The Weekend Edition # 99

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 - Ugly week with Fitch Downgrade and Apple Earnings

• Macro - Developments in the Oil Market

• Earnings Recap

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - Who can blame them?

Let’s dive in ⬇️

Market Recap - 31 Jul - 04 Aug, 2023 📉📈

It’s been an ugly week. No one saw the Fitch downgrade coming for the US. Fitch did warn us earlier in the year when the debt ceiling negotiations were going on but, the timing of the downgrade now is odd. That sparked a sell off in the market.

Come Thursday, we saw Amazon and Apple report earnings. While Amazon surged ahead, Apple’s lackluster performance didn’t do the stock price any favors. We saw the price gap down when market opened on Friday. Apple ended at the day at -4.8%.

Not even end of week flow helped the market and we saw pressure going into the close. August certainly hasn’t had the best start.

Equity returns and corporate yields have seen financial conditions ease from 2022, retracing almost 35% of their decline last year. This is true of the US and Eurozone.

Commodities

Not a great week for commodities either this week. We saw some of the Agri products spike during the week on news of further Russian attack but, most of those gains were given up the end of the week. Crude oil ended the week higher and we talk about some developments in the oil market in the next section.

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 - Developments in the Oil Market

Energy costs have started to increase yet again and this of course, doesn’t bode well for headline inflation… anywhere.

We foresee oil prices remaining relatively elevated until the end of the year with the supply side remaining tight. Goldman Sachs maintains their forecast on Brent at $86 per barrel and we think WTI Crude remains in the $75-$80 range for the remainder of the year.

Demand forecasts have seen a decline given the expected slowdown in GDP and recessionary forces. But, from what we’re seeing the recession (if ever) seems to be delayed and demand has not exactly declined the way everyone expected. Deficits are set to continue into 2024.

The OPEC+ monthly meeting was held on Friday and while there weren’t any major announcements during the meeting, we did get developments from OPEC+ countries during the week.

Saudi Arabia will continue production cuts of 1 million barrels a day into September. That will mean output of about 9 million barrels a day, the lowest level in several years.

Russia announced that it will continue to cut oil exports by 300,000 barrels per day in September, following two earlier pledges to cut supply by 500,000 barrels per day - a cumulative cut of 800,000 barrels per day from February levels. Russian crude export levels have fallen in July, particularly to India.

With the increase in energy prices, speculators have increased their net long position in WTI crude oil, adding more longs relative to shorts; while also seeing CTAs cover a large portion of their shorts.

We saw a record drop in inventories in the past week and while that plays out, we’re certainly seeing inventories at the lowest levels in the past few years.

Earnings Season

FactSet Summary

The blended earnings decline has improved further this week to -5.2% from -7.3% and -9% in the previous 2 weeks. This is definitely means that we are seeing some actual earnings growth but, overall earnings are still contracting quite meaningfully.

We had over 160 S&P 500 companies representing nearly 30% of the index's market cap are scheduled to report, including Apple and Amazon on Thursday. And with that we’ve now seen 84% of the S&P 500 report earnings.

Stock price reactions to earnings have not been great this quarter with over 58% of S&P500 companies reporting a decline in stock price after earnings

The market knows the earnings estimates were taken down a lot and unless we’re seeing some significant good news or a wide beat, the market remains unimpressed.

With inflation subsiding, we’re also seeing revenues come in lower. Currently, the blended revenue growth rate is at 0.6%. To compare, one of the worst quarters we saw in recent history was Q3, 2020 at -1.1%.

The Week Ahead 📅

US Earnings Calendar

US Economic Calendar in Eastern Time 

Closing Thoughts - Who can blame them?

Here are some interesting stats from JP Morgan: “7 out of 12 previous Fed tightening cycles were followed or accompanied by recession. During these 7 Fed tightening cycles, a US recession started on average 5-6months after the last Fed hike.”

Will this time be different?

Many of the big banks are forecasting a much lower probability of recession than a few months ago. And who can blame them? 

With the US GDP coming in at +2.4% in the second quarter, it would seem as though the US Economy has rightly been called the “Teflon Economy”.

And then there’s the discussion that even if there is a recession, it will likely be a mild one and unemployment will likely not increase drastically, i.e., a soft landing. Again, who can blame them? 

We’re still seeing the unemployment rate at 3.5% after the most aggressive Fed hiking cycle. We’re starting to see signs that the labor market is also beginning to cool down with Job Openings declining to the low 9m, Non-Farm Payrolls coming in below 200k and the quits rate increasing.

Finally, we have the yield curve. The inversion of the Yield Curve has been one of the most reliable indicators of a recession coming. As long as the Yield Curve remains inverted, we’re usually in late cycle and stocks can actually rally. When the curve starts to steepen is when we usually see the onslaught of a recession. We’ve almost always seen the curve steepen after a Fed hiking cycle.

The US has become far less interest-rate sensitive in the last decade. With tech taking over and the services economy dominating, we’ve seen a lot of the Capex expenditures remain in check and therefore, what we get is a hiking cycle that is taking time to take hold in the economy.

It remains to be seen how long the lag is between the end of the Fed’s hiking cycle and real contraction in the economy - because there will certainly be some contraction.

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.