Worry about freezing demand, not searing inflation, argues this strategist. How to play this scenario.



Well, Team Transitory took a punch in the nose after Wednesday’s inflation data came in much warmer than expected, with the year-over-year change of 6.2% in October, highest in 31 years.

That said, this is not the last word on whether inflation in 2022 will be scorching. Bond yields increased significantly, with the 10-year yield TMUBMUSD10Y,
surging 11 basis points, but barely a staggering 1.56%, a sign that the fixed income market still believes inflation will subside.

It is Dhaval Joshi, chief strategist of Counterpoint of BCA Research, who advocates this cause. He forecasts a significant slowdown in demand next year and does not see sustained inflation.

Right now, demand is trending, thanks to one surprising category: non-durable goods, such as clothing, food and drink in the home, and games, toys and hobbies. Spending on services, on the other hand, is 5% lower than it should be, which is also roughly the case in the UK and France.

Won’t vaccinations and improved medical care for coronavirus disease increase spending on services? Joshi isn’t so sure. The main component of underutilization is not bars, restaurants and hotels, but health care. “One plausible explanation is that many doctor’s appointments are spent online, requiring much lower expenses. The result is that healthcare consumption has slowed its convergence towards the pre-pandemic trend, implying that a deficit could be persistent, ”he said.

Other sources of under-spending include leisure services, as consumers are now less likely to attend busy events and use public transportation. “Worryingly, recent spending on recreation services and public transportation has stopped converging with the pre-pandemic trend. Granted, this could be a big blow due to the pandemic’s delta wave, and spending could pick up again once that wave subsides. On the other hand, it would be safe to assume that the delta wave was not the last wave of the pandemic and that other waves could arrive in 2022, ”he said.

But, again, the current deficit in services has been filled by spending on goods. Joshi, however, doesn’t expect this to last. Spending on durable goods has already returned to Earth. And the largest component of non-durable spending is clothing and footwear. “Clothing and footwear, while classified as unsustainable, are actually quite durable. This means that once the wardrobe transition is complete, we don’t expect people to spend 20% more on clothes and shoes than before the pandemic, ”he said. He also expects excess spending on eating and drinking at home to stabilize, as insufficient spending on eating and drinking outside has almost normalized.

The only area where he expects the strength to continue is in games, toys, hobbies, animals and pet products.

In summary, he recommends overweighting 30-year Treasury bonds TMUBMUSD30Y,
Underweight reflation sectors, including banking and basic resources, and overweight animal care and interactive entertainment such as video games.

The buzz

A regulatory dossier showed Tesla TSLA,
CEO Elon Musk sold around $ 5 billion in stock this week while exercising stock options. Musk had suggested he would sell around $ 10 billion in a TWTR Twitter,
poll this weekend.

Walt Disney DIS,
shares were expected to fall, after the entertainment giant posted worse-than-expected theme park operating profit and lower than expected subscriber numbers for its Disney + streaming service.

Open House OPEN Technologies,
+ 15.57%
and Offerpad Solutions OPAD,
+ 5.66%
stocks surged as both real estate platforms reported better-than-expected earnings and outlook, in a Zillow Z segment,
has exited.

Beyond BYND Meat,
slipped as the meat substitute maker reported a larger-than-expected loss on lower-than-estimated revenues.

China Evergrande 3333,
+ 9.88%
made a series of last-minute bond payments to avoid default, while the Wall Street Journal reported that Chinese regulators may relax leverage rules to allow developers to sell assets.

The market

US ES00 equity futures contracts,
+ 0.23%

+ 0.26%
rebounded after the 240-point drop in the Dow Jones DJIA index on Wednesday,
while gold GC00,
extended gains.

The US bond market was closed on Veterans Day.

Random readings

A look at three of Tesla’s founders who didn’t get incredibly rich.

Indonesian religious leaders say that crypto is against the rules of Islam.

Wilson, volleyball in Tom Hanks’ movie “Cast Away”, was auctioned for $ 308,000.

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