Has unemployment changed the narrative?
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In today’s KnowHow…
Has unemployment changed the narrative?
Chip shortage to last until at least mid-2022
Yellen Says Higher Interest Rates Would Be ‘Plus’ for U.S
Gold Is Good But Bitcoin Better for $7.5 Billion Hedge Fund
What happened overnight…
A relatively quiet start to the week. Inflation expectations once again have taken centre stage as investors look past the NFPs and to the CPI print later this week (more below). Overnight US equity index futures dropped as investors weigh up these inflation risks and the impact of a minimum corporate tax on technology firms. The 10 year ticked up slightly off the back of Janet Yellen’s comments that a slightly higher interest-rate environment would be a plus. Finally, Bitcoin was steady around $36,000 post a roller-coaster ride over the weekend amid a cryptocurrency crackdown in China.
Chart of the Day
Uber is a name we like and this morning, the company’s EMEA regional head is highlighting that the Ride business is now running at pre-pandemic levels in the UK post re-opening. The chart below is from Apple’s mobility tracker.
Analysis
Has unemployment changed the narrative?
We spoke last Monday about how closely the market will be watching the NFPs for any sign that we may see the Fed tapering sooner rather than later so the question we have had over the weekend a few times is whether or not the print has changed the narrative at all?
What happened?
Payrolls came in a touch softer than expected (559,000 vs 650,000) but digging into the numbers and wage growth and hiring demand were strong against a backdrop of many reports from businesses complaining that they are struggling to rehire workers to cope with surging demand. As the number wasn’t a blowout figure, the S&P reacted positively, triggering short covering while yields fell as Tech and long duration exposed stocks rallied with financials lagging.
The short conclusion for us is that the narrative hasn’t changed post Friday. As the Fed still sees higher inflation as ‘transitory’, employment data needs to consistently beat estimates before the Fed will begin tapering. This is unlikely to occur until Jackson Hole in the Autumn in our view.
Could this week’s inflation print change matters?
The key pushback to the point above is that wage growth in the print on Friday signalled that there is some tightness in the employment market. Put this together with many qualitative assessments suggesting that companies are struggling to hire, and the inflation print this week could add further support to the view that the US economy is recovering at a strength that would force the Fed’s hand to start talking about tapering.
What we recommend investors do is try compare price inflation and wage inflation to assess whether wage growth is being matched by goods price inflation. As you can see from the two charts below, wage growth is being matched by inflation growth. A sustained increase in wages for lower-wage workers and inflation will likely support the need for the Fed to act.
As a result, another strong print in CPI this week may add further support to the charts above and the Fed may need to start talking about tapering. Given the Fed is now on blackout until the June FOMC, there will also likely be further speculation as to whether the Fed will discuss tapering and make a statement on it in June. We personally do not believe we will get a statement until Jackson Hole in August but remain wary that a strong print on Thursday will drive market expectations for a discussion before August.
Looking at the CPI Print itself and consensus is for the year-on-year inflation rate to have jumped to 4.7 per cent in May in figures to be released by the Department of Labor on Thursday, compared with 4.2 per cent in April. The most interesting part of the print will be the extent inflation is broad-based across sectors and the services inflation for healthcare and shelter, which is likely to be more persistent than transitory. On top of this, the Friday release of University of Michigan five-to-ten-year inflation expectations are also worth watching too.
Conclusion:
While there is a lot of noise around monthly numbers, the NFP print on Friday didn’t change the narrative in our view. Having said that, wage growth is ticking up and a sustained rise in inflation across all sectors this week will certainly drive the tapering debate forward. As a result, we would be wary remaining long growth vs short value into Thursday but in the medium-term we expect the Fed to stick to its guns in viewing inflation as transitory over the summer before talking about tapering at Jackson Hole.
What else interests us
Chip shortage to last until at least mid-2022
We have spoken about the chip shortages disrupting supply chains around the world a few times recently, so it was interesting to hear from Flex, the world’s third biggest such manufacturer, suggesting that the global chip shortage disrupting the car industry and threatening the supply of consumer technology products will last for at least another year. Electronics manufacturers in Asia have also recently warned that the chip shortage was beginning to spread to TVs, smartphones and home appliances, with the situation made worse through stockpiling by Chinese groups hit by sanctions. The below chart shows the current expectations from Gartner back in May who seem to be slightly more optimistic than Flex.
Yellen Says Higher Interest Rates Would Be ‘Plus’ for U.S., Fed
We rarely hear so much in the press form ex Fed Chairs but in her role as Treasury Secretary Janet Yellen is hitting the press more regularly than many would be used too. Over the weekend, Yellen said President Joe Biden should push forward with his $4 trillion spending plans even if they trigger inflation that persists into next year and higher interest rates. “If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said Sunday in an interview with Bloomberg News during her return from the Group of Seven finance ministers’ meeting in London.
G-7 finance ministers and central bankers held a phone call on May 28 in which the group pressed Yellen on her views on inflation, according to a Treasury official. The group ultimately agreed with her assessment that price spikes through the year are likely to be transitory, said the official, who briefed reporters on condition of anonymity.
Gold Is Good But Bitcoin Better for $7.5 Billion Hedge Fund
Gold will surge to fresh highs in the next year, but investors seeking currency alternatives as global debt balloons should look to Bitcoin, according to Troy Gayeski, co-chief investment officer and senior portfolio manager at SkyBridge Capital a $7.5 billion hedge fund. While there’s more volatility, “you’re going to capture a little bit more juice than you will in gold from that same phenomenon” said Gayeski in a telephone interview last week. “All fiat-currency alternatives -- which have all gone through fairly recent substantial corrections -- are in a much better place now to handle that eventual taper and gradual slowing of money-supply growth, than they were as they were making higher-highs after higher-highs,” Gayeski said.
