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Listen to the Person who Matters

He reiterated that the tapering process will be very transparent and well-telegraphed.

Many people have their views on inflation and indeed, you may have your own take on how high inflation is and how wrong the Federal Reserve is. However, what truly matters to Fed policy is what the voting members on the committee think.

No one is more important on the committee than Fed Chair Powell and he’s repeatedly told us that he thinks inflation is transitory and unemployment is higher than what the official measure says it is.

We are a long way from full employment, and substantial progress still needs to be made before they start to taper. He reiterated that the tapering process will be very transparent and well-telegraphed.

So, you can decide to either go your own way and fight the market, or just listen to him and ride the trend.

MARKET OBSERVATION

Inflation Still Transitory? (Indeed It May Be)

Lumber prices almost unchanged YoY and Lower YTD.

Powell: “By inflation, we mean year after year after year prices go up,” Powell said. “If something is a one-time price increase… you wouldn’t react to something that is likely to go away.” “We really do believe,” he added, “that these things will come down of their own accord.”

Lumber prices are doing exactly what Federal Reserve Chair Powell was saying when he insists that inflation is “transitory”. The Fed will find every reason to keep the pedal to the metal and Lumber prices along with the reactionary function in long-term rates is indicative that inflation expectations are quelling. This is great for our structural longs in commodities and assets as it ensures that monetary and fiscal tightening will be kept at a distance.

DAY AHEAD

Final day of Federal Reserve Chair Powell’s testimony, each word will be closely monitored and we believe he will stick to the script of transitory inflation, well-telegraphed tapering intentions and that rate hikes are still far away.

TRADING PLAN

1. Currencies:

Keep short USD and long NZD, & CNH. Remain short USD vs NZD & CNH.

2. Commodities: Uranium — Fundamentals remain intact. Stay long and patient.

Key risks: Strong improvement on the job front that can cause a spike higher for US yields that will lead to a strong USD.

3. Equities:

Equity Index: Long Nasdaq futures. Dips approaching 13,950–14,000 should be good opportunities to add to longs. Stay long and patient while looking for substantial dips to buy.

Single Stocks: Stock continues to grind relentlessly higher but some high-beta tech stocks are lagging. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.

Key risks : Higher US yields due to inflation fears and geopolitical worries are the key risks.

WHAT HAPPENED YESTERDAY

Market movements as of New York Close 14 Jul 2021
  • US Producer Price Index for final demand increased 1.0% month-over-month (expected +0.6%), as did the Producer Price Index for final demand, less food and energy (expected +0.5%). That left the year-over-year growth rate at 7.3% for total PPI (expected 6.7%) — the largest since November 2010 — versus 6.6% in May. Producers are encountering higher prices that will create profit margin pressures if they are not offset with price increases to the consumers.
  • The U.S. Dollar Index fell -0.4% to 92.37. Dollar pared recent gains on Wednesday after Federal Reserve Chair Jerome Powell told Congress the U.S. economy was “still a ways off” from levels the central bank wanted to see before tapering its monetary support. His comments came as a report showed U.S. producer prices rose more than expected, posting their biggest annual increase in more than 10–1/2 years. A day earlier, data showed June U.S. inflation hit its highest in more than 13 years. Powell maintained the dovish message, pushing back against any concerns that he would change his tune, or changing the more patient approach that he’s been talking about, after the above expectation inflation release.
  • The 2-year US Treasury Bond yield decreased 3 basis points to 0.23% and the 10-yr yield fell 5 basis points to 1.37% as the bond markets responded to Powell’s reassurance that tapering is not on the cards any time soon and that inflation remains transitory.
  • Oil prices struggled with Brent falling 2.4% after OPEC+ is reportedly close to reaching an agreement to increase production (UAE’s output baseline rise from its current level of about 3.17 million bpd to 3.65 million) after failing to do so earlier this month. The news overshadowed the eighth-straight weekly inventory draw out of the EIA.
  • S&P 500 increased +0.1% on Wednesday in a defensive session led by Apple (AAPL 149.15, +3.51, +2.4%) and the counter-cyclical stocks. The Dow Jones Industrial Average (+0.1%) also eked out a positive finish, while the Nasdaq (-0.2%) closed slightly lower. The Russell 2000 dropped -1.6%.

HEADLINES & MARKET IMPACT

Hit by commodity inflation, Japan firms gradually pass on costs

Notable Snippet: About two-thirds of Japanese firms are passing on rising raw materials costs to customers or planning to do so as surging global commodity markets drive up import costs and squeeze bottom lines amid the COVID-19 pandemic, a Reuters poll showed. Few Japanese firms are considering cutting prices of their main goods and services in the latter half of this year, whereas most would go ahead with price hikes or keep them unchanged, the poll showed.

The Corporate Survey signalled a move away from a price-setting stance seen during nearly two decades of deflation in which companies cut prices of their goods and services out of fears price hikes would drive away cost-conscious customers. The shift could be encouraging for Bank of Japan (BOJ) policymakers who are grappling with stubbornly weak inflation due in part to companies’ bearish price-setting behaviour and adaptive inflation expectations among the public.

Fed’s Powell keeps to script on jobs recovery, feels heat on inflation front

Notable Snippet: Federal Reserve Chair Jerome Powell on Wednesday pledged “powerful support” to complete the U.S. economic recovery from the coronavirus pandemic, but faced sharp questions from Republican lawmakers concerned about recent spikes in inflation. In testimony to the U.S. House of Representatives Financial Services Committee, Powell said he is confident recent price hikes are associated with the country’s post-pandemic reopening and will fade, and that the Fed should stay focused on getting as many people back to work as possible.

THEMATIC CONTEXT: “Tapering is like “monetary chemotherapy” and you need to do it without killing the patient. With Debt/GDP at approx 130%, any move to taper will be akin to killing the patient and there is only one “drug” to get us to the tapering conversation — inflation. Inflation will need to bring Debt/GDP down to a reasonable level before we can start “monetary chemotherapy”, now the Fed’s task is to time the administering of the inflation treatment just right. Hold onto your hats because the Fed cannot begin the 2nd treatment (tapering) without the 1st (inflation), although we understand a great doctor always likes to over communicate the procedures.” — 11th June 2021

“As mentioned, with Debt/GDP this high (130%), we suspect that any attempt by the Fed to taper before inflation brings Debt/GDP back to lower levels (likely 100% <) will result in a “cardiac arrest” by markets and the Fed with Chief Doctor Powell will come rushing back in. We remain cognizant of this fundamental fact and as long as these numbers are showing (debt/gdp), we remain structurally bullish on the flood of money and bearish the USD.” — 17th June 2021

“The dovish talk is reaffirming all the points Powell made during his press conference last week which many traders chose to ignore (as evidenced by the mini tantrum in the treasury market and the USD strengthening aggressively over the next two days after the meeting). As mentioned yesterday, it’s an oxymoron, but we suspect that the closer we are to a sharp sell-off, the better chance we get of the Fed and Government relenting back into the arms of ultra-easy monetary and fiscal conditions that will fuel the next up leg.” — 24th June 2021

EU launches big climate plan for “our children and grandchildren”

Notable Snippet: European Union policymakers on Wednesday unveiled their most ambitious plan yet to tackle climate change, aiming to turn green goals into concrete action this decade and set an example for the world’s other big economies to follow. This will mean raising the cost of emitting carbon for heating, transport and manufacturing, taxing high-carbon aviation fuel and shipping fuel that have not been taxed before, and charging importers at the border for the carbon emitted in making products such as cement, steel and aluminium abroad. It will consign the internal combustion engine to history.

THEMATIC CONTEXT: “Traditional energy is here to stay and the ESG “dream” of having the world run on Solar, Wind and Hydro is far fetched from a practical point of view. The only energy source that can truly sustain such large energy demands while remaining “Green” is nuclear power and for that reason, we believe uranium to be the most mispriced/underpriced asset in the coming supercycle. In the meantime, traditional energy supply/demand imbalance will only be brought forward, leading to an interim bull (years) market in the traditional energy space. We remain heavily invested in this theme.” — 16th Feb 2021

SENTIMENT

FX

STOCK INDICES

Phan Vee Leung
CIO & Founder, TrackRecord

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