The Weekend Edition # 100

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and welcome to all the new subscribers this week! 

Here’s what we cover:

• Market Recap - Another eventful week

• Macro - The Story of Inflation

• Earnings Recap - Tyson, UPS, Alibaba, Eli Lilly

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - Decision Point

Let’s dive in ⬇️

Market Recap - 07 Jul - 11 Aug, 2023 📉📈

The broad indices ended in the red for a second week in the row. Apple's losing streak was broken this week. But, there were other pressures weighing down on the market. Bond yields were higher on the longer-end weighing down high beta, long duration stocks.

Globally, equities were also down on economic data and geopolitical events.

We started off with ugly Chinese Import and Export data showing a significant slowdown in activity. And then the market was seemingly spooked on Wednesday with the Chinese Headline CPI numbers showing actual deflation - coming in negative for the month of July. Then there was news of the US banning investments in certain Chinese tech companies and finally, remarks from the White House on China's problems being a ticking timebomb.

A small sideline to this was Japanese real wages and real consumption also coming in lower which is likely to mean that easing policies continue. We don't think that there will be a meaningful revision to easing this year by the BoJ causing Japanese stocks to remain elevated and the JPY to remain depressed.

Commodities

Energy had quite the rally this week. Natural Gas soared particularly European Natural Gas on news of strikes in Australia that could hamper LNG exports.

“Risks for LNG supply side disruptions are clearly mounting in Australia of worker strikes from fairly sizeable facilities(accounting for nearly 50% of Australia’s total capacity) but whether it will actually happen, the timing and the longevity are all uncertain. This could disrupt ~9.5% of global LNG supply.” - JPM

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro Roundup - The Story of Inflation

The story of inflation remains an odd one. While CPI numbers came in lower than expected, we did see a slight uptick in headline numbers. As far as core numbers are concerned, we’re seeing a decline but, shelter still remains stubborn. Owner’s Equivalent rent increased from 0.4% MoM in June to 0.5% MoM in July. Overall, shelter came in at 0.4%, flat from the previous month. Hotels saw a slight decline but not enough to cause a slowdown in the overall growth number.

We had hoped that by July we’d see signs of a slowdown in shelter inflation and while that has happened to a large extent - year on year the number still remains at +7.7% with no deflation in sight.

Produce prices came in hotter than expected which surprised the market - much of this was food prices and services. The PPI for final demand increased 0.3% for July driven by an increase of 0.5% in services and an increase 0.1% for goods.

As far as inflation expectations are concerned, the University of Michigan survey shows that 1 year out, people continue to believe in the inflation is conquered story. I think they are right to believe so. Despite a temporary surge, we will ultimately see inflation coming down significantly by 2024 - whether we hit the 2% market or not is a different story.

A major point of concern for the Fed has been wage inflation. We are seeing wage inflation decline but, I agree with BoFA that the level is still not commensurate with a 2% inflation target. So if we are to believe that there will be a steep decline in inflation over the next few months, these measures will also need to come down. The Employment Cost Index, for one, needs to be between 2%-3%.

In keeping with the overall disinflation story however, we are seeing trends of declining Global Inflation and I’m not talking about the deflation we’re seeing in China. Here’s a great chart showing core inflation rolling over for most of the world.

One last thing to note, is the Break Even Inflation rates. The chart below shows the 2-Year Break Even Inflation rate. This rate has followed inflation up and will likely lead inflation down. So all things considered, we’re on the right track even if we see a temporary resurgence.

Earnings Season

FactSet Summary

• 91.45% of the S&P500 has reported earnings thus far. The blended earnings decline stands at -4.99%. The actual earnings decline stands at -6.4%.

• 56% of the companies reporting had a negative price impact on releasing earnings results.

Tyson (TSN)

Tyson is a meat packaging and production company. This is the third quarter in a row that the company’s results weren’t up to the mark. Tyson announced the closure of yet four more chicken facilities, adding to the two that they announced the previous quarter. This quarter saw the 5th straight adjusted EPS miss and operating margins declined 6%.

Price declines didn’t increase volumes as expected while a price increase in beef hit volumes hard. It would seem that overall customer spending is declining.

UPS

UPS also had quite a challenging quarter, cutting guidance due to a difficult macro environment. The recent labor negotiations didn’t help either, hitting US volumes and increasing costs as well. Ramping up from these lower sales levels remains a challenge in this environment.

While the company has been successful in cutting costs in many areas, revenue forecasts have been cut from $97B to $93Bfor the year, on the lower volumes.

Alibaba (BABA)

Baba posted a double-digit topline growth - the first since Q2, 2021. The boost came mainly from e-commerce, while their cloud services lagged in growth. We saw this with Amazon and Meli as well. E-commerce is still remains the low cost option for consumers.

The company continue to progress on their split, as well, with the six business already operating under their respective boards’ leaderships.

Eli Lilly (LLY)

Eli Lilly was possibly the star of the week - soaring to all-time highs at $538/share. They posted their strongest revenue growth in over 5 years boosted by only a few of their major drugs.

their type 2 diabetes cure, which is now being used as a weight-loss drug. FDA approval is expected later this year and it could become the company’s top seller.

They also expect to receive approval for the Alzheimer treatment which only adds to Lilly’s impressive revenue growth.

The Week Ahead 📅

US Earnings Calendar

US Economic Calendar in Eastern Time 

Closing Thoughts - Decision Point

Despite the increase in inflation, most analysts still believe that we will see immaculate disinflation in the next few months and the Fed will not hike anymore. I don’t agree with this view.

I do think that we will still see a temporary resurgence in inflation which is likely to lead to one more hike. I don’t however, think inflation exceeds the Fed Funds Rate but, I think the Fed will be on cautious footing and will likely tighten, with even a hint of inflation remaining sticky.

We’re at a decision point for most developed markets. Pause or keep hiking? Personally, I think the Fed, the ECB and the Reserve Bank of Australia all have one more arrow left in their quiver. As for the Bank of England, I think we may see two more hikes.

As far as the Fed is concerned, if they are to hike, it’s likely to be this year because the next year is an election year. We’ll probably know more at Jackson Hole.

For now, we still have a few more economic data points to monitor to see how things shape up into the end of the year.

Here’s wishing you safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.