The receding of COVID case counts and higher oil prices had a beneficial impact on manufacturers in the eleventh district in February.  The Dallas Fed’s Manufacturing Outlook Survey was forecast to see Business Activity rise only slightly from 2 in January to 2.8 after three straight months of declines.  Instead, the index surged 12 points to 14 which is the biggest one-month gain since June 2020 and the highest reading since October.

As we have seen with other regional Fed manufacturing surveys this month, breadth across components has been somewhat mixed in spite of the move in the headline index.  While there are a handful of categories in the upper end of their historical ranges, others like Company Outlook and Inventories have been more middling. Additionally, six categories decelerated month over month.

One area that experienced a decline was in regards to output.  Production and Capacity Utilization both fell in February.  For the former, that was the third decline in a row leaving it at the lowest level since January of last year. Capacity Utilization is also at the lowest level in a year and a month, but this month’s decline was far smaller than the prior month’s 9.4 point drop.

While production has pulled back, Order Growth Rate held firm as New Orders hit the highest level since July.  Meanwhile, order backlogs continue to fall from historic levels with this month marking the lowest reading since last January as shipments recovered some of the declines from the past few months.

Employment was perhaps the most interesting area of the report.  While the region’s firms continue to report net hiring, the Employment index plummeted 9.3 points for the largest single-month decline since March 2020. That deceleration in new employees happened alongside a deceleration in Hours Worked and Wages & Benefits as well. While current conditions for the Wages and Benefits index was lower, expectations have been blown out of the water.  That index not only set a new record high, but it did so on the largest one-month gain to date.  In other words, hiring slowed slightly in February, but there are widespread plans to increase wages in the future. While it is hard to pinpoint the exact reason for that increase, one potential explanation can be firms trying to raise wages to entice new workers.  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!

Inflation

After Long Covid, U.S. Businesses Get Ready for Long Inflation by Shawn Donnan and Emma Kinery (Bloomberg)

Amidst extremely stressed supply chains, high commodity prices, and extremely tight labor markets, US businesses are getting more comfortable and used to the idea of raising prices to solve profitability challenges. [Link; soft paywall, auto-playing video]

Why This Economic Boom Can’t Lift America’s Spirits by Josh Mitchell (WSJ)

While the unemployment rate has plunged, consumer spending is booming, and wage gains are rapid, Americans are feeling much less optimistic about the economy compared to recent periods of weaker growth. [Link; soft paywall]

Crime

Miami Street Gangs See No Hope In Dope. They’ve Switched To Identity Fraud Fueled By Russian Hackers by Thomas Brewster (Forbes)

With stiff penalties and lots of competition (not to mention physical danger) in drugs, semi-organized criminals are turning to white collar crimes as lower hanging fruit. [Link; soft paywall]

Three men plead guilty to planning U.S. power grid attack, driven by white supremacy by Kanishka Singh and Sarah N. Lynch (Reuters)

A small terrorist conspiracy to violently attack the American power grid has led to guilty pleas from conspirators per plea agreements recorded this week. [Link; soft paywall]

China

Beijing Olympic Ratings Were the Worst of Any Winter Games by Tiffany Hsu (NYT)

It wasn’t just your imagination: this Olympics wasn’t good. China’s winter games drew only a little better than half of the viewership the prior games in Korea reported. [Link; soft paywall]

China Is About to Regulate AI—and the World Is Watching by Jennifer Conrad and Will Knight (Wired)

New rules introduced by Chinese regulators will change how algorithms that dictate pricing, determine search results, and power a galaxy of different consumer tech are managed, a first in the world. [Link; soft paywall]

Renewables

U.S. offshore wind auction bids top $1.5 billion, with more to come by Nichola Groom (Yahoo!/Reuters)

The largest-ever sale of offshore wind development rights in the US got major interest from 14 different companies despite efforts by homeowners to restrict development based on protection of views from summer homes. [Link]

Million-Dollar Home Listings Dry Up for Wealthy Suburban Buyers by Prashant Gopal (Bloomberg)

Large footprint suburban homes have evaporated off the market as dual-income Millennials seek breathing space with big budgets. The result is a massive price boom for the McMansion. [Link; soft paywall, auto-playing video]

Markets

Heavily Hedged Traders Have Been Awaiting a Stock-Market Storm by Vildana Hajric and Katie Greifeld (Yahoo!/Bloomberg)

Short interest has risen and put options have flown into the hands of speculators nervous about a market decline, making the drop in equities this week less painful than it might otherwise have been. [Link; auto-playing video]

Ukraine Swaps Signal 90% Chance of Default as Russia Attacks by Laura Benitez (Bloomberg)

Financial markets are pricing high odds of a default for Ukraine, but the aggressor is also being punished thanks to sanctions and fears over political disruption. [Link; soft paywall]

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Have a great weekend!

The Kansas City Fed’s February reading on manufacturing activity was expected to grow at an accelerated rate with forecasts calling for the headline number to rise from 24 to 25. Instead, the actual reading came in even higher at 29.  That is the strongest reading on the region’s manufacturing economy since last May. Similar to the Richmond Fed report on Tuesday, expectations saw a similarly impressive reading rising to 38 which is tied with last April for the highest reading on record.

Relative to other regional Fed reports released this month, the Kansas City Fed’s survey has generally seen stronger results.  As shown below, nearly every category across current conditions and future expectations sit in the top decile of their respective historical ranges and breadth was generally positive. The only indices that declined month over month were not outright negatives with declines in things like prices, order backlogs, and delivery times.

Of the indices that were higher, the biggest gains came from New Orders, Shipments, and Production. Each of these categories rose double digits month over month. While those increases bring these readings into the top decile of their historical ranges, they have not fully recovered the peaks from earlier in the pandemic. Expectations indices are in a similar situation with significant increases (except for order backlogs) this month. Production has seen the most notable increase of these as this month’s reading on expectations hit the second-highest level on record behind the October 2003 reading.

The report showed supply chains remain stressed but improved as delivery times fell another 2 points marking the third decline in a row.

The report’s readings on prices showed a wide divergence between current conditions and expectations.  Both indices had generally been on the decline from extremely high levels in the past year, but over the past two reports, expectations have surged with both prices paid and received hitting new record highs. Meanwhile, current conditions have only flattened out after reversing lower in the second half of 2021. Click here to view Bespoke’s premium membership options.

As the S&P 500 enters correction territory, sentiment has further degraded.  Once again this week, less than a quarter of respondents to the weekly AAII sentiment survey reported as bullish. Although it was an improvement from 19.2% last week, the current reading of 23.4% remains in the 6th percentile of readings going back to the start of the survey in 1987. We would also note that while there are a range of potential factors that have likely played a role in the recent drop in sentiment ranging from price action to forecasted paths of interest rates to geopolitical tensions, this week’s survey likely did not fully capture changes to sentiment from the news surrounding the situation in Ukraine. More specifically, the collection period would not have captured today’s news of escalation.

Bearish sentiment crossed above 50% as recently as the last week of January, and after falling all the way back down to 35.5% earlier this month, it is now back above 50%. In fact, bearish sentiment surpassed the January high of 52.9% by 0.8 percentage points this week to reach the highest level since April 2013.  Back then it was only slightly higher at 54.48%. The two-week increase since the low on February 10th now ranks in the top 3% of all two-week changes on record.  As for other sentiment surveys, the bearish results are being echoed with the Investors Intelligence survey seeing the highest bearish reading since April 2020.

With the huge pickup in bearish sentiment, the bull-bear spread has fallen below -30.  Similar to bearish sentiment, that is the most pessimistic reading on sentiment since April 2013.

With both bullish and bearish sentiment rising, each reading’s gains have borrowed heavily from neutral sentiment. Neutral sentiment has gone from a multi-year high of more than 40% only two weeks ago down to the lowest level since last April this week.  The bulk of that decline occurred since last week’s survey as neutral sentiment plummeted 14.7 percentage points week over week. There has not been as large of a decline in neutral sentiment since February 2003.

Given how severe of a decline neutral sentiment experienced this week, in the table below we look back at all other times that this reading has experienced a double-digit percentage point decline for the first time in at least six months.  Of the baker’s dozen of prior occurrences, the current instance ranks as the second-largest decline in neutral sentiment behind the August 1994 instance when it fell 15 percentage points. There were also three other times—March 2005, July 2010, and April 2013—when, similar to now, bearish sentiment was above 50%.  Overall across these past occurrences, the S&P 500 has tended to outperform in the short term but longer-run performance (3 months to one year out) has been smaller than the norm for all periods.  In the three periods most similar to the present period, though, where nearish sentiment was also above 50%, forward returns three, six, and twelve months later were higher each time    Click here to view Bespoke’s premium membership options.

Initial jobless claims came in 3K lower than expected this week falling from 248K to 232K.  While it does not take away from the fact that the current level of claims is at the low end of the historical range, this week’s number remains 44K above the multi-decade lows set in late 2021.

On a non-seasonally adjusted basis, claims remain within the range of readings from the few years leading up to the pandemic.  This week saw a drop from 239.7K to 214.9K; the lowest level since March 2020.  Claims continue to generally follow the usual seasonal pattern and the next few weeks of the year have historically tended to mark a short-term seasonal low. In other words, some minor seasonal headwinds are on the horizon.

Continuing claims experienced a significant drop this week falling by 112K to 1.476 million. Not only did that exceed expectations by over 100K, but that also marked the largest decline of 2022 to bring claims to the lowest level since March 1970. Click here to view Bespoke’s premium membership options.

For the first time since September of 2014, the price of brent crude oil has topped $100. This occurred on the back of Russia’s invasion of Ukraine, which unleashed a slew of sanctions against Russia from the US & EU, sparking flash backs to the Cold War. Diplomatic relations between Russia and the West are deteriorating, and NATO Secretary General Jens Stoltenberg commented, “Peace in our continent has been shattered. We now have war in Europe, on a scale and of a type we thought belong to history.”

Russia is the world’s second largest producer of natural gas (behind the US) and the third largest producer of oil, as per the US Energy Information Administration. Additionally, Russia has the second largest spread between oil produced and oil used (behind just Saudi Arabia), giving the country a key roll in supplying oil to the rest of the world.

The last time that oil topped $100 per barrel for the first time in three months was in January of 2011. In just two months, the price of oil shot 17.6% higher, resulting in a y/y price increase of 41.4%. This occurred on the back of political turmoil in the Middle East, particularly in Egypt, Lebanon, Yemen and Bahrain. These conflicts caused speculation of continued unrest in the entire region, thus pulling into question the ability for the Middle East to adequately supply the world with oil. This occurred while demand for fossil fuels remained robust, hence the soaring price of oil. Oil did not definitively break back below $100 per barrel level until September of 2014, when OPEC increased output, oil production in the US began to boom and the Middle East’s geopolitical situation eased. The combination of these three factors sent the price of oil tumbling, falling by 51.8% in less than five months.

In 2008, the sky-rocketing in the price of oil was largely demand driven. In late February, oil topped $100 after considerable demand increases crossed with a stagnant supply. Oil moved continuously higher over the preceding 12 months, gaining 63.0% when all was said and done. However, the global financial crisis, also known as the great recession, caused a severe reduction in economic activity and demand, sending the price of oil tumbling by 58.2% in just one year following the initial topping of $100 per barrel.

Below is a set of graphs that shows the performance of the S&P 500 during these periods. As you can see, a rise in the price of oil does not necessarily imply a market pullback. In fact, a high price of oil insinuates that economic activity is strong and demand is robust.

Whereas the correlation coefficient between brent crude and the S&P 500 is just 0.07 since the turn of the century, the correlation in the year before and after oil tops $100 for the first time was 0.40 between February of 2007 and 2009 and 0.84 between January of 2010 and 2012. These coefficients signify a moderate and strong positive relationship, respectively. When oil eventually definitively moved below $100 per barrel later in 2008, the S&P 500 crashed alongside oil prices, but the opposite was seen in 2011. Needless to say, the market is influenced by a multitude of factors, and oil is simply a single input.

Although we don’t have much data to go on, the forward performance of the market has been closely tied to the performance of brent crude after oil has topped $100 since 2000. In 2008, crude crashed just as quickly as it had risen, and the market followed suit. On the other hand, the price of crude remained elevated following the topping of $100 in 2011, and the market performed positively, but the forward year performance was lesser than the average since the turn of the century (3.1% vs 6.8%). In both occurrences, the price of brent crude climbed higher over the course of the next three months. In 2008, the price of brent crude rose by 29.8% in the next three months and 13.6% over the following six months. However, one year later, the price had crashed by 59.4%. In 2011, brent crude appreciated by 24.6% in the following three months, 15.6% in six months and 8.7% in a year. However, insinuating that the crash in 2008 had anything to do with oil would be a mistake. In fact, the inverse is likely true. Long story short, investors should not sell this dip due to the hike in oil prices alone, but there is much more to consider in the current macro environment. Click here to view Bespoke’s premium membership options.