Winds of inflation

The biggest economic release for financial markets has traditionally been Jobs Day, but in recent months, CPI Day has taken the spotlight. That's because the U.S. economy is nearing full employment, while the labor force participation rate has climbed out of its pandemic-era hole. While the strong recovery is a great sign for the economy, that doesn't mean all is well for the average American.

Rearing its ugly head: Headline inflation today is forecast to show growth of 6.8% Y/Y in November, which would be the highest level since the summer of 1982, and overtake the 6.2% increase seen in October. Core CPI is also expected to come in at a flaming 4.9%, prompting Fed Chair Jerome Powell to recently ditch his outlook of "transitory" inflation. Contributing to the surge is resilient demand and unprecedented stimulus, as well as transportation logjams and shortages of both supplies and labor.

The worsening price environment is likely to prompt FOMC officials to accelerate stimulus withdrawal or deliver swifter policy tightening. It also signals a big pivot for the central bank, which until now had been more worried about the "maximum employment" side of its dual mandate, compared to "stable prices." Current market pricing is for the Fed to announce its first 25-basis point rate hike in May or June of 2022, while a high inflation reading could hasten the taper of its $120B monthly bond-buying program, possibly ending it in March.

How to play markets? "What we've seen this year, which is likely to persist into at least the beginning part of next year... is the rapid fire sector rotations," said Liz Ann Sonders, chief investment strategist at Charles Schwab. "Take advantage of these greater swings by upping the pace of rebalancing, and trimming or taking profits where you get some short-term strength and vice versa."

First labor union

A Starbucks (SBUX) store in Buffalo has become the first location in the country to unionize after employees voted by a margin of 19 to 8 to join the Workers United Union. Two other stores in the region also voted on Thursday, but one said no, while results at the third location weren't conclusive. Never in the coffee chain's 50-year history has it relied on union workers to serve up its lattes among its 9,000 corporate-run stores across the U.S.

What it means: Analysts are sizing up what kind of tipping point could be in store as this is the first-ever labor foothold to hit Starbucks. Three more locations in Buffalo are also heading towards union elections, as well as another store in Mesa, Arizona that just filed for a vote. The fact that there was also a win in the restaurant industry - where there are almost no unions - could heat up labor movements and advocacy across the country.

The union drive has preoccupied Starbucks executives for months and the company even unveiled a wage increase in October that would raise the average barista's salary to nearly $17 an hour (from $14) by next summer. "This win is the first step in changing what it means to be a partner at Starbucks, and what it means to work in the service industry more broadly," said Michelle Eisen, a barista who works at the now-unionized Elmwood location in Buffalo. "With a union, we now have the ability to negotiate a contract that holds Starbucks accountable to be the company we know it can be, and gives us a real voice in our workplace."

Go deeper: Brett Levy of MKM Partners noted that unionizing move won't have an immediate impact on Starbucks' strategy or financial results, but if the trends were to spread, the firm would be better positioned to absorb higher costs than its industry peers. In recent months, employees have gone on strike at Deere (DE), Mondelez (MDLZ) and Kellogg (K), as workers find themselves with increased leverage due to a massive labor crunch. President Biden has also promised to be the "most pro-union president in American history," declaring that "unions built the middle class," while there have also been union votes in at Amazon (AMZN), the second-largest private employer in America.

T+1 by 2024

The securities settlement process is set to get even faster after the Investment Company Institute (ICI), the Securities Industry and Financial Markets Association (SIFMA) and the Depository Trust & Clearing Corporation (DTCC) laid out a new goal of getting the industry to "T+1." Currently, market players are required to physically deposit stock in an account within two days of making a transaction in a process known as "T+2." During that time, brokers have to post collateral to the DTCC because equity prices can fluctuate over those 48 hours and some buyers/sellers are using margin/borrowed shares, so the lag can make sure everything turns out all right.

Backdrop: For many years, markets operated on a "T+5" settlement cycle, when security transactions were done manually. In the 1990s, the SEC shortened the settlement cycle to three business days, which reduced the amount of money that needs to be collected at any given time. It was only in 2017 that the commission moved to "T+2," calling the previous standard an outdated "settlement cycle" due to improvements in technology, emerging new products and growing trading volumes.

"Shifting to 'T+1' will strengthen the financial system and offers tangible benefits to investors by reducing their risk exposure and enabling them to more quickly leverage investment opportunities," said ICI President Eric Pan. The extensive overhaul would cover settlement infrastructure, changes to business models and system requirements and improvements. Implementing "T+1" in the first half of 2024 will "allow enough time for firms to assess the changes they need to undertake, for the industry to conduct comprehensive testing, and for regulators to make the necessary regulatory changes."

Outlook: Some have even called for real-time settlement, like Robinhood (NASDAQ:HOOD) CEO Vlad Tenev, whose firm had to restrict trading earlier this year during the notable short squeeze of GameStop (GME). However, that's unlikely to happen anytime soon, as it would require expensive updates to almost all market infrastructure, hamper margin purchases of stock and erase most of the benefits of netting, which provide liquidity and minimize risk. Instead, the next realistic target would likely be "T+0.5," where trades are settled same day.

Evergrande fallout?

Fitch has become the first to label China Evergrande's (OTCPK:EGRNF) overseas bonds as "in default" after the heavily-indebted property developer missed coupon payments totaling $82.5M when a grace period expired on Monday. "There has been no announcement from the company or the trustee. In addition, the company did not respond to our request for confirmation," the credit ratings agency wrote in a press release. Overnight, Evergrande said there was "no guarantee" it could meet its debt repayments as it entered a restructuring process with assistance from local government officials.

The downgrade by Fitch could trigger cross defaults on the developer's $19.2B of outstanding debt across international bond markets. It also raises concerns for what it will mean domestically for China's $5T property sector and the potential impact on the nation's economy. In response, China's central bank has freed up 1.2T yuan ($188B) of liquidity for the banking system - by cutting the reserve requirement ratio by 50 bps - and pledged to maintain "flexible" monetary policy in the coming year.

Too big to fail? One of the biggest questions surrounding the entire saga was if the government would let Evergrande collapse, or rescue it due to its leverage and systematic risk (real estate accounts for a quarter of Chinese GDP by some metrics). That dilemma seemed to be answered by PBOC Governor Yi Gang, who said the inability to meet obligations is a market event and will be dealt with in a market-orientated way. Cue the massive restructuring and deep haircuts for investors given Evergrande's $300B in total liabilities.

Commentary: "I've actually been surprised how little reference there is to the 1997 Asian Financial Crisis and the Guangdong housing market turmoil in that context," added Isabella Weber, Professor of Economics at UMass and political economist working on China. "So I think that to some degree, we see something very similar happening where there is a sense that the situation of the real estate sector has become exceedingly dangerous. And as many people have been saying for a long time... there's an attempt of basically letting go of Evergrande before the whole forest catches fire."

Today's Markets

In Asia, Japan -1%. Hong Kong -1.1%. China -0.2%. India flat.
In Europe, at midday, London -0.1%. Paris -0.2%. Frankfurt -0.1%.
Futures at 6:20, Dow +0.2%. S&P +0.3%. Nasdaq +0.3%. Crude +0.5% at $71.32. Gold -0.3% at $1771.20. Bitcoin -1.5% at $48468.
Ten-year Treasury Yield +3 bps 1.52%

Today's Economic Calendar

8:30 Consumer Price Index
10:00 Consumer Sentiment
10:00 Quarterly Services Report
1:00 PM Baker-Hughes Rig Count
2:00PM Treasury Statement

Companies reporting earnings today »

What else is happening...

Concentration risk? Cathie Wood defends her innovation investment thesis.

Bitcoin hash rate recovers to nearly same level before China's crackdown.

Amazon (NASDAQ:AMZN) fined $1.3B for abusing online market power in Italy.

Lululemon (NASDAQ:LULU) tops estimates, but cuts forecast for MIRROR sales.

Meta (NASDAQ:FB) opens VR/metaverse space Horizon Worlds to public.

Intel (NASDAQ:INTC) sees company turnaround taking at least five years - WSJ.

SEC Chair Gary Gensler seeks tougher SPAC disclosure, liability rules.

American (NASDAQ:AAL) to cut some international flights due to Dreamliner delay.

Strong demand has Ford (NYSE:F) stop taking reservations for F-150 Lightning.

Meanwhile... GM (NYSE:GM) shoots for all-electric Silverado in early 2023.