It’s August. And it’s boring, or at least predictable, so I will cover everything this week in one section. In fact, about the only thing I was really watching this week were DIS earnings. And even the company’s 2Q23 earnings release and explanation of the difficulties the company is facing from CEO Bob Iger wasn’t that surprising (albeit concerning). The decline of “Mickey Mouse and co.” is a topic for another day since I own this disappointing stock and can’t quite bear looking more closely at it just yet.
Back in the real world of global economics and financial markets, it was largely a week devoid of significant market moving news in spite of a few noteworthy data releases. Let’s first take a look at inflation in the US, which had (at least) three important data points all of which when mashed together meant that inflationary expectations ended about where we were at the beginning of the week.
July CPI was released Thursday and came in more or less right on consensus (BLS release here), certainly not a surprise and in line with my thoughts,
July PPI was released on Friday which I read as better-than-anticipated headline PPI, worse-than-hoped core PPI and sizzling PPI in services (BLS press release here), and
The Michigan Consumer Confidence Survey showed that consumer confidence and expectations regarding future inflation really didn’t change much in August vis-à-vis July, at least not enough to matter.
Investors more or less yawned, as they have all week, as equities drifted one way or the other – but largely sideways – most of the week. As far as US stock indices, the tech and value-dependent indices suffered the most, especially as some air came out of the richly-valued tech sector.
The laggards as far as international equity indices were perhaps not surprisingly the FTSE 100 (better-than-expected 2Q23 GDP but does +0.2% growth even register?) and the Shanghai Composite, the decline of the latter – the worst performer WoW (-3.0%) – reflecting a whole host of problems facing the Chinese economy at the moment. Naturally, Chinese stocks cannot decline without splattering the emerging markets indices, and this pushed the MSCI EM Index lower on the week. I suppose the gravity-defying level of the US Dollar has not helped EM stocks either, with the greenback rallying off of a slow burn down for at least the third time this year, defying consensus expectations at the beginning of the year and leaving the global reserve currency only marginally weaker YtD (-0.7%).
As far as the bond market, everything was similarly sideways until mid-week, but then yields on USTs started to push higher across the curve on Thursday, extending into Friday. One website developer / commentator Alessio Farhadi, who has a super-interesting website Speevr, pointed out to me that he thought the “disinflation trade” (i.e. buying intermediate/long-dated USTs) was getting overly crowded and at risk of unwinding. He proved to be right by the end of the week, as even with relatively benign inflation data, bonds began to unravel on Thursday. (As a digression, make sure to check out Speevr where you will find some very interesting subject matter and commentary that is guaranteed to make you think, wrapped around views you are very unlikely to find elsewhere.) Also weighing on the bond market was the auction of over $100 billion of 3-, 10- and 30-year bonds, which results suggested were not overly successful. To add to the pressure, recall that the Federal Reserve is not replacing $95 billion ($60bln USTs and $35bln MBS) of bonds that are maturing on its balance sheet each month. Heavy funding demand by the Treasury and QT from the Federal Reserve will prove to be a wicked combination as far as maintaining pressure on intermediate and longer-term yields.
Corporate credit was also well behaved in a quiet market this week, with high yield spreads grinding tighter through Thursday (last data read from FRED). Oil also continues to be an interesting commodity to monitor in terms of direction of the global economy. Much like the narrative of a pending recession and a significantly weaker US Dollar, the expectations of declining oil prices have proven very wrong. The price of oil has risen fairly steadily for several weeks, with WTI crude up 23% since June 27th. Even though the Chinese economy seems troubled and Europe heads towards slower growth, the demand for oil has risen this summer according to the IEA, which said in its August report (here) that:“World oil demand is scaling record highs, boosted by strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity.” Of course, the reduction in supply borne by OPEC+ (or actually Saudi Arabia) has also boosted prices by reducing supply, contrary to my longer term view that there is enough non-OPEC+ supply to mute any cutbacks.
One more thing – the UK surprisingly grew in the second quarter more than rather meagre expectations. 2Q23 GDP growth of 0.2% (ONS release here) surprised analysts who were expecting economic growth to flatline. The real question is does anyone care given the UK is now going at it alone with limited economic influence on the global stage? This is what BREXITer’s asked for and now they are getting it. The FTSE 100 slumped on the news, at least partially reflecting the sad reality that UK economic growth remains anaemic.
I will end this week’s commentary on earnings. Neither Factset nor Refinitiv – my “go-to’s” for earnings reports – are publishing the rest of August, so the comments below reflect earnings of S&P 500 companies through August 4th, with 84% of companies having reported. Earnings have generally surprised on the upside (more beats than misses), although revenue growth (vs expectations) has been more or less in line with historical averages. This has to be understood in the context of beaten down expectations, as reporting companies have mastered the art of adjusting analysts’ expectations down during the quarter and then delivering better-than-expected results. Although there might have been more bottom-line beats so far, the reality is that earnings for S&P 500 companies have declined 5.2% YoY, and revenues have increased only 0.6% YoY. Think about these growth rates in the context of the most recent CPI read, which has YoY headline and core inflation (CPI) at 3.2%/annum and 4.7%/annum through July. This means that real growth in corporate earnings on both the top and bottom lines was considerably worse than the nominal figures. The forward P/E of the S&P 500 as of August 4th according to Factset was 19.2x, above the 5-year (18.6x) and 10-year (17.4x) averages. As I digest this, I can’t help but have a bias towards the downside, although I suspect the magnitude would be modest (say 5%-7% for the S&P 500) in that stocks trade on forward news / expectations, not backwards.
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes. (Some are repeats from the commentary above.)
Corporate bonds (credit)
Safe haven and other assets