WHY RISING FREIGHT RATES WILL LEAD TO HIGHER INFLATION IN THE US COMPARED TO EUROPE?

A thread

The goods inflation is typically more important in Europe than in the US, but the strenght of the consumer is important to assess the impact of rising freight rates

1/n The US consumption base is simply more geared for price increases than the European counterparts currently

US and UK retail sales close to all time wide levels based on December numbers, which is a strong hint of a big divergence between consumers

2/n

Ooooops, if you think soft data looks bearish compared to hard data, then wait till you look at the equity markets expectations of the future

A thread 1/n Also... On the back of today's Philly manufacturing numbers the spread between prices paid and recevied reached its all time high. That bodes pretty well for SPX historically

2/n

CIVIL WAR IN RUSSIA 🇷🇺🔫

What we know and what we think we know (From our Geopolitical team with strong Russia knowledge)

A thread 1/n What we know:

-The Wagner mercenary with around 25,000 troops have taken up arms against the Russian army. Several Russian army units have joined the rebellion.

2/n

Large parts of the stock market have rallied recently, and whispers of a new bull market are steadily surfacing. Has the time come for caving in to bulls, or are we just seeing the results of impatience after 1,5 years of limbo?

1/n The surge in equities has been very top-heavy. On a YTD basis, the S&P 500 has delivered close to 15% while the equal-weighted counterpart has returned merely 5%. This just underpins the fragility of the current rally, but the breadth is becoming more robust.

2/n

On the back of Norway's 50 bps rate hike yesterday we decided to look at the Scandinavian FX massacre in NOK and SEK NB revised its rate path >60 bps for Q4, with peak policy rate at 4.25% or a peak around 4.67% in NIBOR 3m terms which is the first major attempt to stabilize the NOK.

Will the Fed continue Hiking? When will the AI bonanza end? And what's going on with UK inflation numbers?

Here's some of the main points from our weekly '5 Things We Watch' where we take you through what to watch in the coming weeks: The AI rally is still going, which is likely the driver behind the current rally. But divergences are building with the actual index posting a return 10 percentage points higher than the return of the average S&P 500 company (equal weighted index)

NEW EM PIECE OUT!
As a new addition to our EM editorial, we will now provide a monthly overview of emerging markets, taking a step back from the intricacies and offering a broader perspective of the EM landscape as we see it
EM 🧵 1/ Today Powell said to congress that he expects the current "pause" to BE TEMPORARY and hikes to continue in the coming months- Market currently anticipates as much but also expects cuts due this year and many have pondered whether the USD won't fall as a result 2/

TURKEY has been in the limelight recently with Erdogan winning yet another term (again) and TRY trading like Venezuelan Bolivar. But what is going on with Turkey these days?

Turkey 🧵 1/

#TRY $TRY While Inflation has been met with rate cuts, foreign sovereign bond investors have cut tail and ran. Meanwhile the vulnerability of relying on foreign in-flows has been exposed causing a MASSIVE pressure on the TRY and the current account deficit grown 2/

Will the optimism for U.S. earnings growth last, and has the immense influx of capital to Japanese markets overbid fair value?

We have taken a closer look at pricing relative to earnings in both markets.

A thread 1/n Despite the relatively high-priced tech- and cyclical equities, they are priced with the prospect of future growth – and maybe even an accelerating one at that. In both sectors, the forecasted earnings are 21.6% and 20.6% stronger relative to those realized.

2/n

OPEC+ meeting at the end of the week and with crude under 70 USD, it is time to get your popcorn out, folks! Esspecially when the Saudis have an estimated 81 USD breakeven in order to finance your Red Sea resort the size Belgium Now, Sleepy Joe has been awake enough to counter the OPEC cut with further SRP releases himself, thus no help for MBS to get there.

Every Wednesday we provide you with the 5 topics that we track intensively in the current environment. Today is no exception.

A thread. European inflation generally surprised 0.4-0.5%-points on the low side across the continent today, and the European Commission survey on price expectations among companies printed at 6.6, which is consistent with <2% inflation in Europe in 6 months from now.

Long bonds?

Why is the labor market so resilient?

Well, it is basically not a surprise since the price of labour has dropped MARKEDLY in real terms in 2021/2022

A thread

1/n The price labour dropped 10% relative to consumer prices through 2022 in many European countries.

This makes labour CHEAPER for companies relative to their selling prices

Bottom-line = SWEET margins

2/n

A MUST READ ON EUROPEAN ASSETS

Does the tale of European banks being safeguarded from deposit flights by better legislation hold true, or are markets taking comfort in a false sense of security?

A short thread 1/n European corporate deposits have on avg. shrunk close to 9% YoY - as of March. To put these numbers into perspective, the deposit base of US commercial banks is currently down 4.95% on average relative to a year ago.

2/n

Our long Brazilian sovereigns trade has been spot on since we added it in April

Is the South American govie space still a place to hide from the weakening economies in the West? We still believe the trade comes with a decent risk/reward as the Central Bank of Brazil is WAY closer to reaching their inflation target than the US. Also makes sense since the Brazilian Central Bank hiked rates 12% in a little more than a year.

Might be time for a pivot soon?

Italy has a major funding issue as they have to refinance roughly 650 bn. EUR worth of debt within the next year in the middle of a ECB hiking cycle.

Who will scoop up their govies?

A short thread. The borrowing requirement of the Italian government on a monthly is at the levels last seen at the outbreak of the pandemic. And when you add roughly +200 bps to the BTP yield since 2020, the financing is not going to be cheap.

We have looked into the strength of the US consumer base, and for how they can continue to rely on their excess savings to support consumer spending

A short thread.

1/n With the outbreak of the pandemic, policymakers decided it was a good idea to hand out 100-dollar bills to most of the population, which of course spills over to household's monthly savings, which until 2020 just followed a 20-year trend.

2/n

The USD funding market is about to get REEEEALLY interesting due to the debt ceiling

A short thread

1/n We project a deficit of roughly $160bn in May, which leads to a HIGH risk of a partial shutdown already by the last week of the month or the first week of June

2/n

Is it the flow or the stock of money that creates inflation?

A brief example from the US

1/n The stock of M2 (broad money) suggests that the Fed will have to do much more to win the inflation battle as the money supply is WAY above trend still

2/n

Are US equities past the peak, or is the window for investing still open?

Ahead of today’s FOMC meeting, we decided to take a closer look at the state of US equities and whether a defensive rotation was due - or if one were better off leaving the table entirely

A thread

1/n Judging by the classic rotation from discretionaries towards staples, it sure looks like investors have begun rotating their portfolio, hiding in less sensitive and shorter duration bets in order to safeguard against what could be a choppy second half of the year.

2/n

With the failure of First Republic Bank and Ueda’s dovish remarks, we once again dig into how traders are positioned across asset classes. Find out if you have picked the right horses in this week’s thread.

1/n The market is still having their foot on the speeder despite net short positioning, pushing the YoY return of S&P towards 0% - something not seen since the start of 2022. Have conditions really become better for equities since a year ago? We doubt it. 

2/n

Sticky wage inflation in Europe?

This week Germany’s biggest public union Verdi reached an agreement with the government to be voted through by its members and we wanted to look at the consequences of said deal for the German wage indices

1/n As we pointed out this week, the overall picture in Germany is a disinflationary one ... But wages is one thing which could taint that picture.

2/n