The Weekend Edition # 103

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 - August was a tough month

• Macro - Where are the savings?

• Earnings Recap - Earnings Season Performance

• The Week Ahead - Economic & Earnings Calendars

• Closing Thoughts - Conflicting Stories

Let’s dive in ⬇️

Market Recap - 28 Aug - 01 Sep 2023 📉📈

We had another green week. So that’s 2 weeks of red and 2 weeks of green but August still ended red overall. And it wasn’t just the US.

Global equities also sold off during the month with the exception of a few countries. India took a hit after more news came out about the Adani group but still managed to close in the green.

Earnings was certainly a negative catalyst for price action where the S&P500 was concerned but the overarching theme was rising bond yields due to the possible resurgence of inflation. No doubt, the idea of immaculate disinflation has subsided and we’re warming up to the idea that inflation is not going straight down.

But, another element to the story now is the split in views between the Fed being done and one more hike in November. As I wrote a few weeks ago, I do believe that the US will hike one more time but, whether that’s September or November, remains to be seen.

Commodities

Aluminum prices have been on downtrend since the cycle peak last year with demand levels falling off. The drop in Chinese construction has been a major drag on prices. Add to that a slump in European and US Manufacturing.

Aluminum stockpiles have also been on a downtrend since 2015. To make matters worse, Europe closed almost half their facilities due to higher energy costs. Restarting production once a factory is closed takes a significant amount of time and energy. One ton of aluminum requires 15MW of energy; 40 times more than a ton of copper. Europe’s aluminum production has fallen to its lowest level since 1973.

Russian stockpiles are still sitting in LME warehouses and many are unwilling to trade that inventory because of the unpredictability of sanctions.

With all this being said, Aluminum prices are now in contango and traders are betting on an increase in prices because of these lower stockpiles and an expected return of demand by early next year.

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 - Where are the savings?

It was a busy week for Macro data but the two most important data releases were perhaps the PCE Inflation numbers on Thursday and the Employment Report on Friday.

While the PCE Inflation didn’t have any surprises, we did see inflation inch up on a YoY basis, albeit very mildly.

The one thing that did catch our attention with the PCE release was the Personal Savings Rate, which came down yet again last month to 3.5% from 4.3% in June. The savings rate seems to have peaked 4.7% in May, if we look back over a period of one year. Of course, the savings rate has been much higher before that.

From what we can see over the course of the last few years:

• Inflation has eroded savings as people are having to pay more everyday

• All the excess savings that people had over the pandemic because of stimulus measures is dwindling

• Much of the pent up savings have been used for pent up demand in travel, leisure and medical care

The downtrend forming over the last few months however, is very interesting because it would seem that despite higher rates, and a possible slowdown in the economy, people are not saving as much any more.

We seem to have a situation where either:

people cannot save because inflation is still running hotter than expected in many categories and the cumulative impact of inflation is hurting the consumer,

or

people don’t foresee a slowdown in the economy anymore and therefore, don’t think that they need savings to tide them over.

If you ask me, I think it would be the first one. We have seen a slowdown in inflation but we haven’t seen outright deflation in most categories.

The Personal Savings Rate is definitely a metric that we should be keeping an eye because it tells a lot about the health of the consumer.

Earnings Season

FactSet Summary

• The S&P 500 reported a decline in earnings of -4.1% - the third straightYoY decrease.

• There were 288 mentions of inflation - still a hot topic

• Top Sector - Consumer Discretionary with 54% growth

• 79% of companies exceeded EPS Estimates

The tough part of this earnings season was the reaction to releases. We saw companies getting sold off even on bad news that was mild. And for those who had really bad news, we saw double-digit sell-offs.

A look at factor performance for the last 3 months shows us that value and mid-caps seemed to have fared better than the rest. (Granted this is based on ETFs but it still gives us a flavor how the markets moved). ⤵️

Despite the sell-off’s valuations still remain relatively high with the S&P500 running at 20x P/E. With the way the market has marched up this year, we’re seeing more expensive valuations as earnings get revised lower.

Traders and investors will now have to look for companies outperforming in H2 to justify the valuations. While some companies may be able to pull this off, the rest will struggle.

What’s good for inflation is actually bad for many companies as they will see their revenues decline. Costs have come down but by now most companies have normalized and that tailwind from lower costs doesn’t have any gusto left.

The Week Ahead 📅

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

Closing Thoughts - Conflicting Stories

With the market absorbing the idea of one more hike and a slight resurgence in inflation, it would seem that some of the fear has subsided and bond yields are responding to that.

Bond yields however, are only part of the story. We still have growth concerns. Manufacturing PMIs across Europe released on Friday show us that most countries are still in contractionary territory. As is the case with China, where we saw some improvements in New Orders but, not enough to spark a revision to GDP growth rates. If anything, we have more banks estimating a sub-5% growth rate for China.

It would seem that the Fed Funds Futures is now pricing in a pause for the Fed after the labor report that showed an increase in the unemployment rate from 3.5% to 3.8%, which is what the Fed focuses on. But, this level is still below the 4.1% that the Fed has forecasted. The forecast was revised down in June from 4.5%.

September’s meeting will bring us the Summary of Economic projections and we will see if they make further cuts to their unemployment rate forecast. As of now, the Fed still has the problem of inflation, unemployment has reached the forecast and neither has the Fed’s forecast of Federal Funds Rate which sits at 5.6%, indicating one more hike.

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.