The fourth of five regional Fed manufacturing surveys came in this morning from the 11th district in Dallas.  Whereas the New York and Philly Fed saw strong readings earlier this month, the Kansas City Fed and now the Dallas Fed’s survey were less positive. The Dallas Fed’s index fell to 4.6 versus expectations for an increase to 11.

While the headline index was lower, it remained in expansionary territory in the middle of its historical range.  The majority of other categories throughout the report also remain in expansion and are even at historically high levels with many in the upper decile of readings. The only real outlier was the index for Company Outlook.

The Company Outlook index plummeted 14.3 points month over month which is the seventh-largest decline of any month on record. That massive decline brought the index to its first negative reading since May of last year.

While the readings are still showing expansion, indices covering order volumes were also weaker versus August.  Orders are growing at the weakest pace since last July, but on the bright side, shipments improved slightly to 18.7 in September. Paired with the slowed pace of new orders, the index for Unfilled Orders pulled back to the lowest level since February.  While that means that businesses are likely working off backlogs, the index remains in the upper 5% of readings well above anything observed prior to the pandemic.

After falling back in July, Prices Paid continued to bounce back reaching 80.4 this month.  That is only 0.4 points below the record high from back in June.  Prices Received, meanwhile, set a new record high after gaining another 5.9 points.

Even though those prices continued to rise, Wages and Benefits saw another decline in September. That index peaked at 48.1 this past June and has declined to 42.7 in the months since then. That being said, the current level of the index is well above any other reading outside the past several months. In other words, companies are reporting that they are continuing to raise wages at a rapid pace.  Meanwhile, if the rise in wages and benefits is not evidence of labor market tightness enough, employment also saw a modest pickup.  That index rose 4.4 points to the highest level in five months when it was at a record. Although that indicates a modest acceleration in hiring, employers are looking to take on far more workers.  The expectations index for this category rose to a record high in September; the only expectations index to do so.Click here to view Bespoke’s premium membership options.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

While you’re here, join Bespoke Premium with a 30-day free trial!

Sports & Crypto

Sports Fans Are Into Cryptocurrency, and Brands Are Capitalizing by Alex Silverman (Morning Consult)

A new survey of Americans suggests that sports fans are much more likely to be familiar with cryptocurrency and other digital assets than the population as a whole, suggesting a valuable vein of marketing potential. [Link]

Golfer Tiger Woods joins NFT craze, releases 10,000 digital images to be sold through company co-founded by Tom Brady by Tom VanHaaren (ESPN)

Tiger Woods will attempt to monetize his career accomplishments via Tom Brady’s company Autograph. The NFTs are available via the DraftKings marketplace. [Link]

Regulation

Treasury unleashes cryptocurrency sanctions to fight ransomware by Sam Sabin and Victoria Guida (Politico)

This week Treasury announced stepped-up enforcement against crypto exchanges and cryptocurrencies that are used in ransomware attacks. An initial round of sanctions targeted Russian crypto exchange Suex. [Link]

Justice Department Files Antitrust Suit Challenging American-JetBlue Alliance by Brent Kendall and Alison Sider (WSJ)

An agreement between American and JetBlue to limit head-to-head competition in hub airports throughout the Northeast is being investigated by the Department of Justice on anti-trust grounds. [Link; paywall]

COVID

Pregnant Women Who Get COVID Vaccine Pass Antibodies to Newborns (HealthDay News)

An NYU study showed that all 36 newborns tested at birth for COVID-19 antibodies from their vaccinated mothers had immune systems primed for the virus, a major endorsement of vaccination for pregnant women. [Link]

‘Post-Vax COVID’ Is a New Disease by Katherine J. Wu (The Atlantic)

Some diseases that we already vaccinate against continue to infect vaccinated people, but in a modified, much less dangerous form. COVID is likely to move the same direction over time, remaining a burden on vaccinated people but ultimately a much less deadly one. [Link]

Renewables Finance

EXCLUSIVE White House backs plan for renewable energy industry tax partnerships by Jarrett Renshaw and Laura Sanicola (Reuters)

Carbon-intensive energy infrastructure is often owned by master limited partnerships, which confer significant tax advantages. The Biden administration is reportedly considering the creation of a similar set of vehicles for renewables energy production and distribution. [Link]

Europe’s Big Climate Reveal Gets Stuck on Sovereign Bonds by Frances Schwartzkopff and John Ainger (Bloomberg)

The EU is requiring disclosure from asset managers on how much of their portfolios are invested in environmentally sustainable activities. But government bonds aren’t included in the disclosure requirements, leading to a strange grey area for the largest chunk of the European bond markets. [Link; soft paywall]

A huge new city is being built in the US desert – but is it just greenwashing? by Ed Cunningham (TimeOut)

A billionaire’s plan to create a city of 5 million in the arid western United States is either a stroke of genius or a vanity project run horrifically amuck. [Link]

Natural Disasters

The Long-Lost Tale of an 18th-Century Tsunami, as Told by Trees by Max G. Levy (Wired)

A 9.0 magnitude quake before the arrival of Captain Cook in the Pacific Northwest recked havoc on the region, leaving a massive impact on the growth of Douglas Firs which still stand today. [Link; soft paywall]

Economic Research

Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?) by Jeremy B. Rudd (Federal Reserve Finance and Economics Discussion Series)

A scathing review of the widespread presumption that inflation expectations are a key source of future inflation, raising the possibility of significant policy errors. [Link; 27 page PDF]

E-Commerce

FedEx, UPS Rate Rises Are Making Online Shopping More Expensive by Paul Ziobro (WSJ)

Large shipping companies are raising prices in coming weeks with FedEx announcing a 6% cost hike; UPS and FedEx typically raise prices at about 5% per year. [Link; paywall]

Read Bespoke’s most actionable market research by joining Bespoke Premium today!  Get started here.

Have a great weekend!

Last week saw a massive decline in optimism according to the AAII‘s weekly investor sentiment survey. In fact, bullish sentiment saw its largest one-week decline in over two years. Even though the S&P 500 has technically declined more in the week leading up to this week’s survey than last week’s, sentiment actually improved with the percentage of respondents reporting as bullish rising from 22.4% to 29.9%.  That was the biggest one-week increase since the first week of July, but the percentage of bullish respondents is still well below the past year’s range.

Even though there was a big pickup in bullish sentiment, bearish sentiment was only little changed.  This reading only fell 0.1 percentage points to 39.3%. That remains at a level above anything observed since last fall.

That means that mostly all of the gains to bullish sentiment this week borrowed heavily from the neutral camp.  Neutral sentiment fell sharply this week shedding 7.4 percentage points.  That was the biggest one-week decline since a 7.5 percentage point drop in the first week of August.

We’d also note that while last week saw a big shift in sentiment among individual investors, this week, newsletter writers followed suit as bullish sentiment among that group fell below 50% to 47.1% for the lowest reading since May. Bearish sentiment meanwhile rose to 22.3% which is the highest reading since October 7th of last year.  Click here to view Bespoke’s premium membership options.

Rather than the expected decline to 320K this week, seasonally adjusted initial jobless claims rose to 351K (from weekly FRED data). That is the second week in a row that claims were higher and in which claims were worse than forecasts.  After the past two weeks of increases, claims are also now at the highest level in a month, though, that is still near pandemic lows.

On a non-seasonally adjusted basis, claims were also higher rising by 40.3K week over week. That brings regular state claims back above 300K for the first time since the week of August 13th.  Pandemic era programs technically ended in the first week of September and last week’s release was the first data point to capture this.  PUA claims did drop substantially that week with an over 70K decline, but they did not fall to zero as one might expect.  The same is the case this week with PUA claims falling further to a very low level of 15.16K.  As for why PUA claim counts are still being recorded following the end of the program is not exactly clear, but it could be due to backdating of claims.

While PUA claims will likely continue to drop and become even less of a factor than is already the case, we are now past the point of the year in which claims have seasonal tailwinds.  As shown below, on average claims historically rise from mid-September through the end of the year with week over week increases happening more than half the time. In other words, pandemic programs falling off have and will keep lowering claim counts but that will also be to some degree offset by seasonality.

Continuing claims are lagged an additional week to initial claims making the most recent data through the week of September 10th. Here too, claims saw a surprise uptick to 2.845 million versus expectations of a further decline to 2.6 million.

The inclusion of all programs adds yet another week’s lag to the data making the most recent data through the week of September 3; the last before the end of pandemic programs. Leading into the deadline for pandemic programs, total non-seasonally adjusted continuing claims fell to a fresh low of 11.26 million. PUA claims and PEUC claims were the biggest contributors to that decline as the former fell by 591K and the latter fell by 161K. Regular state claims also experienced a significant decline of 290K.  As those programs all saw significant declines, that was offset by another sizeable increase in extended benefits programs although there is a caveat to that move.

Over the past couple of months, we have frequently made note of the volatility in claim counts for extended benefits programs.  Week to week this reading has been in a cycle of big increases followed by big drops. To quantify just how volatile it has been, in the second chart below we show the 8 week rolling average in the program’s absolute week-over-week change. That average not only surpassed last year’s highs but it hit a record last week, surpassing the prior high from after the Global Financial Crisis.  Click here to view Bespoke’s premium membership options.

In order for an investor to generate real returns, the yield of an investment must exceed the going rate of inflation.  Using the 10-Tear US Treasury Note as an example, if it yields 5% and inflation is running at 3%, an investor’s real yield would be 2%.  The chart below shows the yield on the 10-year US Treasury along with Core CPI on a y/y basis going back 50 years.  Throughout history, inflation and interest rates have tended to track each other over time, and most of the time, the 10-year yield exceeded the y/y rate of Core CPI.  In fact, on a monthly basis, the 10-year yield has exceeded Core CPI more than 85% of the time.  The shaded areas in the chart show periods where Core CPI was greater than the 10-year yield.  Prior to the Financial Crisis, there were only two periods where it occurred, but since 2010, inflation has exceeded the 10-year yield much more frequently, although the current spread between Core CPI and the 10-year yield is the widest it has been since 1980. In other words, investors aren’t being compensated much for holding US Treasuries.

While it is relatively uncommon for Core CPI to exceed the yield on the 10-year, it is much more common for Core CPI to exceed the dividend yield of the S&P 500.  Whereas Core CPI has exceeded the 10-year yield less than 13% of the time since 1971, it has exceeded the S&P 500’s dividend yield more than 75% of the time.

With Core CPI currently higher than both the 10-year yield and the S&P 500’s dividend yield, what does it mean for stock prices?  There’s no way to be sure, but looking back over the last 50 years, stock prices have tended to trade relatively well during these periods.  Going back on a monthly basis over the last 50 years, we calculated the S&P 500’s forward 12-month return following different scenarios in the relationship between Core CPI and yields on the 10-year US Treasury and the S&P 500.  The first section of the table below shows S&P 500 average forward returns when CPI is higher than the 10-year yield or the S&P 500’s dividend yield.  Below that, we show performance following periods when Core CPI was below either of those yields, and then lastly, given that Core CPI is above both the 10-year yield and the S&P 500’s dividend yield, the bottom section shows average forward equity market returns under that scenario.

As mentioned above, it’s not common for Core CPI to exceed the yield on the 10-year.  While only 13% of months in the last 50 years have met that criteria, the S&P 500’s forward one-year performance was very strong, averaging a gain of 18.7% with positive returns nearly every time. In fact, the only time the S&P 500 had a negative 12-month return following a month that met this criteria was in the 12 months following 9/30/1980.  When Core CPI has exceeded the S&P 500’s dividend yield, the S&P 500 was still positive over the next 12 months nearly three-quarters of the time, but the index’s average gain has been a more modest 7.8%.

In the opposite scenarios, when Core CPI is lower than the yield on the 10-year US Treasury, the S&P 500’s average 12-month forward return was a gain of 7.6% with positive returns 72.5% of the time. Performance is much better when Core CPI is lower than the S&P 500’s dividend yield.  In the year following those occurrences, the S&P 500 averaged a gain of 13.6% with gains 87% of the time.

Lastly, scenarios like the current one where Core CPI is simultaneously higher than both the 10-year yield and the S&P 500’s dividend yield are very uncommon occurring in less than 10% of all months since 1970.  Following those periods, the S&P 500’s average change over the next 12 months has been 15.8% with positive returns over 98% of the time.

While forward 12-month equity market returns have been positive when Core CPI is higher than the 10-year yield, these returns don’t take into account the impact of inflation.  Real returns which we alluded to above will not be as strong, but the analysis does suggest that historically, equities have provided some degree of a hedge in a higher inflation environment.

As always, past performance is no guarantee of future results.

While the broader market has generally trended lower this month, one area of slight outperformance has been the stock market newbies.  As shown below, whereas the S&P 500 (SPY) has fallen 2.88% MTD, the Renaissance IPO ETF (IPO) has risen 3.5%.  At the moment, the IPO ETF is actually trading overbought (>1 standard deviation above its 50-DMA) while SPY began the day in oversold territory (>1 standard deviation below its 50-DMA).

The move higher in the IPO ETF has resulted in the past year’s relative strength line versus the S&P 500 (SPY) to move back into positive territory and taking out the late June high as well.  Positive readings and times when the line is trending higher indicate that IPO is outperforming the S&P 500 and vice versa for negative readings.  Click here to view Bespoke’s premium membership options.

Data on residential housing this morning surprised to the upside at the headline level in terms of both Building Permits and Housing Starts.  Despite the better than expected results, the internals of the report weren’t great as all of the strength was in multi-family units.  In fact, single-family Building Permits were only up 0.6% m/m and were down -0.1% y/y compared to a m/m gain of 15.8% and a y/y gain of 44.3% in multi-family permits.  Similarly, single-family Housing Starts actually declined 2.8% m/m and only increased 5.2% y/y compared to multi-family units which rose 20.6% m/m and 52.7% y/y.  An increase in multi-family units isn’t necessarily considered a bad thing, but single-family units tend to have more of an economic impact.

Overall, Housing Starts are still trending higher.  On a 12-month moving average basis, Housing Starts have been surging in recent months and just came in at the highest level since May 2007.  Housing data tends to roll over well in advance of recessions, so as long as Starts keep trending higher, it’s a sign of economic strength.

Looking more closely at single-family Building Permits and Housing Starts, the 12-month moving average of this metric has actually been starting to flatten out in recent months. Housing has been a pillar of the economy in the post-pandemic rebound, so this will bear watching going forward.

It’s always interesting to see how closely homebuilder stocks tend to track trends in Housing Starts, which we show below.  Similar to the stall out in starts, we’ve also seen the iShares Home Construction ETF (ITB) start to stall out over the last few months. Click here to view Bespoke’s premium membership options.

Salesforce.com (CRM) kicks off its annual Dreamforce conference today. This is the 19th year of the event in which the company showcases its products and hosts various presentations by industry leaders. Like many conferences, in-person attendance is limited again this year with the event streamed online over the next few days. Unlike last year, the conference is back to its usual length of only a few days compared to the 2020 event that went on for nearly a month.  The Dreamforce conference typically occurs in the fall but has happened as early as the end of August and as late as early December.

As for how Dreamforce impacts the stock, below we show how CRM’s performance leading up to, during, and after each year’s conference.  The stock pretty consistently trades higher around the Dreamforce conference. If you exclude last year when the conference lasted for a much longer period of time, and the Slack takeover acted as a negative catalyst, CRM tends to move higher during the conference. The only notable period of weakness is the week after the conference ends.  That period has averaged a 0.93% decline with positive performance less than half the time. Longer-term performance, though, has been more consistent to the upside. Note that because of the extended length of Dreamforce in 2020, performance figures at the bottom of both tables do not take 2020 performance figures into account.

Salesforce.com is a giant in the Tech sector ranking as the eighth largest stock in the S&P 500 Technology sector.  As such, the stock’s performance does hold some weight on the broader market.  Below we replicate the table above but with the performance of the S&P 500 Tech Sector ETF (XLK). As with CRM, XLK has typically rallied leading up to the conference, but it tends to underperform CRM during the conference falling 20 bps on a median basis during the few days the event takes place versus CRM’s median gain of 0.51%.  Following the conference, like CRM, XLK’s short-term performance over the next week is mixed to negative, but one, three, and six months later the stock has traded higher more than two-thirds of the time.Click here to view Bespoke’s premium membership options.