Chart of the Day
The election of Joe Biden promised further stimulus which greatly lifted those small-cap stocks most exposed to economic conditions, as evidenced by the outperformance of the small-cap Russell 2000 to the Nasdaq from November until around the end of the first quarter. Since then, that outperformance has gone into reverse, with the Russell-Nasdaq ratio falling to its lowest so far this year. That could reflect the greater exposure of those smaller firms to the labor market, which labor shortages threaten to put pressure on their margins. Either way, it is another sign, along with some lower commodity prices, the drop in bond yields and weaker cyclical currencies (see below), that the reflation trade is going into reverse.
Macro
US initial jobless claims fell to 360,000 last week, while continuing claims increased to 3.2mn in the week before.
Meanwhile, US industrial production decreased to 9.8% YoY in June. The annual rate is mainly being dictated by base effects from last year, because production was barely changed in MoM terms.
The Empire State manufacturing survey surged in July, a good sign for the national ISM.
But the Philly Fed manufacturing survey fell to 21.9 in July, and sends the opposite message.
Markets
Corn prices came down sharply yesterday, after the spot contract rolled over to December – the price is still much higher than this time last year.
Spot commodity prices have generally weakened lately, but only lumber has fallen dramatically.
In another sign of concerns about the outlook, the more cyclical European indices have underperformed the S&P 500 over the past month, and basically made little headway.
Similarly, US financials have been underperforming versus tech stocks – this is mainly a reflection of lower long-term bond yields, but that in turn may be related to concerns about the growth outlook.
The cyclical AUD has also been weakening, and continued to drop relatively quickly yesterday.
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