Insights

WuRevue Week Ending 5/7/2021

 

Top News:

05/03: Secretary Yellen denied inflation to be an issue, saying “we have the tools to address it.”  Two measures of US manufacturing (here, here) painted a mixed picture in April, amid escalating concerns over supply chain disruptions.  Meanwhile, the world’s second most populous nation remains mired in new Covid infections, with nearly 7 million cases reported in April alone.

 

05/04: Reflective of a jittery stock market, particularly amongst tech names, Yellen sent investors into a tizzy when she  acknowledged that, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.”  Consequently, investors rotated into more cyclical names seen as better positioned for further economic reopening.

 

05/05: More notable as a directional harbinger, a private employment index showed healthy gains recently.  Furthermore, investors cheered the robust expansion of US service-oriented businesses in April.  However, investors are reading the tea leaves on the Fed’s thinking as various officials expounded on the Bank’s monetary trajectory (here, here & here).  In a symbolic move for now, the US has reversed course by supporting a WTO proposal to waive intellectual property rights over vaccines.  Separately, the EU is re-examining economic ties with China, a reflection of recent heightened tensions.

 

05/06: US enjoyed healthy productivity gains, while labor costs remained in check during the first quarter.  As yet another positive, the initial jobless claims figure set another pandemic low.  Meanwhile, the Bank of England kept its monetary policy unchanged, as expected.  In Asia, relations between two key trading partners became further strained, after China suspended indefinitely high-level economic dialogue with Australia.

 

05/07: April nonfarm payrolls were noticeably lighter than expected, while the unemployment rate ticked up to 6.1%.  In response, the 10-year Treasury yield dipped to as low as 1.48%, as the Street discounted inflationary fears.

 

 

Heard on the Street:

“Listen, every client call I’m on… is talking about overheating… the Fed is right about most of these costs are transitory… The longer that policy stays this easy, as long as the liquidity in the system is excessive, then you run the risk that you overheat or you run the risk that … the exit from this policy may have to be a bit more aggressive.”

— Rick Rieder, CIO of BlackRock’s global fixed income, as quoted by CNBC on 5/04/2021

 

“Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year… The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.”

— Lael Brainard, Fed Governor commenting on the semiannual Financial Stability Report on 5/06/2021

 

 

Longer Game:

Characterizing government deficit as a “Ponzi gamble,” one academic believes two key variables that would allow such an endless rollover of debt  — low interest rates and fast economic growth — are now “uncertain,” given a much changed competitive landscape and the size of the nation’s projected debt.

 

As consumers of Big Tech products, we all experience the last line from the song “Hotel California”– “You can check out any time you like, but you can never leave.” The ongoing EPIC vs. Apple lawsuit is more than a quibble over the share of the pie; it can be an example of antitrust being exercised to guard against monopolistic abuses.

 

 

Bonus:

Concerned over sooner than anticipated rate hikes prompted by an overheating economy, a Bank of America survey showed hedge funds were “extreme” sellers of stocks, especially in sectors which had benefited from lockdowns.