Click HERE to access the FSInsight COVID-19 Chartbook.
We publish on a 3-day a week schedule:
– SKIP MONDAY due to July 4th holiday
– SKIP TUESDAY
– Wednesday
– SKIP THURSDAY
– Friday
This coming Monday is the July 4th holiday and a NYSE market holiday. We will not be publishing a note this coming Monday.
Cooling of inflation (“i”) aka disinflation is Fed primary focus and in 1H2022, the sole focus of markets. Obviously, there remains the question of how quickly inflation can cool, and this lack of visibility unsettles markets. But as we discuss below, energy prices have dropped sharply in the past few weeks with Natural gas down -45% and oil -14% and we have heard that food suppliers are sitting on mounting food inventories. Thus, headline drivers of inflation (food + energy) could be cooling sharply.
But the converse of this “i” positives is the mounting concerns about S&P 500 EPS guidance in 2H. Our Head of global portfolio strategy, Brian Rauscher, has written extensively on this. Keep in mind:
- EPS risk as the “bullwhip” effect is going to cause wild swings in EPS
- nominal GDP, however, will continue to be strong given headline inflation
- markets, in our view, can more easily see through “e” than they can see through “i”
- thus, in 2H2022, the easing of “i” matters far more to markets than “e”
On Thursday this week, May Core PCE came in at +0.3% (+4.7% YoY), below Street’s +0.4% and another modest but encouraging downside read on inflation. PCE, or personal consumption expenditures, differs from CPI as the PCE measures the costs of goods and services consumed by households and not just the out of pocket costs. The Fed tends to favor the PCE as their preferred measure of inflation.
The chart of core PCE vs core CPI is shown below and the difference is 130bp. And the only reason we highlight this is that core PCE is closer (still a distance) to the Fed’s target of 2.0% and this will be important to keep in mind as we move through 2022.
Fed Chair Powell spoke at the European Central Bank Forum in Sintra (Portugal). And while his overall stance remains focused on inflation, one statement garnering particular attention is Powell’s comment on risk of “deanchoring” of inflation expectations. And there is a “time window” to achieve inflation tempering.
- market-based measures of inflation seem to be anchored
- while some business surveys show rising inflation expectations
- the larger risk is the public/consumer expectations
- much of this inflation perception stems from food/energy
- as discussed below, there are signs these are cooling
Market-based measures are well anchored
With recent softer inflation readings (and softer economic readings), market-based measures of inflation and Fed hikes have decreased notably in the past month:
- inflation 12M forward is down to 4.3% from 5.6% (month ago), or -130bp
- Implied Fed funds rate by YE2022 down 38bp, or -1.5 fewer hikes to 3.4% from 3.78%
- Fed funds is currently is 1.75% and should be 2.50% after July FOMC
- Suggesting post-July, there would be +0.9% of more hikes, or less than 4 hikes between July and YE 2022
…in just the past month, sharp drop in expected inflation in 2022
And when looking at futures markets, inflation forecasts for 2022 have dropped sharply in the past month:
- there are no longer >10% YoY inflation expected in near months
- YoY CPI is now similar to levels seen in April 2022
And the “difficult” months for inflation (month-over-month change) are seen to be June and July with >1% m/m gains. And then a sharp drop thereafter.
- thus, if market-based measures are correct
- the “i” will be cooling notably after July 2022
Consumer inflation expectations have not cooled, but falling energy might be downside driver
Even as market-based measures show cooling, consumer-based measures of inflation have not cooled. One example is the U Mich Consumer expected inflation next 12M (median) which is down modestly but still at 5.3% is higher than the 4.4% seen for market-based measures:
- market-based measures have seen inflation expectations fall -190bp in past few months
- consumer-based measures have fallen by a mere 10bp
Previously, we have noted that gasoline and food drive consumer expectations around inflation, as easily seen by the chart below.
…Energy prices are cooling and Mark Newton sees further downside in next month or so
Energy prices have cooled recently, even as the Russia-Ukraine war persists.
- oil is down 14% in past 2 weeks
- natural gas -45% same timeframe
- but gasoline is down less -3% due to refinery capacity issues, etc
But we think the drop in natural gas will be important. While this is not garnering as many headlines, this is a key power source for consumer electricity, etc.
And our Head of Technical Strategy, Mark Newton, sees Natgas weakening possibly into 2H2022.
- in fact, he posits that it might be possible that Natgas has peaked for the year
- if this proves correct, we think this is a driver of declining consumer inflation expectations
As this chart from the EIA shows, electric power is the largest use of natural gas. The next largest is industrial power.
And within households, air conditioning and heating are the major uses of electricity. In other words, falling natural gas could prove to be a driver for containing headline CPI and headline PCE in 2H2022.
Indeed labs data shows further cooling in job postings = ease labor tightness
The Fed would also like to see labor markets soften. Jobless claims are modestly rising (from decades lows) and it looks like hiring demand is also cooling. The latest data from indeed.com labs shows the continued easing labor markets.
- Using the model created by our data science team, led by tireless Ken, suggests that JOLTS reports for May and June should show weakness compared to April (last actual)
- but the Fed would like to see JOLTS openings fall by several million and the progress so far is modest
As highlighted below, there are notable drops in listings for:
- Food service/hospitality
- Technology and science postings
- Managerial and white collar listings
Bullwhip effect will impact “e”
Previously, we wrote about the “bullwhip” effect leading to easing consumer prices, as building inventories means inventory liquidations.
Micon’s FQ3 results speak to this. As shown below, customers of MU 0.57% are cutting inventories. Thus, Micron is impacted by this bullwhip effect.
And as this chart from Deutsche Bank highlights, manufacturing is 68% of S&P 500 EPS. Thus, the bullwhip effect will play out in EPS results.
The effects of inflationary pressures, however, are far greater for overseas corporations. As shown below, the PPI YoY for US is notably lower than European competitors. Thus, there will be relative share opportunities for US corporates.
While this is a headwind for stocks in the near-term, we believe the “i” component matters more the markets. Inflation is not necessarily forecastable. But if the leading indicators of inflation are cooling and market-based measures show both lower inflation risks and fewer Fed hikes:
- means Fed is “less behind the curve”
- natural gas might have made its 2022 highs
- Energy prices are down meaningfully
- Sort of seems like these are positive developments for risk assets in 2H2022
_____________________________
31 Granny Shot Ideas: We performed our quarterly rebalance on 4/5. Full stock list here –> Click here
_____________________________
POINT 1: Total COVID-19 cases 723,093 over past 7D (avg 103,299 per day), up +79,191 (+11,313 per day) vs same period 7D ago…
_____________________________
Current Trends — COVID-19 cases (past 7D vs. 7D prior):
– Total new cases 723,093 vs 643,902 7D prior, up +79,191
– Avg daily cases 103,299 vs 91,986 7D prior, up +11,313
– 7D positivity rate 11.4% vs 11.2% 7D prior
– Hospitalized patients 29,487, up +8.8% vs 7D ago
– 7D Avg daily deaths 367, up +30% vs 7D ago
_____________________________
Over the past week, a total of 723,093 (avg 103,299 per day) new cases were reported in the US, up +79,191 (avg +11,313 per day) compared to the same period 7 days prior.
- New COVID-19 cases have risen over the past week. Average daily cases once again surpassed 100k per day. The 7D delta in daily cases has been up in 7 of the past 9 days.
- Although the post holiday “true-up” might play a role, the uptick in case counts should be largely due to the spread of BA.4 and BA.5 variants.
- As we noted last week, the new BA.4 and BA.5 variants have caused a renewed wave in Europe. And in the most recent update, CDC Nowcast estimates the BA.4 and BA.5 together accounted over half of the new cases in the US. And, the share of new BA.4 and BA.5 cases has risen rapidly across all regions compared to last week.
- The case trends in next few weeks bear watching as the Independence Day outings and gatherings could facilitate a further spread of the variant. Besides, we might get a better sense about the lethality of the variants (so far it does not seems to vary much from other Omicron sub-variants). Again, rising cases solely will not create “crisis,” but surging hospitalizations and mortalities.
The 7D delta in daily cases has crept up recently. The 7D average of 7D delta has risen to +11,313. Admittedly, holiday “true-ups”, to some degree, distorted the data and played a role in recent rise. But the main cause of the recent trend reversal is likely the spread of BA.4 and BA.5 variants.
In fact, BA.4 and BA.5 have already caused a renewed wave in Europe. As shown below, daily cases in Europe have been rising since early June.
And according to the latest estimates from CDC, BA.4 and BA.5 combined accounted more than half (52.3%) of the new cases in the US, up from 34.9% last week.
Below we also show the latest CDC regional variant proportion estimates and the one from last week.
As you can see, BA.4 and BA.5 are overtaking other strains rapidly across the whole country. Hence, US might follow Europe and we might see a renewed wave in US as well (especially following the Independence Day holiday).
The good news is so far we have not seen any sign of change in severity for BA.4 and BA.5 compared to previous Omicron-related subvariants. But if cases increase substantially, hospitalizations and mortalities natually likely to follow. So, the case trends in next few weeks bear watching.
State COVID Trend Tracker
*** 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…
The CDC has not updated its vaccination data since 6/23, which was also our last time updating our COVID stats. Therefore, the following content, up until Point 3, is from last week’s update.
___________________________
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
_____________________________
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
