Not A Storm But A Hurricane Coming (J. Dimon)
Updated: Jun 13, 2022
The US Jobs report last Friday showed 390’000 jobs were created in May while the April figure was also revised higher. The JOLTS job opening report on Wednesday also came in better than expected while jobless claims remained at historically low levels which all suggested that US labour market tightness remained persistent, dealing another blow to the “dovish” tightening narrative that had helped reduce Fed tightening expectations the week before.
Fed officials did their part last week to push back against taking back Fed tightening expectations after Fed Governor Christopher Waller said “We are not going to sit there six months…I am advocating 50 on the table every meeting until we see substantial reductions in inflation. Until we get that, I don’t see the point of stopping.”. Vice Chair Lael Brainard communicated to the same effect.
While this short circuited a nascent bond rally, stocks also had to sweat out (which they did) comments from JPMorgan’s CEO J. Dimon who warned about a hurricane coming as the world economy faces fiscal tightening, quantitative tightening (one that is going to be twice as big as the last QT effort exiting the great financial crisis) and the consequences of the war in Ukraine, calling for people to brace themselves. A top Goldman executive echoed similar concerns.
The other “news” global markets had to cope with last week were the much higher than expected European inflation which hit a record 8.1% in May at the pan-European level and 8.7% in Germany, driven by soaring energy and food prices.
This was without the European Producer Price Index surging 37.2% in the year to April (from 36.9% in March).
The ECB remained steadfast dovish, with Italy’s I. Visco pushing back against the prospect of more aggressive rate hikes and ECB President C. Lagarde reassuring everybody saying she is not panicking…
Still, European bond yields rose and underperformed last week while peripheral spreads widened (despite a general improvement in credit markets that followed stocks higher).
While the US economy may still look strong in comparison, French GDP data came in worse than expected showing the economy contracted -0.2% in the three months through March which really shows the ECB in in a bind facing both a recessionary relapse and ever soaring inflation (not least because it is behind the curve).
If this macro-European situation was not enough of a concern, the agreement of a 6th train of European sanctions aimed at cutting off (90% of) European Russian oil imports by the end of the year was nearly farcical as it will serve no other purpose than pushing inflation ever higher and growth ever lower in Europe. Not only will the price of oil continue to grind higher but scarcity will most likely become an issue as well, if the bifurcation of buying back refined Indian oil …that will have been sold to them at a discount by Russia …does not go fast enough…
As for the US, they will buy more of this fungible resource from Iran (even without a nuclear deal) and Venezuela, making the imperatives of “real politik” only crueller if too much of its own oil needs to be diverted to Europe so as to keep the old continent afloat, electrified and heated from September onwards.
No situation, however hard it might be (all wars are horrible, especially those that could have been avoided) justifies Europe to shoot itself in the foot the way it does, certainly not to end up becoming a political puppet set in subordination of both the US and the belligerents of this war.
As for the net effect on Russia, it will provide a mirage of European determination as deleterious to Russia, the RUB and its current account surplus, as the European “decision” not to (want to but ending up having to) pay for Russian gas in RUB.
Oil and copper added 4% last week as China progressively reopens and looks set to benefit from a massive, prolonged and historic fiscal stimulus. Wheat and corn dropped however by respectively 10% (+50%) and 6.5% (+23%) on the week.
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Over the past week, the S&P500 gained 1,3% (-13,6% YTD) while the Nasdaq100 rallied 2,3% (-23,0% YTD). The US small cap index rallied 2,4% (-15,9% YTD).
Cboe Volatility Index sold off by -9,9% (44,0% YTD) to 24,79.
The Eurostoxx50 dropped -0,6% (-9,9%), underperforming the S&P500 by-1,9%.
Diversified EM equities (VWO) rallied 2,0% (-12,2%), outperforming the S&P500 by 0,7%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,3% (6,5% ) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,3% (-2,0% ).
10Y US Treasuries underperformed with yields rising 21bps (144bps) to 2,95%. 10Y Bunds climbed 31bps (145bps, Z-score 2,3) to 1,27%. 10Y Italian BTPs underperformed rising 50bps (223bps, Z-score 2,5) to 3,40%, underperforming Bunds by 6bps.
US High Yield (HY) Average Spread over Treasuries dropped -4bps (125bps) to 4,08%. US Investment Grade Average OAS dropped -3bps (41bps) to 1,41%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 4bps (43bps) to 0,98%.
Gold dropped -0,2% (1,2%) while Silver dropped 0,0% (-5,7%). Major Gold Mines (GDX) gained 0,5% (1,7%).
Goldman Sachs Commodity Index gained 1,9% (52,0%). WTI Crude rallied 4,5% (59,8%).
Overnight in Asia,,,
S&P500 +14 points; Nikkei +0.3%; CSI300 +1.0%
CAIXIN China May services PMI came out weaker than expected at 41.4 (from 46 expected).
The ECB meets on Thursday with a 25bps tightening expected.
Have a nice week ahead and be good to yourself !
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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Marc Bentin serves as Economic Advisor to Blue Lotus Management,
a specialist multi-manager investment firm, which seeks to provide investors a compelling alternative to the traditional 60/40 equity and bond portfolio by targeting higher returns without amplifying equity risks.
BentinPartner GmbH is Advisor to the Phi Funds AIF, an umbrella Alternative Investment Fund registered and regulated in Lichtenstein, specializing in the management of Funds focused on physical precious metals.
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