 Welcome to the MarketWatch podcast by Amplify Live, where you can access the latest market insights with me, Anthony Chung, the head of market analysis, and joined by our head of trading, Piers Curran, getting you up to speed on what mattered in markets this week. Okay, so it is Friday morning, the 7th of May, and I'm joined as ever by our head of trading, Piers Curran, and little do people know Piers when they're listening to these regular podcasts that obviously we record this on Zoom, and I can see you while we're talking. And you're looking like you're going out on date, no? You've got a little like milk-train man outfit going on here. It's funny you say that, because actually I'm doing two things today that I haven't done in more than 12 months. I'm very excited. Number one, I'm going to go on the London Underground. Yes, I thought that was like a legacy thing that doesn't exist anymore. I'm travelling into work on the Tube. I have not been, I've lived in London, I've lived in London since 1997, and I've used the Tube every week for that entire period up until end of Feb 2020, and I haven't been on it since. It's been a weird, so today that I'm going after this podcast, I'm going into the office and I'm going to go on the Tube. Now that's number one. Number two, check this out. You might remember this from years gone by. I'm going out for some beers with some colleagues. I'm not sure what to do in those social situations. Exactly. Making me nervous. I'm very excited and to add to my levels of happiness, Arsenal lost in the semi-final last night as well. This is a great day. Well, as some people will know, Sam North who was a long-standing member of Team Amplify is no longer with us anymore. He's moved on to new things, so we can say what we want about Arsenal Football Club now. It's absolutely fine. Absolutely. Let's get to it and really want to focus this discussion on one specific area, but I think it kind of then leads us on into a very really important theme that's going to become increasingly so, more in focus as we go through the coming months. I'm going to start it off with a little bit of a top overview of what's happening in commodities right now. All over the world, commodity prices are rising sharply as the global economy goes through this reopening phase. Before I get into that, then subsequently, what does that mean for inflation? There's discussions at the moment about all the feds seeing this right in regards to their calmness to stay true to that kind of transitory belief that inflation will come and pass or settle in time after the reopening is done, and then the communication challenges that come with that from a central bank perspective and subsequently a trading perspective. I guess kicking it off then with commodities, a couple of stats then for copper, we've obviously been up there at decade highs, aluminium prices have approached their highest levels in multiple years, palladium record high, lumber is kind of like the new hot buzzword, if you like, and I know there's a few things to have a look at there. One of the things I was looking at was as of March, new housing starts in the US now the highest level since 2006, and I was listening to a conversation that some analysts were having about lumber, I mean lumber is something I would have never traditionally looked at, I'm not sure if you ever did over the years, but the market structure for lumber, and I think this is an important point for anyone who's investigating potentially trading or investing in commodity, is really understanding that product's market structure, and with lumber it was quite interesting, the futures market, cash market, lumber yards, sawmills, now you've got to get at your stumpage fees, and then there's the home builders, so yeah I mean that's a big story at the moment, so let's have a chat about that first, and then I want to kind of talk about what the ISM, the Institute of Supply Management said earlier this week. Yeah I mean just commodities generally, I mean it's that classic supply versus demand equation that anybody who's studied economics in their previous lives will of course know about, but it's so true, and what's great, what I love about commodities is all right on the demand side you could say there are some overarching general themes and drivers on the demand side, and a lot of those are just linked to economic activity, economic growth, right, but then when you drill down onto the supply side, you know every commodity has its own kind of unique supply structure, I mean lumber's such a fascinating one at the moment, and you know as you said it's the classic, when you get a price spike, and just to put it into context here, lumber prices, so well firstly what is lumber, I mean lumber is wood that's machined and produces beams and planks, all right, and that forms you know one of the key building materials in the U.S. For example, I was surprised about this, so in the U.S. when they're building new homes, 90% of newly built homes are made from wood frames in the U.S., do you know what the percentage is for the U.K.? What percentage of new homes in the U.K. are built using wood frames? 0.3%. That's a rubbish answer. 30%, 30%, right? I was quite shocked at that. And the decimal place thing, so I was exactly on. I was quite shocked at the difference. I was quite shocked that it's so high in America, and I was quite shocked it's so low here, but one of the key things about wood frame homes is that it's actually timber-framed housing has the lowest embodied CO2 of any commercially available building material, so given in the U.K., given obviously and not just the U.K., these global commitments to try and reduce greenhouse gases and et cetera, then actually in the U.K. where we're expecting that percentage to rise quite significantly in the coming years. So anyway, it just gives you an insight. 90% of newly built homes in the U.S. have wood frames, right? So that gives you one hint at where some of the demand comes from, and it just so happens as you said, new home building stats are through the roof, 15-year highs or what have you. And so from the demand point of view, it's red hot. And the thing is, just as demand is red hot, we've got quite unique and unprecedented supply constraints across the system. Of course, this is leading to prices spiking up over $1,600 yesterday. And that did to give you an idea, so $1,600 just a year ago is only $260. And then pre, that was the depths of the pandemic right when it first hit, but if you kind of take the pandemic out of the equation, then the previous all-time high for lumber was $650, which was back in 2018, so $650. So not only have we smashed $650, it's now trading at $1,600. So I suppose there's this reaction anticipation at the reopening, but then underlying a lot of these commodities. There are other themes like palladium and U.S. vehicle sales used as a metal key component, catalytic converters. There's a newly approved, the Chilean lower house that we all know so well, approved introducing progressive taxes on copper sales. And obviously Chile's the most important for the supply of copper. And it's going to be the most heaviest levees in global mining, essentially. And that's going to stall investment is what people are saying. And this is already coming at a time when there's pent up demand coming and now this is coming in as well. And similarly, with the drying up of existing home infantry, one of the things that I was reading is about demographics and millennials. Now they don't have a choice. They have to go new construction, which further than it's like a double whammy, isn't it at the moment? Yeah. Well, that kind of Chilean example. I mean, it's just, don't forget that these governments, their finances are desperate, desperate, straight given the pandemic. And it's like desperately trying to find some new revenue streams or increasing revenue streams through tax and obviously for Chile, it's all about copper and copper demands through the roof and crop prices are through the roof. So actually, right, as a government, let's tap in on some of that action, please, because we're on our knees here. But with regards to those homes, just kind of back to that lumber thing, because it's having quite the dramatic nature of the and talking about inflation, right, the dramatic nature of this price rise to give you to put this into context in terms of how much it costs to build a house. And then how much this rise in lumber prices has an impact on that cost. So right now, it's costing $24,000 more to build a single family home, a family home in America, a normal single family home, averaging around about $315,000 at the moment, right, if you want to buy one, the price to build it has gone up $24,000 in the last 12 months, just because of that lumber price change. And so obviously that that price rise to the home builder obviously gets passed on in the end, all these price rises in the end, all get passed on to the to the doormat of the consumer. And so in the end, it's it's it's the consumer that's got to pay for all of this. But it's quite interesting with with it's the irony of all of this, because right, they're trying to obviously there's a desperate situation for supply of lumber in America, they're trying to bring more in from Canada. But Trump, unfortunately, Trump's come back to haunt us a little bit because Trump increased tariffs on Canadian lumber coming over the border. So that's not helping. And then just just at the worst time, there's a big mountain pine beetle in Canada, devastating those beetles at the back supply. Yeah. I mean, you can't even you can't even script this stuff. So you've got this quite and actually, unfortunately, in the kind of southern America, where a lot of this lumber is harvested, a lot of these trees are harvested, and then you produce lumber, right? There's actually a big spike in the demand in the supply of trees, because apparently they I didn't realize they went through in the 1990s, they went through a planting craze to plant more trees and all these trees and I big enough that is right, let's chop them down. But the bottleneck is in the sawmills. So actually the price for buying logs is really low, because the supply is so high. And yet the price for the planks that are produced by the sawmills are a record record ever high. So your massive bottleneck is banging these sawmills. And if you own a sawmill at the moment, is happy days, you are buying logs really cheaply, and you're selling these planks for crazy money. When you were explaining that, I was just thinking, God, if I was a hedge fund manager with billions of dollars at my disposal, I'd go to the Galapagos Islands or something, find some exotic beetle that just loves eating a certain type of pine, and I would develop it in a lab, grow them, and then I would drip feed them in while I build up a humongous position. And I'd be like, okay, Feds, see what have you got on me now? I'm not sure why my mind works like that, but that was the first thing I thought was, how do I harvest these beetles and then just unleash them on some kind of key component? But yeah, there was a good summary here was from the ISM. The reason why I wanted to comment on them was because we've had the PMI numbers from the Institute of Supply Management this week, so manufacturing services. On the manufacturing side, the Survey Committee members reported that companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus impacts limiting availability of parts and materials as we've discussed. They said recent record long lead times, wide-scale shortages of critical basic materials, rising commodity prices, and difficulties in transporting products are continuing to affect all the segments of the manufacturing economy at the moment. Because actually the manufacturing employment component, which obviously we look at because payroll is coming out later today, that was pretty much the only area in US employment that fell against the prior month. Interesting. Talking about the ISM manufacturing components, as you're saying that the prices index rose to, well it's 11 months straight, it's been rising, but it's actually now up to the highest level since July 2008. And I was listening, another big event over the last week has been the Berkshire Hathaway, AGM, and Buffett was talking and he got asked about inflation because you've got, and Berkshire Hathaway by the way, they're in a great position to be able to measure real inflation, inflation right out there on the ground, so to speak. And Berkshire Hathaway, well they own obviously loads of companies and they own railways and they own low cost housing and they own metal fabrication businesses, they employ actually nearly half a million people believe it or not, but Buffett was asked about inflation in the AGM and he said and I quote, we are seeing very substantial inflation, it's very interesting. And he said that we as a business, we are raising the prices of the goods that we're selling and he said that's because people are raising prices to us, raw materials and we've got no choice but to accept those prices and then of course we're passing those on. So you know, and back to home builders because Berkshire Hathaway, they own nine different home building companies as well as you know, manufacturing houses and operational side of things and stuff, so actually they're the largest in the country in terms of kind of home builders and stuff, so they're right at that kind of coalface if you like and for him to really step out and make a point of saying that and mentioning that definitely means it's there, it's real, you can see it in all the price charts and it's feeding through to inflation and we've got some key inflation data next week of course with the US, the April inflation numbers that are going to be announced on Wednesday. So then this leads us on to the next point which is there's quite a few traders this week that I've been talking to who I just kind of sat there waiting for this equity market to burn. You just can't change bears, likely can't change bulls I guess and we had that wobble at the beginning of the week that it's Tuesday and the market sold off quite aggressively. I say aggressively, it came off 1% or 1.5% off the near 100% price that we've had but it's so interesting obviously being exposed to the day trading environment that that is increased volatility against the general norm but what you've just discussed that last point is exactly what's fueling the appetite for these bears to think. I think the Fed have got this wrong and actually the mismanagement of them believing that this inflationary pickup will be temporary of nature is incorrect and they're going to have to accelerate and respond and tighten faster or communicate that and thus equities are going to have some downside. What's your take on this whole kind of transitory idea that the Fed has and why do the Fed feel confident and comfortable to say committed to that? So this comes right down to the crux of it. If you go back to our podcasts like episodes 1, 2, 3 or whatever months ago now then it was very easy to predict at that point that inflation was going to build and it was going to start to ramp quite sharply higher as we hit the spring. We were saying this, everyone was not saying we had some kind of crystal ball, everyone was saying this, it was very easy to predict given that the financial, sorry the pandemic crash was in April of 2020 as soon as we hit April of 2021 then the year on year price comparisons are going to be at their kind of widest and this will be through into inflation measurements ramping and jumping higher. We were talking about this months ago, the real difficulty and we were saying yeah, it's going to be transitory and we'll talk about why in a second but you can have these theories but then when the moment arrives this is where it really tests your metal if you like, it really tests your conviction of your analysis and we're right now in that sweet spot where it's going to be super difficult for people to stay, hold, stay on tracks, stay with your beliefs, you'll start to get more irrational as inflation spikes. So we're right into in the beginning of that because inflation is not going to, it's going to carry on ramping higher and these commodity prices will probably carry on ramping higher for a while yet so it's really going to test people. I'm definitely still in the camp of, this is all as expected and it's going to be transitory and this is a temporary spike and that come the second half of 2021 all of this stuff will start to calm down and certainly towards the end of the year it'll start to calm down and my reasoning for that is that you know essentially inflation right, if you go back to the last time we had inflation sustained inflation spikes, it was in the 1970s and the 1980s, I mean most people listening to this weren't alive during that period okay, to have a sustained inflation spike it needs to be driven by an underlying consistent wage growth. In the end if inflation rises the only way it's going to continue to rise is if wages go up consistently along with that inflation meaning that consumers are able to afford to buy these products at these ever higher prices okay, if you get inflation going up and wages do not go up well then in the end you get a recession and that's because people just can't afford the higher prices so they can't buy as much stuff anymore consumption drops and you end up with a recession right so what's happening at the moment is we're in this artificial limbo period furlough right you've got God knows how many millions of people on furlough scheme so fine their wages that well by the way their wages have gone down but maybe it's like 80% right but my point is at least they've got most of their salary still coming in okay and if you add on top certainly in the US if you add on top those stimulus checks that are hitting the door mats then you've kind of got this artificial situation where you've got people's incomes being temporarily artificially propped up okay now as we see this recovery and look some of the growth forecasts have been amazing like yesterday the Bank of England in the UK for example again stepping up 2021 UK GDP growth forecast to seven and a half percent is quite just extraordinary in the UK they're predicting that the UK will be back to pre pandemic levels in terms of the size of the economy by the end of this year which is astonishing um but the point is that's great news right but it also means we're getting ever closer to the government pulling away that that artificial scaffolding and when they pull away the artificial scaffolding only then will we be truly be able to kind of see the damage that this pandemic has caused and it's going to lead to an unemployment going up it's one of the only times I've ever seen growth forecasts dramatically rising and then unemployment forecasts also going up at the same time which kind of seems counterintuitive and that's because we're in this weird situation so in the end you're going to see no wage growth to sustain a long-term inflation rise and so either inflation drops back down or we get a recession in which case actually inflation drops back down anyway so that's my that was my belief three months ago and I know it's harder to sustain that belief now when inflation is ramping on the up but I'm still staying true to my thesis well you're supported by a guy I guess he's got an okay you know I guess respect in the market and a fairly substantial job title ahead of the the head of the federal reserve oh yeah so you're enjoying power seem like bezzie jp jp is as you like to refer to him when you're down the pub with jp but but in all seriousness though this is this is the challenge though coming for the fed right which is they do need to start as you you mentioned there like when the stimulus checks kind of stop and you know when the foot comes off the gas a little and we do reopen and things touch would do turn to normality or then there's no need for this incredible stimulus that we've seen in monetary support and fiscal support and so timings wise then this is like the next big discussion is is when do they make that that kind of hint towards tapering the discussion on the discussion of tapering and then eventually then the timeline of rates and yeah an interesting thing that's happened this week is Janet Yellen again very well respected individual just given she formally was in charge of the Fed for many years and she was actually you know this is an interesting talking point because no traders love to like talk about conspiracy theories because Yellen Yellen was a vice-chair under Bananke during the financial crisis she's been around a long time oh yeah and she made a quote blunder yeah and I'm like just Yellen make blunders I find that hard to believe I mean I now I know now she's surrounded by politicians so now she's got a political agenda semi-tied to her she doesn't need to be so dependent I guess but she was talking about she kind of made an offhand comment that you know the economy's picking up inflation is going to rise we might need to hike rates the market then that was in the midst of the sell-off we had at the beginning of the week and it kind of further fueled the flame then she walked it back came out later on the same day and said just to clarify I didn't mean we need to hike rates and it was just a bit embarrassing I guess to a certain extent but the the point being though is that that those discussions are going to have to happen on the on a Fed level what's your idea about timing a lot of people are penciling in June because that's when the next economic projections of the Fed come out and obviously would have progressed in vaccines and the reopening or people have said Jackson Hole right which is August which is kind of coming towards then I guess we're just further down that road then with more more kind of information about the inflation situation things like that yeah what do you say firstly on on Yellen she's about the safest pair of hands you're ever going to get and she's super dovish normally so I know all right she's got she's the constraints of the central bank are off and perhaps she can speak a bit more freely but there's no way she made a gaffe there that was incredibly she's an very intelligent person and she knew exactly what she was doing I don't know what their agenda is maybe they're worried about asset price bubbles I don't know but anyway that's one point actually what just on that the Fed released last night their financial stability report funny you should say that because they said in that report rising appetite for risk across a variety of asset markets is stretching value valuations and it's creating vulnerabilities in the US financial system right and so just keeping it true and you know an interesting thing is like the market a few months ago was sorry to jump in but the market a few months ago was like yield obsessive inflation expectations and everyone was panicking then everyone's now bought back into the Fed volatility dropped very low now and then it was almost felt like Yellen was just like don't get complacent here I'm just going to drop this in and then the next day the Fed come out and force several speakers just realigning it it's just not just tactical management Yellen fully coordinated I'm sure Powell was talking to Yellen look the Fed got this very difficult challenge where they've got asset price bubbles pockets prices are really dangerously bubbling and that's a risk right so the financial system and therefore the underlying economy so they want to calm that down but at the same time they don't want to then destroy or risk confidence within the broader economy just as we're emerging from lockdown so you kind of be caught between a rock and a hard place so I know why don't we get our old mate Yellen who's not in the Fed to flash up a bit of a hawkish comment from from nowhere and then we can come back in and kind of counter that and defend that and stay dovish and we try and achieve our dual aim of calming down price bubbles whilst also sustaining confidence at the economic level so I'm sure it's all very strategic and coordinated I mean one one thing I would say about the Fed and will it be June when they start the discussion of maybe we should think about tapering one thing to note that's different this time than any other Fed cycle is what Powell said earlier this week and he said that the Fed will not remove the punchbowl he didn't say these words exactly but will not remove the punchbowl until the labor markets worst off have seen their prospects improve there's a very different Fed now and it's about the lower income bracket it's about the worst off it's about the rich poor divide now for the worst off the lower income they got hit the most by the pandemic so they're going to wait and keep policy ultra accommodative until the worst off start to see their conditions improving which means they're going to I would say they'll delay their exit more than they would have done let's say in previous crises which is why I think June is still too early and technically from a numbers point of view we've got payrolls out in a few hours the headlines expected just short of a million which is a high number in terms of the recovery of jobs in the US but that would leave employment about seven and a half million below its peak in February of 2020 before the pandemic hit so in terms of that gap to fill interestingly there was a comment here just to kind of close from Stephen Englander you might have heard of him Piers he's he's fairly well followed the global head of FX research at standard charter but he's he's got some good good pieces out and he was talking about today's payroll and he was suggesting that you're going to need a number north of two million today if you are going to see the Fed potentially reconsidering that view about tapering talk being too premature and he was actually talking about consensus today is actually 978,000 he's actually was saying that in fact if we see anything below 1.5 million so still strongly above consensus the market will just swallow that the Fed will stay and actually it just further feeds that positive narrative that things are moving on in the right way and the kind of gravy train continues so to speak and in fact looking on other asset classes anything that comes in between one and a half million he sees as sufficiently significant positive surprise for well not being a significant positive surprise for bond investors and therefore actually yours might fall yeah even if we get a 1.2 1.3 million reading today and actually two notes might rally and that right there sums up the incredible moment in time that we are living in yeah I mean I agree it's got to be north of two million that's that feeds back into that the lower income bracket properly recovering because you're going to need super strong job creation for it to properly feed down to that bottom level and it's only then that the Fed will start to sit up and take note so I agree you're going to need a monster reading north of two million for the Fed to even kind of flicker I would say yeah well if that does happen just look out for source comments this afternoon that's all I'm saying absolutely all over the weekend I'm sure they'll be all over the weekend press but with that pierce safe journey back on the tube yes looking forward to it and I did see the actual invite but I won't be able to attend because I'll be doing work while you're enjoying your curry in true British style yeah well we'll catch up with you later in the month but I hear so you know it's a bad time you you've dragged yourself out and showed your face yeah all right with that with that pleasant view for everyone or not so pleasant we wish everyone a great weekend good luck for payrolls and we'll see you next week