Head of BofA Global Research
This week we discuss what’s attracting investors to digital assets, our latest read on the U.S. economy, supply chain disarray and how higher energy prices are impacting each region around the globe.
In 10 years digital assets went from being non-existent to worth over $2 trillion dollars. While everyone always thinks of Bitcoin when they hear cryptocurrencies (and for good reason with a market value of $900bn), Alkesh Shah details how the digital asset ecosystem is so much more.
Tokens that act like operating systems, decentralized applications (DApps) without middlemen, stablecoins pegged to fiat currencies and central bank digital currencies (CBDCs) to replace national currencies are just a few of the reasons investors are becoming more attracted to digital assets. Hundreds of companies now provide infrastructure support, marketplaces and applications (such as decentralized finance, digital identity, supply chain, gaming and social media).
Digital assets that enable applications to be built, like the Apple iPhone did with its App Store, are gaining the most value. While some investors expect strong performance once governments and regulators introduce the rules of the road, we believe there's likely to be plenty of volatility along the way.
The September employment report was a mixed bag. While the jobs report from October 8th disappointed with nonfarm payrolls increasing only 194K, the details of the report were stronger with net positive revisions of 169K and a drop in the unemployment rate to 4.8%. U.S. Economist Michelle Meyer points out how supply side issues are front and center with a contraction in the labor force and strong wage growth. Meanwhile, the virus situation continues to improve rapidly. While COVID remains a threat, we think the recent drop in cases has helped ease COVID concerns. As a result, we continue to see improvement in service sector activity.
Interestingly, spending at daycare centers in September was 52% above last year's level and only 13% below the same time in 2019. Michelle sees this as an encouraging sign as reliable childcare is critical for the recovery of the labor force. Bottom line – Michelle thinks the Fed is still on track to taper at the November meeting.
It’s well known that the global supply chain remains in disarray, partly because of labor supply, but Transportation & Shipping analyst Ken Hoexter enlisted the help of some of those particularly close to the situation to help us understand the latest. A call with ZIM Integrated, a top 10 container shipping company, suggests that there was indeed pull forward of demand as shippers looked to get product ahead of the holidays, contributing to port backlogs. And while the peak seems past, ZIM’s ships remain fully booked well into 2022 as shippers are still dealing with low inventories.
BofA’s proprietary bi-weekly Truck Shipper Survey also suggests peaking demand, likely owing to early holiday shipments, but the demand gauge is above the long term average and the inventory gauge sits at record lows, which should keep demand strong at a time when Ken believes truck stocks discount peak cycle concerns.
The spike in energy costs adds yet another variable this holiday season. Head of Global Economics Ethan Harris finds that the U.S. is in a relatively good position to weather the shock. For one, the U.S. is self-sufficient in energy, so higher prices are “collected” by U.S. energy suppliers. Also, U.S. consumers have excess savings, the Fed has credibility and U.S. fracking can be ramped up if need be. Europe, however, looks more vulnerable, as do countries in Asia which consume large amounts of commodities, but don’t produce them. Globally, Ethan believes that the energy spike could act as a “consumption tax” of as much as 1.6%, perhaps more if production disruptions get worse and in case producers pass on higher costs.
While there will be a drag and energy prices could go higher from here, at 5.6% of global GDP, energy’s share of the global economy today is still well below the 8.8% seen in 2008, when high energy prices became problematic for growth.
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