Incoming economic "hard" data won't reflect increasing signs of disinflation. Visibility on "i" matters more than "e"

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Incoming economic “hard” data (over next few weeks) may not necessarily confirm the increasing signs of softening of inflation

There will be several incoming “hard” data points that will impact market views on inflation and economy and therefore impact Fed policy. Paramount remains inflation pressures and while many “soft” (surveys and market implied) and leading indicators (commodities, etc) have softened sharply, the actual data needs to be seen to assuage inflation concerns:

• Friday is the June jobs report and Street consensus is NFP +237k
• Consensus avg hourly earnings +0.3% m/m
• Next week June CPI and +0.6% m/m is consensus (see below)

But in a sense, these “hard” data prints seem somewhat lagging with the visible data we are seeing. To recap, commodities both energy and food are down sharply, even rents are cooling (see below) and market expectations are falling as well.

The S&P 500 closed at 3,903 and while this remains a depressed level, this is an improvement compared to levels seen in the past month:

• S&P 500 closed
• 3,900 post-May CPI “massacre” (June 10th)
• 3,790 post-June FOMC (June 15th)
• Still below technically important 3,946 (June 28th)
• June NFP July 8th
• June CPI July 13th

While there are a few important “hard” data points in the coming week or so, what is encouraging is that the S&P 500 has recovered its losses stemming from the May CPI massacre and moved higher from the June FOMC meeting.

As an aside, job postings for June dropped sharply as shown by this indeed.com labs data. The May JOLTS figures were reported on Wednesday, but as seen below, June saw a pronounced weakening. This could be showing up in the June payrolls report.

…Huge drop in market expectations for CPI since May CPI report

Earlier this week, we highlighted the drop in 5Y5Y inflation expectations to below 2%, the key level for the Fed. But even near term inflation forecasts have fallen sharply. Below is the inflation swaps for near expirations:

• these approximate month over month CPI expectations (even though actual contracts are 3M rolling)
• in past 3 weeks, there has been a huge drop in monthly inflation forecasts July through December
• sort of hard to see, but compare the plots of the gray line (3 weeks ago) versus blue line (now)
• this drop, in our view, reflects the cumulative declines in energy commodities, food and durable goods prices

…If swaps market is correct, inflation m/m <2% (annualized) Aug 2022 to Jan 2023

Interestingly, it looks like monthly CPI gains (month over month) are expected to drop to <2% annualized for much of the next 7 months.

• July is expected to show >1% but drops thereafter

…in past month, inflation seems to be less “sticky” than markets thought 3 weeks ago

Market based measures can change sharply, in response to new data, so we cannot necessarily claim these new forecasts are set in stone. But the drop in expectations is notable:

• forward inflation expectations have dropped sharply since May CPI print (June 10th)
• interest rates have also dropped since June 10th
• Expected Fed interest forecasts have dropped since June 10th
• Collectively, inflation expectations have fallen

And the takeaway, to me, is as follows:

• growing evidence that inflation has peaked early in 2022 = Fed has less wood to chop
• pace of declines could be sharp as shown by the 20%-30% drop in commodities = Powell’s “sudden drop”
• retailers are swimming in inventory = prices set to weaken
• China supply chains are ungumming = prices set to cool
• “war premium” for wheat and oil also gone = war surge reversing

Collectively, this argues that inflation seems far less sticky than many pundits have argued. And if so, it could also be possible that Fed could slow pace of hikes sooner than expected.

Latest CoStar report suggests “rent” cooled in 2Q, another “disinflation” data point

ES (one of Fundstrat’s closest clients) shared the email from CoStar Group below. CoStar (ticker CSGP 0.62% ) provides analytics and information for commercial and residential real estate. Their latest bulletin (July 7th) is eye opening:

• multifamily rent “cools” in 2Q
• third quarter in a row of diminishing demand
• vacancy rate up 10bp
• record 450,000 additional units expected to be delivered by YE
• “perfect recipe” for a sharp rise in vacancy

Does this sound like housing and rent inflation are accelerating?

This also corroborates the acute weakening in homebuying traffic. The latest Redfin data shows:

• % listings with price drops surge to 7%
• collapse in homes under contract within a week (caution)
• number of homes sold falling to seasonal 5-year lows

Per Gasbuddy.com, 2,535 stations have sub-$4 gasoline

Additionally, gasoline continues to fall, falling for 24 straight days. And as this tweet by @carlquintanilla highlights, the number of stations with falling prices is surging. In fact, gasbuddy.com suggests that this figure could double or triple in coming weeks.

…If oil is close to pre-Russia Ukraine war prices, gasoline could fall another 25% to $3.57 or so

And to reinforce the same point, oil is close to the pre-Russia Ukraine war price ($92-$93) and we think gasoline futures and gasoline will eventually fall further. As shown below, there is less progress on gasoline prices so far.

And as many are aware, it is not just energy commodities. It is industrial metals and even soft commodities. While many say this is a recession signal, food and soft commodities do not follow business cycles.

• This weakening argues, in our view, that inflation surges from:

• inflation effects of bullwhip on supply chain are fading
• inflation effect from war is reversing partially
• this all points to less work for the Fed
• hence, less “hawkish” risk = better risk/reward for equities

STRATEGY: Market positioning remains cautious but this also supports stronger 2H views

Many investors, arguably most, believe inflation will persist for such a long time, the Fed will keep policy tight for a long time.

• The Fed has repeatedly discussed need for inflation to decline in a persistent and convincing manner
• Fed views risks of de-anchoring inflation is greater than economic risks
• But the unknown in the above statement is the pace that inflation will decline
• Many incoming “soft” data points suggest inflation might be cooling faster than consensus expects
• This is the obvious key
• Hence, our view “i” matters more than “e” at the moment

And as we look at investor positioning and market internals, we see a supportive setup for 2H2022.

REVISIT: % stocks >50D mavg, after falling below 1% now back to 29%

Recall, a few weeks ago, we highlighted that % S&P 500 stocks >50D fell below 1%:

• in fact, this fell to 0.8% (or 4 stocks) on 6/17/2022
• I mean, it can only go to “zero”
• so we saw this as a sign of massive selling and panic
• since 6/17, this figure has recovered to 29%

Since 1990, this has happened 8 times as highlighted below. Actually, there are 8 clusters, really.

Stocks are up 6M later 88% (7 of 8 times) and 12M later, higher 100% (8 of 8 times)

Our data science team, led by tireless Ken, wanted to see how stocks react when this measure recovers to >25%:

• trigger is this measure falls below 5%
• and then recovers to >25%
• look at 1M, 3M, 6M and 12M returns

This widespread breakdown of stocks has positive forward implications:

• 88% and 100% win-ratio 6M and 12M
• So argues 2H2022 should be strong
• Problem is this tripped a signal in August 2002 and December 2008
• Both were “early” relative to the final bottoms, which were 3-6 months away
• But still both showed positive gains 12M later

And keep in mind, institutional investors have liquidated their equity holdings. So there is firepower, in theory. This is a tweet by @emilethecat1 citing data from S&P Global Market Intelligence.

Outperformances of FAANG and China argue against a global recession (FAANG against further hikes)

And for those suggesting this weakness is due to a recession risk, take a look at the relative performance of FAANG and China CSI 300 below:

• China has been outperforming the S&P 500 since April 2022
• Despite China concerns due to COVID-19 lockdowns, this is positive
• As China is globally economically sensitive
• China has broken the downtrend in place since 2020

• FAANG has been showing relative strength (vs S&P 500) since late May 2022
• FAANG needs to outperform an additional +1.9% to break the downtrend
• FAANG has been particularly hard hit by interest rate concerns

The relative strength of these two indices, in our view, are counter arguments to a “recession starting” in the US. And moreover, we think this coupled with improving inflation risks, support better equity returns in 2H.

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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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POINT 1: Total COVID-19 cases 708,863 over past 7D (avg 101,266 per day), down -20,048 (-2,864 per day) vs same period 7D ago…

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Current Trends — COVID-19 cases (past 7D vs. 7D prior):
 – Total new cases 708,863 vs 728,911 7D prior, down -20,048
 – Avg daily cases 101,266 vs 104,130 7D prior, down -2,864
 – 7D positivity rate 12.5% vs 11.4% 7D prior
 – Hospitalized patients  32,291, up +9.3% vs 7D ago
 – 7D Avg daily deaths 303, down -18% vs 7D ago
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Over the past week, a total of 708,863 (avg 101,266 per day) new cases were reported in the US, down -20,048 (avg -2,864 per day) compared to the same period 7 days prior.

• Based on the COVID stats reported by states’ health departments, the new COVID-19 cases have been down slightly over the past week. But the data is likely being distorted due to the holiday closures.
• Therefore, we should be able to have better insights in the COVID trend over the next few weeks. This definitely bears watching as BA.4 and BA.5 now accounted for more than 70% of new cases in the US. And the holiday gatherings over the Independence Day holidays very possibly could further spread the variants.
• Globally, BA.4 and BA.5 variants also created a renewed wave in Europe. The surge of new cases in France and Germany persists. Daily new cases in LatAm also start to rise.
• As we emphasized many times in prior notes, rising cases solely will not create a “crisis,” but surging hospitalizations, mortalities, and an overwhelmed healthcare system. Hence, the virulence of BA.4 and BA.5 variants is the key.
• Based on the statistics of BA.4/BA.5 in South Africa, where the variants were first detected, there is no indication that BA.4 or BA.5 is more deadly than previous variants. Even though BA4 and BA5 did create a renewed wave in South Africa in terms of daily cases, daily deaths essentially remained flat (prior infection might play a role as well). Thus, even if the daily cases in the US might surge again due to BA.4 and BA.5, the risk of a potential healthcare crisis should be low. However, as we always said, the future is uncertain.

Daily cases have been essentially flat since late May. The 7D delta in daily cases has fluctuated between positive and negative territories. But recently, we have seen more positive readings than negative ones. This is consistent with the growing dominance of BA.4/BA.5 variants.

The latest CDC variant report shows BA.5 has surpassed BA 2.12.1 and now is the most dominant strain in the US.

• BA.5 itself accounted for more than 50% of the new COVID cases
• Together with BA.4, both variants accounted for over 70% of new cases in the US.
• In HHS Region 6 (AR, LA, NM, OK, and TX), the share of BA.4 and BA.5 has reached 75%. 4 weeks ago, the combined share was only 22%.

Not only US, but other countries/regions have also seen cases rise due to BA.4 and BA.5 variants. Cases in Europe continue to rise and there has been no sign of slowing down yet. Even case counts in Latin America are rising rapidly.

As we are facing the possible surge due to the new variants, naturally one would wonder whether the new variant is more lethal. Unfortunately, there are not many research papers published yet. But our data science team put together a chart showing the case and mortality trend of the past 3 major waves in South Africa, which could give us some insights.

• Why South Africa? Similar to the original Omicron variant, the BA.4 and BA.5 variants were initially detected in South Africa.
• The BA.4/BA.5 wave in South Africa has largely done. Daily Cases have fallen to pre-BA.4/BA.5 levels.

As you can see, the daily deaths have followed the spike of daily cases for both Delta and Omicron waves. In terms of the severity, the Omicron seems much less deadly – the jump in daily deaths was much lower than it in Delta wave.

More importantly, look at the daily deaths during the BA.4/BA.5 wave. Admittedly, daily cases have not spiked to the levels of Delta or Omicron wave. But the daily deaths have been essentially flat! This is good news – it suggests even if US might face a renewed COVID wave due to BA.4 & BA.5 variants, the potential risk of a healthcare crisis (surge in hospitalizations and deaths) could be low.

You might also wonder what the current situation in Europe looks like. Below we plotted the daily cases and daily deaths (per 1mm residents) for France and Germany.

• Both countries have seen cases rise rapidly, especially France.
• Daily deaths have yet followed the rise in daily cases.
• This might be due to the lag between case data and mortality data.
• But it might also be due to the possible lower virulence of BA.4 and BA.5 suggested by what happened in South Africa.
• Anyhow, it is still in the early stage. Until more evidence or studies on the variants, we cannot draw a decisive conclusion yet.

POINT 2: VACCINE: CDC Updates Switch From Daily to Weekly

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Current Trends — Vaccinations: 
– avg 0.2 million this past week vs 0.4 million last week
– overall, 32.7% received booster doses, 66.8 fully vaccinated, 78.1% 1-dose+ received
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In the three weeks since the authorization of COVID vaccines for children under age 5, only about 300,000 children (about 2% of the under 5 age group) have received a shot. An April Kaiser Family Foundation survey found that 1 in 5 parents of children under age 5 would get their children vaccinated immediately upon approval, 38% responded that they would wait and see, and almost 40% responded that they would not elect to vaccinate their children under age 5 or only if mandated. While the data is showing a vaccine uptake pace slower than that of other age groups, this is in line with experts’ estimates.

In an investor presentation last week, Pfizer and BioNTech announced plans to start clinical trials for universal, or pan-coronavirus, vaccines in the second half of this year. The company aims to provide “durable variant protection” in light of the steady stream of new variants.

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