Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
On Consumers, Chips & The Oceans
Check out the accompanying pdf and chart collection. Executive Summary: Consumers are still spending robustly in many categories, as the surprisingly strong retail sales report for October showed. But Walmart and Target brass speaking on Q3 conference calls described heightened budget consciousness across income demographics. And while consumers have income, their balance sheets have been weakening as they take on more debt. … Are semiconductor stocks becoming attractive at their depressed valuations? Perhaps, but news this week reminds us why valuations are so depressed—demand is weak and analysts pessimistic. … Also: The oceans are about to get greener if innovative solutions employing AI, 3D printing, and low-tech dragnets succeed.
On Inflation & Financial Stability
Check out the accompanying pdf and chart collection. Executive Summary: The inflation-is-peaking euphoria that’s driven the stock market skyward in recent days adds to our confidence that the bear market bottomed on October 12. … The latest batch of inflation indicators was mixed but overall suggests progress in the right direction, which may mean the Fed has done enough tightening already. … Don’t fear systemic effects from the bursting of the cryptocurrency bubble—US banks are just fine. … Also: Melissa examines what the Fed thinks about the resilience of the US financial system, recapping points from its latest Financial Stability Report.
Where Inflation Is Plummeting & Soaring
Check out the accompanying pdf and chart collection. Executive Summary: US inflation is sticking roughly to the script we’ve been expecting, having peaked in the summer and fallen since. We expect further declines through 2023. Today, we review what’s been going on beneath the surface of the headline rate, including the recent trajectories of nondurable goods, durable goods, and services inflation along with our expectations for each. … Also: The central banks of Europe, Japan, and China each are battling inflation along with daunting challenges specific to them.
On Earnings & Inflation
Check out the accompanying pdf and chart collection. Executive Summary: Economic recessions invariably produce earnings recessions, but earnings slowdowns and downturns can occur without economic recessions: Nominal GDP and revenues growth can stay strong as profit margins narrow, causing earnings growth to falter. That’s what seems to be happening now, with the earnings weakness looking like that of a soft, not hard, landing. Whether that changes up ahead depends much on what happens to profit margins. … In this context, Joe discusses the latest earnings results for Q3, explaining how to interpret the results supplied by two different data providers. …And: A look at the components of October’s CPI results, which cheered the stock market at the end of last week. ... Also: Feshbach sees trading range ahead.
On Transports, Oil & Climate Change
Check out the accompanying pdf and chart collection. Executive Summary: Does the recent rally in the S&P Transports signal that investors think transportation stocks have been beaten down enough so far this year? Will they continue to chug uphill despite the drag from slowing fundamentals? Jackie examines the challenges up ahead for shippers, truckers, railroads, and air freight and logistics companies; airlines, though, seem headed for blue skies. … Also: A look at the oil market’s tug of war between China’s downward pressure and Russia’s upward pressure on prices. … And: Today’s Disruptive Technologies segment focuses on news from the UN’s international climate change conference, COP27.
On Political Cycles, Earnings Estimates & Fiscal Fatigue
Check out the accompanying pdf and chart collection. Executive Summary: The stock market historically has performed well after midterm elections and during third years of presidential cycles, but none of these positive political cyclical trends will make much difference if inflation remains elevated, which would force the Fed to cause a hard landing of the economy. … Also: Analysts’ earnings estimates are falling mostly because their expectations for margins are falling. We review the relevant data for the S&P 500 sectors. … And: How fiscal policy has contributed to the deficit and inflation.
On Labor, Productivity & Wages
Check out the accompanying pdf and chart collection. Executive Summary: For a variety of reasons, there’s a severe mismatch between the demand for and supply of labor in the US. That’s created a maelstrom in the market, with extraordinary levels of turnover: One third of payroll employees have quit their jobs over the past 12 months, most for higher-paying ones. That’s driving up wage inflation and driving down productivity. … But we still expect productivity to recover this decade as businesses react by investing in productivity-boosting technologies—our “Roaring 2020s” scenario. … While the latest data show some moderation in wage inflation, it probably won’t continue to moderate sustainably until turnover subsides.
Powell Is From Mars, Brainard Is From Venus
Check out the accompanying pdf and chart collection. Executive Summary: Has the stock market been voting early? It‘s up 5% since the S&P 500’s October 12 bottom—which may turn out to be the bear market’s ultimate bottom. Tomorrow’s midterm elections may further boost stock prices in coming months if history is a guide. Our soft-landing economic outlook, if it pans out (60% subjective odds), may be another wind at the stock market’s back. … A headwind last week was Fed Chair Powell’s peak hawkishness, but we expect to hear counterbalancing views from other Fed officials now that their quiet period is over. … Much now—both the economic and financial market outlooks—hinges on inflation reports in coming months. ... On inflation, Brainard makes sense. ... And: Dr. Ed reviews “Don’t Worry Darling” (+ +).
On Powell, China, Consumers & AI
Check out the accompanying pdf and chart collection. Executive Summary: Fed Chair Powell’s hawkish press conference yesterday deflated the stock market, but we think the S&P 500 bottomed on October 12 and see a few potentially uplifting developments to come. … Also: What might it take for the China MSCI to start performing better? Jackie considers this question and examines two big issues holding it back. … And: The shift in consumer purchasing patterns from stuff to services was apparent in the Q3 earnings of companies affected both positively and negatively. … Finally, today’s Disruptive Technologies piece showcases the rapidly advancing technology of AI.
On Powell, Inflation & Home Prices
Check out the accompanying pdf and chart collection. Executive Summary: After Fed Chair Powell’s press conference today, investors are bound to see more light at the end of the tightening tunnel. We’re hoping he’ll suggest that just two more 75bps turns of the federal-funds-rate screw—one announced today and another in December—may be tight enough. … Also: We assess the latest persistently high inflation data with an eye toward assessing whether our inflation forecast for the rest of this year is overly optimistic. … And: Housing prices are falling in the wake of rising mortgage rates. But we don’t see the market crashing as in 2007, Melissa explains. The downward drivers then and now are nothing alike.
Back To The Old Normal?
Check out the accompanying pdf and chart collection. Executive Summary: The unconventional ultra-easy monetary policy that reigned from the Great Financial Crisis to the Great Virus Crisis—a.k.a. the “New Normal”—aimed to stimulate the economy and shore up inflation. Now the “Old Normal” is back, characterized by more conventional tight monetary policy aimed at taming inflation, even if that kickstarts a recession. … But this post-pandemic business cycle isn’t following the usual Old Normal script—instead featuring an oddly quick snapback of GDP growth and oddly vigorous comeback of inflation. … Today, we look at what’s been happening in various segments of the economy this year and forecast what’s in store for 2023.
Bear Bottoms
Check out the accompanying pdf and chart collection. Executive Summary: The bear market has clawed 30% out of stock valuations, returning the S&P 500’s forward P/E to its historical average of 15. But October 12 may have marked the bear’s bottom. If GDP and inflation perform as we expect and the Fed does what everyone expects, that bottom should hold. … We think the stock market has discounted a soft-landing scenario (to which we give a 60% subjective probability) but is nervous about a hard landing (40%). … Also: The MegaCap-8 stocks’ outsized influence over their resident indexes has been diminished. … Movie review: “All Quiet on the Western Front” (+ + +).
China and Semiconductors
Check out the accompanying pdf and chart collection. Executive Summary: Today, our focus is the semiconductor and semiconductor equipment manufacturing industries, both down on their luck these days. The US Commerce Department has barred the door to one of their major markets, China. Yet the CEOs have been curiously acquiescent. … Jackie examines the administration’s possible motivations and the impacts on specific players in the space. … This bad news couldn’t have hit at a worse time: The semiconductor cycle may be heading south. Earnings estimates have been getting slashed and stocks battered.
ECB On Thursday, Inflation On Friday
Check out the accompanying pdf and chart collection. Executive Summary: ECB hawks will be squawking at their meeting on Thursday. Fed hawks will be all over the critical US inflation data that comes out on Friday: The Employment Cost Index may suggest a peaking of wage inflation, and September’s PCED may reflect a declining headline rate (albeit rising core rate, as did September’s CPI, due to services inflation). Today, we examine the significance of each. … Also: We drill down to inflation within services industries, where the worst of it now roosts. … And: Once again, the ECB is on a mission and vowing to “do whatever it takes” to achieve it. This time, the goal is smothering Europe’s inflation fire even if GDP is dampened in the process.
Your Wish Is Our Command
Check out the accompanying pdf and chart collection. Executive Summary: Our Monday webinars often don’t allow time to answer all your questions. So today’s Morning Briefing is devoted to a few recent ones. … We don’t expect much economic impact when the drawdown of the SPR ends, as we don’t foresee gasoline prices spiking as a result since tapping the SPR didn’t contribute much to the decline in prices. … Also: We counter our skeptics who expect a rampant recession, explaining why we see greater odds (60%) that the gently rolling recession already underway will continue. … And: The strong dollar should peak when monetary policymakers’ hawkishness does, to the relief of US companies with foreign-derived sales and earnings.
The Great Monetary Policy Reversal
Check out the accompanying pdf and chart collection. Executive Summary: Both the bearish and bullish cases for the stock market currently boil down to how the economy responds to the tectonic monetary policy adjustment from unconventionally ultra-easy to conventionally tight, a.k.a. “The Great Monetary Policy Reversal.” … We describe both cases, pointing out that bullish could morph into bearish if services inflation doesn’t abate. We’re in the minority as glass-half-full bulls, counting on a muted rolling recession, with rolling inflation, passing through the economy and out. … Also: Fed officials may be dialing back their hawkishness, which would support the bullish case. We think monetary policy is decidedly restrictive now already. … And: Midterm elections could energize Santa Claus rally. ... Plus: Dr Ed reviews “Eiffel” (+).
On China, Banks & Solar
Check out the accompanying pdf and chart collection. Executive Summary: China’s economy is ailing, but you wouldn’t know it to hear President Xi’s speech before the Chinese Communist Party’s annual National Congress. Jackie puts into perspective the points he made and, more importantly, the ones he omitted. … Also: Big banks’ Q3 earnings reports showcase their resilience so far in the current higher interest-rate environment, but leveraged loans could be a problem area in the future if companies have trouble making higher interest payments. ... And: A look at solar energy’s sunny future: With new technologies making panels lighter and more versatile, the sky’s the limit to their potential applications.
On Mid-Terms, Earnings & Commodities
Check out the accompanying pdf and chart collection. Executive Summary: Octobers tend to turn out decent returns during mid-term election years. Twelve bear markets have met their demise during October, often setting the stage for Santa Claus rallies. … Q3 earnings season has stumbled out of the gate, but stocks have rallied anyway. We look at which sectors and industries benefited the most and where estimate-cutting industry analysts are cutting the most. … Also: Melissa discusses how recent news from China and Europe has been affecting commodities prices.
Going Fishing
Check out the accompanying pdf and chart collection. Executive Summary: Our bond market analysis suggests that the 10-year Treasury bond yield might peak at 4.00%-4.25%, probably in November after the Fed raises the federal funds rate by 75bps and possibly in anticipation of one final 75bps hike in December that puts the terminal federal funds rate at 4.50%-4.75%. … Our stock market outlook involves the S&P 500 remaining in a volatile trading range between 3666 and 4305 for the rest of this year. ... Also: Why hasn’t the labor-force participation rate snapped back to its pre-pandemic levels now that the pandemic has abated? Melissa explores various reasons. … And: She examines trends perpetuating today’s extreme labor shortages.
Mostly All About Inflation
Check out the accompanying pdf and chart collection. Executive Summary: More persistently pernicious inflation than expected is at the root of the financial market’s bearish sentiment. Revenues, profit margins, and earnings have been holding up relatively well; the market’s big problem is a significant downward rerating of the P/E multiples that investors are willing to pay in this inflationary economic environment. ... We continue to think the economy is undergoing a rolling recession afflicting different industries at different times. We also think that inflation might be following a similar rolling script. Notably, goods inflation pressures have abated as services inflation pressures have picked up.
On Semis, Valuation & Energy
Check out the accompanying pdf and chart collection. Executive Summary: The cyclical S&P 500 Semiconductors and Semiconductor Equipment industry indexes have had a terrible week and year. … Also: The stock market’s poor recent performance has been mostly attributable to valuation resets at lower levels. Jackie finds a mixed valuation picture among sectors and industries. … And: Developments that exert upward pressure on oil prices have been countered by factors with the opposite effect; three in particular have been sapping global demand for oil lately.
The Most Widely Anticipated Recession In History
Check out the accompanying pdf and chart collection. Executive Summary: Some areas of US economy are thriving while others flounder, and several looming challenges signal tough times ahead. JPMorgan Chase’s CEO yesterday said a recession is coming. Our assessment is that a rolling recession is already here and should linger well into next year. … We’re raising our Q3 forecast for real GDP and lowering our Q4 one. … Notably, small business owners remain depressed, with inflation topping their worry list even as they’re forced to exacerbate it. … Also: Industry analysts have been continuing to lower their earnings sights; we may do the same for S&P 500 earnings this year and next depending on the strength of Q3 earnings results.
More Inflation (News) Is Coming
Check out the accompanying pdf and chart collection. Executive Summary: The financial markets have been laser focused on inflation news this year, and are bracing for the next couple of days’ releases. Thursday’s CPI report for September is bound to move the markets, and tomorrow should bring a sneak peek of what it holds in store via the PPI release, specifically its personal consumption expenditures index. … Today, we examine the inflation information available to date in preparation for the big releases. … Notably, global supply-chain pressures eased in September, and the prices-paid indexes in both manufacturing and nonmanufacturing PMIs are way down from their peaks.
Volcker 2.0 vs Bernanke 2.0?
Check out the accompanying pdf and chart collection. Executive Summary: Our current Fed chief has recently turned to Paul Volcker’s playbook to fight inflation. The risk is that he will trigger the kind of financial instability that occurred during Ben Bernanke’s term as Fed chair. Powell and his colleagues seem hellbent on further rate hikes with no pause to assess the impacts of recent ones. One Fed governor recognizes the risks of doing so but agrees with the Fed’s risky course. Another one is quite dismissive of financial stability concerns. But we see red flags in the weakness of the housing market, the negative wealth effect, and the strength of the dollar. … Also: The labor market remains robust, but wage inflation may be peaking. … And: Dr. Ed reviews “Operation Mincemeat” (+ +).
On Earnings, JOLTS & Housing
Check out the accompanying pdf and chart collection. Executive Summary: While S&P 500 forward revenues has hit successive record highs lately, the forward profit margin and forward earnings both peaked in June. Since then, forward earnings has been flat. We see more of the same for earnings given our expectation that economic growth will be close to zero in our growth recession scenario. … Also: One in three workers quit their jobs over the past year! But their ex-employers quickly rehired. We examine the reasons for the labor market’s mind-boggling pace of job churn. … And: Home affordability challenges have sent the recently hot housing market into a deep freeze. Melissa traces the causes and the effects on homebuilders.