Discover more from Banking on the Market
The Weekend Edition # 87
Big Tech continues to lead; Inflation - CPI & PPI; Earnings Recap; Closing Thoughts - Retail Earnings
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 - Big tech continues to lead
Macro - Inflation - CPI and PPI
Earnings - Recap
Articles of the week - Kenvue
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - Retail Earnings ahead
Let’s dive in ⬇️
Market Recap - 08 May - 12 May, 2023 📉📈
We keep having these choppy weeks and in fact, choppy days. There’s some concern around the US Debt Ceiling and a possible default with deadline from the US Treasury as June 1 but, the market still remains muted on that front even though there’s no indication of any agreement being reached.
In fact, we’re seeing quite a lot of momentum to the upside from indices particularly the Nasdaq. With upside leadership from select big tech, the Nasdaq closed on Wednesday at its best level since last August.
But consider this: the S&P500 (SPX) continues to soar but the equal-weighted S&P500 (SPXEW) is not exactly reciprocating this. If we look back through history, we notice that every time there’s been distress in the financial system, we see the SPX increase but not the equal-weighted counterpart. The chart below is a ratio of the SPX to the SPXEW and the increases show that the SPX outperforms the Equal Weight Index during tough times. This just suggests that people are hiding out in the top stocks for fear that there will be a recession. It’s definitely something to consider.
An area of renewed focus is now China. We’ve seen quite a few pieces of data come out of China this week and they remain quite troubling. Two months ago we had this notion that China was going to experience the big re-opening and that there was a lot of pent up demand there. There were charts floating around showing us that China had trillions in savings and that they were ready to deploy that spending into revenge spending.
On the other hand, we had hoped that China’s industrial economy would also take off immediately and we would start seeing a barrage of products being churned out. This however, did not pan out. Nevertheless, we saw the government start to ease conditions to help jump start the production economy. It was thought people would take time to get back to work because of the lockdowns and thereafter, getting sick with Covid. But that has not exactly played out. China’s Manufacturing PMI is still in contractionary territory and last week we saw the PPI decline-3.6%. We also saw imports decline by -7.9% and Exports fall to +8.5% from +14.8% in the prior month.
Further pressure has been created by the property sector, which is nowhere close to recovery. China continues to see problems in the property sector which in turn is weighing down on commodities.
Last week we saw significant pressure on Copper, with a decline of -4.15% over the week. We’re seeing pressure on the entire industrial metals complex, agricultural commodities and of course, oil. The expected demand from China’s reopening is not improving and the global slowdown continues to cause commodity prices to retreat.
Macro - CPI & PPI 🌎
This week brought us some important Macro data on inflation. The US CPI YoY inflation dropped below 5% for the first time in almost 2 years, May 2021. Core Inflation (CP ex-Food and Energy) is also slowing, which is a positive sign. CPI came in at 4.9% while Core CPI came in at 5.5%.
While Food Inflation declined YoY, Energy Inflation increased. The highest reading this time around came from used vehicles and cars at +4.4% MoM. We’ve been seeing the Manheim Used Car Index going up since January and this has translated into a higher CPI reading. It’s likely we will see this come down in the next couple of months.
But, what remains troubling with the CPI continues to be Shelter inflation (Red Line above) and Core Services (Yellow Line above). Overall, Shelter inflation slowed down but, that was mainly on account of the decline in prices for hotels and motels. This item had shot up over the last few months with the re-opening travel spending, and now we’re seeing levels normalize. We heard this from the hotels that reported in the last few weeks, including AirBNB. So, in essence Shelter inflation actually has not declined the way we’d hoped.
Medical Commodities also went up. This is something we’ve discussed about the pharmaceutical manufacturers when United Health reported. The Inflation Reduction Act proposes new guideline whereby it will be more difficult for drug companies to raise prices. Phamaceutical manufacturers are front-running this, and increasing prices ahead of the changes and this is what we’re seeing in terms of increases.
We’re also seeing hospital usage increase. Both HCA and Tenet Health reported increased outpatient services and the CPI shows pricing for hospital services going up.
Producer Price Index (PPI) also showed a meaningful decrease. As you can see in the chart above, the PPI (yellow) has crossed over below the CPI (purple) in December and this has been pulling consumer inflation down. This is exactly what we want to see - input costs decline. This is also what has been helping margins increase for companies - particularly the food manufacturers. But this gap will soon close putting pressure on margins.
While actual inflation is trending down, inflation expectations seem to be trending up. This Friday we received the Michigan Consumer Sentiment Survey results which showed that long-term inflation expectations have reached a 12-year high!
Earnings - Highlights 📝
Here’s the FactSet Summary for the Week:
We’ve now had 92% of the S&P500 report and the blended earnings decline has deteriorated slightly to -2.5% from -2.2% last week.
As for the Nasdaq-100, we’ve seen 81% of the companies report and the blended earnings decline of -4.98%
If this quarter ends with negative earnings growth, it will mark two quarters of decline, i.e., an earnings recession.
While the gap between the PPI and CPI have been helping margins for the last quarter, the outlook going forward isn’t as rosy. As we the CPI catch down to the PPI, analysts are expecting margins to contract. Something that the Fed Chair also mentioned during his last press conference.
Articles of the Week 📖
Please do consider upgrading to my premium newsletter for only $10/month or just $100/year. I offer original research regularly focused on macro updates, industry reviews, stocks, and more.
The Week Ahead 📅
Economic Calendar in Eastern Time
It’s a fun week with a lot of Fed speakers on the roster, including Chair Powell who speaks on Friday with the former Fed Chair, Ben Bernanke. That should be an interesting conversation!
Closing Thoughts - Retail Earnings
We hear from the major retailers next week and we’ll be looking out for details on inventory, margins and growth.
We’ve been tracking the Redbook Index - which is a sales-weighted of year-over-year same-store sales growth in a sample of large US general merchandise retailers representing about 9,000 stores. The levels have fallen off significantly in the past couple of months and are now below pre-pandemic levels. But, January and February 2023 have still been good months of spending because of better weather and cost of living adjustments. Not to mention, some of the YoY comparisons will likely be easier because we’re comparing to Q1, 2022, when Omicron was still prevalent.
One thing to note about the retailers reporting this week is that their quarter is February to April so they may not exactly reap the rewards of higher spending in January and may actually be further impacted by the drop in spending in April.
Here’s wishing you safe investing.
Please take a moment to share and subscribe, if you found this newsletter useful.
Ayesha Tariq, CFA
There’s always a story behind the numbers.