The Weekend Edition # 101

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 - Third Red Week

• Macro - Rates, China and Japan

• Earnings Recap - Retail Week 1

• The Week Ahead - Economic & Earnings Calendars

• Closing Thoughts - Powell has left the building!

Let’s dive in ⬇️

Market Recap - 14 Aug - 18 Aug, 2023 📉📈

After a third ugly week, we saw some respite on Friday with the indices closing out flat to higher. But, Friday’s close puts us in an awkward situation. We’re now at a point where the market is looking for some relief and with the options expiration and major earnings out of the way, we could possibly see a bit of a bounce from here.

Sector performance has been mixed with technology being the least bad and energy in the second spot. But, below that we continue to see a risk-off feel with healthcare, utilities and staples.

Bank stocks were weak on Tuesday. The previous week, Moody’s lowered ratings for 10 U.S. banks that are small or mid-sized and Fitch discussed doing the same this week. Minneapolis Fed President Kashkari said banks may have to follow stricter capital regulations, which also affected the group.

Homebuilders turned ugly, that too right after Warren Buffett’s 13F came out saying that he’d invested in Lennar, DR Horton and NVR last quarter. We still have the housing shortage in the US but, it’s likely that some of that story has been overshadowed by Mortgage Rates hitting a record high.

Bond yields continue to hover at October 2022 highs and not just for the US. Global yields have seen a rise and we’re seeing that in selling pressure across equities and bonds in Europe and the UK as well. The Euro Stoxx 50 index actually crossed below its 200-day Moving Average, which is a significant bearish technical indicator.

Next Friday brings us the famous Jackson Hole Symposium where Fed Chair Jay Powell gives his speech. And while last year was extremely memorable, this year is likely to be more of a quiet event.

Commodities

Gold has been interesting over the past two weeks. August has been a month for risk off and with that Gold prices have also taken a hit. The inverse correlation between gold and the 10Y treasury rate continues to hold.

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 - Rates, China and Japan

The markets seem to be content to make up their own theories of what’s happening - with inflation threatening to stage a comeback, a soft landing is becoming more and more elusive. The market is pricing in one more hike and suddenly this seems to be an issue.

I realize that the Fed may have a credibility issue but, even if you don’t believe them, believe what you can see in the data.

Everything points to one more hike and likely cuts from mid-2024. And even that cut will be probably be gradual. 5.75% may seem high right now but, in the greater of context of things, it is not. ⤵️

But, 5.75% does come with consequences and that’s what we need to remember! The bigger issue is not whether a soft landing will or will not happen but, what’s happening under the surface leading in to that first rate cut. And the data is deteriorating.

Bond yields are finally getting to where they actually should be and we’re seeing the havoc they are wreaking. For long term investors, this is what we want. With earnings falling -6% YoY, we certainly don’t want the stock market to march to all-time-high’s on weaker earnings making it enormously expensive for us to buy and hold.

China and Japan also remain wildcards in this equation.

While I don’t think Japan will change their stance on easing this year, the higher YCC band will mean a higher level of yields causing some of that carry trade to disappear eventually attracting funds back into the country. Eventually, not immediately.

In the meantime however, Japan has a balancing act to perform. As long as the yields continue to float higher, there will also be reluctance to buy those bonds here since prices will continue to drop and funds may continue to flow to the US as people speculate that the Fed is approaching its terminal rate.

MOF data showing Japanese net purchases of US bonds totaled JPY13.6T in H1, the highest for a HY period since 2014. Furthermore, this week we saw low demand for 20-year Japanese Government Bond (JGB) during the auction which pushed yields up higher but the Government didn’t intervene to buy any of the bonds quite likely to manage their currency which is already hovering at 145-146 per dollar.

China on the other continues to see their GDP get revised downward with one bad data point after another. Their property market remains a ticking timebomb and government intervention is lacking.

We shouldn’t underestimate the effect this can have on global equities.

The world continues to be global and we continue to keep an eye on everything macro. 

Earnings Season

FactSet Summary

• 95% of the S&P500 has reported earnings thus far. The blended earnings decline stands at -4.59% (previous week: -4.99%). The actual earnings decline stands at -5.55% (previous week: -6.4%).

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

We had a whole set of retail earnings this week, with more coming up next week as well.

Starting off with Home Depot, earnings came in better than expected. As we’d said in our earnings preview, the surge in homebuilders would be a tailwind for the more professional customers that Home Depot services. Nevertheless, they were cautious on the outlook and maintained guidance.

Walmart posted a double beat while Target missed on revenues, as expected. Yet, Walmart dropped -2.2% and Target saw an increase in share price of +2.8%! Discount retailers continue to do well as Ross Stores and TJX both posted decent earnings and were up on the results.

While demand and spending patterns still remain firm, a common theme was warnings about the macro environment and the effects of declining inflation.

Cisco surprised the market with better-than-expected earnings after easing supply chains helped them improve margins and their bottom line.

Finally, Deere beat both top and bottom line but the stock did not react well. As we’d discussed the market is seeing this as peak performance for the company and is wary of a slowdown ahead. Small ag and turf which is more retail-centric slowed down significantly and long term demand trends are in question with replacement cycles becoming longer.

The interesting thing about earnings last week… most of the earnings came out exactly as we had discussed in our earning preview. But, the reactions did not!

Reactions to earnings have been extremely volatile and unpredictable this quarter, leaning more heavily on the negative as you can see from the FactSet stats above.

The Week Ahead 📅

US Earnings Calendar

US Economic Calendar in Eastern Time 

Closing Thoughts - Powell has left the building!

I doubt there are many who will forget Powell’s 8-min fiasco at the Jackson Hole Symposium last year. He took the markets by surprise and set them on fire. I doubt we will see anything close to that fiasco this time around.

Ladies and gentlemen, Jackson-Hole-Powell has left the building!

We’re probably going to see a more calmer Powell talking about being data-dependent and keeping the door open for a hike in September. I won’t be surprised if he mentions: Our job is not done!

The Fed has come a long way from where we were last October and even if they cheated with the BTFP backstop, they’ve managed to get inflation down relatively smoothly. Even if we do get a resurgence in inflation, conditions are probably tight enough that they will keep working as long as we don’t experience any global shocks.

The fiscal impulse and tight labor market has kept GDP and retail spending going strong and that’s been a huge source of comfort in many ways for the economy. There is no doubt that there will be some deterioration in both those areas and growth will slow but, the Fed has already taken that into consideration.

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.