Hive Intelligence Report: FOMC, Greek Bonds, Uranium Versus Thorium

Every week, we bring together our community of macro experts to discuss the latest market developments. In this piece, we distil the insights from our conversations up to 8 November. These are views from our network rather than the views of the Macro Hive research team.

FOMC

Read Dominique’s latest on how the October NFP Supports a Faster Tapper Announcement at December FOMC Meeting. On the UK she wrote on how the BoE Tells Markets to Keeping Hunting the Thimble.

Post-FOMC Statement [Wednesday]

• Was it common place previously that they would not pre-commit to a pace?
• They never changed pace in 2014: ‘However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.’
• Yes, but the commitment here is less solid.
• While 2014, here’s a quote from a speech by Christopher J Waller: ‘One issue on which we should also be clear is the pace of tapering. I have said in the past that I favor a pace of tapering that would result in the end of asset purchases by the middle of 2022. Of course, if economic conditions and the outlook were to deteriorate significantly, we could slow or pause this tapering. And if the economy were to strengthen more than expected, the plan to rapidly end purchases would provide policy space in 2022 to act sooner than now anticipated to begin raising the target range for the federal funds rate.’
• The range of outcomes for 2022-23 are super-wide (and because the pace of the taper is much faster than 2014) they want to keep some flexibility.
• Since Clarida and Powell have repeatedly stated that inflation risks were tilted to the upside I thought they would include it in the statement. They did not, so it must be they could not bring the whole FOMC on board. Alternatively, they want to molly-coddle the markets.

Post-FOMC Presser [Wednesday]

• The main issue is they are pre-committing to only two months of the current pace.
• Powell’s not saying not to rate rises – but he’s reading the answer to ensure he didn’t trip up.
• He has just agreed with lift-off mid-2022. He said he expects full employment by mid-year.
• It’s clear, we are at a junction however they don’t know what they will do either.
• Need to watch December and March. They will regret having those dots. And they could taper faster, maybe to give more time between taper and lift-off.
• This is probably good enough for risk to do well. Markets won’t sell stocks until it’s clear as day. It will have to be a taper tantrum, or something similar.
• Powell seemed nervous. But he wouldn’t have to be if he had made clear that inflation reflected fiscal, not monetary, policy.
• Or just say we [FOMC] are surprised by inflation, we have decisions to make but I [Powell] really have nothing else to say.
• He basically said that pre-COVID full employment is no longer attainable – hawkish.

‘The risk is skewed to higher inflation’. Why not say so in the statement then?

• They have been saying a version of that for some time. Also, I would think they would find that a conflict with still adding accommodation and being transitory. And it’s something you might see in Q1 (if they flinch) or when they start to lift-off.
• So, they cannot be too open about their concerns over inflation because they cannot tighten policy fast enough without disturbing markets?
• FOMC are also mixing time frames that they still believe things will moderate in 2022 (their view on transitory is that 2022 will be lower than 2021). I just figured I would see ‘risks to upside’ in the statement when they are hiking, not while they are still easing.
• It is true that buying $120bn of securities when you think inflation risks are tilted to the upside is not exactly logical. They over-eased 18-months ago and are over-easing now.

Takeaway from Post-FOMC [Wednesday]

• Bottom line, rates are 0, they are still doing QE. It should be supportive.
• Or Powell is not sure about his second term, or all three.
• Powell is up for re-election and frankly with all these issues he is skating on thin ice
• No way he is going to get past Warren.

Inflation Outlook

Where do you see Core PCE in 12 months?

• Core PCE is 20bp MoM. It is more likely to go down than up because supply bottlenecks are more likely to get better than worse. So, 12 months from now we are likely to be around 2%.
• Of course, the slowdown in YoY inflation won’t show up until Q2 because of the base effect.

US Inflation

• Yellen says reciprocal lowering of tariffs could help ease inflation is logical. It’s a bullish marker as central banks won’t need to hike as much.
• If this was an imposition of tariffs it would be a one-time, and thus temporary, shock that one must look through.
• Yes, but it’s about the optics now of the YoY inflation reading and the implications for the midterms.

Market Implications

• Strong growth and inflationary data today [Tuesday] in the US and UK.
• I’m staying paid rates despite my concerns around peaking energy prices, and long stocks.
• But it’s a slog here.

On the US

Recession?

• If we are going into recession, it’s going to be something else that has nothing to do with historical data patterns that causes it.
• Imagine a recession yet the stock market keeps going up and unemployment falling.
• It seemed a recession could have been round the corner based on July and August real PCE. But it was revised up in Q3 GDP. Upwards revisions also in last 2 months NFP prints. That is, the US economy has more ‘oomph’ than suggested by unrevised data. This does not mean that a recession is not coming, just that if it does it will come more slowly than previously thought when based on unrevised data.

Next for the Office?

• If the Republicans can avoid a Trump run in 2024 and, instead, get a Youngkin-like candidate they have a good shot at the White House.
• They need to figure out how to handle Trump. He is happy right now as he is earning well with his new media company. May be that is how they keep him from running.
• However, one Wall Street guy notes ‘most GOP folk I know love Trump. Mostly NYC Wall Street folk.’

ECB Greek Bond Purchases

Logistics on purchasing Greek Government Bonds

• Greece bonds are rated BB, which can only be bought by the ECB under PEPP which ends in March 2022.
• Do you expect a rating upgrade before PEPP expires? And, if it isn’t upgraded, does the ECB have other programs it can deploy Emergency Liquidity Assistance (ELA), albeit slightly ‘out of fashion’? Also, so far, we have seen BTPs underperforms GGBs, understandably with the ECB holding most.
• Unsure about timing of upgrades. But certain it will become part of APP. Also, there is small issuance because of debt structure, and the main buyers are banks. So, the flow picture is the opposite to what people assume. I would prefer to short Italy, but the spread is non-trivially wide here.
• For rating constraints, I agree that the simplest option for the ECB is to allow a waiver also in the APP (at least this is what most people in the market are expecting). Having said that, the Friday after the previous ECB meeting, Greece went 28bp wider on the headline that PEPP might not be even used in full.
• You should keep selling BTPs on any rally.

Emerging Markets

Read Caroline’s latest EM Rates Review.

Chinese Economy

• Imagine the state of the Chinese economy if it had not been able to benefit from the COVID lead export boom. Official manufacturing PMI is below 50, equity markets have tanked for reasons we know but still, it’s part of the CCP economic reality as it is. If China got this little, then its vast trade surplus is more an Achilles heel than anything. If you correct GDP growth for excess trade, assuming it will normalise, it is probably close to zero already.

An alternative view of supply crunch in China

• It’s driven by the fourteenth 5-year plan and the energy transition that the CCP is forcing on production.
• Energy rationing has caused magnesium supply key region to lower 30-40% – regions that account for 65% of Chinese production.
• This is in part caused by real power shortage but also a mismatch of energy use meaning some provinces have overused energy earlier in the year.
• H1 saw a surge in power demand from 5G, data centres etc, combined with lower renewable output, particularly from hydrogen. This put the burden on coal fired power during a time when coal imports from Australia were banned.
• Magnesium production should re-start in December, but it will take 10-12 weeks to get it to Europe. This is temporary but a risk is now added beyond that.

Polish Central Bank Meeting

• Interesting that PLN hasn’t moved that much given you have had two big surprises on rates in the last two meetings. NBP is not that far behind the others in rate hikes now with 115bps over past two months vs 120 from NBH and 125 from CNB (both since June). Tensions with the EU clearly taking a toll.
• Poland, like Ukraine, is too strategic as a buffer state to Russia.

Commodities

Uranium

• China announced they are planning to build a further 150 nuclear reactors. On average a nuclear reactor consumes about 0.5mn lbs a year so these new reactors will generate 75mn lbs of yearly demand once built.

Where is the uranium going to come from with market already in a supply deficit?

• The new infrastructure bill in the US has set aside $6bn for civil nuclear reactors to prevent early closures and a further $6bn for carbon free advance nuclear reactors. This is important as now nuclear operators are able to plan long term fuel commitments knowing there is bipartisan support for their industry.
• On Friday evening Sprott announced that they have agreed to have exclusive marketing rights for the URNM ETF, this will mean accelerating money flows into uranium stocks that are part of the ETF. UEC and URC are both part of it.
• interesting data point. In the last 16-years the now defunct Uranium Participation Corp accumulated 18.2mn lbs of uranium. Since Sprott took over the running of the fund since late July they have accumulated the same amount of uranium in less than 4-months.

China is also building Thorium Molten Salt Reactors

• There is three times more thorium than uranium, but it doesn’t produce plutonium as a by-product. Hence, it never got the (military backed) funding that uranium did. Investing in uranium is like investing in internal combustion engines, there is much better technology available.
• China has been running test TMSR since 2011 and sits on vast quantities of thorium. China will want to be an export giant in safe nuclear power than cannot be used to make weapons, it will strongly enhance its political position.
• Nuclear power plant technology is still relatively a very young sector, there’s plenty of technological innovations that can make nuclear a completely different technology to produce electricity compared to its current version, particularly in terms of passive safety and non-proliferation design.
• China, or the first country to be able to promote the right receipt, will have a huge advantage.

Macquarie Analyst Observations

• German original equipment manufacturers are likely to allocate scare resources even more rigorously towards their most profitable products. Companies are not saying much as they are in a quiet period.
• For the steel industry, a magnesium injection for desulphurisation of steel could be substituted by calcium carbide. If we saw a demand driven weakness, Voestalpine would suffer most.
• There are risks for the EU steel industry from the magnesium shortage.

Fertiliser

• Last week saw the price of fertiliser reach 300% higher than it was 6 weeks prior.
• Agricultural yields are massively vulnerable. On the flip side is that farmers rich with cash and desperate to buy yield gains will be trying to go shopping at John Deere, and the likes, for any advantage. The issue being the huge lead time within agricultural.
• Fertiliser and crop protection product prices are always very closely correlated to crop prices. But fertiliser prices are now also being ‘fuelled’ by energy shortages.
• The lead time also creates a huge issue. Food remains a modest part of CPI baskets. Clearly, it’s rising and at the lower percentiles this becomes another large draw on consumption and subsequently erodes corporate abilities to reflate margins.
• Not even at lower percentiles. Food is ~5% of CPI, but when I add up my monthly expenditures, excluding housing, it’s a way bigger proportion.

Currency Observations

EURUSD [Thursday]

• EURUSD still trades heavy. If US data continues to show improvement, I think EUR will be through year lows soon.
• It’s ominous to see EUR this soft with broad risk-on.
• All on data now for the next move. But in risk-on EUR generally trades soft because of its funding status.
• USD traded heavy after FOMC, mainly because of the stock market rally. But the following morning it traded well versus the EUR.

EURCHF [Thursday]

• I wonder if the SNB have told selective Swiss accounts that they won’t be defending CHF.
• If energy prices stay high and inflation is persistent, then central banks will begin edging away from this currency weakness war.

COVID

Pfizer pill a game changer?

• It was expected. But it is good news and earlier than people thought.
• This ends COVID being an issue, combined with vaccines.
• The vaccine is 70-90% effective and of the remainder we can reduce another 80-90%? Not many people are going to die of COVID if this is true.

Do we need a booster?

• The UK is open, nobody wears masks, and we can see here that the vaccine works. Does it matter if I need boosters or not? In the rich countries it doesn’t.
• Unless there are mutations, I don’t think COVID is coming back if we get people to vaccinate which is an issue in places like Austria.

Efficacy against severe disease

• The presentation of the efficacy against severe disease does not confirm the data we have out of UK and Israel, it is probably higher.
• When you set the claims of decreased vaccine induced immunity against falling hospitalisations, the lasting natural immunity view makes sense. The medical pandemic is over, a key differentiator of country performance could be which countries normalise faster.
• In the US, the geriatric president and his incompetent handlers have not figured out yet these voters want a return to normality more than new shots or pills, but it seems other governments will be faster to figure it out.

A vaccine mandate too late?

• For better or worse, mandates are going the way of the dodo in the US.
• Magic pills are making vaccines redundant, especially since vaccines confer only temporary immunity. The US government is deep in the pocket of pharmaceutical companies. The bigger problem for Biden is that he doesn’t get voters don’t want more pills or shots, they just want normality.
• The Pfizer vaccine could be the big deal it sounds if those whom of which that have not yet been vaccinated do indeed take the pill.
• However, some voters don’t get that the path to normality involves vaccines, pills, and sensible restrictions.
• The UK seems like an example of how it goes when you vaccinate a large percentage of your population and have almost no restrictions. It seems to be ok!

A return to mobility?

• Since the end of October there has been a big decline in Google mobility around workplaces and public transit.
• People are still flying in the USA.
• The ‘trend’ is real, according to a professional in the aviation sector in Western Europe, they are now hoping for a solid Christmas/Ski season to negate the last two weeks of rapid contraction.
• What’s striking is how flat the economic policy uncertainty index has been since mid-year. Last year it was a good proxy for panic/media fear mongering. That suggests behaviours are back to normal, except for a few long-term changes such as working from home.

Crypto

Crypto Ownership and Job Exits

• ‘11% of the general population reports either having personally quit their jobs, or knowing someone who has, as a result of their crypto investments. Surprisingly, however, when crossing by income, we see that the larger portion of those quitting their jobs as a result of their crypto investments are those in the lowest income brackets.’ – Civic Science.

Why is everyone so bullish ETH considering gas prices?

• I presume many are just trading on coinbase and read about EIP-1559, proof of stake, etc. But, unless they can fix the gas issue, it may just become an institutional platform. Institutions now account for over 60% of DeFi volumes.
• That’s a ‘nobody goes there anymore, it’s too crowded’ argument though. ETH is incredibly bullish because it’s basically a market price for truly decentralised computing power on the strongest network by far. There is no profitable deviation for any individual participant from a game theoretic standpoint. And, if a protocol is ever developed that strictly dominates the current protocol it will just be adopted by the Ethereum network.

Trade Ideas

I’ve updated my Trade Ideas, while John Tierney says it’s Time to Have Some Fun! Overweight Travel and Leisure Sectors, and the Macro Hive network make 15 changes to the Trade Survey.

• Long EasyJet (EZJ) [Friday]. At cheap levels.
• Potential Receive ED Whites (6m1y) [Saturday].If we can’t sell off more on the back of a strong US CPI print, then the trade is on. But a bit of patience might be warranted rather than selling OTM put spreads.
• Long $UEC [Saturday]. If you believe in a $200 uranium scenario, which on an inflation adjusted basis would only just exceed the high of 2007, then $UEC could be a $20 stock.

Interesting Reads, Watches, and Listens

Reads

• China Bond Market Meltdown Brings World of Hidden Bills to Light | Bloomberg
• Uranium Stocks Soar As Market Discovers China’s Plans For 150 Nuclear Reactors | Zero Hedge
• Wirecard and me: Dan McCrum on exposing a criminal enterprise | Financial Times
• British Medical Journal: “Researcher Blows the Whistle on Data Integrity Issues in Pfizer’s Vaccine Trial” | naked capitalism
• Covid: How long does vaccine based immunity last? | Sebastian Rushworth

Listen

Listen to my latest podcast with Alex Gurevich on Trading COVID, Inflation and Games (1 hour 20 minutes) and Andrew is a guest on the latest Market Huddle podcast (2 hours 52 minutes).

• Thomas Jam Pedersen and the Future of Nuclear Power (42 minutes)

Humour

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)