Category: zerohedge

After Dallas Fed President Robert Kaplan spooked stocks by repeatedly suggesting that it was time to start discussing tapering of the Fed’s asset purchases, Friday’s job number offered doves on the Fed just the ammunition they needed to push back.

So we weren’t surprised to see Minneapolis Fed President Neel Kashkari appear on Bloomberg TV Friday morning just minutes later to defend the Fed’s dovish approach, while implying that hawks like Kaplan and Kashkari’s other “critics” on Wall Street may secretly be trying to sabotage the recovery.

After the 3.7-sigma miss from the 1MM+ projections (one of the biggest in history and the biggest in decades), Kashkari insisted that Friday’s jobs number is the latest evidence that the US post-pandemic economic recovery “has a long way to go”.

“For all those people who have been saying ‘oh my gosh, the Fed needs to normalize quantitative easing,’ today’s job report is just and example of – we have a long way to go” Kashkari said. He added that he was “firmly in the camp” for maintaining the Fed’s policy stance, which presently entails buying $120 billion in assets every month, while keeping the Fed funds rate close to zero.

“Let’s not just forecast that the labor market will recover, let’s actually wait for the labor market to recover. As Chair Powell said a week ago, we’ve had one great jobs report, let’s not declare victory yet.”

It’s certainly convenient that just as dissenting voices on the FOMC were starting to speak out, Fed doves like Kashkari and Powell got essentially the perfect reading to justify their actions.

But even more notable than his defense of the Fed is the fact that, when confronted about the role that unemployment benefits may have played in depressing job gains, Kashkari openly acknowledged that the government is essentially paying people to stay home. Kashkari acknowledged that generous unemployment benefits are keeping workers out of the labor market, because workers are confident jobs will still be there in three or four months when the government money runs out.

“We hear all the same anecdotes…yes of course there are people who are on the sidelines and who are getting generous unemployment and they’re saying ‘yes we understand the labor market will be strong in three or four months…we know that dynamic is there,” Kashkari said.

But there are other factors at work, he argued, citing women unable to return to work for child-care reasons, and people who are still afraid of contracting the virus, as examples of workers who must still be coaxed back into the labor market before stimulus can be safely withdrawn. But these will likely be resolved on their own as the virus wanes.

But in trashing those who would dare to criticize the Fed, Kashkari – as he often does – set up a straw man opponent: the market participants who are purportedly angry with the Fed for sabotaging their business. In the interview, he insisted he had “zero sympathy” for his critics on Wall Street.

“For my friends on Wall Street, and I have a lot of them, I hear from them all the time complaining about the Fed’s policies that are mucking up their trading strategies,” the former Goldman Sachs Group Inc. and Pacific Investment Management Co. executive told Michael McKee on Friday in an interview on Bloomberg Television. “I have zero sympathy — because there are still 8 to 10 million Americans who want to work, who ought to be working.”

Of course, in an age where anybody can seem like an investing genius simply by observing the mantra that “stocks only go up”, we certainly don’t hear too many complaints. Yet, Kashkari insists on criticizing Wall Street, while ignoring the fact that the Fed’s policies have driven one of the most lucrative bull markets in history (while sending stocks back to record highs on Friday).

Did Kashkari fall on his head today?

“For my friends on Wall Street, and I have a lot of them, I hear from them all the time complaining about the Fed’s policies that are mucking up their trading strategies”

Yes, it’s a chorus of complaints about the Fed propping up markets

— zerohedge (@zerohedge) May 7, 2021

That being said, Kashkari added that he would be “open” to debating the finer points of the Fed’s policy, like the exact amount of assets that the central bank should be buying.

“I don’t see any reason right now to change something that is working,” Kashkari said. He noted the quantitative easing is an “inexact science.”

“You know, could someone say ‘oh, instead of 120 [billion] you should be buying 110,’ sure we could have that debate,” he said.

“What we’re doing right now, I think, is supporting, certainly the housing market, supporting financial markets in general, keeping the yield curve lower, keeping the 10-year down, which bleeds through into all sorts of other different interest rates across the economy,…providing a lot of support to accelerate that recovery,” he said.

To sum up, here’s a distillation of Kashkari’s logic: Friday’s weak jobs number justifies even more stimulus. More stimulus allows more workers to postpone return to the labor force as restaurants and retail outlets refuse to hike wages to the degree needed to lure more workers back to the work force.

Procyclical stimulus:

Not enough jobs as employers can’t find workers who opt for government stimulus instead; and the poor jobs number ensures that even more stimulus will be handed out, ad inf.

— zerohedge (@zerohedge) May 7, 2021

Was, rinse, repeat.

Readers can listen to a clip from the interview below:

Via SchiffGold.com,

Inflation is the word of the day.

We’ve been talking about inflation for months, but now the mainstream is starting to pay attention to rising prices. In corporate board rooms, board members are talking about passing along their increased costs to their customers. Consumers are trying to tighten budgets. But the Federal Reserve keeps telling us there isn’t a problem. Inflation – so we’re told – is transitory. In his podcast, Peter Schiff said the central bankers at the Fed have to tell us that because they can’t be honest about inflation.

The ISM Services Index prices paid component reveals just how much prices are going up. The ISM’s price gauge rose to a 13-year peak and came in twice as high as the last month before the pandemic began. But the central bankers at the Federal Reserve continue to insist the price increases are transitory. Peter called their position absurd.

To simply dismiss what is happening as being transitory strains any credibility. It makes no sense for the Fed to be taking this position unless you actually understand why they’re doing it.”

When it comes to inflation, the Fed basically has two options. It can admit it’s a problem and take steps to address it, or it can pretend there isn’t a problem so it doesn’t have to do anything about it. If the central bankers admit inflation is a problem, it puts the onus on them to take action. That would mean tightening monetary policy – hiking rates, ending quantitative easing, and shrinking the balance sheet.

And therein lies the problem.

They can’t simultaneously prop up the economy and then take the props away. The economy is being propped up on pillars of inflation. That’s the only thing that we’ve got going is the inflation. So, the Fed has to continue to provide inflation. It can’t take it away.”

On top of that, we have President Biden promising all kinds of big spending programs, from his massive infrastructure plan to the “American Families Plan.” If the Fed admits we have an inflation problem, we can’t have these spending plans.

The only reason that we can have all the stimulus is if we also pretend that financing it is not inflationary, that we can print all this money to pay for all this government, and we’re not going to have an inflation problem.  So, once you understand the box that the Fed is in, now you understand why they have to dismiss inflation as being transitory. Because they have to pretend that there’s no problem to solve. Because the only way they can keep printing all this money and enabling all these deficits is if they also maintain that it’s not going to cause inflation.”

Even the slightest hint by anybody at the Fed or in the administration that inflation might be a problem creates panic in the markets. We saw this earlier in the week when Treasury Secretary Janet Yellen suggested interest rates might have to rise to keep the economy from overheating. The stock market tanked and Yellen quickly walked back her comments, pivoting back to the approved messaging – inflation is “transitory.”

Peter called it an “insipid” inflation problem that has nowhere to go but up.

More and more Americans are going to have to start accepting and dealing with the consequences of living in a highly inflationary environment.”

Warren Buffett recently warned about inflation, but he blamed it on a “red-hot economy.” Peter said the economy is the exact opposite of red-hot.

A hot economy doesn’t cause prices to go up. It’s actually an ice-cold economy that is the cause. Because the economy is so cold, the government is artificially heating it up with stimulus. So, that is what’s causing this substantial inflation. It’s not the strong economy. It’s the fact that we don’t have a strong economy. We have a weak economy. And so the Fed is stimulating the weak economy by printing money to finance massive government spending. And that is responsible for the increase in prices — not the strength of the economy.”

2018 was not a good year for bitcoin, and for cryptos in general: after hitting an all time high of (only) $20,000 in December of 2017, much of the remainder of 2018 was spent with the crypto bubble deflating, with early crypto investors first casually than fervently taking profits and dragging the price of cryptos ever lower. The punchline came in September, when as we reported at the time Goldman – clearly disappointed with the lack of upside momentum – suspended its fledgling crypto trading desk plans…

… sending bitcoin tumbling back below $7000. In retrospect anyone who bought then can now retire.

But fast forward a little over two years forward when following the 8-fold increase in the price of bitcoin since Goldman’s cowardly exit, the bank – which has lost some of its top executives in recent weeks – has made a less than triumphant return and as we reported back in March, had restarted its cryptocurrency trading desk effort and was preparing to deal bitcoin futures and non-deliverable forwards for clients from next week.

As of today, this effort is complete with Goldman’s Market Division officially announced the formation of the firm’s cryptocurrency trading team which will be part of Goldman’s Global Currencies and Emerging Markets unit, and reports directly to Rajesh Venkataramani, the head of Goldman’s GCEM Foreign Exchange Options Trading.

As part of the initial launch, Goldman said it had successfully executed Bitcoin NDFs and BTC future trades on the CME on a principal basis, with all cash settling. The bank said that it is selectively onboarding new liquidity providers to help expand the firm’s offering.

Furthermore, Bloomberg yesterday reported that as part of its NDF derivative offering, Goldman then protects itself from Bitcoin’s volatility by buying and selling Bitcoin futures in block trades on CME Group Inc., using Cumberland DRW as its trading partner. Goldman, which still isn’t active in the Bitcoin spot market, introduced the wagers to clients last month without an announcement.

“Institutional demand continues to grow significantly in this space, and being able to work with partners like Cumberland will help us expand our capabilities,” said Max Minton, Goldman’s Asia-Pacific head of digital assets. The new offering is “paving the way for us to evolve our nascent cash-settled crypto-currency capabilities.”

After Wall Street initially shunned cryptos, with Jamie Dimon’s infamous 2017 outburst slamming bitcoin now in the running for the dumbest thing ever said by a bank CEO, soaring client interest and Bitcoin’s astronomical gains – reaching a high of almost $65,000 in April – have turned most bankers around, with Morgan Stanley making a Bitcoin trust product available to its customers and JPMorgan working on a similar offering.

“Goldman Sachs serves as a bellwether of how sophisticated, institutional investors approach shifts in the market,” said Justin Chow, global head of business development for Cumberland DRW. “We’ve seen rapid adoption and interest in crypto from more traditional financial firms this year, and Goldman’s entrance into the space is yet another sign of how it’s maturing.”

Goldman Sachs may next offer hedge fund clients exchange-traded notes based on Bitcoin or access to the Grayscale Bitcoin Trust, Bloomberg reported.

“The crypto ecosystem is developing rapidly,” Chow said. “There is progress being made in offering ETFs, new custody providers coming online and optimism that regulatory efforts are coming into focus. It’s a great time to be in the space.”

Who could have possibly seen this coming?

According to Bloomberg, economists are suddenly ‘baffled’ by perhaps the most obvious outcome of a government paying people not to work during the pandemic; there’s a giant shortage of people willing to return to the workforce.

From Chipotle, to MGM, to McDonald’s, companies are now widely reporting that they can’t find – or entice – enough workers to fill open positions now that America has largely emerged from COVID lockdowns. Executives, who are decidedly less ‘baffled’ than the economists, are blaming ‘stimulus checks and generous unemployment benefits’ for hampering their efforts to hire.

And as we noted earlier Thursday, Montana has become the first state to cancel unemployment benefits due to an ‘unprecedented worker shortage.’ This was confirmed by the results of the latest, April, NFIB Small Business survey, which found that a record 42% of companies reported job openings that could not be filled.

The key quote from NFIB Chief Economist Bill Dunkelberg was “Main Street is doing better as state and local restrictions are eased, but finding qualified labour is a critical issue for small businesses nationwide.” And the explicit admission that BIden’s “trillions” in stimulus are behind this predicament:

“Small business owners are competing with the pandemic and increased unemployment benefits that are keeping some workers out of the labor force.”

As if it wasn’t clear, the NFIB added that “finding eligible workers to fill open positions will become increasingly difficult for small business owners.”

In Late April, the Wall Street Journal reported that restaurants are even offering signing bonuses.

Full-service and high-end restaurants like Wolfgang Puck’s Spago Beverly Hills, where servers can earn $100,000 a year with tips, also are struggling to recruit workers. Mr. Puck said in an interview that expanded unemployment benefits and new options like personal chef gigs are contributing to staffing shortages at Spago and his other restaurants.

“I don’t think we should pay people to stay home and not work if there are jobs available,” he said.

…

Illinois-based Portillo’s Hot Dogs LLC boosted hourly wages in markets including Arizona, Michigan and Florida, and is offering $250 hiring bonuses. The chain has hired social-media influencers and built a van called the “beef bus” to help recruit. Still, many of the chain’s 63 restaurants remain understaffed, said Jodi Roeske, Portillo’s vice president of talent.

“We are absolutely struggling to get people to even show up for interviews,” Ms. Roeske said.

We noted this nearly four weeks ago – after BLS data showed that there were over 100 million Americans who are out of the workforce – of which just 6.85 million were looking for a job.

Consider the following striking anecdotes:

• Early in the Covid-19 pandemic, Melissa Anderson laid off all three full-time employees of her jewelry-making company, Silver Chest Creations in Burkesville, Ky. She tried to rehire one of them in September and another in January as business recovered, but they refused to come back, she says. “They’re not looking for work.”
• Sierra Pacific Industries, which manufactures doors, windows, and millwork, is so desperate to fill openings that it’s offering hiring bonuses of up to $1,500 at its factories in California, Washington, and Wisconsin. In rural Northern California, the Red Bluff Job Training Center is trying to lure young people with extra-large pizzas in the hope that some who stop by can be persuaded to fill out a job application. “We’re trying to get inside their head and help them find employment. Businesses would be so eager to train them,” says Kathy Garcia, the business services and marketing manager. “There are absolutely no job seekers.”

These are not one-off cases: these real-life events, revealed by Bloomberg, expose the striking statistical reality in the US: on April 1 the NFIB (National Federation of Independent Business) reported that in March a record-high percentage of small businesses surveyed said they had jobs they couldn’t fill: 42%, vs. an average since 1974 of 22%.

Even JPMorgan admitted last month that for normalcy to return, people must not only be employed but must want to be employed – and suggested that the “robust” government stimulus may be keeping workers on the sidelines. Bloomberg even admitted that trillions in Biden stimulus are now incentivizing potential workers not to seek gainful employment, and instead sit back and collect the next stimmy check for doing absolutely nothing in what is becoming the world’s greatest “under the radar” experiment in Universal Basic Income.

Yet, now Bloomberg reports that ‘economists’ (perhaps proponents of ongoing stimulus) are apparently “unclear about what’s really causing this gap and how long it will last.”

“There is definitely a job paradox that’s going on,” according to Bank of America senior US economist, Joe Song, who says that while it’s difficult to quantify, “but it’s clearly a challenge that’s weighing on a quicker pace of recovery.”

While the unemployment rate probably fell to 5.8% last month, according the median estimate in a Bloomberg survey of economists, the labor force participation rate remains well below pre-pandemic levels. Further, the employment to population ratio — which measures the share of the population that is employed — is still more than three percentage points below where it was before Covid-19.

Lingering health concerns, ongoing child care responsibilities and the inability to do some jobs from home are just some of the reasons why Americans are reluctant to return to work. Some are also retiring early.

And anyone who previously made less than $32,000 per year is better off financially in the near term receiving unemployment benefits, according to economists at Bank of America. -Bloomberg

Now, the argument has begun to shift to ‘fair wages’ – with the Economic Policy Institute’s Heidi Shierholz, former Labor Department chief economist under Obama, saying: “Employers are like: ‘Why the hell, if there are so many people who need jobs, can’t I find somebody really awesome, really cheap?“

Of course, as massive stimulus ‘coincides’ with massive inflation across several categories, the definition of ‘really cheap’ is now relative when a gallon of milk jumps over 11% in a year, as one of many examples.

“If we’re having that kind of job shortage at a time when the economy is still in front of what almost everybody thinks is going to be a very substantial boom over the next six months, I am concerned about inflation and inflation expectations,” former Treasury Secretary Larry Summers, a good friend of Jeffrey Epstein, told Bloomberg TV in an interview.

According to policy makers, including Fed Chair Jerome Powell, the ‘mismatch’ (massive job shortage) is only temporary – and workers will ‘likely’ return to the labor force after their extended jobless aid programs are over.

Which begs the question – if employers are already having trouble attracting workers back into the labor force, why do we need a $1.8 trillion ‘human infrastructure’ plan?

Authored by Lance Roberts via RealInvestmentAdvice.com,

Are stocks “cheap,” or is this just another bullish “rationalization.” Such was the suggestion by the consistently bullish Brian Wesbury of First Trust in a research note entitled “Yes, Stocks Are Cheap.” To wit:

“The Fed remains highly accommodative, there are trillions of dollars of cash on the sidelines, vaccines have reached over 50% of Americans, and the economy is expanding rapidly. Some valuations have been stretched, but the market as a whole remains undervalued. As a result, we remain bullish and are lifting our targets.”

Yes, it is true the Fed remains highly accommodative, which has undoubtedly pushed asset prices higher. In fact, financial conditions recently reached a historic low, which suggests elevated asset valuations ironically.

We have busted the “myth of cash on the sidelines” previously, but this is a “rationalization” that won’t seem to die.

“‘There are no sidelines. Those saying this seem to envision a seller of stocks moving money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.’ – Cliff Asness

Every transaction in the market requires both a buyer and a seller, with the only differentiating factor being at what PRICE the transaction occurs. Since this is necessary for there to be equilibrium in the markets, there can be no ‘sidelines.’” 

In the last 5-months, more money flowed into equities than in the past 12-years combined. That flow pushed investor allocations to historic extremes suggesting there is little “on the sidelines.”

Difference Between Expansion & Recovery

With vaccines reaching more Americans, the economy is indeed recovering. However, there is a difference between an economic “recovery” and an “expansion,” as noted recently.

“The “Economic Activity Index” is an average of the 4-most essential components of organic economic activity. Interest rates have a long historical correlation to economic activity, along with inflationary pressures. Without productivity and business investment, jobs do not get created to support consumption which is ~70% of the GDP calculation.”

However, I want to focus on the valuation component of his thesis and whether stocks are actually “cheap.”

Through the first quarter of 2021, the expected economic recovery runs well ahead of what the “economic activity index” approximates. Furthermore, given the market’s advance is based on optimistic expectations, there is potential for disappointment.

Such is where fundamentals become extremely important. When expectations of the recovery are disappointed, the market will begin to reprice itself for its intrinsic value. With the market is trading more than twice the level of underlying economic growth, such suggests a significant risk.

Growth Versus Recovery

“With real GDP growth of 6%+ this year and S&P 500 earnings expected to grow by 27%, or more. We think stocks
will easily bust through our original target by year-end, so we are raising our year-end target to 4,500. That is 7.5% higher than the Friday close.” – Wesbury

The story would have merit IF the economy were expanding at 6% annually, every year. Notably, 2021 economic growth is primarily a function of annual comparisons recessionary growth. Unfortunately, once the initial recovery is complete, both economic and earnings growth will revert to historical norms.

Since corporate profit growth is a function of economic growth, the relationship is also a cause of concern. With the price to profits ratio elevated well above the long-term trend, there is little to suggest that markets haven’t already priced in the expected recovery.

While the U.S. economy will indeed exit the recession in 2021, it may be a statistical result rather than an economic recovery leading to broader prosperity. The most significant risk, which Wesbury overlooks, is a surge in inflationary pressures, undermining more optimistic projections. That concern will manifest itself as a stagflationary environment where wages remain suppressed while costs of living rise. Such will hurt earnings and profitability in an already overvalued market.

Value Isn’t Cheap

“Some investors and analysts are skittish about further gains in equities. The price-to earnings (P/E) ratio on the S&P 500 is 32.6 (based on trailing earnings) is high by historical standards. And the total market capitalization of the S&P 500 has reached about 175% of GDP.” – Wesbury

While Wesbury suggests that valuations are cheap, there is little evidence that such is the case. Most of the assumption is that earnings and the economy will “catch up” with prices. Such would suggest that prices remain stagnant during that process, yet Wesbury assumes prices will surge to 4500 in 2021, eclipsing the benefit of assumed growth. 

Therefore, valuations are not only high by historical standards now but will remain high in the future as prices rise along with economic and earnings growth. The consequence of over-paying for valuations today is substantially lower long-term returns from asset classes in the future. The eponymous GMO noted such in their most recent 7-year forecasts.

However, as we showed previously, such is also proven out by the historical correlations between a majority of the most relevant valuations models: Tobin’s Q, Price/Sales, Market Cap/GDP, and CAPE:

The Fed will continue to supply liquidity, which will help the market ignore the reality of the barometers shown above. As we saw in March, that does not preclude hair-raising volatility and significant declines, but it does support prices on the margin regardless of the environment.

The average of the 10-year expected returns from the four gauges is -0.75%. Whether by design or due to inflation, slower economic growth, or massive debt levels, rich valuations will matter whenever the Fed backs off.

Rationalizing Valuations

“Also, persistently low-interest rates make higher P/E ratios more sustainable as future profit growth is worth more with a lower discount rate.” – Wesbury

The view that low interest rates justify high valuations has little historical evidence to support such a claim. As I discussed recently:

• Exceptionally high interest rates, which have occurred twice, coincided with low stock market valuations. 

• Exceptionally low interest rates, which have occurred twice, have coincided with high stock market valuations only once; today. 

• Only once (1/3 probability historically) did high stock valuations coincide with low-interest rates; today.

• If extremely low interest rates do not cause high stock market valuations, then a rise in rates should not necessarily cause a decline in stocks. 

Furthermore, if we run a correlation between 10-year yields and forward returns, as suspected, we find there is virtually no correlation to support Wesbury’s claim.

Notably, in studying if  low rates justified high valuations, we quoted Cliff Asness of AQR:

“Instead of regarding stocks as a fixed-rate bond with known nominal coupons, one must think of stocks as a floating-rate bond whose coupons will float with nominal earnings growth. In this analogy, the stock market’s P/E is like the price of a floating-rate bond. In most cases, despite moves in interest rates, the price of a floating-rate bond changes little, and likewise the rational P/E for the stock market moves little.”

Simply, if you are going to discount the “P” due to low rates, you also have to discount the “E” as well.

Not Today, But Eventually

While it is “bullish” to come up with reasons to justify overpaying for assets in the short-term, outcomes are quite different long-term.

If this wasn’t the case, then “riddle me this.”

If investing works like the media suggests, then why are 80% of Americans living paycheck-to-paycheck? Why is it just the top 10% of income earners own 88% of the stock market?

The reality is that investing long-term is hard. Short-term exuberance tends to lead to poor long-term returns.

Let me conclude with this crucial quote from Vitaliy Katsenelson, which sums up our investing view:

“Our goal is to win a war, and we may need to lose a few battles in the interim.

Yes, we want to make money, but it is even more important not to lose it. If the market continues to mount even higher, we will likely lag. The stocks we own will become fully valued, and we’ll sell them. If our cash balances continue to rise, then they will. We are not going to sacrifice our standards and thus let our portfolio be a byproduct of forced or irrational decisions.

We are willing to lose a few battles, but those losses will be necessary to win the war. Timing the market is an impossible endeavor. We don’t know anyone who has done it successfully on a consistent and repeated basis. In the short run, stock market movements are completely random – as random as you’re trying to guess the next card at the blackjack table.”

Rationalizing high valuations today will likely lead to ultimately “losing the war.” 

With Elon Musk slated to host Saturday Night Live this weekend, the whole world’s focus has been on whether or not Musk is going to use the platform to pump either Tesla stock or any number cryptocurrencies, which have rallied ahead of Musk’s appearance. 

The paparazzi professionals over at TMZ caught up with Elon Musk late this week and were able to lob the Tesla CEO a couple of questions about what’s on everyone’s mind: Dogecoin.

“Elon, do you think Dogecoin could really be the next currency of the world,” someone asks Musk. “I think it should be the will of the people,” Musk responds.

“Do you think there’s a problem because its not limited, like Bitcoin,” an onlooker asks. “Do you think that brings away [from] the value of the coin?”

“Yes, it does,” Musk responds. “People should not invest their life savings in cryptocurrency, to be clear. That’s unwise. But if you want to speculate and maybe have some fun…There’s a good chance that crypto is the future currency of Earth. Now it’s just ‘which one will it be’?”

“It should be considered speculation at this point. Don’t go too far on the crypto speculation front,” Musk says. “Dogecoin was invented as a joke. I think there’s an argument that fate loves irony. What would be the most ironic outcome? That the currency invented as a joke then becomes the actual currency?”

“My dogecoin went up when you tweeted,” one bystander can be heard shrieking at the end of the video. “How do you do it? The power of Elon Musk!”

“Don’t take too much risk on crypto,” are Musk’s last words before driving off. 

Well that escalated quickly. The dismally disappointing payrolls data has sparked chaos across capital markets as investors consider ‘tapering the taper’ talk.

The equity market is very mixed as the rotation back to ‘growth’ explodes with Nasdaq soaring and Small Caps plunging…

Treasury yields have crashed to two-month lows…

The dollar is puking back to its weakest since February…

Which is sending gold higher, back above $1840 at two-month highs…

But as a reminder, BofA notes that US payrolls release has been a highly risk-on even over the last 12 months…

Get back to work Mr.Powell.

For once the disappointing ADP report was right.

With expectations of today’s payroll print soaring, consensus expecting a whopping 1 million number and some forecasters calling as high as 2+ million, few were prepared for a miss. And of course the market gods made sure to inflict the most possible pain with the BLS reporting an April payroll of just 266K in April, a huge miss compared to the 1 million consensus estimate.

Developing

Another month, another blowout trade report from China.

China’s April exports rose 32.3% yoy in dollar terms, well above market expectations of 24.1%, suggesting its trade out-performance could last longer than expected this year, fueled by global fiscal stimulus. This implies a sharp sequential rebound of 9.4% in April vs. -6.6% in March. At the same time, imports soared 43.1% yoy on strong domestic demand and soaring commodity prices, in line with consensus expectations of 44.0%, and the sequential growth moderated to +2.1% sa non-annualized in April (vs. +3.7% in March). The surge in exports led to a bigger-than-expected trade surplus of $42.85 billion, above the $27.7 billion consensus.

Here are the key numbers (USD-denominated):

• Exports: 32.3% yoy in April (Bloomberg consensus: +24.1%). March: +30.6% yoy. Sequential growth (seasonally adjusted by GS): +9.4% non-annualized in April vs. -6.6% in March.
• Imports: 43.1% yoy in April (Bloomberg consensus: +44.0%). March: +38.1% yoy. Sequential growth (seasonally adjusted by GS): +2.1% non-annualized in April vs. +3.7% in March.
• Trade balance: US$+42.9bn NSA (Bloomberg consensus: US$+27.7bn) in April. March average: US$+13.8bn.
• RMB-denominated:
• Exports: +22.2% yoy in April vs. +20.7% yoy in March.
• Imports: +32.2% yoy in April vs. +27.7% yoy in March.

“The export figure clearly reflects a recovering and expanding global economy,” said Hao Zhou, an economist at Commerzbank AG in Singapore. “Robust imports and exports also mean that China’s manufacturing industry is still outperforming the services sector to lead the economic rebound.”

Higher oil and metal prices continued to support commodity imports in value terms. Crude oil imports accelerated to 73.2% yoy mainly on a low base, and iron ore imports rose 89.6% in April. Import growth of integrated circuits remained strong and rose 22.6% yoy in April (vs. +23.3% yoy in March). In volume terms, crude oil imports fell 0.2% yoy, vs. +20.8% yoy in March. Iron ore imports rose 3.0% yoy, decelerating from +18.9% yoy in March.

“Imports were lifted mainly by higher commodity prices, but also due to a recovery in domestic demand. These factors that supported China trade look set to continue in the near term.” said Bloomberg’s David Qu.

Exports grew more than expected in April, supported by solid demand for housing related products and sequential increases in COVID-19 related personal protection supplies due to resurgence in infections in major trade partners in April. Higher commodity prices continued to support commodity import value, although import volume growth slowed.

The base effect also came into play. According to an analysis by Bloomberg Economics the low base from a year ago also helped to underpin the strong results, but even on a two-year average growth basis which strips out those effects, April’s export growth was 16.8%, much stronger than pre-pandemic levels.

China’s soaring trade reflected rising global appetite for Chinese goods thanks to stimulus packages introduced by developed economies that’s helped to fuel demand for household goods, furniture and electronic devices. As Bloomberg notes, with vaccine rollouts accelerating and more economies opening up, China’s export growth was widely expected to moderate this year as consumers start to spend more on services. But April’s data shows that hasn’t happened yet.

By major export destination, exports to major DMs slowed. Exports to the US moderated to 31.2% yoy in April (vs. 53.3% yoy in March) and growth of exports to EU slowed to 23.8% yoy from 45.9% yoy in March. Exports to Japan only rose 0.4% yoy (vs. +7.6% yoy in March). In contrast, exports to major EMs accelerated. Exports to India rose significantly by 143.8% yoy in April likely on a surge in COVID-19 related medical supplies. Exports to ASEAN also accelerated meaningfully to 42.2% yoy (vs. 14.4% in March). Export growth to Korea accelerated to 23.1% yoy in April (vs. 20.9% in March).

The U.S. was the biggest export market last month, accounting for 15.9% of Chinese goods sold abroad. Southeast Asian nations bought 15.6% of exports while the European Union purchased 15.1%. Meanwhile, exports to India surged 144% in April from a year earlier with the monthly value hitting a record $7.8 billion.

“We expect China’s export growth will stay strong into the second half of this year,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd, citing strong growth in U.S. demand and continued coronavirus outbreaks in developing countries such as India causing production to shift to China. Those trends are likely to support China’s currency, he added.

Liu Peiqian, an economist at Natwest Group Plc, cited increased global demand for microchips, where Chinese companies are a key part of the supply chain, as another reason why “exports outperformance will likely remain a key theme” in China’s recovery. In volume terms, imports of industrial metals and energy products softened slightly in April, she added, suggesting that the domestic demand recovery could still be relatively weak.

At the Communist Party’s Politburo meeting last week, China’s top leaders pledged to accelerate the recovery in domestic demand and reiterated there would be “no sharp turn” on economic policy. But the government is focused on raising consumer spending on goods and services, while taking a cautious stance on property and infrastructure investment, which tends to be more import-intensive.

A strengthening recovery in Chinese consumer spending was indicated by the April services purchasing managers’ index compiled by Caixin Media and IHS Markit, which rose to 56.3 from 54.3 the previous month, well above the 50 reading that marks an expansion from the previous month. However, data from a recent five-day public holiday in China showed spending below pre-pandemic levels, suggesting China will remain dependent on overseas demand for much of its growth this year.

Last week, we first highlighted an unusually large position being built in Eurodollar Mid-Curve options anticipating a Fed hawkish shift in outlook built around the Jackson Hole event held in late August.

Bloomberg’s Edward Bolingbroke was the first to highlight the massive ED trade by an unknown entity, who appears to be betting that the Fed’s dovish stance will end with a bang not in June, as many analysts predict, but in August with Powell making the inevitable taper announcement at Jackson Hole, which will lead to a bloodbath across the curve and especially the short-end.

Why Jackson Hole?

Because last year, Powell unveiled a new policy framework for inflation, while in 2012 Ben Bernanke signaled more bond purchases were on the table.

Since we first noted it, there has been a burst in eurodollar options activity involving a position that will benefit from this potential ramp-up in taper rhetoric in August, and Nomura’s Charlie McElligott notes that, ahead of tomorrow’s much-anticipated payrolls print, there has been a dramatic increase in the ‘eurodollar whale’ position.

Source: Bloomberg

After we posted yesterday, Sep21 3-year mid-curves Open Interest rose 140k in 98.00 puts after volume exploded to 285k contracts. Oopen interest in the strike now totals 422k.

Bloomberg now estimates the wager carries a notional value of $40 billion, noting that the positions are now the third-biggest of any Eurodollar options.

The position has continued to be placed despite Fed officials this week pushing back on market expectations for policymakers to start discussing a tapering of the central bank’s bond-buying program.

To get a better handle on the demand for this position, we can look at implied vols for those options…

Source: Bloomberg

Eurodollar futures imply around 5 rate-hikes through September 2024 and the ‘eurodollar whale’ position is betting that The Fed will hike at a faster-than-expected pace (implying 7 rate-hikes)…

Source: Bloomberg

With Dallas Fed’s Kaplan saying that he “wants to see taper talks start sooner rather than later,” warning that there are “side effects” from Fed bond-buying and today’s payrolls data anticipated to be over 1 million jobs added, perhaps it’s not so far-fetched to see Jackson Hole as the place to begin thinking about thinking about normalization.