Weekly Market Update (July 31, 2022)
Major US stock indices are finally having a solid month after the horrific first half of the year. S&P 500 and Nasdaq rebounded by 9.11% and 12.55% respectively last month. Nasdaq outperformed the market this week due to the robust earnings in tech. Retail stock dragged down the market on Tuesday after Walmart issued its 2nd profit warning in 10 weeks. US consumer confidence fell because of the increase in food and fuel prices. Stock rallied after the market interpreted it as a dovish sign after Powell’s announcement.
Fed: US Federal Reserve again raised the US benchmark interest rate 75bps on Wednesday as expected to the target range of 2.25% - 2.5%. Stocks moved sharply higher after the announcement, with very little surprise in the announcement or press conference.
GDP: Two consecutive quarters of decline in GDP is the widely accepted definition of recession, which has just happened after the announcement of the 2nd quarter GDP data. Yet, US Treasury Secretary Janet Yellen refused to call it “recession” while admitting the economy is slowing down. She also emphasized the job market remains strong.
Earnings: In tech mega-caps, Microsoft and Alphabet(Google) released earnings early this week. Both of them missed expectations in revenue and earnings per share(EPS) while not to a very large extent. Their prices pumped up after the announcement albeit with the below-expectation result. It is mainly because of the double-digit quarterly revenue growth and optimistic outlook of Microsoft’s sales amid strong USD and Alphabet’s spectacular advertising revenue. Meta also released its earnings later this week, reported its first quarter of sales decline, and share prices plummet more than 4% afterward.
Shrinkflation: It means you pay the same amount of money, but do not receive the same quality of product or services. For instance, the burger is smaller in a fast food shop, the shorter opening hours in coffee shops, and all with the same prices. They are mostly intangible and hard to measure, which cannot be captured by CPI easily. It is happening and CPI is already discounted because of this matter.
*Data as of market close. 5-day change ending on Friday.
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J.P. Morgan: Energy, materials, and industrials sectors are expected to have significant growth as these sectors are highly cyclical and benefit directly from the price growth in the first half of the year. Financials are having a gritty quarter, and the drop in operating earnings is mainly attributed to the larger loan loss reserves, the decline in investment banking activities, and the downturn in mortgage fees.
UBS: Current equities valuation in the eurozone has already priced in the weakness of earnings. They are expected to be flat by the end of this year. If there is an abrupt halt to Russian gas, earnings could drop about 30%.
Morgan Stanley: The 2% inflation target is still far away, even if it slows sequentially to 0% for the coming 8 months, inflation will still be 5%. Given that the fed fund rate is usually staying above Core Personal Consumption Expenditure after the 1980s with the spread average of 3%, Fed is not likely to stop tightening in the near future as the spread today is still -3.1%.
Citi: Worker shortages have hampered the growth in production capacity. Unemployment rate is low and down to the pre-pandemic level, but the pressures on labour market are elevating in various countries.
Deutsche Bank: The shift in employment structure and the shortage of skilled labour have long been a problem for numerous countries. It is more obvious when the holiday seasons approach. Long queues at the security checks, canceled flights, and complaints about short of staff in restaurants and hotels are all subject to the decline in the number of employees in these sectors. The original employees have transitted to other non-seasonal and well-paid jobs during the pandemic period, making the search for labour in the hospitality industry more difficult.
Morgan Stanley: Central banks are fighting inflation with aggressive rate hikes around the globe, especially in commodities-based economies (e.g. Australia, Canada). It may take several quarters to cure the structural disruption in agriculture and energy remains severe.
Goldman Sachs: The return of Libyan supplies, concerns about China's renewed lockdowns, and the slowdown of the summer driving season in the US are all contributing to the volatile swings in oil prices.
Morgan Stanley: Historically, a peak in fed fund rate is accompanied by an inverted 3M/10Y Treasury yield curve. Although the curve is flattening, the 35bps sloped positively does not indicate an end to tightening.
Goldman Sachs: Different types of properties(i.e. Apartment, Office, Retail, Industrial) are having a higher dispersed rent growth. Despite the slow growth in apartments, it remains higher than retail and office. Apartment rent is expected to be elevated due to the rising mortgage rates and high home prices, which lead to home affordability problems and phase out marginal homebuyers.
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