So what if inflation is Transitory?
If inflation is indeed transitory, there is no real hurry for the Fed to start tapering…
The US inflation data released yesterday, although remaining elevated, shows that inflationary pressure is indeed looking transitory. That is exactly what the Federal Reserve has been telling us thus far.
If inflation is indeed transitory, there is no real hurry for the Fed to start tapering their ultra-easy monetary policies and they can begin the process at a very gradual pace that will not shock the markets.
The tapering process, if and when it begins, will be due to “further substantial progress” made on the employment front and that is way better than if it was due to inflationary pressures forcing the hands of the Fed.
With fears of inflation ebbing, the party rocks on…
China’s State Capitalism policy has been extremely effective in helping the dynasty catch up with the West. This goes to show that China’s state planning has been very purposeful and their recent regulatory crackdown is just a blip in the broader trend.
For AI to succeed, you do not just need to have good scientists and semiconductor chips that are capable of performing the tasks required but also access to troves and troves of data for your models to “learn” from.
Unless things change drastically with regards to privacy laws and concerns, access to data is one such area where China will have the upper hand over the US for the foreseeable future.
TR & LTG: We continue to believe that the Chinese RMB is a structural long and will continue to add on Dollar spikes.
US PPI and Unemployment claims will be watched today as any miss weakness relative to market expectations will further fuel Dollar weakness and be generally constructive for risk assets.
Keep short USD and long NZD, & CNH. Volatility remains low. USD is easing off recent highs after the benign US CPI data. Keep short USD..
2. Commodities: Uranium & Energy — Energy stocks rallied strongly again yesterday. Stay on the path.
Key risks: Spread of the delta strain, and comments from Fedspeakers regarding the tapering process are the key drivers of risk sentiment for now.
Equity Index: Long Nasdaq futures. Stay long and patient. Look to buy dips on approach of support levels at 13950–14000.
Single Stocks: Every dip is a chance to get involved. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Spread of the delta strain, and Fedspeakers comments on the tapering process will dictate the market risk sentiment for now.
WHAT HAPPENED YESTERDAY
- US Total CPI, driven by increases in the indexes for shelter, food, energy, and new vehicles, increased 0.5% month-over-month in July, as expected, while core CPI, which excludes food and energy, rose 0.3% (expected 0.4%). On a year-over-year basis, total CPI was unchanged at 5.4% and core CPI moderated to 4.3% from 4.5%. The key takeaway for the market is the moderation in the year-over-year readings, which feeds into the “peak inflation” narrative. That is, the market is taking some comfort in the notion that inflation pressures might not be as pronounced in coming months.
- Separately, Kansas City Fed President George (strongly Hawkish, 2022 voter) and Dallas Fed President Kaplan (Hawkish, 2023 voter) suggested the Fed should consider tapering asset purchases sooner rather than later, echoing comments from Atlanta Fed President Bostic (hawkish, 2021 voter) and Boston Fed President Rosengren (slightly Dovish, 2022 voter) earlier this week.
- The U.S. Dollar Index fell -0.2% to 92.89 fell on Wednesday after U.S. inflation data showed consumer price increases eased in July, taking some pressure off the Federal Reserve to begin scaling back the monthly bond purchases that are part of its toolbox to support the economic recovery.
- US 2-year Treasury Bond yield decreased 1 basis point to 0.23%. 10-yr yield decreased 1 basis point to 1.35%.
- S&P 500 (+0.3%) and Dow Jones Industrial Average (+0.6%) set closing record highs on Wednesday, as value/cyclical stocks continued to sport a bullish bias following a better-than-feared Consumer Price Index (CPI) report for July. The Russell 2000 increased +0.5% after being down as much as -0.8% intraday. The Nasdaq, however, declined -0.2% despite the overall strong risk sentiment.
- Interestingly, the health care sector (-1.0%) was the only sector in the S&P 500 that closed lower, largely due to weakness in Pfizer (PFE 46.31, -1.88, -3.9%) and Moderna (MRNA 385.33, -71.43, -15.6%). MRNA pulled back 15.6% after doubling between July 9 and August 9. PFE gained about 20% over the past month.
HEADLINES & MARKET IMPACT
Notable Snippet: Hours after the U.S. Senate approved a $3.5 trillion budget blueprint chock-full of investments in new domestic programs, fissures emerged between the moderate and liberal wings of the Democratic Party over the size and scope of the spending.
Senator Joe Manchin, a moderate Democrat representing the conservative-leaning state of West Virginia, issued a warning shortly after the Senate early on Wednesday passed the budget deal that would carry out President Joe Biden’s top priorities.
THEMATIC CONTEXT: “When push comes to shove, we believe that the US government will do the right thing and they are on the edge of unleashing unprecedented fiscal money. We have been saying that Biden’s best work has to be accomplished from now to midterm elections and each day later just coils the springs of explosive growth as he will have to go faster and more aggressively within a shorter period of time. Don’t miss the forest for the trees at this point in the cycle.” — 21st July 2021
“The key development to take note in the language these days is the fact that Democrats are signalling that they will plan to use the “Reconciliation Act” to advance their plans with or without the Republican’s support. As we have been saying, when push comes to shove, the Biden administration will get the spending plans approved and start boosting the economy ahead of the mid-term election in Nov 2022.” — 30th July 2021
WHAT WE THINK: The slow but sure process continues. More horsetrading are in store before the floodgates open.
Notable Snippet: U.S. motorists drove 14.5% more miles in June as rural driving topped pre COVID-19 levels and more Americans returned to offices and leisure trips. The Federal Highway Administration said Wednesday motorists drove 282.5 billion miles in June, up 35.7 billion miles over June 2020 as overall travel was nearly back to pre-pandemic levels. In June 2019, U.S. motorists logged 284.5 billion miles.
For the first time since the pandemic began, rural driving surpassed pre-pandemic levels in June, while urban driving remains slightly below 2019 levels.
THEMATIC CONTEXT: “Each time an organization or a country makes claims such as “It will consign the internal combustion engine to history.”, the more bullish we get for traditional energy as it shows how tight the funding situation for new exploration will be (back-end oil futures curve is not registering this yet, hence the energy game is still early for energy equities). The transition to green energy is great, but no one talks about the “cost of transition” because it will first entail very high energy prices (due to lack of funding), this combined with massive requirements for new infrastructure and materials demand will cause inflation to remain high on an absolute basis for a good period of time. We remain well positioned for this outcome.” — 15th July 2021
WHAT WE THINK: This too shall pass and demand will return stronger than ever as countries start to view Covid as an “endemic”, however, the supply deficit persists and the ESG narrative will cause energy inflation to be a costly affair.
Notable Snippet: California on Wednesday became the first U.S. state to require that its teachers and other school staff be vaccinated or regularly tested for COVID-19, a move Governor Gavin Newsom called “a responsible step” to ensure the safety of children.
The move comes as Texas Governor Greg Abbott’s statewide ban on mask mandates hit its second legal setback after a judge in Dallas County temporarily blocked it from being enforced amid a nationwide rise in coronavirus cases.
THEMATIC CONTEXT: “Measures taken by countries on a Macro level will impact already sensitive social sentiment and we suspect that as Delta variant spreads, this will be the worst time for central banks and governments to talk about talking about tightening credit conditions. In fact, we have been banging the table that the entire credit tightening situation is a farce and merely showboating. The time to unveil the actual show is here and we suspect that assets will resume its trajectory in time.” — 19th July 2021
WHAT WE THINK: The Delta variant curve in the US is peaking and we suspect this is bullish for cyclicals and energy demand in the weeks ahead.
Phan Vee Leung
CIO & Founder, TrackRecord