**PRO** Macro Investors (BONUS SECTION)
November 15, 2024 BONUS >> 4 Investment Opportunities >> US Inflation Update, Labor Market Strength, Producer Price Index (PPI) and Crude Oil Inventories, Global Signals from Japan and the UK
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⚡ US Inflation Update: The Steady Pressure of Rising Prices
On November 13, we saw the U.S. Core CPI tick up by 0.3% MoM in October, exactly as the analysts expected.
On an annual basis, CPI now sits at 2.6% YoY, edging up slightly from the previous 2.4%.
What’s fascinating here is how inflation at this level often impacts Treasury yields.
Think back to 2018 - when inflation hovered around these levels, the 10-year U.S. Treasury yield pushed above 3% as the market braced for further rate hikes.
Could we see a similar response now?
If the Fed continues to play it safe, steady inflation like this could once again keep moderate upward pressure on yields.
Equity markets, too, have shown interesting behavior around similar inflation patterns.
In mid-2021, for instance, when inflation was steady but persistent, we saw sectors like financials and energy rally.
The S&P Financials Index, in particular, posted an 8% gain over three months as banks anticipated higher earnings with rising interest rates.
Could this be another period where those sectors shine? Time will tell, but the groundwork seems familiar.
🧠 Labor Market Strength: A Positive Signal for Spending?
The latest Initial Jobless Claims came in at 217K, lower than expected and a signal that the US labor market remains robust.
A strong labor market often fuels consumer spending, which is crucial for economic growth.
If we look back to 2019, during a similar phase of low jobless claims, consumer discretionary stocks in the S&P 500 saw a solid increase, gaining around 5% over the quarter.
Why? Because when people are working and feel secure in their jobs, they’re more likely to spend, and that spending often drives demand in key sectors.
The currency markets offer another perspective.
In 2018, when the US labor market showed similar resilience, the USD/JPY exchange rate strengthened by 4% as international investors were drawn to dollar-denominated assets.
It’s worth keeping an eye on this dynamic, as a strong labor market could once again attract capital flows into the dollar.
💥 Producer Price Index (PPI) and Crude Oil Inventories: What Lies Beneath the Surface
October’s Producer Price Index (PPI) rose by 0.2% MoM, matching forecasts and showing steady producer costs.
When we see PPI stabilize like this, it often signals steady, if not explosive, demand for commodities.
A glance back at early 2020, when PPI showed similar stability, reveals that WTI crude oil prices hovered around $60-$65 per barrel - a calm before the storm that later followed with the pandemic.
With steady PPI today, we might be looking at a similar period of relatively stable commodity prices - unless new pressures emerge.
This week’s crude oil inventories are another story.
We saw a sharp increase, with stockpiles up by 2.089 million barrels, far surpassing expectations.
Back in March 2017, a similar surge in oil inventories led to a 6% drop in WTI crude prices over just a couple of weeks as oversupply concerns took hold.
If these builds continue, we could be looking at renewed downward pressure on oil - a potential positive for inflation-sensitive sectors but a watch-out for oil investors.
💡 Global Signals from Japan and the U.K.: A Tale of Two Economies
Shifting our focus abroad, Japan reported GDP growth of 0.2% QoQ for Q3, down from a previous 0.5%.
Slow growth in Japan has often led to a weaker yen.
Take 2019 as an example: as Japan struggled with low growth, the yen depreciated by nearly 3% against the dollar.
If Japan’s economic performance remains tepid, we might see a similar trend in the USD/JPY pair, especially if investors start seeking returns elsewhere.
Over in the UK, the GDP data paints a slightly different picture.
September saw a small contraction of -0.1% MoM, below the forecasted growth, yet annual GDP still posted a 1.0% YoY increase.
This reminds me of 2017, when the UK economy showed resilience despite uncertainties, prompting an increase in demand for UK government bonds.
That year, yields on the 10-year Gilt dropped by about 0.5% as investors sought safe havens amid the mixed economic data.
Currency-wise, the GBP/USD pair showed volatility, underscoring how sensitive the pound can be to growth surprises, whether positive or negative.
BONUS SECTION: 4 Investment Opportunities
As I reflect on this week's data, I can’t help but see some intriguing opportunities emerging on the horizon - opportunities that align beautifully with our macroeconomic insights and could provide a powerful edge in the months ahead.
Let’s dive into where the trends are leading us.
1️⃣👉 With steady inflation levels confirmed and the Fed likely to maintain a cautious approach, financials and banks are poised to thrive in this environment.
Consider sector-focused ETFs like the Financial Select Sector SPDR Fund (XLF) or the Invesco KBW Bank ETF (KBWB), which hold some of the most robust names in the financial sector.
Both ETFs offer exposure to banks and financial institutions that could benefit as inflation stays moderate and the economy remains resilient.
2️⃣👉 In commodities, I’m particularly drawn to the energy sector. The unexpected buildup in crude oil inventories has placed downward pressure on prices, but demand hasn’t vanished.
Energy-focused ETFs like the Energy Select Sector SPDR Fund (XLE) or iShares Global Energy ETF (IXC) could provide an opportunity to ride the waves of this volatile sector.
After inventory surges like the one we saw, oil prices tend to stabilize, creating a potential entry point for investors seeking energy exposure.
3️⃣👉 On the currency side, a stronger dollar remains in sight as US labor markets outperform.
For those looking to capitalize on this, the Invesco DB US Dollar Index Bullish Fund (UUP) offers direct exposure to dollar strength against a basket of major currencies.
And if we see the yen weaken further on Japan's slower GDP growth, USD/JPY could be a strategic play, especially if the Bank of Japan maintains its accommodative stance.
4️⃣👉 Lastly, consumer resilience is still a major theme in the US, backed by the strong labor market.
Consider exploring consumer discretionary ETFs like the Consumer Discretionary Select Sector SPDR Fund (XLY), which gives exposure to companies likely to benefit from steady spending.
When people are working and confident, they spend - and that’s fuel for these sectors.
🚦 These are just ideas, of course, but in a market as dynamic as this, staying nimble and reading the data can make all the difference. Let’s keep our eyes open, leverage what we know, and stay positioned to capitalize on these macro shifts as they unfold.
Best regards,
Alessandro
Founder of Macro Mornings
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Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.