Service sector of the economy is crushing it
Abraham George Macro View
The US service sector of the economy is very hot. In most sectors, the activity has returned to levels seen before the arrival of the pandemic. Hotels, food services and flying has still to catch up. Real estate has been very strong. So is construction, wholesale trade, finance, insurance, warehousing, health care, management and support services, agriculture, fishing and hunting you name it.
As per Institute of Supply Management (ISM), the survey concludes that prices paid by service organization for materials and services are very strong. All soft commodity prices have shot up. To top it up inventories are down meaning new inventories will be built up at higher prices. The fast and aggressive measures taken by the Fed and the administration in last March within a short time of economic shutdown provided enough cushion for a vaccine.
To top it up, we have another $1.9 trillion coming in terms of “aid.” All this is providing a melt up situation at least for the short term and laying grounds for some run away inflation. And we have not talked about the supply chain disruptions. The Fed has been trying to get some inflation for four decades.
It was like the dog running after the fire engine. Finally it looks like they may succeed. But in their mind they are ready for this risk. It shouldn’t be the Tiger that they got on to and then can’t get off. Be prepared for a lot of volatility.
Equities: The corrective up move has extended more than our expectations. There are divergences between the major indices. If the correction in the the S&P 500 topped out at 3848 yesterday, the S&P should decline soon below 3774. Breadth was flat at 1.28:1. It was also the fifth day of consecutive contracting volume. Not that common. Many developments are pointing to a corrective top.
Bonds: Bonds have been one of the easiest markets for us to follow. The trend remains clearly bearish. The next downside targets are close to 163 to 164.
Euro: Euro prices dropped down to 1.2004 yesterday. The next immediate downside target is 1.1890. The move down from 1.2190 can turn out to be more complex in which case prices can again rise to 1.2190 before coming down.
Gold: The volatility in silver is causing all sorts of confusion in gold but gold is much more well behaved. The high to 1876 must have completed the corrective up move we were alluding to. The move down 1600 handle can take place any time and it could be a strong one.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.