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The Weekend Edition # 54
Market Recap; The Fed at Jackson Hole; Earnings Results; The Week Ahead
Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and subscribed to the newsletter this week!
Here’s what we cover:
Macro - Jackson Hole
Premium Post of the Week - All Eyes on Jackson Hole
The Week Ahead - Economic & Earnings Calendar
Let’s dive in ⬇️
Market Recap - 22 Aug - 26 Aug, 2022
The bears are back, thanks to Fed Chair Powell’s short speech at Jackson Hole. No amount of positive PCE data on the day could save the indices. With a speech that lasted just over 8 minutes (perhaps his shortest ever), Powell tried to leave no room for interpretation. [We dig into this under the Macro section below]
It was pure carnage once people had a chance to digest the speech and I don’t think we see this turn around next week. I think the notion that a Fed Pivot is coming has been put to rest now and we’re likely to resume the bear market, going lower for longer. This is not to say that there won’t be rallies in between. We probably will have rallies and taking shorter trades at such time will probably be prudent.
We will see further decreases in company profitability and beating estimates mean very little, if we’re not seeing earnings and cash flow.
Bitcoin broke below $20,000. This seems to be an important event. More than anything it signals “risk-off” in this environment.
Both Crude Oil and NatGas has been bullish for the week. Russia has been limiting their NatGas since June of 2021 and with winter coming, Europe’s energy costs, that are already soaring, will probably continue to increase. There’s little hope that prices will crash. We also had the Saudi Oil Minister come out and say that they are like to curb production levels and this will probably keep the price of oil at buoyant levels.
Soft commodities have see quite a bullish week as well. Fertilizer prices still remain at relatively high levels even if they have fallen from their peak, earlier this year. To add to that the world is experiencing drought, from China to Brazil to Colombia, weather conditions are making it challenging to produce adequate amounts of crop.
“Farmers in Brazil are dealing with the fallout from freakish weather last year, where plantations endured first drought and then frost. Some say that their crop of higher-end arabica coffee beans will be less than half what it could be in a good year.” - WSJ
Macro of the Week - The Jackson Hole Speech
I’m sure most people watched the speech. It wasn’t long and it’s still up on YouTube to replay. Here’s how I see it.
The most jarring part of the speech, in my opinion was:
Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.
- Fed Chair Powell
Basically, Powell’s finally pointing out everything that we have been warning about and should have known for months coming.
The economy is going into a recession (or already there, as I see it).
The unemployment rate will increase as the Fed tightens
There will be a period of slowing growth for companies, which means we will see a profit recession
Also, there was quite a important comment on the labor market:
The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers.
To me this signals that the Fed now believes that the unemployment numbers we’re seeing are skewed. While the rate of unemployment is low (and dropping), the participation rate still remains at abysmal levels.
What about future rate hikes:
July's increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting…..At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.
What’s unusually large for the Fed? Well, some could argue anything more than 75bps since, they’ve already done that. But, I think that’s still their threshold and we just may get a 75bps hike in September.
As for the second part of the quote, I do believe he is referring to Quantitative Tightening (QT), which kicks off in full force in September at $95B per month. Now it would seem like the Fed will wait until the full effects of QT kick in before they decide whether it has had meaningful impact on inflation.
One last important thing from the Fed Chair:
we must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting.
[All quotes in this section have been taken from Fed Chair Powell’s Jackson Hole Speech]
Earnings of the Week
This hasn’t been a great week for earnings. While a few companies did gap up, most companies had a very dismal outlook. Despite guiding down previously, Nvidia NVDA 0.00%↑ still missed earnings and revenue. Snowflake SNOW 0.00%↑ on the other hand, exceeded their lowered guidance particularly in terms of product revenue.
If you ask me, I think the real pain we are about to see is in retail. In particular, I think it’s only a matter of time before the apparel retailers start to collapse because of seasonal inventory gluts and decreased consumer spending.
In case you missed it, I had written a premium post earlier in the week with my take: All eyes on Jackson Hole this Week
The Week Ahead
Economic Calendar - It’s Jobs Friday Again!
I’ve been writing this newsletter for over a year now. One thing that I’ve not wanted to do is make calls on stocks or industries. Sometimes, I have but, mostly in very subtle ways.
I think the more important goal for me was to present a picture of where the market was, is and perhaps, will be going. Not in terms of levels but, more to understand the big picture so that anyone reading can understand and make a slightly more informed decision.
I don’t think Fed Chair Powell could have made my job any easier. He’s basically told us everything we need to know about what to expect in the coming months - summed in one word - “pain”. It’s not a word a Fed Chair would like to use lightly!
For the record, I never thought that this was the beginning of a new bull market and I still don’t. I also don’t think that a Fed Pivot is coming anytime soon and if you don’t believe me, at least believe the Fed Chair.
Next week is likely to be a rough week, so let’s stay sharp.
Here’s wishing you a happy weekend and safe investing.
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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 mentioned. I have no affiliation with any of the companies that are mentioned.