Saturday, August 13, 2022

Constructive inflation data bolsters soft-landing scenario Weekly Market Update: Constructive inflation data bolsters soft-landing scenario

8/12/2022 4:03:07 PM

Stock markets continued to rally this week as investors took comfort in US inflation readings that supported the ‘peak inflation’ narrative. US Treasury yields remained largely in check and the curve finally saw some steepening, pulling the 2-10 spread away from its most inverted levels of this cycle. Small cap stocks surged early in the week, while the NASDAQ reached a 20% rebound and the S&P tested its 50% Fibonacci retracement level, both from the June lows. Nevertheless the debate carried on, with skeptics contending this was still nothing more than a bear market rally, the likes of which was seen on multiple occasions coming out of the early 2000 tech boom and the great financial crisis which later resulted in fresh lows as part of a multi-year bottoming process. Bulls on the other hand, drew solace from the fact that a soft landing very well could be in the cards as the turn in inflation could ultimately allow the Fed to back off, while corporate earnings reports have held up surprisingly well, suggesting earnings estimates may not have to come down as much as many have feared. Investors’ increased wiliness to take on risk was on full display. Crypto assets rebounded sharply, and traditional meme stocks saw a notable resurgence with traders bidding up shares amid no discernable news or catalysts. Also several extremely disappointing individual earnings reports and slashed guidance were met with heavy buying, resulting in eye popping reversals in beaten down shares. For the week, the S&P gained 3.3%, the DJIA rose 2.9%, and the Nasdaq lifted 3.1%.

Wednesday’s US July CPI data finally offered some tangible signals that inflation has started heading in the right direction. Headline CPI was 0% m/m for the first time since May of 2020 while the y/y print came in below all analyst estimates for the first time in 17 months. The deceleration was largely driven by the recent pullback in commodity prices, as well as other volatile pandemic-affected categories. But encouragingly, rent of shelter and owners equivalent rent categories slowed too. The Atlanta Fed’s annualized sticky-CPI reading saw an even more dramatic pullback to 5.4% from 8.1% m/m. Thursday’s producer price data also came in well below expectations with the first m/m decline in two years, suggesting further improvement to come. Futures markets basically flip-flopped on the September FOMC meeting and now see better odds of a 50 bps hike, rather than 75 bps. But with more than a month until the next Fed conclave -- and another CPI print, as well as the Jackson Hole Fed meeting in between -- those projections are likely to remain fluid. To that end Fed officials once again were quick to push back against dovish pivot hopes, reiterating they will need to see more evidence inflation is slowing and that forecasts for 2023 rate cuts are premature. Also, Friday’s final passage of the Inflation Reduction Act will be another variable that officials will have to factor into the forecasts.

In corporate news, chipmakers got off to a rough start at the beginning of the week. Nvidia warned that a 44% decline in gaming revenue would negatively affect its Q2 results. Micron cut its outlook again on macro/supply chain factors, forecasting a challenging market environment in Q4 and Q1’23. Apple is said to have told its manufacturing partners that it plans to produce 90M new iPhones, in line with 2021 levels.

Disney earnings impressed investors, as the entertainment giant noted hearty profit growth and strong theme park revenue, despite cutting its long-term forecasts for Disney+ subscriber numbers. AppLovin submitted a non-binding proposal to acquire video game software developer Unity at $58.85/shr in an all-stock $20B deal, which would put a damper on Unity’s plan to acquire app monetization company IronSource.

SUN 8/7
BRK.A Reports Q2 EPS (Class B) -$19.84* v $12.33 y/y, Rev $76.2B v $69B y/y
*(CN) CHINA JULY TRADE BALANCE: $101.3B V $88.1BE (record surplus)
(CN) Chinese military will from now on conduct regular drills on the eastern side of the median line of the Taiwan Strait - Chinese TV
(US) Fed's Bowman (voter): 75bps rate hikes should be on the table until inflation declines meaningfully; Have seen few, if any, concrete indications that inflation had peaked earlier in the year
(US) US Senate passes ~$430B Climate Change, Tax, and Drug bill; the final vote was 51 to 50; Vice President Harris placed the tiebreaking vote
(JP) Japan June BoP Current Account: -¥132.4B v -¥706.2Be; Adj Current Account: +¥838.3B v -¥27.6Be
MON 8/8
AAPL Reportedly informed its suppliers that it raised expectations to produce and ship 95M units of new iPhone 14 rather than 90M prior - Taiwanese press
NVDA Reports prelim Q2 Rev $6.70B v $8.12Be; Shortfall versus outlook primarily driven by weaker Gaming revenue
*(US) Former Pres Trump says FBI agents have made an 'unannounced raid' on his Mar-A-Lago compound in Florida - press
(CN) China prelim July Retail Passenger Vehicle Sales 1.84M, +20.1% y/y - PCA
TUES 8/9
(UK) BOE Ramsden: Believe it's more likely than not that MPC will have to raise Bank Rate further. But I haven't reached a firm decision on that
MU Announces $40B investment by 2030 in memory manufacturing in the US using anticipated grants and credits made possible by the CHIPS and Science Act; To create up to 40K new US jobs
(US) Reportedly US solar industry grapples with import ban on China's Xinjiang region; Shipments from Chinese suppliers either detained or sent back - US financial press
(RU) Russian press reports Ukrainian oil firm Ukrtransnafta stops pumping oil via Southern leg of Druzhba ('Friendship') oil pipeline to Hungary, Czech Republic and Slovakia (**Note: Druzhba accounts for up to 8% of EU’s total crude imports from Russia)
AVYA Reports prelim Q3 -$0.24 v $0.53 y/y, Rev $577M v $716 y/y
(US) Bank of America July total payments +7% y/y; Median rent payments +7.4% y/y; Notes many reasons to remain positive about the steady resilience of US consumers
(US) US House Speaker Pelosi: China Pres Xi is in fragile place and acting like a scared bully; Still support the One China policy
Redfin report: July share of US homes listed for 30 days or longer without going under contract +12.5% y/y (1st Y/Y increase in housing supply since the beginning of the pandemic)
*(US) Q2 PRELIMINARY NONFARM PRODUCTIVITY: -4.6% V -4.7%E V -7.3% PRIOR (**largest ever decline on annual basis); UNIT LABOR COSTS: 10.8% v 9.5%E
U AppLovin submits non-binding proposal to acquire Unity at $58.85/shr in all-stock $20B deal
(UK) UK govt reportedly plans for possible power cuts to industry and homes in Jan under worst-case scenario - press
992.HK Reports Q1 Net $516M v $466M y/y, Rev $17.0B v $16.9B y/y
(JP) Japan July PPI (CGPI) M/M: 0.4% v 0.4%e; Y/Y: 8.6% v 8.4%e
(TW) China reiterates not ruling out the use of force for Taiwan and the use of One country-Two systems for Taiwan; Withdraws promise not to send troops to Taiwan after unification - China State TV
WEDS 8/10
TSM Reports July (NT$) Rev 186.8B +49.9% y/y, +6.2% m/m
AD.NL Reports Q2 €0.59 v €0.54e, Rev €21.5B v €20.8Be; Raises Net profits and FCF outlook; Notes positive momentum going into H2 2022
7267.JP Reports Q1 Net ¥149.2B v ¥222.5B y/y, Op ¥222.2B v ¥243.2B y/y, Rev ¥3.83T v ¥3.58T y/y; To buy back up to ¥100B in shares (1.9% of market cap); Raises outlook for Op profit and Revenues
6502.JP Reports Q1 Net ¥25.9B v ¥18.0B y/y, Op -¥4.81B v +¥14.5B y/y, Rev ¥740.7B v ¥727.9B y/y
2317.TW Reports Q2 (NT$) Net 33.3B v 30.8Be, Op 44.3B v 36.8Be, Rev 1.51T v 1.45Te; Guides FY22 Rev higher y/y
(EU) German Rhine River is said to become effectively impassable at Kaub (key point between Frankfurt and Dusseldorf) on Friday, Aug 12th - press
7203.JP Guides Sept-Nov average volume at 900K units/month (prior guided Aug-Oct at 850K/month); Affirms FY22 global volume at 9.7M units; To suspend production at 3 lines on some days in Sept amid part shortage and COVID restrictions
BABA Softbank stake in Alibaba to fall to 14.6% from 23.7% end-June via early physical settlement; Softbank sees ¥4.6T gain (~$34B) on Alibaba transactions
*(US) JULY CPI M/M: 0.0% V 0.2%E; Y/Y: 8.5% V 8.7%E (annual pace matches lower end of all analysts' estimates)
(US) Freeport LNG reportedly removes its force majeure declaration following the June explosion - press
(US) Atlanta Fed July Sticky-CPI annualized 5.4% v 8.1% m/m, core 5.2% v 7.9% m/m
(US) Association of American Railroads weekly rail traffic report for week ending Aug 6th: 496.5K total units, -2.6% y/y
(US) Atlanta Fed GDPNow: Raises Q3 GDP to 2.5% from 1.4% prior
(US) Fed's Kashkari (dove, non-voter): Happier to see inflation surprise to the downside; Today's CPI data does not change my rate hike path; Idea of rate-cutting early next year is not realistic
DIS Reports Q3 $1.09 v $0.94e, Rev $21.5B v $21.1Be; Surpasses Netflix in number of subscribers
DIS Cuts forecast for 215-245M Disney+ subs by 2024 (prior: 230-260M by 2024) - earnings call comments
(CN) White House has reportedly for now set aside any plans to scrap certain China tariffs or to look into adding more; Biden yet to make any final decision - press
*(SG) SINGAPORE Q2 FINAL GDP Q/Q: -0.2% V +0.2%E; Y/Y: 4.4% V 4.8%E
THURS 8/11
SIE.DE Reports Q3 -€1.85 v -€0.63e, Industrial Business EBITA €2.88B v €2.90Be, Rev €17.9B v €17.5Be
IEA Monthly Oil Report (OMR); European heatwaves boosting demand for oil; Declines in Russian oil supply less than previously expected
CAH Reports Q4 $1.05 v $1.17e, Rev $47.1B v $44.6Be; Introduces medical improvement plan targeting $650M in profit by 2025; Guides initial FY23
BLK Reportedly offering to big institutional clients its first-ever investment product directly in Bitcoin, new private Bitcoin trust - press
*(US) JULY PPI FINAL DEMAND M/M: -0.5% V +0.2%E; Y/Y: 9.8% V 10.4%E (1st negative M/M print since June 2020)
(US) Certain Freeport customers reportedly dispute retraction of force majeure declaration and seek its reinstatement - press
SHEL Shuts Mars, Ursa, and Olympus deep water crude oil platforms in US Gulf due to flange leak at Port Fourchon facility booster station - press
AAPL Reportedly manufacturing partners said to assemble 90M new iPhones, on par with 2021 [**Note: earlier Taiwan press reported Apple plans to produce 95M units of new iPhone 14] - press
FRI 8/12
981.HK CEO: Rising geopolitical tension, high inflation and a cyclical downturn in chip demand have triggered some panic in the chip industry; Notes extreme quick freeze reaction in some parts of the supply chain over threat of conflict - FT
300750.CN Said to plan investing up to €7.3B in Hungarian plant; Will build a power battery system production line in Hungary with an annual capacity of 100GWh - press
PTR PetroChina and Sinopec to voluntarily delist from NYSE
(CN) Reportedly brokers in China looking into Germany as a banking base due to tensions with the US - press
*(US) AUG PRELIMINARY UNIVERSITY OF MICHIGAN CONFIDENCE: 55.1 V 52.5E; 1 year inflation expectations 5.0% v 5.1%e; 5-10 year inflation expectations 3.0% v 2.8%e
(CN) Preparations said to be under way for President Xi to travel to Southeast Asia to meet with President Biden in November - press
(US) USDA WASDE Crop Report: End 2022/2023 US Stocks (M bu): Soybeans: 245 v 227e; Wheat: 610 v 651e