Click HERE to access the FSInsight COVID-19 Chartbook.
Inflation vs Recession = Markets focus of either “half-empty” views to “worser half-empty”
Incoming data this week has pointed to a pronounced softening of economic momentum globally, and this has pushed commodity prices lower and similarly pushed down interest rates. And this has shifted market focus:
- inflation vs recession
- two paths to ruin, either inflation wrecks the economy or a recession wrecks the economy
- weakening incoming economic data, at a minimum, reduces the “hawkish upside” risk from central banks
- but these are not the only two paths for markets, even if markets see these as most probable
- falling inflation is arguably more important anyways
- falling inflation would push Fed closer to a dovish pivot
- a recession would trigger a Fed pivot (to dove) and would support markets
A third option remains “soft landing” — in this version:
- inflationary pressures are cooling as supply chains ease
- Fed and other central banks have tightened sufficiently currently to further soften the labor market and housing
- thus, instead of a recession vs inflation debate, it should be “soft” vs “hard” landing
- and under “soft” there is a wider path for equity markets to recover
Taking a step back, the incoming data this week could be viewed as discouraging in this shortened week. Yet, as shown below, the S&P 500 has managed to climb 3.3% and even closed relatively strong Thursday, even as multiple Fed speakers, including Powell, continued to speak of the need to push Fed fund rates higher.
The relative strength of Nasdaq 100 and China equities argues for “soft landing” not recession
One argument in favor of “soft landing” or disinflation, is the relative strength shown by Nasdaq 100 (QQQ 0.22% ) and China equities (CS 300). As shown below, both have shown demonstrable strength:
- China has been outperforming since late April
- Nasdaq 100 since early June
Since April, inflationary fears have accelerated. And since early June, fears of a widening economic slowdown have strengthened. These two markets bear watching. After all:
- a recession would be a massive headwind for QQQ and China equities
- surging inflation would be a headwind for QQQ and China
- but a soft landing would arguably be a positive, since this would signal Fed potentially shifting dovish
Even Powell, in his testimony to Congress, made reference to the possibility of a “sharp decline in prices.” The context for this statement is that:
- in situations of unusually tight supply/demand
- prices move far more than suggested by typical models
- in excess demand, prices rise faster
- in easing supply (ala supply chains ease), the prices could move lower
This comment did not get wide coverage, but he made a similar statement during the Q&A of the June FOMC press conference (6/15). This speaks to the possible positive implications of supply chains easing.
Market-based inflation measures see ~9% CPI YoY through November…
Our data science team, led by tireless Ken, compiled market-based inflation expectations. They used inflation swap markets to get implied inflation forecasts for the next 12 months:
- Market-based measures see YoY CPI ~9% through November 2022
- This, in part, explains why markets see the Fed as far behind the curve
- And is also instructional, as we get a sense where expectations are calibrated
To the extent incoming inflation is softer than consensus, we could see these measures adjust downward sharply. This would be positive for risk assets.
And market-based measures are forecasting far more inflation than economists. For instance, JPMorgan Economists expect inflation to moderate towards a 7% pace by 3Q22 compared to the 9% seen in market forecasts.
Similarly, Goldman Sachs sees CPI YoY around 8% in 3Q2022 and falling towards 6.8% by 4Q2022 and PCE Core YoY falling to 4%. These are well below the levels forecasted by inflation swap markets.
Leading indicators of inflation are easing as well
Many commodities have already started to rollover. Commodities are a long lead to inflation:
- oil and gasoline and natural gas directly impact headline CPI (gasoline and nat gas)
- other commodities lead inflation as these are raw materials
- we have seen the downturn in industrial commodity prices – as shown below, falling 5% to 10% in the past month
- agricultural commodities have also rolled over hard as well, with steep declines
The cooling of inflationary food price pressures has been incrementally observable in the past few months. The time series below looks at the diffision of food prices declining month over month:
- the percentage of items with negative month over month changes has been rising
- this bottomed at 10% in February 2022
- and is now 17% currently as of May
- and as above has shown, commodity prices have since fallen in the month of June
One of our clients, FH, has shared the following email as well. He had spoken to a small restaurant owner. This restaurant owner had said prices have fallen:
- prices for chicken breast and romaine lettuce have fallen sharply
- this is a break of the pattern for much of the last two years
- this also corroborates the comments we heard from a seafood producers a few weeks ago
If one is wondering with what items (as of May) are seeing declining prices month over month, this is shown below. There are about 10 items with declining prices, these are shown below.
Our Head of Technical Strategy, Mark Newton, also believe commodity prices could be softening for the next few weeks into July. If this is true, commodity prices would be down from May 2022 levels.
On Friday (6/24), the final May University of Michigan Consumer survey will be published. Recall, it was the +0.3% rise in consumer inflation 5-10 years forward to 3.3% that prompted the Fed to hike 75bp. So, this might be watched by markets. Consensus is expecting the final to remain 3.3%.
- the difference between initial and final is about an additional 140-150 responses
If one is wondering how a change in YE Fed Funds forecast impacts markets, we can see that equities have been keenly focused on this:
- light blue line is YE 2022 Fed funds rates, using futures markets
- if Fed funds YE falls, the line moves up (axis is reversed)
- in the past week, the YE FF has fallen 40bp (line moved up)
- S&P 500 has managed to move up
Indeed.com data shows June post postings softening = JOLTS likely weaker in June = what Fed wants
Latest data from indeed.com suggests job postings, per indeed.com labs data, has softened. As shown on the right side, this suggests that June JOLTS should show further softness compared to May. There is a substantial lag in JOLTS data.
- the April JOLTS was only released in June
- there is a 6 week lag in the data
- the Fed has noted that one of their policy goals is to soften the job market
- previously, Powell cited there are 2 openings for every available worker
- thus, reducing job openings helps ease the tightness in the labor market
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31 Granny Shot Ideas: GOOGL -5.67% , AMZN -2.45% , GRMN 1.71% , TSLA -0.62% , BF/B, MNST 0.52% , PG 1.53% , PM 0.59% , CVX 0.15% , DVN 1.15% , PSX -0.03% , XOM 1.24% , ALL 3.14% , AXP 1.84% , CB 0.80% , CINF 2.13% , WRB 1.97% , AAPL -0.14% , AMD -0.12% , AVGO 0.41% , CSCO 0.16% , KLAC 2.65% , MSFT -0.69% , NVDA 0.28% , PYPL 0.18% , QCOM 0.76% , QRVO 3.37% , CF 0.81% , AMT 0.96% , CCI 0.12% , EXR 1.11%
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We publish on a 3-day a week schedule:
Monday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday
POINT 1: Total COVID-19 cases 643,902 over past 7D (avg 91,986 per day), down -54,509 (-7,787 per day) vs same period 7D ago…
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Current Trends — COVID-19 cases (past 7D vs. 7D prior):
– Total new cases 643,902 vs 698,411 7D prior, down -54,509
– Avg daily cases 91,986 vs 99,773 7D prior, down -7,787
– 7D positivity rate 11.2% vs 11.6% 7D prior
– Hospitalized patients 27,077, up +2.3% vs 7D ago
– 7D Avg daily deaths 282, down -4.2% vs 7D ago
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Over the past week, a total of 643,902 (avg 91,986 per day) new cases were reported in the US, down -54,509 (avg -7,787 per day) compared to the same period 7 days prior.
- Daily cases have been gradually falling over the past few weeks. As you might notice from the media coverage, COVID appears to have less and less impact on our daily lives, even if there are still nearly 100,000 new cases reported per day on average.
- Memorial Day and Juneteenth had caused the daily data to fluctuate. But, the overall trend remains promising. Hospitalizations have been peaking and might start to decline soon. Daily deaths have not followed the case and hospitalization trend and remained at low level.
- The new BA.4 and BA.5 variants are key to watch as they have caused another new wave in Europe. According to CDC estimates, BA.4 and BA.5 combined accounted for about 1/3 of new cases in the US currently. And at the regional level, the South Central states currently have the highest share of BA.4 and BA.5 variants in the new cases.
The 7D delta in daily cases has been negative in 11 of the past 12 days. The only “up” day was the Tuesday right after the Juneteenth holiday. “A negative 7D delta” means the daily cases are lower vs. 7D ago. When 7D delta remains negative continuously, we know the case trend is turning downwards. More important, if the decline in 7D delta persists, we could see daily cases fall even more rapidly.
As we noted last week, current COVID hospitalizations have shown signs of peaking – the rise in the number of patients who are currently hospitalized has slowed. Even the mortality trend, which tends to follow the rises in cases and hospitalization, remains essentially flat.
In short, the current COVID situation in the US looks promising. But the new BA.4 and BA.5 variants might be key to watch. According to the data we are tracking, daily cases in Europe have been rising since early June. And as many media reported, this new wave is largely caused by the BA.4 and BA.5 variants.
However, the BA.4 and BA.5 variants have actually emerged in the US. According to the latest estimates by CDC, BA.4 and BA.5 combined accounted over 1/3 of new cases in the US.
Regionally, the “South Central” region appears to have the largest proportion of the new BA.4 and BA.5 variants. Interestingly, the East Coast, especially the “Northeast” region where Omicron and its subvariant hit the first, has seen the least BA.4 and BA.5 case share.
Possibly fueled by the BA.4 and BA.5 variant, all states in the South Central region have seen some degree of case rise. Although the absolute case levels remain low and the speeds of case rise remain slow, it is definitely worth watching the COVID trend in this region.
As cases roll over in northeastern states, the number of states with rising cases cut to 25.
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling (or about to fall), and the other where cases are rising.
In these tables, we’ve included the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table for states where cases are declining is sorted by case % off of their recent peak, while the table for states where cases are rising is sorted by the current daily cases to pre-surge daily cases multiple.
– The states with higher ranks are the states that have seen a more significant decline / rise in daily cases
– We also calculated the number of days during the recent case surge
– The US as a whole, UK, and Israel are also shown at the top as a reference
POINT 2: VACCINE: vaccination pace has been up recently…
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Current Trends — Vaccinations:
– avg 0.3 million this past week vs 0.3 million last week
– overall, 32.1% received booster doses, 66.7% fully vaccinated, 77.8% 1-dose+ received
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Over the Juneteenth holiday weekend, the CDC endorsed regimens of the Moderna and Pfizer COVID vaccines for children between 6 months and 5 years of age. So far, states have ordered about 2.5 million doses of the Pfizer vaccine and 1.3 million doses of the Moderna vaccine for the approximately 18 million children between 6 months of 5 years of age. While the number of doses ordered may seem low, fewer than 30% of children in the 5 to 11 age group received a two dose regimen of the Pfizer vaccine, which was authorized for 5-11 year olds back in November. While some parents are quite eager to get their children vaccinated, others are less inclined; especially if their children were already infected (federal health officials estimated 75% of American children had been infected by COVID as of February 2022). The weeks to come will shed more light on uptake in this age group, as well as effects.
Vaccination frontier update –> all states now above 100% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent.
Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC).
– Currently, all states are above 100% combined penetration
– Again, this metric can be over 100%, as infected people could also be vaccinated, but 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated
The CDC has recently started reported vaccination statistics weekly, rather than daily, which is why the most recent data point shows 1.5 million doses given. Those 1.5 million doses were given over the last 6 days.
This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.
In total, 591 million vaccine doses have been administered across the country. Specifically, 258 million Americans (76% of US population) have received at least 1 dose of the vaccine. 221 million Americans (66% of US population) are fully vaccinated. And 106 million Americans (31% of US population) received their booster shot.
POINT 3: Tracking the seasonality of COVID-19
***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***
As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus. The possible explanations for the seasonality we observed are:- Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer- “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors- Opposite effects hold true in the winter
During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, southern states are not showing as much of a spike as other states. This could be attributed to spring weather in the south encouraging more outdoor activities.
CASES
HOSPITALIZATION
DEATHS
