E.g., 21-10-2021
E.g., 21-10-2021
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    Gavekal Research

    The US Production Problem

    US manufacturing production data for September released on Monday was a double disappointment. The -0.7% month-on-month decline, down from growth of 0.2% in August, not only fell short of consensus expectations for 0.1% growth. It also dampened hopes that manufacturing is set to emerge as a significant driver of US economic growth. This raises questions over the future strength of the US expansion.

    0
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    Gavekal Research

    The Source Of Discoordination And Inflation

    Today, the global economy lacks its usual order. Each month brings a new shortage that is disrupting supply chains and driving up prices. In short, the right goods are not being delivered at the right time and place. Will examines the drivers of spacial and temporal "discoordination" to determine how investors should allocate assets in this challenging environment.

    3
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    Gavekal Research

    The Troubling Signal In US Savings

    In recent months, the US net national savings rate—the share of income unconsumed—has ticked lower. It may seem a small concern as the Federal Reserve prepares to taper, but if the rate of genuine savings continues to fall over coming quarters, it will be a danger signal both for asset markets and for US economic growth.

    4
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    Gavekal Research

    Persistent Inflation Takes Over

    Some may hope that supply bottlenecks quickly ease and the price-hike scare of 2021 soon fades, but that is not the story of the latest US inflation reading. In short, US inflation is now persistent and the Federal Reserve will soon have to address this reality head-on.

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    Gavekal Research

    Video: Musical Chairs At The Fed

    After the resignation of two regional Federal Reserve branch presidents over potential conflicts of interest, the knives are out in Washington for Jay Powell. In this video interview, Will assesses what personnel changes at the Fed may mean for the trajectory of US monetary policy and for the Fed’s role as US banking supervisor.

    0
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    Gavekal Research

    A Temporary Respite

    Going into 4Q21, a worry for Will had been that asset prices faced the prospect of two tightening moves to US liquidity. Yet, with Congress now punting a debt-ceiling reckoning to December, this could, in turn, delay the Fed’s taper announcement to December, or even January. Thus, yesterday’s deal on Capitol Hill could allow temporary relief on the liquidity front.

    2
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    Gavekal Research

    Volatility In A Changed Economy

    It’s been a chastening, if not decisive, month for investors in US equities. The S&P 500 index has recovered ground, but still endured a -4% fall from its September 2 peak. On a historic basis, the drawdown was small but we have not seen many of them in the last 18 months. Bulls hope that having weathered worries about China and the Federal Reserve’s asset purchase taper, the ground has been set for US equities to hit new highs. My aim today...

    0
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    Gavekal Research

    Liquidity And Shortages

    It is possible the US equity market was simply confused on Wednesday, when it rallied after the Federal Open Markets Committee unfurled its communiqué. Or perhaps it was just oversold. Either way, the Federal Reserve revealed itself to be as hawkish as could have been expected. Asset purchases will be tapered “soon” and likely occur at a faster pace than last time around. Interest rates could be hiked next year and the Treasury will soon become...

    0
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    Gavekal Research

    Squeaky Bum Time For The US Economy

    As Covid cases rise in the US, most indicators point to a slowing economy. After August’s payrolls came in weak, activity measures and nowcasting readings have softened, while conditions in leading sectors like housing and autos have worsened. With the Citi US economic surprise index having fallen to -44.6 from close to zero a month ago, forecasters have been caught off guard by the slowdown. As Sir Alex Ferguson, the former Manchester United...

    0
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    Gavekal Research

    Webinar: Questions Arise As US Growth Slows

    As renewed Covid outbreaks curtail activity and the labor market starts to normalize, the US economy is no longer generating big upside growth surprises. Will the Federal Reserve defer its retreat from super-easy monetary policy, and what will come of the Biden administration's fiscal strategy?

    0
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    Gavekal Research

    Video: Cryptos, NFTs And CyberPunks

    As investors have flipped between euphoria and dejection over the future of crypto-currencies and related digital assets, prices have had a crazy ride. In this video Will outlines a framework for thinking about valuations. Even if digital art sold as NFTs sticks around, the basic economics of their use case means they probably won't be great stores of value.

    0
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    Gavekal Research

    The Economy And Volatility

    US equities have gone almost 18 months without a double-digit drawdown. Such calm is likely to trouble devotees of Hyman Minsky, who showed that excessively long periods of market stability breeds countervailing episodes of violent instability. The question is what will cause the transition to a more volatile market, or dare I say it, what could trigger a “Minsky moment”?

    2
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    Gavekal Research

    Bottlenecks And Corporate Bond Yields

    It seems that not all parts of the US economy are created equal. As the Delta variant outbreak causes US Covid cases to soar, the service sector is taking a hit. In contrast, the less-exposed manufacturing sector saw job growth in August. The question for investors is how these somewhat conflicting forces impact different asset classes.

    0
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    Gavekal Research

    Strategy Monthly: How To Hedge Tighter Liquidity

    So far, markets have not panicked over the prospect of the Federal Reserve tapering its asset purchases. But when it comes, the taper will materially tighten global liquidity conditions. In this calm before the storm, investors running global portfolios should focus on their hedges.

    0
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    Gavekal Research

    Investing Through The Taper

    After all the build-up hype, investors seem to have taken Jerome Powell saying that the Federal Reserve may soon be buying less assets in their stride. They have no doubt taken solace from the Fed chair’s promise that tapering does not mean imminent interest rate hikes, or quantitative tightening. So is the great 2021 “taper whimper” done and dusted? Perhaps not, for while the Fed’s expectation management has been slick, in the months ahead...

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    Gavekal Research

    The End Of The Cash Dump

    The US Treasury is running low on cash. Having massively ramped up its holdings of cash between April and July 2020 at the height of the Covid crisis, the Treasury has been running them down again since February 2021. Normally the Treasury aims to hold cash equal to one week of its outgoings, but it has fallen to less than half that amount.

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    Gavekal Research

    Housing’s Different Drivers

    High house prices may be making headlines in the US, but the homebuilding sector faces headwinds. In July, housing starts and building permit issuance for single family dwellings fell -1.7% month-on-month and -4.5%, respectively. Mortgage applications also fell, which points to weaker construction ahead (see chart below). A positive factor for US housing has been the recent decline in long-term treasury yields, yet there are good reasons to...

    0
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    Gavekal Research

    The Taper Is Coming

    In less than two weeks, Jay Powell will get up to make his speech at the annual Jackson Hole gathering of central bankers. Investors should position for a clear signal that in the coming months the US will begin to taper. It is possible, even likely, that the ever-cautious Federal Reserve chief may decide to delay a few weeks, perhaps until the conclusion of the Fed’s next policy meeting on September 22. But his signal is only a matter of time....

    3
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    Gavekal Research

    The Coming Decline In Earnings Growth

    After 453 of the S&P 500’s constituent companies have reported for the second quarter, aggregate earnings are up 99% year-on-year. Much of this jump is attributable to base effects; the second quarter of 2020 was when lockdowns hit hardest. But not all; even stripping out base effects, earnings growth has been strong. This growth is destined to fade over the second half, as the impact of economic reopening and government stimulus abates, and...

    0
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    Gavekal Research

    Video: A Healing US Labor Market

    Since the depths of the pandemic, the US labor market has recovered remarkably quickly. A key question for investors is how long strong job creation can be sustained before upward wage pressure returns. Ahead of Fridays’ payrolls report, Kai Xian outlines the key drivers of the US labor market.

    0
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    Gavekal Research

    The Sobering Signal In Lumber

    Back in May, an internet meme suggested that if you wanted to impress your date by taking them somewhere really expensive, you should go to a lumber yard. No longer, as the price of US two-by-four has since cratered by two-thirds. KX examines what commodity-price moves such as this can tell us about the broader economy.

    2
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    Gavekal Research

    Risks To The Rally

    US equities have ground higher on strong demand, easy monetary policy, and unattractive bond yields. As long as this situation remains, investors should remain moderately overweight US equities. But they should also carefully monitor three key macro risks that could upend this fairly benign investing environment.

    0
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    Gavekal Research

    Strange Times And The Return Of TINA

    Fresh Covid-19 outbreaks, stunning Chinese regulatory actions and worries over global growth are causing US real bond yields to plumb new depths. So what is the humble investor to do? After all, historically tight US credit spreads means corporate credit is unattractive, while equities keep making new highs, pushing the S&P 500 index up 18% year-to-date. The answer may not be that complicated, as current growth data and market pricing...

    0
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    Gavekal Research

    Webinar: The State Of Global Growth

    The reflation trade has ebbed in recent weeks as investors have gotten more comfortable with the trajectory of US monetary policy and concerns have risen over the Delta variant of Covid disrupting economic opening. At the same time, China continues to crack down on its high-growth internet sector. Our team assessed the market implications of these trends.

    0
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    Gavekal Research

    Did The Equity Rotation And Bond Sell-Off End In May?

    The arrival of Covid-19 vaccines in November sparked a selloff in bonds and significant outperformance of value stocks, at least until mid-May. Having advised a bias to value stocks and keeping duration short in bond portfolios since last November Will was wrong-footed by the market moves of the past two months. Will the new trend last?

    2
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    Gavekal Research

    A High-Pressure Business Cycle

    The US economy may have suffered one of its biggest ever contractions last year, but at just two months, it was one of the shortest due to aggressive policy reactions that spurred an unlikely economic boom. A worry for investors is that late-cycle stresses now emerging cause this expansion to fade as quickly as it started.

    3
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    Gavekal Research

    The Economic Impact Of Delta

    This week saw Gavekal writers address risks to the global reflation trade. Louis explored three reasons for the market shift: (i) the rise of the Delta Covid variant, (ii) tighter-than-expected policy settings in the US, and (iii) China’s tightening measures. My aim is to focus on risks posed by the first of those: another Covid shock to Western economies.

    4
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    Gavekal Research

    Breaking Down US Inflation

    So have hopes that US price pressures are merely a transitory effect faded like a mirage on an Oregon highway? The higher-than-expected jump in June’s consumer price index to a 5.4% year-on-year gain certainly dented investors’ belief that US price pressures will prove fleeting. They are probably right in that view. For while some factors driving US prices higher will abate, new pressures are waiting in the wings. Therefore, in the medium term,...

    0
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    Gavekal Research

    Demographics And Prices

    Starting in the early 1980s, the world became increasingly flush with people in their prime working and saving years. That trend, however, has largely run its course and may now be going into reverse. As a result, investors should consider what economic trends have demographic drivers, making them vulnerable to a structural shift occurring.

    9
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    Gavekal Research

    Webinar: Can Things Really Keep Getting Better?

    The US economy continues to break growth records as it reopens and other big regions may be set to go the same way, while Asia continues to prosper from a strong export outlook. The question is not whether the world economy slumps back into a funk, but whether growth expectations are now set too bullish.

    0
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    Gavekal Research

    Strategy Monthly: Dialing Down Expectations For US Growth

    Growth in the US economy is set to go from great to good. The easy pickings of releasing pent-up demand and re-employing idle workers are almost used up. Growth should stay above trend, but by a smaller margin. Investors should prepare for growth to undershoot expectations that are now too high.

    0
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    Gavekal Research

    Peak US Growth

    The US economy has been on a tear and it could be assumed that a bipartisan Congressional deal to spend US$1.2rn on roads, bridges and tunnels would spur even more growth. Yet, surprising as it may seem, we may have seen the top of the US growth cycle as activity goes from great to good in the second half of this year.

    0
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    Gavekal Research

    Video: The US Housing Sector Rolls Over

    The US housing market has been booming for the past year, with prices setting a record-high in data released this week. However, a decline in affordability, coupled with the potential for higher mortgage rates, is weighing on demand and has started to force a shift from a buyer-led market to a renter-led market.

    0
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    Gavekal Research

    The Dollar’s Temporary Fillip

    Currency markets must process information on many factors impacting an economy and then judge how it stack ups against another economy, yet from time to time the focus switches to just one thing. The Fed's hawkish statement last week sparked a monomaniacal focus on the timing of a taper to asset purchases. Yet there are already signs that this unitary focus is waning.

    0
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    Gavekal Research

    Webinar: The Market Impact Of US Policymakers

    In yesterday’s webinar, our team of US analysts considered what the Federal Reserve's tentative moves to normalize monetary policy means for growth and asset values. They also offered updates on US fiscal policy and anti-trust developments.

    0
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    Gavekal Research

    Fed Talks Of Tapering

    It should not be shocking but the Federal Reserve is getting set to return to a more normal monetary policy. To avert a 2013-style “taper tantrum”, Jay Powell wrapped cotton wool around his “tightening” message on Wednesday but the fact is that the Fed is talking about tapering its asset purchases.

    4
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    Gavekal Research

    Peak Inflation Expectations

    Despite warning signs, it is now clear that investors were too relaxed about US pricing pressures at the start of this year. That much was clear from the consumer price index rising 5.0% year-on-year in May and at an annual rate of 5.9% over the last six months. Yet with the market measure of forward inflation expectations just below a 10-year high, the scope for these numbers to keep shocking has waned.

    8
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    Gavekal Research

    Video: Weighing The Fed’s Unconventional Options

    The Federal Reserve’s next move is likely to be verbal guidance over a tapering of asset purchases, argues Will. That is increasingly a consensus market position, so in this interview he explores other policy options that the Fed could choose to pursue.

    0
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    Gavekal Research

    Here Comes The US Capex Boom

    Amazing as it sounds given all that has happened in the last 15 months, the US economy is already entering a “mid-cycle” phase that should change the drivers of growth. Sectors like housing and durable goods have enjoyed double-digit growth over the last year, but now face head winds. In contrast, firms across the US seem set to go on a capital spending binge.

    0
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    Gavekal Research

    Accomplishing The Fed’s Mission

    Another week, another discourse on US inflation, this time triggered by the personal consumption expenditures index rising 3.6% year-over-year in April, the fastest gain since 2008. Some of that is base effects, but not all: since the Federal Reserve refined its 2% inflation target to an “average” 2% last August, the PCE index has risen at an annualized 3.5%. The point of the Fed’s change was to “make up” for misses and better anchor long-term...

    1
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    Gavekal Research

    A Cooling Market For Cars and Houses

    With stimulus checks having been sent and the jobs market recovering, last month saw the biggest jump in US car sales for at least 35 years. Will Denyer and I have been bullish on autos (and for similar reasons, housing) for the last year. Yet just as the punch bowl fills up, it looks time to get more cautious.

    4
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    Gavekal Research

    Video: Buy The Crypto Dip?

    Crypto-currency prices have plunged in the last two weeks on a bad brew of news. Will wants to believe in crypto-currencies as an alternative form of money. However, he has struggled to see how such tokens make the jump to being “money”, with all that entails. The question is whether after such a big price drawdown, this skepticism is now discounted into the price.

    0
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    Gavekal Research

    No Reason To Reverse A Weak Dollar Call

    The US dollar is nearing the bottom of its trading range, so does it bounce back, or break lower? In 1Q21, the US’s rapid vaccination rollout and improving economic outlook spurred the dollar’s rebound. In early April KX argued that as other nations followed a similar path, the relative strength of these factors would wane. This has played out, and there are other reasons to fade the dollar.

    0
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    Gavekal Research

    Profits And The US Reshoring Plan

    In selling his US$2.3trn infrastructure investment plan, US President Joe Biden says it will create millions of secure manufacturing jobs: “There is simply no reason why the blades for wind turbines can’t be built in Pittsburgh instead of Beijing,” he recently opined. While not successful, the reshoring of US manufacturing jobs was a key justification for Donald Trump’s mercantilist trade policy. Now, as Biden seeks Congressional votes for his...

    5
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    Gavekal Research

    Webinar: Inflation And Its Global Impacts

    Markets have been roiled by rising US inflation that seems to be returning sooner than expected, and similar inflationary dynamics are starting to be seen in Europe. Our team of analysts addressed the inflation outlook in the US, Europe and emerging markets, and offered views on what it means for asset prices in these markets.

    0
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    Gavekal Research

    The Data Against The Fed Stacks Up

    The US Federal Reserve prides itself on being “data dependent.” If it is truly data dependent, the Fed is going to find it increasingly difficult to justify its extremely easy monetary policy stance. The latest of the data points to stack up against it are professional forecasters’ inflation expectations, which the Fed has often lent weight to in the past. For the last two years, these have been subdued. Now—the last piece of the inflation...

    0
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    Gavekal Research

    Hardly Transitory, But Not A Spiral

    After headline and core CPI readings hit multi-year highs for April, investors have inflation on their minds. The rise in US bond yields and continued fall in equities reflects fears that the Federal Reserve is behind the curve, and could be about to slam on the monetary brakes. My view is that these price pressures are far from transitory, but a spiral higher does not beckon.

    4
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    Gavekal Research

    Playing The Inflation Rotation

    It seems wherever you look today, there are inflation signals. If the Federal Reserve is right, and the signaled burst of inflation proves transitory, then all will be well. The risk is that inflation proves stickier than policymakers expect. If so, Monday’s -2.6% sell-off in the Nasdaq is just a taste of a rotation that still has further to run.

    2
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    Gavekal Research

    Webinar: Global Investment Roundtable, May 2021

    Joe Biden's enormous fiscal initiatives mark a potential sea change in the US government’s role in the economy. They may yet get watered down as the US president negotiates with more conservative members of his party, but tax and spend is clearly the new mantra in Washington DC. The question for investors is what this means for assets in the US and around the world.

    0
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    Gavekal Research

    The Changing State Of US Liquidity

    When it comes to creating and distributing US money, there are three main players: the Federal Reserve, the US Treasury and commercial banks. Recent events call for a status update on the prospects for money flows from each, and what it all means for the bond market.

    4
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