The Weekend Edition # 107

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 - A green week

• Earnings Season Q3 - Beware of the Staples!

• The Week Ahead - Economic & Earnings Calendars

• Closing Thoughts - A Big Week Ahead!

Let’s dive in ⬇️

Market Recap - Oct 02 - Oct 06, 2023

We had the first green close in 5 weeks on the S&P 500. The week started out with the usual selling pressure. But, Friday brought us quite the turnaround in equities for US Markets. The SPX bounced off the 200-day moving average.

What’s most surprising is that this massive green Friday came after a big upward surprise in the unemployment numbers, and in the face of bond yields and the US Dollar still remaining elevated.

There were a couple of narratives being discussed:

1. Wages didn’t go up and that will mean lower inflation so the Fed won’t have to hike in November. This is odd because the probability of a hike actually increased from the previous week. We don’t agree either and we wrote an article on Friday explaining why we think the numbers are weaker than they look.

   

2. The bond market reacted negatively and so did equities at first. We think the bond market is right to price in higher rates and uncertainty. In fact, if anything this employment report brought a lot of uncertainty to the current situation.

3. A soft landing narrative is being discussed as full employment persists while inflation continues to decline. The problem with this scenario is that with full employment, the economy is likely to overheat and push inflation right back up. Fed Chair Powell has mentioned several times that the economy needs below-trend growth and a softening in the labor market in order to achieve the inflation target level of 2%.

The most plausible explanation is that the market was oversold and was due for a bounce. And Friday brought with it the weekly options expiries. Given that Monday is Columbus day and the bond market is closed, we may see continuation to the upside in equities barring external factors such as the current geo-political situation in the Middle East escalating further.

Commodities

The major news this week in the commodities world was the drop in oil prices. WTI Crude went all the way down to $82/bbl, closing out the week almost -9% lower. The driver was reportedly lower demand for gasoline and no bad news coming out of the OPEC+ meeting on Wednesday. The next support level is about $79.50 but, I doubt this pull back is sustainable and we will likely see a bounce back up in the coming week. We may even have a catalyst for that.

A declaration of war dominating the headlines can’t be a good thing for global markets. There’s a lot of speculation that we’re likely to see a spike in the US Dollar and oil. I doubt we see much of “spike” in the USD but, we’re likely to see some upward pressure on oil, rates, and gold. Even though, there’s no direct relation to OPEC+ and oil supplies here, there is likely the perception that this will curtail supply.

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

Earnings Season - Beware of the Staples!

Pricing power is declining with inflation coming down. What is a relief for the overall economy, may not be such a major relief for stocks, particularly when it comes to revenues.

We discussed overall factors affecting earnings last weekend, and pointed to the fact that the current earnings estimates seem optimistic. It's likely that we will continue to see downgrades throughout earnings season.

While we expect top line revenue will take most of the hit, weaker pricing power and rising financing costs, will lead to lower operating leverage and lower profitability as well. Freight and labor costs were two major issues that had reversed in the previous two quarters and this had now largely normalized and so may not have much of a positive effect any longer.

With this background theme in place we expect to see Consumer Staples come under pressure from three distinct angles this earnings season.

Volumes & Revenue

We will see volumes decline because of overall demand being destroyed caused by the higher level of pricing over the last few quarters. Add to that the pressure of stimulus measures and excess savings declining. The consumer has become weaker and that means more cost conscious spending even on food, grocery and restaurant purchases.

The outlook from the earnings calls this quarter is likely to point towards lower revenues and possible adjustments in pricing downwards in to order for companies to manage the decline in volumes.

Margins

As we see from Conagra's example, margins will also come under pressure. As purchasing volume declines, companies will compete even harder for shelf-space and visits. This means putting out the best deals to attract customers. Slashing prices means lower margins as you charge lower for products, where the costs are the same as before.

Weight-Loss Drugs

Finally, we have the fallout from the weight-loss drugs, also known as the GLP-1 drugs. I know it seems too early think about what effects these drugs may have but, companies like Walmart are already talking about it and last week, the consumer staples sector ETF (XLP) took a hit in price.

Markets are forward looking as they say, and price is often dictated far more by perception and anticipation than anything else. The weight-loss drugs are meant to work by killing cravings and as result, food and beverage companies are likely to take a hit to their volumes. They also stifle urges for tobacco and alcohol so even cigarette, beer and spirits manufacturers are likely to be impacted.

A few companies to watch for these impacts would be:

Articles of the Week

The Week Ahead

US Earnings Calendar

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

Closing Thoughts - A big week ahead!

Earnings season starts this week! But that’s not the only thing happening. Monday should be a quiet day because of Columbus day and the bond market is closed. This may mean lower liquidity on Monday and we will see a follow through of Friday’s price action to the upside.

But after that, we have two treasury auctions - the 3Y on Tuesday, the 10Y on Wednesday and the 30Y on Thursday. Not to mention, we have the FOMC minutes on Wednesday and CPI on Thursday. Considering that this is the last CPI report before the November Fed meeting, it’s likely to be an important one.

With all the events lined up for the week, watch out for heightened volatility and choppiness in the markets.

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.