Emerging leadership of Tech + China supports better 2H outlook... more signs forward inflation cooling

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May CPI obvious focus but “half full” gaining incrementally

As many of our clients have remarked recently, every economic data point is really an inflation report. Repeating the obvious logic: trajectory of inflation impacts Fed rate path. Thus, every report is an inflation report.

But as we have discussed previously, there are many emerging signs that economic activity/inflation is potentially slowing faster than expected.

• this week, US mortgage applications plunged to lowest in 22 years.
• for reasons discussed below, this portends a dual hit to home price (negative shock) and possibly 60% drop in mortgage banking employment
• fertilizer prices are down 34% from peak
• there are signs that corn, cattle and wheat prices might be plateauing
• in the meantime, the global supply chain strains seem to be easing
• this points to possible accelerated declines in goods pricing
• of course, oil remains elevated, but oil is almost becoming a barometer for the Russia-Ukraine war and as long as hostilities escalate, oil is higher
• but this is somewhat binary — cessation of hostilities likely dramatically impacts inflation perceptions

All in all, this argues that the “half-full” view regarding both Fed trajectory and equity markets is gaining credence. That is, the 20% decline already has discounted a “soft landing” or “growth scare” and only a “hard landing” would justify further downside. In other words, we stick with our view that stocks strengthen in 2H and even revisit prior highs.

GREEN SHOOTS: Nasdaq 100 and China are beginning to outperform the broader market

And possible signs of “green shoots” are the emerging outperformances of both Nasdaq 100 and China equities:

• Nasdaq 100 peaked (vs S&P 500) in November 2021 and recently showing signs of a bounce
• China (CSI 300) has been quietly outperforming since March 2022
• Both indices would not perform well if inflation risks are rising
• Nor would these outperform if the global economy was headed for a “hard landing”
• So, for now, we see this as “green shoots” and positive for risk assets
• And affirms that we see large-cap Tech leading in 2H 2022

May CPI is important, but not necessarily decisive

May CPI is reported Friday am (6/10) at 8:30am ET and equally important is the U Mich Consumer 1-yr expected inflation. And the key figures are highlighted below.

• our clients have told us their focus will be on the services components of CPI
• they expect goods pricing to be easing

Travel and Hotels have seen the biggest surge in inflation

Our data science team highlights “revenge travel’s” distorted impact on services CPI. The April surge (already reported) shows >20% gains for hotels and airlines:

• May CPI should show this trend to continue
• markets seem to be bracing for further surges as equities were weak into Friday

Inflation surprise risks are abating in the US, even as China comes online

Broadly speaking, inflation risks in the US are diminishing to an extent. As shown below, the Citi Inflation Surprise index (only updated monthly) shows diminishing surprises for the US.

• inflation surprises are rising in Eurozone and EM
• and China
• but diminishing in the US

…Mortgage applications down 68% from 2021 peak

As cost of money has risen (“mortgage rates”), mortgage applications have fallen sharply and now the lowest level in 22 years.

Looking at the 4-week sum, applications are now down 68% from levels seen in 2021. That is a huge decline and for reasons discussed below, suggests downturns in:

• US home prices likely to fall = wealth effect is what Fed is targeting
• Mortgage employment likely to fall sharply = weakening labor market is what Fed is targeting

Home prices are likely to weaken from here (thanks for flagging this Mark Newton). As shown:

• mortgage application activity leads
• home price change by roughly 12 months
• downturn in applications portends a sharp fall in home prices
• Fed tight policy is targeted to impact asset prices like housing
• thus, weaker home prices is an outcome the Fed is looking for

Could mortgage banking employment fall 60%?

Employment in mortgage banking is likely to suffer as well. As shown below:

• employment in mortgage banking is linked largely to mortgage activity
• this makes sense given the labor intensity of financing process
• At GFC, mortgage applications fell 74%
• Mortgage banking employment fell 62% or 155,000 jobs lost
• History suggests that employment might fall 82,000 in coming months
• This is also an outcome the Fed is targeting — softening the labor market

Redfin data is supporting that housing activity is slowing

Redfin data is already showing signs of weakness emerging in housing.

• % active listings with price drops is sharply higher than seasonals suggest
• activity is down as shown by weekly homes sold is slowing

As for jobs market, we want to again highlight that retailers are likely to cut jobs in coming months, given the high levels of inventory. We discussed this in our prior note.

Chemical/ Ag equities + Fertilizer prices down = portend food pricing pressures to ease

I was surprised to see that Chemicals/Ag stocks are down 25% from their recent highs as shown below. This group is highly sensitive to the expected direction of fertilizer and chemicals prices.

• the fact these stocks are down is contrary to “inflation are far as eye can see” narrative

Fertilizer prices are curiously down 23% YTD and down 34% since April

And interestingly, Fertilizer prices are actually down YTD. This surprises me:

• fertilizer prices should be up given the surge in energy and supply chain issues
• but they are down YTD and down 34% from highs

And many food commodities are also flat to falling:

• Wheat prices have been essentially flat since March
• Corn is essentially flat since March
• Cattle is actually down 2% YTD
• For all those concerned about surging beef prices, cattle is actually down

Supply chains are easing

Below we show some key measurements of supply chain pressure, including freight costs and PMI. Collectively, these are pointing to a vast improvement in the supply chain:

• Baltic Dry Index is flat YoY
• Air freight costs are flat/down YoY except for cargo from US to Asia
• US PMIs show backlogs are falling (both services and manufacturing)

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 4.52%  GBTC 5.18%  BITW 2.35%
– Energy
– FAANG FNGS 1.83%  QQQ 2.13%

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 5.94%  AMZN 0.82%  NFLX 2.52%  GOOG 0.29%

All in all, one wants to be Overweight BEEF

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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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We publish on a 3-day a week schedule:

Monday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday

POINT 1: Total COVID-19 cases 717,915 over past 7D (avg 102,559 per day), up +45,415 (+6,488 per day) vs same period 7D ago…

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Current Trends — COVID-19 cases (past 7D vs. 7D prior):
 – Total new cases  717,915 vs 672,500 7D prior, up +45,415
 – Avg daily cases    102,559 vs 96,071 7D prior, up +6,488
 – 7D positivity rate 9.5% vs 10.1% 7D prior
 – Hospitalized patients  25,394, up +3.5% vs 7D ago
 – 7D Avg daily deaths 386, up +27.5% vs 7D ago
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Over the past week, a total of 717,915 (avg 102,559 per day) new cases were reported in the US, up +45,415 (avg +6,488 per day) compared to the same period 7 days prior.

• The daily cases have been essentially flat following the Memorial Day holiday. This is good news as holiday outings and gatherings did not cause a surge in case counts. Plus, hospitalization, daily deaths, and positivity rate have been stable.
• The 7D delta in daily cases is still distorted at some level by the holiday effect. But if we focus on the overall trend, the 7D delta appears to be falling.
• COVID data have fluctuated due to the holiday data distortion. And given another two national holidays in the next 4 weeks, daily COVID data could be very jumpy. Therefore, the overall trend would be more appropriate to focus on vs. single data points.
• At the state level, all Northeastern states, where the BA.2 subvariant initially outbroke, have seen case rollover. If other states follow the same roadmap, an Omicron-like wave will not likely happen.

7D delta in daily cases has jumped between positive and negative territories due to the holiday data distortion. The current 7D average of the 7D delta is at a moderate level of 6,488.

At the state level, FL, TX, and MN are the states with the largest increase in weekly cases, while all northeastern states have seen case rollover. Recall that, the northeast, especially the tri-state are, is the region where BA.2 subvariant initially outbroke. Hence, the rollover in the northeast region is in particular promising. In other words, if other states follow the same roadmap, the chance of another “omicron”-level wave will be low and we could see case rollover nationwide soon.

As cases roll over in northeastern states, the number of states with rising cases cut to 27.
 *** 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

Net Hospitalization has decelerated and the positivity rate has been flat. Daily mortality remains low…

Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

– About 28,000 patients are currently hospitalized due to COVID, up about 3.5% from last week. The rise in current hospitalization has slowed. This is good news as we do not see the hospitalization surges following the Memorial Day long weekend.

– The daily mortality fluctuated slightly over the past week as a result of the data distortion due to the Memorial Day holiday. Although the trend seems to edge up, the absolute level remains near the all-time low.

– The positivity rate has been essentially flat over the past 3 weeks. As the speed of the case rise slows down, we could see the positivity rate rolls over.

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, 31.8% received booster doses, 66.5% fully vaccinated, 77.6% 1-dose+ received
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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

There were a total of 197,561 doses administered, as reported on Wednesday. The vaccination pace has started to level off after a brief pickup in mid-March.

This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.

In total, 589 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 105 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