Jul 14, 2023
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“You don’t reason with intellectuals. You shoot them.” – Napoleon Bonaparte
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For all the talk about how the discourse has become so much more violent in recent years, we have nothing on Napoleon. Shooting people you disagree with??? The only duels these days happen on Twitter.
After a brief scare last week from a stronger-than-expected ADP report, the bull market came back from July 4th vacation this week, and futures are poised for a flat to modestly higher open to close out what has been a very positive week. The only economic reports on the calendar this week are Import Prices at 8:30 (weaker than expected) and Michigan Sentiment at 10 AM. It’s been a busy morning for earnings, and so far, the reports have been positive as all seven of the companies reporting as we write this have reported better-than-expected earnings and five out of seven have topped sales forecasts. So far so good.
European markets are mixed so far this morning with the STOXX 600 essentially flat while France leads the way higher with a gain of 0.3% and Germany lag (-0.2%).
They say a dollar isn’t what it used to be, but it can still have a big impact on equity market performance. Take the recent performance of European stocks. The chart below shows the performance of Europe’s benchmark STOXX 600 index over the last year. After an extended period of sideways trading, the STOXX 600 sold off in late May and ever since has been making a series of lower highs and lower lows. A recent test of the 200-DMA held, but the index is currently bumping up against its downtrend and trying to reclaim its 50-DMA as we close out the week. From a technical perspective, it’s not the greatest picture for European stocks.
If you’re an investor in the US and looking at the performance of European stocks through the lens of the US dollar, you’re seeing an entirely different picture. Instead of lower highs and lower lows, it looks more like higher highs and higher lows as the STOXX just this morning broke above resistance from earlier this year and is now trading at 52-week highs. Technically speaking, the STOXX 600 in dollar-adjusted terms looks a whole lot better. What a difference the dollar makes!
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Jul 13, 2023
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“The discipline of writing something down is the first step toward making it happen.” – Lee Iacocca
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Equities remain in rally mode again this morning as Dow, S&P, and Nasdaq futures are all firmly positive. Treasury yields are also firmly lower across the curve. The 2-year yield which was over 5% a week ago is now down to 4.67% while the 10-year yield which was over 4% is now down to 3.83%. Much of this really has been the result of benign economic data specifically related to inflation, but for it to continue we’ll need to see companies pick up the baton as they start to report earnings.
This morning’s earnings reports have been generally positive. The two biggest companies to report – Pepsi (PEP) and Delta (DAL) both handily beat EPS and sales forecasts, and PEP even raised guidance to complete the Triple Play. Conagra (CAG) also managed to top EPS forecasts but missed on the top line, while Fastenal (FAST) reported slight misses on both the top and bottom line. As one might expect given the results, both PEP and DAL are up over 2% in the pre-market while the other two are down roughly 2%.
Besides the earnings results this morning, it’s a busy day for economic data with June PPI and jobless claims coming out at 8:30. Initial Claims came in lower than expected at 237K versus forecasts for 250K while continuing claims were slightly higher than expected (1.729 mln vs 1.720 mln). The big report of the morning though was PPI and that came in at 0.1% at both the headline and core levels, which was lower than the 0.2% forecast.
Regarding PPI, as we’ve highlighted in recent months, the spread between consumer and producer prices has widened to historically wide levels. Last month, the spread between the y/y readings of CPI versus PPI widened to 2.9 percentage points which is the highest since at least 2011 when the current incarnation of PPI begins. Following this morning’s release, the spread remained at that record level of 2.9 suggesting that corporate profit margins remain healthy.
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Jul 12, 2023
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“I don’t mind going back to daylight saving time. With inflation, the hour will be the only thing I’ve saved all year.” – Victor Borge
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We’re already in the middle of the week, but in many ways, it’s just beginning as June CPI is being released as we write this, a number of Fed speakers are on the calendar to speak, and then later in the week, we’ll get PPI, Jobless Claims, Michigan Confidence, and then the start of earnings season. Heading into the release of today’s CPI report, equity futures are higher following a mixed session in Asia, and a strong showing in Europe where most benchmark indices are up 0.5% or more. Interest rates are lower, and crude oil is up back above $75 per barrel.
In Asia, overnight data was positive as PPI in Japan unexpectedly declined 0.2%, and in China, the government pledged support for internet platform companies which could signal some thawing in the tensions between the communist government and the country’s most powerful executives.
There isn’t much in the way of specific catalysts to speak of explaining the rally in European stocks, although Spanish CPI increased 0.6% m/m which was right in line with expectations. What makes that report notable is that the y/y rate of inflation dropped to 1.9% from 3.2% making Spain the first EU member state to reach the 2% inflation bogey. Will the rest of the region follow suit?
The June CPI report was just released, and while economists were forecasting both the headline and core readings to rise 0.3%, the actual readings came in at 0.2% on both a headline and core basis. On a y/y basis, headline inflation dropped to 3.0%, the lowest level since March 2021 while core CPI dropped to 4.8, which is the lowest reading since October 2021. We’re definitely not at Mission Accomplished, but it’s still moving in the right direction. In response to the report, equity futures are higher with the Nasdaq leading the way gaining more than 1%.
Remember back when it seemed we couldn’t get a weaker-than-expected CPI reading? Well, that tide has turned in a big way. The charts below show the rolling 12-month total of the number of months that headline and core CPI came in higher than expected. At the headline level, there have only been two stronger-than-expected readings in the last year which is the fewest in a twelve-month span since November 2019. On a core basis, there have been just three stronger-than-expected monthly readings, and that’s the fewest since November 2020. In markets, just when you think a trend is entrenched, things have a way of turning on a dime, and that’s an important thing to remember for both investors and policymakers alike.
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Jul 11, 2023
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“Yesterday’s home runs don’t win today’s games.” – Babe Ruth
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Futures have a positive tone heading into the trading day as investors still look ahead to Wednesday’s CPI and then the start of earnings season later this week. The only economic report of note today was small business optimism from the NFIB which came in stronger than expected (91.0 act vs 89.8 est). International stocks are also broadly positive with gains of around 0.5% or more depending on the country/region. The notable laggard is the UK, which is down 0.1%.
Gearing up for the start of earnings season later this week, we thought it was worth highlighting the rebound in earnings and revenue results relative to expectations over the last three months. The chart below comes from our Earnings Explorer and shows the EPS and revenue beat rates on a three-month rolling average basis. In the aftermath of COVID, when the stimulus hose was flowing from both the fiscal and monetary faucets, beat rates surged to record highs. As the hose was turned off, the pace of beats among US companies also slowed, and by early this year was trending back down towards pre-COVID levels.
The last three months, though, have seen a reversal of that trend as analyst forecasts simply turned way too bearish and set the bar unrealistically low. As things stand now, the EPS beat rate is nearly 10 percentage points above its long-term historical average while the sales beat rate is close to 15 percentage points above its long-term average. For some perspective, outside of the post-COVID period, the current pace of EPS and sales beats would be right around the highest levels of the last twenty years.
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Jul 10, 2023
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“The pilots I worked with in the aerospace industry were willing to put on almost anything to keep them safe in case of a crash, but regular people in cars don’t want to be uncomfortable even for a minute.” – Nils Bohlin
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There’s not a lot going on in equity futures this morning. Overnight, Asia saw mixed trading as Europe is modestly higher. Notable economic data released overnight included a weaker-than-expected inflation reading in China where CPI was unchanged on a y/y basis versus forecasts for growth of 0.2%. In Europe, the July Sentix Investor Confidence Index fell more than expected. There’s not a lot of US data this morning, but there are several Fed officials scheduled to speak (yay).
The second half of 2023 started a week ago, but with a shortened session Monday and a market holiday Tuesday, it wasn’t much of a week even if there was some important ISM and employment-related data. All that can be considered a dress rehearsal for a big and full week of trading as we’ll get CPI on Wednesday, PPI Thursday, and the unofficial start of earnings season on Friday when the big banks like Blackrock (BLK), Citi (C), JPMorgan (JPM), and Wells Fargo (WFC) all report. In the words of Nils Bohlin, the Swedish engineer who was granted the patent for the three-point seatbelt back on this day in 1962, “Don’t forget to buckle up.”
One area where investors are used to being buckled up is in the bitcoin market where volatility is a fact of life. Over the last couple of weeks, though, volatility in that market has dampened. Over the last two weeks, bitcoin’s maximum intraday high was just over $31,500 versus an intraday low of just over $29,500 working out to a range of 6.7%. As shown in the chart below, that narrow of a range in the price of bitcoin has been somewhat uncommon over the last six years or so. It’s a small sample size, but the only period where a sharp sell-off immediately followed this type of narrow range was in late 2018.
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Jul 7, 2023
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“A state of war is not a blank check for the president when it comes to the rights of the nation’s citizens.” – Sandra Day O’Connor
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There was little conviction in equity futures heading into the June jobs report this morning. Overnight, Asian stocks were lower as they caught up to the declines from the US yesterday while European stocks attempt to bounce from yesterday’s sell-off. Industrial Production in Germany was weaker than expected falling 0.2% m/m versus expectations for no change, but commentary from ECB officials including de Guindos and Lagarde both implied that more rate hikes are in the cards.
Today’s Non-Farm Payrolls (NFP) report missed expectations by 21K while the Unemployment Rate declined to 3.6% which was right in line with expectations. Average hourly earnings and average weekly hours both came in better than expected, though. As far as revisions go, prior readings were revised lower by over 100K with May’s originally reported level of 339K revised down to 306K. Futures have seen a modest bounce while treasury yields are lower.
The streak is over! With today’s weaker-than-expected report, the record run of better-than-expected NFP reports ended at 14 and came just one month shy of tripling the prior record of five straight better-than-expected reports. It only figures that the streak ended on the same month that the ADP Private Payrolls report crushed estimates and caused just about every investor out there to price in a better-than-expected report as a sure thing. If you’re keeping track, the last three times now that ADP surpassed forecasts by 300K or more, the corresponding NFP report for the same month missed forecasts. On 6/3/21, ADP topped forecasts by 328K, and on the next day, NFP missed forecasts by 116K. On 1/5/22, ADP topped forecasts by 397K, and two days later NFP missed by 251K. Now, this week ADP tops forecasts by 372K, and NFP missed by 21K. Relying on the ADP report as an indicator for the NFP report? What is it they say about insanity and doing the same thing over and over again?
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