As we approach the open... - 7/30/21

As we approach the open... - 7/30/21 

Apologize for any typos.

As we approach the open of US equity trade in NY, a risk-off tone pervades global markets with stocks and other risk sectors mostly down, bonds and other safe havens mostly up.  In the US, tech leads to the downside following poor reactions to big tech last couple days followed by a big down open on tap for Amazon after it missed revenue estimates and guidance.  NDX indicated down -1.18%, SPX -0.67%, RUT -0.5%.

Stocks, though, are off the lows as we got better than expected personal income and spending (and PCE) numbers covered below. I honestly wouldn't be shocked to see us in the green later.

Remember our summer caveat: One thing to keep in mind is after July 4th until around Labor Day, there is significantly less liquidity in the markets due to vacations, etc., so we can get more whippy action and "overshoots" in all markets.

In U.S. corporate news:

Amazon.com (AMZN 3364.00, -235.92): -6.6% after missing revenue estimates and guiding Q3 revenue and operating income below consensus. Procter & Gamble (PG 140.75, +1.27): +0.9% after beating top and bottom-line estimates and guiding FY21 EPS and revs above consensus. Chevron (CVX 104.60, +2.03): +2.0% after beating top and bottom-line estimates. Caterpillar (CAT 207.85, -4.71): -2.2% despite beating top and bottom-line estimates. T-Mobile US (TMUS 144.00, -0.63): -0.4% despite beating top and bottom-line estimates. Pinterest (PINS 57.00, -15.04): -20.9% after reporting a 5% yr/yr decline in U.S. monthly active users. The company beat top and bottom-line estimates. 

ABBV also reported this morning beating top and bottom lines, while CL was basically in-line.

Asia

Major equity indices in the Asia-Pacific region ended the week on a lower note, leading to mostly down weeks with weekly losses in Chinese/Hong Kong shares most since February. Japan's Nikkei: -1.8% (-1.0% for the week) Hong Kong's Hang Seng: -1.3% (-5.2% for the week) China's Shanghai Composite: -0.4% (-4.3% for the week) India 's Sensex: -0.1% (-1.0% for the week) South Korea's Kospi: -1.2% (-1.6% for the week) Australia's ASX All Ordinaries: -0.4% (-0.1% for the week).

Chinese weakness likely in part related to further industry-specific announcements, as China's National Development Reform Commission said that the country's major fertilizer producers will suspend exports, and China's Ministry of Finance confirmed that tax rebates on certain steel products will be removed and that export tariffs for certain products will increase on August 1. A little more on this below.

In other news, Japan will extend Tokyo's state of emergency declaration until August 31.

In economic data, highlights were June IP beating in both Japan and S Korea.  

Japan's June Industrial Production 6.2% m/m (expected 5.0%; last -6.5%). June Unemployment Rate 2.9% (expected 3.0%; last 3.0%) and June jobs/applications ratio 1.13 (expected 1.10; last 1.09). June Housing Starts 7.3% yr/yr (expected 7.2%; last 9.9%) and June Construction Orders 32.3% yr/yr (last 7.4%)

South Korea's June Industrial Production 2.2% m/m (expected 1.0%; last -1.0%); 11.9% yr/yr (expected 9.3%; last 14.9%). June Retail Sales 1.4% m/m (last -1.8%). August Manufacturing BSI Index 96 (last 101)

Australia's June Housing Credit 0.7% m/m (last 0.6%) and Private Sector Credit 0.9% m/m (last 0.4%). Q2 PPI 0.7% qtr/qtr (last 0.4%); 2.2% yr/yr (last 0.2%)

Singapore's Q2 Unemployment Rate 2.7% (last 2.9%). Q1 Business Expectations 20.0 (last 32.0)

Hong Kong's Q2 GDP 7.5% yr/yr

As recent Chinese actions have SEC freezing Chinese IPOs until it can update risk disclosures.

And, in addition to the steps noted above, China hinted that they might not be quite done as they described the world’s second largest economy as “not yet solid,” and vowed enhanced cross-cyclical macro adjustments. Whatever that means. Bloomberg noted that “some analysts have said the comments mean authorities will take a longer time frame when considering policy support and avoid overstimulating the economy.” 

Additionally, the Politburo “urged” stabilization in housing prices and expectations, so watch the property sector as we noted earlier this week.  China’s banking and insurance regulator pledged to accelerate efforts to “deal with” high-risk institutions in a bid to circumvent financial risks. That was according to a statement on the CBIRC’s website. Among other measures, regulators will ensure bank and insurance money doesn’t find its way into the property market “illegally.” The “resurgence” of risky shadow banking activities will not be permitted.

This was Goldman's take - “The new regulations announced in the past weeks have reinforced our view that the prevailing tightening cycle is unprecedented in terms of its duration, intensity, scope, and the velocity of new policy announcements, as reflected by our proprietary regulation proxy,” they said, adding that although the regulations “are arguably backed by clear policy intentions and social merits, and could improve social equality if executed in a prudent manner, the equity market has taken a significant hit given the uncertainty centering on related companies’ growth and profitability outlook, risk premium, business legality, and existential/going concern.”

Europe

Major European indices are on track for a lower finish to the week despite the release of mostly better than expected flash GDP readings for Q2. STOXX Europe 600: -0.5% (UNCH week-to-date) Germany's DAX: -0.7% (-0.9% week-to-date) U.K.'s FTSE 100: -0.8% (-0.1% week-to-date) France's CAC 40: -0.1% (+0.9% week-to-date) Italy's FTSE MIB: -0.4% (+1.2% week-to-date) Spain's IBEX 35: -1.2% (-0.4% week-to-date).

There is growing speculation that the U.K. will delay the release of its budget for 2022.  France's Finance Ministry continues expecting domestic GDP growth of 6.0% for 2021

Economic data highlighted by 2QGDP first estimates which beat overall for the EU (Germany missed though, but Italy big beat).  Price data came in a touch hot.  French consumer spending missed.

It appears the German miss in GDP was due to supply chain issues, but ING was optimistic about the future - Despite a weaker-than-expected showing, Europe’s biggest economy will continue to ramp up, according to Carsten Brzeski, head of macroeconomics at ING. “We expect the German economy to return to pre-crisis levels before the end of the year.” However, he warned of growth risks from the Delta variant, ongoing supply chain issues, and rising inflation. "As order books are richly filled and inventories are still low, activity in the German industry will accelerate. At the same time, however, sentiment in the service sector is still far off from record highs and rather mute, while consumer spending could be undermined by higher inflation in the second half of the year."

Eurozone's flash Q2 GDP 2.0% qtr/qtr (expected 1.5%; last -0.3%); 13.7% yr/yr (expected 13.2%; last -1.3%). June Unemployment Rate 7.7% (expected 7.9%; last 8.0%) and July CPI -0.1% m/m (last 0.3%); 2.2% yr/yr (expected 2.0%; last 1.9%)

Germany's flash Q2 GDP 1.5% qtr/qtr (expected 2.0%; last -2.1%); 9.6% yr/yr, as expected (last -3.4%). June Import Price Index 12.9% yr/yr (expected 12.8%; last 11.8%)

Italy's flash Q2 GDP 2.7% qtr/qtr (expected 1.3%; last 0.2%); 17.3% yr/yr (expected 15.6%; last -0.7%). June Unemployment Rate 9.7% (expected 10.4%; last 10.2%). July CPI 0.3% m/m (expected 0.2%; last 0.1%); 1.8% yr/yr (expected 1.7%; last 1.3%)

France's flash Q2 GDP 0.9% qtr/qtr (expected 0.8%; last -0.1%) and June Consumer Spending 0.3% m/m (expected 1.4%; last 10.6%). July CPI 0.1% m/m (expected -0.1%; last 0.1%); 1.2% yr/yr (expected 1.0%; last 1.5%)S

pain's flash Q2 GDP 2.8% qtr/qtr (expected 2.2%; last -0.4%); 19.8% yr/yr (expected 19.0%; last -4.2%). June Retail Sales 1.4% yr/yr (last 19.7%)

Swiss July KOF Leading Indicators 129.8 (expected 130.0; last 133.3)

Commodities/Currencies/Bonds

Bonds - Getting a bid with the risk off mood, as 10-yr yields trade down at the bottom of this week's range at 1.241%.  2-year is flat at 0.20%, flattening the curve a touch.  

Dollar (DXY) - Despite the bearish technical situation, the risk-off trade is keeping it supported as it trades just above flat levels but remains just below $92.  

VIX - Trading higher at 19.  

Crude (/CL) -  Is trading just under flat levels at $73.53 WTI as bullish technicals fight with risk off mood.  

Natural Gas (/NG) - After strong day yesterday, has given most of that back to fall just under $4.  This fits with our prediction of a consolidation around that level.   

Gold (/GC) - After strong day yesterday, not getting help from the risk-off tone as it tests the top of the 50-DMA, so I guess some consolidation.  It would do well to avoid falling back below that I think.  Technicals remain favorable.  

As gold demand bounced back strongly in 2Q.

Copper (/HG) -  Trades down mildly but remains in range of last few days.  Technicals remain favorable.

US Data

June personal income and spending (which also includes PCE, the Fed's preferred inflation gauge) are out.  I'll a deeper dive later this morning, but the headline are beats on income and spending and PCE coming in a bit below expectations, so good across the board.

US Personal Income Jun: 0.1% (est -0.3%; prevR -2.2%; prev -2.0%)

US Personal Spending Jun: 1.0% (est 0.7%; prevR -0.1%; prev 0.0%)

US Real Personal Spending Jun: 0.5% (est 0.3%; prevR -0.6%; prev -0.4%)

US PCE Deflator (M/M) Jun: 0.5% (est 0.6%; prevR 0.5%; prev 0.4%)

US PCE Deflator (Y/Y) Jun: 4.0% (est 4.0%; prevR 4.0%; prev 3.9%)

US PCE Core Deflator (M/M) Jun: 0.4% (est 0.6%; prev 0.5%)

US PCE Core Deflator (Y/Y) Jun: 3.5% (est 3.7%; prev 3.4%)

We'll get UofM consumer expectations later this morning which I'll report on at some point later today.

Also, I realized I didn't do a good job in my GDP summary of talking about the significance of the different numbers.  I'll try to note a few things the next day or two.  One though is that big negative inventory number.  Due to the unique issues of Covid supply chain issues are different than most recessions which normally are cured by this point in the cycle.  That supply chain rebuilding is equal to 1.5% of GDP when we get that sorted out.

Also, I noted it, but personal consumption was very strong in second quarter.  

Misc.

Random stuff:

Startlingly close correlation between the 2s10s curve and ratio of equal-weighted to cap-weighted SPX.

And we noted earlier this week that 10-yr yield and Naz remained in negative territory (120 day avg), and RUT the same.

As hotel occupancy edges ever closer to 2019 levels, which is a bit surprising to me considering how much less business travel there is.

And restaurants continue to recover as well.

To see more content, including summaries of major economic reports and my nightly summary go to https://sethiassociates.blogspot.com