Prices Continue to Climb, Yield Curves Flatten, and the Energy Crisis Deepens

After a dip into contraction in September, manufacturing in Richmond has realigned with the national average to settle in “slow-growth” mode. Prices also followed a similar pattern to the national average and continued to race higher in the face of extreme supply bottlenecks and labor shortages—and manufacturers don’t expect the trend to reverse in the near future. And as stocks grow ever-more expensive and P/E ratios approach bubble territory, we’re wondering how soon we’ll see consequences from the recent dearth of capital expenditures and overreliance on buybacks. Meanwhile, central banks around the globe are growing more hawkish in response to accelerating inflation, sparking a number of reactions including a slew of rapidly collapsing yield curves. Finally, as the energy crisis continues to brew beneath the surface, inflation is taking root in emerging market economies. The issue is particularly acute in Brazil, where their currency, stocks, and bonds are now all under pressure. Can the issue be addressed before it metastasizes? 

1. The Richmond Fed survey returned to slow-growth mode:

Source: The Daily Shot, from 10/27/21

2. They also confirmed the national trend in price increases: 

Source: The Daily Shot, form 10/27/21

3. When 2/3rds of businesses (or more) can’t find enough help, the economy is going to experience some pain:

Source: Alignable, form 10/27/21

4. As housing prices continue to surge, will rising mortgage rates and the lack of affordability choke off this pandemic-led cycle?

Source: The Daily Shot, form 10/27/21

5. The stock markets are nearing bubble territory, but before they “pop”, they can go much higher first: (“markets can remain irrational far longer than you (most investors) can stay solvent”—John Maynard Keynes 

Source: Stifel, form 10/27/21

6. Capex has been displaced by buybacks. At some point, this too will come home to roost:

Source: Bank of America Securities, form 10/28/21

7. Inflation expectations in the near term are flattening the yield curve across the globe:

Source: Bloomberg, form 10/28/21

8. The U.S. oil and gas industry has been feeding off its drilled but uncompleted wells. This is a finite “reserve” and capex will need to start relatively soon:

Source: Cornerstone Macro, from 10/27/21

9. Are U.S. producers tacitly going along with OPEC+’s supply limitations?

Source: The Daily Shot, form 10/28/21

10. The heavy hand of the communist government is forcing prices lower in coal and many other energy-dependent industries:

Source: The Daily Shot, form 10/27/21

11. And so it begins: Canada’s central bank is the first major economy to pull the QE plug:

Source: Wall Street Journal, from 10/27/21

12. The big outlier is Japan. The BOJ signaled a continued dovish stance as they project low inflation for years. Will global inflation finally ignite their economy?

Source: The Daily Shot, form 10/28/21

13. Meaningful; inflation is already affecting many emerging markets:

Source: The Daily Shot, form 10/27/21

14. Brazil, with 10% inflation, has already had six rate increases:

Source: The Daily Shot, form 10/28/21

15. Brazil, an important emerging economy, has been devastated by Covid. Their President may be facing criminal charges for the way he handled the pandemic. Their economy is struggling mightily:

Source: Pavilion Global Markets, form 10/28/21

16. The new Delta mutation is showing disturbing trends in the U.K.—it appears even more contagious, and almost half of the new cases are under age 19:

Source: Longview Economics, from 10/27/21