Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE: 30 APRIL 2021

Personal Income and Outlays, March 2021

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Full BEA release here.

The JP Morgan Chase card spending tracker through April 24: +10.7% over 2 years ago.

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The Goldman Sachs Analyst Index (GSAI) rose 5.8pt to an all-time high of 79.2 in April (Exhibit 1). The composition of the survey was strong, as the orders, shipments, and employment components all increased.

  • Other major business activity surveys were very strong in April.

  • Roughly ¾ of surveyed sector analysts report that business activity in their industry is at or below pre-virus levels, but about 60 percent said they expect demand in their industry to overshoot pre-virus levels in 2021, on average by 0–10%.

1. GSAI Rebounds to Record High in April. Data available on request.

U.S. Initial Unemployment Insurance Claims Fell Further

Initial claims for unemployment insurance continued to decline in the week ending April 24, falling to 553,000, down 13,000 from the prior week’s 566,000 (revised up from 547,000). The Action Economics Forecast Survey panel expected that 563,000 new claims would be filed. The latest week’s figure represents yet another new low since the pandemic started in March 2020, even though it is still well above pre-pandemic levels. The 4-week moving average fell to 611,750 in the week ended April 24, also a pandemic low, from 655,750 the previous week.

Initial claims for the federal Pandemic Unemployment Assistance (PUA) program fell to 121,749 in the April 24 week, down from 133,358 the week before. Still, these are both the smallest since April 11, 2020, right after the program began. The PUA program provides benefits to individuals who are not eligible for normal state unemployment insurance benefits, such as the self-employed. Given the brief history of this program, these and other COVID-related series are not seasonally adjusted.

Continuing claims for regular state unemployment insurance edged up 9,000 to 3.66 million in the week ended April 17 from 3.65 million in the previous week (revised from 3.67 million). The state insured rate of unemployment was unchanged at 2.6%. The 2.6% rate is also the lowest since the pandemic started; it was as high as 15.9% in May 2020.

Continuing PUA fell markedly in the week ended April 10, to 6.97 million from 7.31 million. Still, this is the lowest since the first few weeks of the pandemic period, except for a temporary dip during the week between Christmas and New Year’s. Also in the April 10 week, the number receiving Pandemic Emergency Unemployment Compensation (PEUC) fell sharply to 5.19 million from 5.61 million in the prior week. This program covers people who have exhausted their state benefits.

The total number of all state, federal, and PUA and PEUC continuing claims fell to 16.01 million in the week ended April 10, down 823,000 from the previous week. This is also the lowest since very early in the pandemic period, except for the week after Christmas. This grand total is not seasonally adjusted.

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U.S. Pending Home Sales Rebound in March

Pending home sales increased 1.9% (23.3% y/y) during March following an 11.5% February fall, revised from -10.6%. According to the National Association of Realtors (NAR), recent sales weakness continued to reflect a record low number of homes on the market.

Sales in the Northeast jumped 6.1% (16.7% y/y) following two months of sharp decline. Sales in the South rose 2.9% (27.9% y/y) after a 12.9% drop in February. In the West, sales also gained 2.9% (29.8% y/y) after declining for two straight months. Moving 3.7% lower (+14.1% y/y) were sales in the Midwest, down for the fifth straight month.

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MANUFACTURING PMIs

China: Manufacturing PMI picks up to four-month high in April

Latest survey data indicated that growth momentum picked up across China’s manufacturing sector in April, with firms reporting the strongest increases in output and sales for four months. This supported renewed expansions in employment and purchasing activity. However, the time taken for inputs to be delivered continued to lengthen amid reports of material shortages and logistical delays. Prices data meanwhile showed that higher raw material costs led to a steeper increase in input prices, which were generally passed on to clients in the form of higher charges.

The headline seasonally adjusted Purchasing Managers’ Index ™ (PMI ™ ) rose from an 11-month low of 50.6 in March to 51.9 in April. This signalled the strongest improvement in the health of the sector since December 2020, albeit one that was modest overall.

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Total new orders rose for the eleventh month running in April, with manufacturers widely commenting on improved market conditions and greater customer demand. Though mild, the rate of growth was the strongest in 2021 to date, and supported by a further upturn in export sales.

The sub indexes for output and total new orders both reached the highest in four months. Overseas demand remained strong although some countries suffered resurgences in Covid-19cases. New export orders expanded month-on-month for the second straight month and the pace of expansion picked up.

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Greater inflows of new work led goods producers in China to expand production volumes again in April, with the rate of expansion also improving to a four-month high.

The sustained increase in sales also led to a further accumulation in backlogs of work, with the rate of growth picking up since March. Consequently, manufacturers added to their staff numbers for the first time in five months. Though only marginal, the rate of job creation was the second-fastest seen in over eight years.

Goods producers in China also upped their purchasing activity in order to support higher production volumes. Though moderate, the rate of expansion was the steepest seen since December 2020. On the inventories front, stocks of inputs were broadly stable, while inventories of finished items fell modestly.

The time taken for purchased inputs to be delivered continued to lengthen in April, and to a greater extent than in March. Firms frequently mentioned that raw material shortages and logistical delays had driven the latest decline in vendor performance.

Prices data showed a further rapid increase in input costs amid reports of supplier price hikes (with metals and chemicals mentioned in particular). Notably, the latest increase in expenses was the quickest since November 2017. As part of efforts to alleviate pressure on margins, companies often passed on higher costs to customers through higher factory gate charges, which rose sharply overall.

Output expectations remained markedly upbeat in April, despite the level of positive sentiment edging down to a three-month low. Hopes of an end to the COVID-19 pandemic and the release of pent up demand, alongside new product releases, reportedly drove confidence. (…)

Policymakers have expressed concerns about rising commodity prices on several occasions and urged adjusting raw material markets and easing businesses’ cost pressure. In the coming months, rising raw material prices and imported inflation are expected to limit policy choices and become a major obstacle to the sustained economic recovery.

China’s official purchasing manager’s indexes showed manufacturing activity falling more sharply than expected, dropping to 51.1 in April, according to data released Friday by the National Bureau of Statistics—lower than March’s 51.9 reading and falling short of the 51.6 median forecast expected by economists polled by The Wall Street Journal. (…)

China’s nonmanufacturing PMI, which includes services and construction activity, fell to 54.9 in April from March’s 56.3 level. The subindex measuring business activity in the service sector fell to 54.4 from March’s 55.2.

FYI from Nordea:

Copper prices wildly outpacing Chinese PMI

Japan: Manufacturing PMI reaches highest level for three years

The Japanese manufacturing sector registered the strongest improvement in operating conditions in three years, according to the latest PMI® data. Firms reported the fastest expansions in production and incoming business since early-2018, as demand and confidence continued to recover from multiple waves of COVID-19 infections. At the same time, additional production requirements encouraged manufacturers to increase employment levels for the first time since December 2020. As a result, Japanese manufacturing firms expressed a stronger degree of positive sentiment regarding the year-ahead outlook for output.

At 53.6 in April, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) rose from 52.7 in March. This indicated the strongest improvement in the health of the sector since April 2018, which reflects a steady recovery from COVID-19 related disruption.

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The improvement in the headline index was supported by a solid expansion in production volumes. Output increased for the third consecutive month in April, and at the fastest pace since April 2018. Firms linked growth to the ongoing recovery in demand, which led to increased orders for manufactured goods.

New orders, meanwhile, rose further in the latest survey period, with the pace of the expansion the fastest recorded for 38 months. According to anecdotal evidence, client confidence had continued to lift in both domestic and international markets. Furthermore, new export sales increased for the third month running, and at the quickest pace since February 2018 as demand improved in key markets, notably China.

At the same time, employment levels returned to expansion territory for the first time in four months in April. The rate of job creation was only marginal overall, yet it was the fastest recorded since February 2020. Firms noted higher capacity requirements due to increased orders, as well as taking on new graduates. In line with the trend in new orders, outstanding business rose for the second successive month. The pace of expansion was moderate overall, and the sharpest in just over seven years.

There were further reports that rising raw material prices placed sustained pressure on average cost burdens across Japanese manufacturers in April. Input prices have now risen in each of the last 11 months, with the rate of inflation quickening to the fastest since November 2018. Output prices, meanwhile, increased for the fifth month in a row, as firms sought to partially pass higher input costs to clients.

As output and orders continued to expand, buying activity increased for the second successive month. Moreover, the rise was moderate overall and the fastest reported for three years. Manufacturers in Japan noted ongoing difficulties in sourcing raw materials due to global shortages as well as some disruption caused by the fire at the Renesas chipmaking facilities and Suez Canal blockage. As a result, businesses utilised existing stocks of both inputs and finished goods.

Finally, business confidence regarding activity over the coming 12 months gathered pace in April. Positive sentiment was at its second-highest level since the survey first posed the question in July 2012. Optimism was underpinned by hopes of a broad economic recovery once the pandemic subsided.

EUROZONE INFLATION

Euro-area headline inflation jumped from 1.3% to 1.6% in April. Most of the increase inflation is due to the base effect from the oil price. Otherwise, the inflation outlook is much cooler and core inflation declined to 0.8% from 0.9%. Both numbers hit the consensus.

Most headline inflation stemming from the oil price

The Euro-area GDP 6% below the pre-crisis level (USA: -0.9%)

INFLATION WATCH

The average used vehicle is now worth $17,609, according to Manheim’s Used Vehicle Value Index. Pickup trucks, in particular, are fetching much higher prices than they were worth just a few months ago, Felix writes.

  • The supply-and-demand dynamics are unlikely to change soon. The chip shortage is ongoing and has caused Ford, the maker of the best-selling vehicle in America, to cut its Q2 production by 50%.

Trade-ins are now becoming very difficult. Normally, dealers buy an old vehicle at a discount to what it’s worth and hope to sell it at a profit.

  • Now, they need to worry that the whole market will crash from its current frothy highs.

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Even Jay Powell must keep track of used car prices. Nordea says “This alone could perhaps push up core inflation by one percentage point late in the third quarter of this year”.

  • Mondelez International Inc. plans to “price away inflation,” according to comments made after reporting first-quarter results on Tuesday. Judging by the pace of crop-price increases, other food makers may have to follow suit. The Bloomberg Agriculture Spot Index’s annual rate of change surpassed 75% this week for the first time since June 2011. In the process, the index came within striking distance of the biggest year-to-year advance in its 30-year history: 82.5%, recorded in March 2008. Strategists at Deutsche Bank AG highlighted the current surge in a note Wednesday. (Bloomberg’s Dave Wilson)

EARNINGS WATCH

A Bumper Earnings Day

It’s Short Squeezes All the Way Down Turns out one supply bottleneck is an opportunity, but too many of them is an obstacle

(…) what happens when short squeezes meet other short squeezes? Resolute Forest Products is one of the first sawmills to report this earnings season and it should have unveiled bumper revenue with lumber prices up 85% this year alone. Instead, the company reported earnings-per-share that came in below analyst expectations. Why? It seems the supply shortage in wood bumped into a supply shortage in transport. From the statement:

“The wood products segment generated operating income of $221 million in the quarter, a $93 million improvement from the fourth quarter, due to a $266 per thousand board foot increase in the average transaction price, or 44%, on strong lumber demand. But shipments fell by 50 million board feet because of seasonal shortage in rail cars and trucks, pushing finished goods inventory up by 46 million board feet, to 143 million board feet. The operating cost per unit (or, the ” delivered cost “) rose by $49 per thousand board feet, or 13%, reflecting a higher variable compensation provision, higher fiber costs and the CEWS credits received in the previous quarter. EBITDA in the segment improved by $93 million, to $232 million.”

Resolute Forest Products plunged 15%.

China Warns Large Tech Firms as Industry Faces Rising Oversight Tencent, ByteDance and JD.com were among the firms ordered to change business practices that regulators see as risky, the latest sign of heightened scrutiny of the sector.

China is reining in the ability of the country’s internet giants to use big data for lending, money-management and similar businesses, ending an era of rapid growth that authorities said posed dangers for the financial system.

On Thursday, China’s central bank and other regulators ordered 13 firms, including many of the biggest names in the technology sector, to adhere to much tighter regulation of their data and lending practices.

Their aim, say analysts, is to curb a revolutionary business model that let China’s Big Tech develop and use powerful payment apps and other information about hundreds of millions of users. (…)

An article published by the official Xinhua News Agency late Thursday said all 13 of the firms had agreed to rectify their business practices as required. (…)

The crackdown comes as China’s leaders make greater demands for its tech entrepreneurs to be aligned with the state’s goals and priorities.

These internet giants—armed with troves of data, deep coffers and an influence that spans all aspects of Chinese life—have increasingly made them a national-security concern for Beijing.

A statement released by the People’s Bank of China Thursday listed a number of “widespread problems” among the tech firms, including offering banking and other financial services without license, inadequate corporate governance and engaging in unfair competition. All 13 of the firms must “conduct comprehensive self-examination and rectification” of their businesses based on laws and regulations, it says. (…)

The regulators, spearheaded by Vice Premier Liu He, Mr. Xi’s economic captain, also want to subject all the big tech firms involved in financing to greater capital and reserve requirements as well as data regulations.

At the core of the fintech clampdown is their payment businesses, which have powered Chinese Big Tech’s forays into finance and have emerged as stiff competitors to state banks, which traditionally processed payments. (…)

Under the guidelines regulators released Thursday, the tech firms must “disconnect the improper connection between payment tools and other financial products.” The vague language indicates that the ability for the firms to channel funds from their payment apps into lending and money-management activities would be severely curtailed.

Regulators also want to limit the use of the payment apps by the corporate sector, which could significantly hurt the growth of the tech firms’ payment business. In addition, by trying to break what the central-bank statement calls control over data, the People’s Bank of China signaled its intention to get the tech giants to share their troves of consumer-credit data.

The regulators believe that the firms’ control over such data give them an unfair competitive advantage over small lenders or even big banks through swaths of personal information harnessed from their payment apps. Alipay, for instance, is used by more than 1 billion people and has voluminous data on consumers’ spending habits, borrowing behaviors and bill- and loan-payment histories.

“We’re seeing the beginning of what could be a fundamental shift in the model for fintech in China,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics who specializes in China’s economy. “This seems to be an attempt to reverse course entirely from the China super app model that has proven so revolutionary.”

The Economist calls Taiwan the world’s most dangerous place

The U.S. “is coming to fear that it may no longer be able to deter China from seizing Taiwan by force,” The Economist writes (subscription). “Taiwan is an arena for the rivalry between China and America. … If the Seventh Fleet failed to turn up, China would overnight become the dominant power in Asia.”

THE DAILY EDGE: 29 APRIL 2021

Fed Holds Steady on Interest Rates, Bond Purchases Central bank maintains easy-money policies while noting recent economic gains

(…) “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the Fed said in a statement released after the conclusion of its two-day policy meeting. “The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.”

Fed Chairman Jerome Powell said at a news conference Wednesday that the recovery has advanced “more quickly than generally expected,” while adding that it “remains uneven and far from complete.” (…)

[Fed officials] also repeated Wednesday that they want to see the economy make “substantial further progress” toward maximum employment and 2% average inflation before starting to reduce the pace of bond purchases. Mr. Powell has said that process would likely begin well before the Fed starts to raise rates.

He said Wednesday “it’s not time yet” for officials to start discussing a pullback in the Fed’s asset purchases.

“Economic activity and hiring have just recently picked up after slowing over the winter,” Mr. Powell said. “And it will take some time before we see substantial further progress.” (…)

“We know that the [inflation] base effects will disappear in a few months,” Mr. Powell said. While increased demand for goods and services is harder to predict, he said, “We think of them as not calling for a change in monetary policy, since they’re temporary and expected to resolve themselves.” (…) (WSJ)

This Haver Analytics chart shows the FOMC forecast to which I have added Goldman Sachs’ own views. But GS’s inflation expectations remain very muted: “Based on our bottom-up inflation model, we forecast core PCE inflation of 2.05% at end-2021, 2.0% at end-2022, 2.1% at end-2023, and 2.2% at end-2024.”

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Goldman Sachs on goods inflation:

Commodity supply is basically inelastic. “Only physical scarcity can sustain backwardation, and importantly, backwardation is now in over half of all commodity markets…sustained backwardation is showing us how commodity markets are becoming progressively tighter today.” (The Market Ear)

Nordea on wage inflation:

The Fed is also clear that the only true inflation, is inflation stemming from a tight labour market. Bottlenecks and base-effects will not be considered when setting monetary policy. The big risk is now if the Fed underestimates the roaring comeback that employment may make over summer. If we get 2-3 months of significant labour market progress, this may test the current Fed stance. Inflation prints above 2% are not enough as they will be deemed transitory. We still consider the Fed behind the curve on this topic.

Powell: “These base effects will contribute about 1% in headline and 0.7% of core inflation. The other thing I want to talk about is bottle-necks. A bottle-neck is a temporary blockage of supply chains… We think of bottle-necks as something that will be resolved, hence they are temporary of nature”

BTW: Eurozone: Economic sentiment goes through the roof The European Commission’s economic sentiment indicator soared in April, with the services sector now also in expansion mode. We can now declare the Covid-19 recession over. Inflation expectations also continue to increase (ING)

The European Commission’s economic sentiment indicator surged to 110.3 points in April from 100.9 in March, dwarfing the consensus forecast of 102.2. In two months’ time sentiment has gained 16.9 points, now firmly standing above its long-term average. Amongst the bigger member states, all countries saw higher sentiment figures, with the Netherlands gaining 10.7 points, Spain 9.1, France 8.5, Germany 5.7 and Italy 5.3.

Industrial confidence is now at a record high, while sentiment in the service sector surprised with an 11.7 point jump. Confidence in retail and in construction saw a significant increase, while consumer confidence also improved. It is very encouraging to see that all forward-looking indicators are rising. Production expectations in industry reached their best reading on record, while stocks were considered scarce as never before. Order books and demand expectations are swelling in all sectors. The Employment Expectations Indicator (EEI) exceeded its long-term average for the first time since February 2020 on the back of a hefty increase in April (+9.9).  All surveyed business sectors showed more optimistic employment plans.

The quarterly survey showed that the rate of capacity utilisation rose to 82.5%, a marked 5.0 percentage points higher than in January and now above both the indicator’s long-term average and pre-pandemic level. This bodes well for a recovery in business investment in the course of this year. With unemployment expectations declining, it comes as no surprise that a growing number of consumers is planning major purchases over the next 12 months. The Covid-19 recession can now be declared officially over.

Selling price expectations rose for the second month in a row across all surveyed business sectors. Consumer price expectations increased only mildly. Selling price expectations in industry are now close to a record high, but they are now also in construction, retail and even the services sector above their long term average. The big question is how temporary these price increases will be. Will they disappear once some of the supply chains problems are resolved?

With strong demand to be expected in the second half of the year and a further inventory build-up in the offing, we doubt that price tensions will disappear quickly. To be sure, it is probably too early to anticipate a price-wage spiral. But if we see a strong recovery in the coming months, which seems to be suggested by today’s data, the hawks in the ECB’s Governing Council will likely become a bit more vocal. The chances of the Pandemic Emergency Purchase Programme being lengthened after March 2022 are getting slimmer by the day and the central bank could even suggest that it will not fully spend the current envelope.

Morning Consult:

In the latest update to our Return to Normal tracking data, for the first time in Morning Consult tracking, over half of members of all generations say they’re comfortable returning to their normal routine, with baby boomers setting a new high mark at 53 percent. Read More.

66 percent of Americans said they are or are willing to be vaccinated, while 20 percent said they are unwilling and 14 percent said they are uncertain.

Gallup:

Fifty-seven percent now describe their current financial situation as excellent or good. That is one percentage point higher than the 56% recorded in 2019 and significantly better than the 49% recorded a year ago, at the start of the pandemic.

Axios: Big government is back, trickle-down economics is out!

“My fellow Americans, trickle-down economics has never worked. It’s time to grow the economy from the bottom up and the middle out.”

Biden wants to spend a phenomenal amount of money — his accomplishments and proposals total $6 trillion — and mobilize the government to touch every corner of American life.

  • The great bet is that all this spending won’t lead to runaway inflation.
Advance U.S. Trade Deficit in Goods Deepens to Record in March

(…) Imports of autos & parts rose 7.3% (8.3% y/y) following two months of significant decline. Food & beverage imports rebounded 7.0% (9.4% y/y) last month after falling 4.9% in February. Nonauto consumer goods imports rebounded 7.0% (37.5% y/y) following a 4.2% drop. Auto & parts imports rose 7.3% (8.3% y/y) after falling sharply for two straight months. Industrial supplies imports strengthened 7.6% (22.1% y/y) with higher oil prices. Capital goods imports rose 5.7% (16.6 y/y) after a 0.3% improvement.

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Canadian Retail Sales Rebound After Second-Wave Lockdowns 

Retail sales rose 4.8% in February, while preliminary estimates for March showed a 2.3% gain for that month, according to data released on Wednesday by Statistics Canada. It represents a bounce back from a flat reading in January and a sharp decline of 5.5% in December, when many businesses were forced to close because of a second wave of Covid-19.

THE CANADIAN DOLLAR

The Loonie has been the best performing
major currency so far this year. Here’s my friend Hubert Marleau’s take:

Coincidently, the Loonie is trading at Palos’ estimated purchasing power parity rate (PPPR) which is 80 US cents. While the PPP possesses the property of pulling currency prices toward its rate, prices often trade below or above the PPPR. Exogenous factors like changes in terms of trade, monetary policy and foreign inflow of capital can price currencies differently from their fundamental values, forcing currencies to trade far away from their perceived fair value or equilibrium rate. Unfortunately, it is very hard to forecast where exchange values are heading because the aforementioned forces that drive prices are unquantifiable. The forex market responds to narratives and usually acts as a shock absorber. Additionally, when it comes to pinpoint currency values, everything is relative.

Nonetheless, it just so happens that the Canadian dollar might be in a sweet spot– that Canada is in one of those rare moments when the three main factors that usually determine the performance of the Loonie are in sync. It could trend higher, perhaps to 85 US cents, even though Canada is not terribly competitive when the Loonie trades above its PPPR.

Firstly, the Canadian terms of trade have significantly improved as a result of the rapid and robust increase in commodity prices like energy, lumber, agricultural products, industrial metals and minerals. For example, at the end of last December, on average the commodity prices were up 15% whilst the commodities which are particularly important to the Canadian economy were up by significantly more. For the comparable period, the exchange value of the Canadian dollar is up less than 2%.

Presently, the grim situation in India could for a time be a drag on the trajectory of the Canadian dollar. (…) India represents 5.4% of world oil demand, so a 20% fall equates to about 1% drop. Oil analysts believe the decline will not amount to much. The interlude should be relatively easy to absorb, in spite of bigger than expected flows of unsanctioned Iranian crude, because other economies are growing rapidly. The Citi team led by Edward Morse, a leading expert on the oil market, said that the current pause in the rise of oil price is not a function of deteriorating fundamentals. It is related to financial flows rather than change in supply versus demand bearishness. Citi still expects quarterly declines in total oil inventories through 2021 and possibly into 2022. That spells higher prices into the $70 range for Brent oil, bringing better terms of trade for Canada.

Secondly, the monetary stance of the Bank of Canada has meaningfully diverged from that of the Fed. Interest rate differentials have widened at the front-end and narrowed at the back-end of the yield curve in favour of Canada. The Bank of Canada (BOC) has allowed this to happen because inflationary pressures have been
mounting, the housing market is red-hot and the economic recovery appears to be ahead of schedule. A few weeks ago, Deputy Governor Toni Gavelle announced that the central bank was winding down emergency liquidity programs, including programs to buy provincial and corporate bonds it deployed to grease the money and capital
markets when the coronavirus struck last year. On Wednesday last, Tiff Macklem, governor of the BOC officially broke it to the market that he’s slowing down the pace of the bank’s bond purchases. In a nutshell, the BOC is cutting its bond-purchase target to $3 billion a week from a minimum of $4 billion and made it clear that a rate hike may be warranted sooner than originally expected–the second half of 2022 is now a probability.

Given that the Loonie is not internationally important and a very marginal reserve currency, the BOC can afford to take more liberty to do what it thinks than the ECB or the Fed. It has no real risk of offending emerging economies or force the ECB and the Fed to catch up. In the words of Louis Vachon, CEO of the National Bank of Canada, the hawkish tone of Tiff Macklem is about being prudent and giving the BOC optionality in terms of policy. As a matter of fact, the Canadian yield curve has steepened to some 30bps (ten’s minus two’s), strongly suggesting that bond traders are expecting a lot more aggressiveness from the Canadian monetary authorities with swaps trading giving a 50% chance of a rate hike by next March.

Thirdly, Canada has not been in a better position than now to abundantly attract foreign capital. For the first time in years, the relative attractiveness of Canada as a destination for investments has not been better than now. The government introduced a $100 billion growth plan over three years without any increase in the personal income tax, capital gains tax and corporate tax rate. Neither was reference made to a wealth tax. By contrast, the US administration is determined to raise taxes on personal income, capital gains and corporate profit. Interestingly, it’s happening when a strong cyclical reflation is apparent, the indirect beneficial effect of Biden’s infrastructure package on Canada’s economy could be huge and Washington is viewing Ottawa as a strategic partner in the development of minerals deemed critical for national defense. The Canadian stock market, adjusted for foreign exchange, is very cheap when compared to the S&P 500–the ratio is only 3.7x. History shows that this ratio could be considerably higher especially when cyclical reflation dominates the headlines.

Nordea on the USD:

The US is likely to outperform all peers growth-wise this year, which over time usually leads to a stronger USD versus other currencies as a result of the side-effects of a stronger growth pace. First, USD bonds may continue to yield better than most peers, second the Fed is more likely to respond to strong growth rates via a slightly tighter policy, maybe via a tapering discussion already this summer.

USD-comeback to be driven by much higher growth in the US compared to peers?

EARNINGS WATCH

We now have 201 reports in, an 86% beat rate and a huge +22.7% surprise factor (+3.1% on revenues). The 201 companies having reported so fare show a combined +56.4% earnings growth rate on revenues up 8.4%.

Tailing EPS are now $152.56, rising to $180.96 for the full year 2021 and $205.02 in 2022. If so, earnings will have jumped 26% from 2019 to 2022, that is +8.6% on average per year. That compares with +7.4% on average between 2014 and 2019 with no global pandemic and a huge U.S. corporate tax cut. Truly amazing!

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We also have 54 STOXX 600 companies in, showing a 65% beat rate and a +34.3% surprise factor (+3.5% on revenues).

BUYBACKS ARE BACK

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Apple Signals Hot Streak to Continue as Sales, Profit Surge Demand for new 5G iPhones helps fuel a more than doubling of quarterly profit to $23.6 billion

AAPL’s results reflect amazing technology but also strong consumer demand across the board of products and price ranges.

New, more expensive models of the iPhone 12 have been a hit with customers, and revenue from Mac computers and iPads also rose during the quarter on strong demand from employees and students conducting their work at home.

Apple’s fiscal second-quarter results set new highs in what could be a record-setting year for profit and revenue. Analysts predict full-year profit will exceed $70 billion, nearly a third more than last year.

The Cupertino, Calif. company reported a profit of $23.6 billion in the latest quarter as revenue rose 54% to $89.6 billion, far exceeding Wall Street expectations. The company also announced a 7% increase to its cash dividend to 22 cents a share and that the board had authorized an increase of $90 billion to an existing share-repurchase program. (…)

Apple’s revenue results beat estimates from analysts surveyed by FactSet by 16% while profit was 42% better than expected. (…)

Apple was able to avoid a microprocessor shortage in the March period. But Mr. Maestri cautioned, during a public conference call, that a shortage would contribute to a decline in revenue in the current quarter steeper than the typical falloff following the March period. Supply constraints will primarily affect Macs and iPads. (…)

The real engine of 2021 is the latest iPhone: Overall iPhone revenue for the March quarter rose 65% to $47.9 billion. Analysts had expected a 42% rise.

Higher-end versions of the iPhone 12 appear to be providing a boost. The average retail price in the U.S. during the past three months rose $52 to $847 from a year earlier, according to data from Consumer Intelligence Research Partners LLC, which surveys buyers.

The most expensive version, the iPhone 12 Pro Max with a 6.7 inch display that starts at $1,099, saw its share grow to 20% of sales from 13% a year earlier, the survey found. (…)

Greater China sales in the latest quarter nearly doubled to $17.7 billion. (…)

Apple saw record demand for Mac computers and an 11% rise in iPad tablet sales. That growth continued in the March period. On Wednesday, Apple said Mac sales rose 70% to $9.1 billion and iPads increased 79% to $7.8 billion. That beat analyst expectations for increases of 27% and 29%, respectively. (…)

GS:

Our original view that the iPhone cycle would disappoint in the midst of COVID was clearly wrong. Not only has Apple done better than we expected on iPhone during the cycle but Mac and iPad have also materially outperformed our forecasts. iPad demand is so strong that the company believes they will leave $3bn-$4bn of revenue on the table in FQ3 to June.

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Bloomberg:

Apple Inc. became the latest company to signal that the global semiconductor shortage was leading to production curbs. Executives warned that lost sales of iPads and Macs would knock $3 billion to $4 billion off third quarter revenue. The situation seems to be only getting worse for automakers, with Honda Motor Co. and BMW AG saying they would be pausing production at some plants and Ford Motor Co. reduced its full-year earnings forecast on the component shortage.

COVID-19

New COVID infections fell by roughly 16% over the past week in the U.S. — a big improvement after weeks of stasis, Axios’ Sam Baker and Andrew Witherspoon write.

  • More than half of American adults have gotten at least one vaccine dose, and that seems to finally be putting a dent in the size of the country’s outbreak.
  • The U.S. averaged about 55,000 new cases per day over the past week, down from about 66,000 per day the week before.

The number of new infections declined in 26 states and rose in only four.

  • New York and Michigan saw the biggest improvements: New cases were down about 30% in each state.

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Data: CSSE Johns Hopkins University; Map: Andrew Witherspoon/Axios

Cruise Lines Could Start U.S. Sailings by Mid-July, CDC Says The update paves the way to resume operations that have been suspended for longer than a year due to the Covid-19 pandemic, and allows operators to avoid test cruises if 95% of passengers and 98% of crew are vaccinated.

FYI via Axios:

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