50% from two weeks earlier, according to U.S. Department of Health and Human Services data. The areas with the largest percentage upticks were Connecticut, New Jersey, Washington, D.C., Vermont and Rhode Island.

To see more content, including summaries of most major U.S. economic reports and my morning and nightly updates go to Cbus Neil's Blog Posts for more recent or Sethi Associates for the full history.

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