US business inventories still very low

Likely to put upward pressure on inflation

Chart of the Day

It was a heavy US data day Friday, with one release confirming the ratio of inventories to sales across the economy remains lower than it has been for years. The low inventories to sales ratio is partly because everyone stuck at home is buying more in the way of goods than spending on services, and points to upward pressure on inflation. For instance, one way this is manifesting itself is through much higher shipping rates (as we saw last week), which is likely to feed through to consumer prices.

Macro

The December consumer confidence and retail sales data were also released. Both were weaker than the month before, although the hit during the latest wave of the virus has not been near as bad as during the first.

There’s been lots of focus on how China has benefited from the pandemic thanks to higher goods exports, and that looked evident in the Q4 2020 GDP data, with China reporting growth of 6.5% YoY - it was 6.0% YoY in Q4 2019, before the pandemic.

Markets

There has been a clear outperformance of some of the East Asian stock indices over the past month.

After tracking the S&P 500 closely over most of 2020, the rise in the past month has caused the outperformance of Korea’s Kospi more recently to widen - relative to the S&P 500, it’s up by 23% since the start of 2020. The gain seems to partly reflect the high weight of technology stocks in Korea - Australia’s index has done much worse despite also bringing the virus under control, but natural resource companies are more important there.

That said, US tech stocks have not been performing that well recently, and have fallen as a share of the total S&P 500 market cap in the past few months.

At a global level, the reflation trade has lost steam. These indices of risk-on and risk-off assets we’ve constructed (components listed at bottom) have both moved sideways in the past week.

Sticking to that theme, the CFTC commitment of traders report showed traders continue to gradually reduce their net long in copper.

By contrast, traders have not yet lost their faith in the big net USD short, even as the USD edged up on a trade-weighted basis last week.

Similarly, traders raised their net long in lumber and remain positioned to benefit from further gains in most cyclical commodities compared to normal - one exception is WTI, with positioning still short relative to the long-term average despite its recent strong run.

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