Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities

Inflation remains top priority of policymakers

The White House and Fed met Tuesday and this is the first meeting since Powell was re-confirmed. The takeaways from this meeting are not entirely surprising and President Biden noted that he will give the Fed the necessary independence to fight inflation.

  • per Biden “I agree with their assessment that fighting inflation is our top economic challenge right now”

And naturally, this remains a primary focus for markets. In fact, Eurozone reported inflation figures yesterday and inflation (HIPEC) came in at 8.1% YoY, above expectations. This figure is equivalent to the US “headline CPI” and includes food and energy. The “harmonized” figure (sort of ex-food/energy) is +5.7% YoY. Still uncomfortably high.

  • similar to US concerns, investors fret that inflation will remain sticky
  • hence, not only are investors focused on a peak in the rate of inflation, but also the pace that inflation weakens
Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities
Source: Fox Business

US incoming data points point to cooling inflation

As our clients know, there is a growing constellation of incoming data points that show inflationary pressures in the US are peaking. We highlighted a few over the past few days, but the evidence of cooling inflation is broadening:

  • retailers have too much inventory and soon will discount
  • many commodities are now showing negative price gains YoY, including copper and platinum and lumber
  • Morgan Stanley automotive team notes that the semi-chip shortage could be ending, leading to easing bottlenecks
  • the WSJ reports that OPEC could exclude Russia temporarily and pave way for OPEC to increase production

One of the great risks for inflation is when ever rising prices become part of consumer expectations. This creates a negative feedback loop around wage expectations and even consumption habits — if consumers expect rising prices, this can pull forward demand. Hence, signs of falling prices, evident to consumers are a welcome development.

  • as this article from CNN highlights, the piling inventory (we wrote last week about this) is leading retailers to begin considering discounts
  • this is a break from pricing strategies seen since the pandemic, where shortages led to ever rising prices
Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities
Source: CNN

...even commodities broadly are showing deceleration of price gains YoY

One of the more interesting developments, in my view, over the past few months, is that commodity prices are no longer rising. In fact, as this chart from IHS Markit shows, many industrial commodities are down in price YoY:

  • only Fiber and Energy are higher YoY
  • iron, lumber, rubber, pulp, even industrial metals like copper and platinum are down YoY
Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities

We have highlighted 6 commodities below and we can see the declines YoY. The trends in prices seem to be mixed:

  • iron prices have been rising since late 2021, but are still down YoY
  • Rubber and pulp seem to be in uptrends, but are down YoY
Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities

And yesterday’s headline from OPEC seemed to have a short-term impact on oil. Oil rising is obviously not portending well for forward headline inflation. But the possibility of increased OPEC production could be helpful. This is an unconfirmed story that the WSJ broke and we will have confirmation later this week.

And as shown, both oil and natural gas are still up sharply YoY. Taking a step back, neither looks to be significantly weakening, but incoming consumption data will impact prices (obviously). There are reports of looming shortages of gasoline in the US, due to the combination of low inventories, expected demand increases and general price dislocations.

Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities

But at the moment, it does look like there has been a demand impact from higher gasoline prices. As shown below, YoY consumption of gasoline in the US is down. This is data from the EIA.

Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities

And lastly, regarding automobile component shortages, these appear to be easing. In fact, this research report by Morgan Stanley analysts suggest that chip shortages might be alleviating faster than expected. And as such, OEM (manufacturers) could replenish inventories faster:

  • read this as auto prices, new and used, could soon ease faster than expected
Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities

And already, high prices for cars seems to be hurting demand. Consumers, according to the below CNBC article, are taking more time to purchase a car. But prices of vehicles have not yet fallen due to the low levels on inventory. Hence, if the MS research above is correct, we could see inventories begin to recover. This, in turn, supports, declines in prices. The opposite of inflation and highlights further the impacts from supply chains.

Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities
Source: CNBC

STRATEGY: Revival in junk bond market shows capital markets are not completely broken

The high-yield market shows signs of reviving. Spreads and rates have stabilized and now it appears some issuers are able to complete sales. This is a welcome development as one of the first signs that the capital markets are stabilizing. And a stabilization in HY would bode well for equities. Not only are HY and equities highly correlated, but the resumption of access to capital reduces the risks of a larger financial downturn.

  • in our view, equities and markets overshot to the downside in May as extreme pessimism about central bank inflation fighting would lead to a larger economic downturn
  • if inflation cools faster than consensus expects, this also changes the Fed and other central bank path on tightening
  • this is where consensus could be positively surprised
Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities
Source: Bloomberg.com

Mark Newton, Head of Technical Strategy, posits Bitcoin could have bottomed = supportive of equities

Peculiarly, Bitcoin has been a leading indicator for NASDAQ and equities. Probably due to the reflexivity inherent in digital asset valuations. Thus, a bottom in bitcoin bodes well for a broader market bottom.

  • our head of Technical Strategy, Mark Newton, suggests bitcoin might have bottomed
  • the move above $30,628 increases his confidence
  • intermediate trends have turned bullish
  • this is good for risk assets
Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities
Source: FSinsight


STRATEGY: We lean relatively “bullish” into 2H2022 (but also 2Q22), but warn of jagged next few months… Stick with BEEF
To recap on equity strategy, we are leaning bullish into 2Q2022.

Stocks have continued to be treacherous in 2022. Investors are on a hair trigger.

– this is in context to a challenging 1H2022
– so jagged next 3 months

Broadly, our existing sector strategy of BEEF remains valid. Even in war. Even with inflation. In fact, the last few weeks are strengthening the case for our “BEEF” strategy. That is, BEEF is

– Bitcoin + Bitcoin Equities  BITO 4.48%   GBTC 4.22%   BITW -0.23%
– Energy
– FAANG  FNGS -0.14%   QQQ -0.10%

Combined, it can be shortened to BEEF.

Why is this making stronger BEEF?

– Energy supply is now a sovereign priority
– this helps Energy stocks

– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities

– if Global economy slows, growth stocks lead
– hence, FANG starts to lead  FB  AAPL -1.45%   AMZN 0.26%   NFLX -1.37%   GOOG -0.19%

All in all, one wants to be Overweight BEEF

Recent cadence of data shows inflation risks cooling = half-full arguments gaining traction. TA Newton believes Bitcoin has bottomed = good for equities

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31 Granny Shot Ideas: We performed our quarterly rebalance on 4/5. Full stock list here –> Click here

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