"By endurance we conquer." - Ernest Shackleton
Access this week's chart booklet leading with recent Nonfarm Payrolls wage data, followed by an in-depth look at corporate trends. This week, we cover S&P Global, MasTec, and Cognex.
Don't miss the first episode of our Triple Play Podcast! Bill Baruch and Jannis Meindl talk about the macro landscape in connection to 3 stocks in AI, automation and energy. Stay tuned for episode 2 this week!
Markets are in a tug of war against central bank liquidity drying up while hard economic data remains somewhat buoyant. Nevertheless, ISM Services was in contraction territory last week, moving one step closer to the recession playbook. Arguably, that's exactly what the Fed needs and wants to see. Unemployment at 3.5% with labor force participation ticking up by 0.1% is a goldilocks scenario, especially as wages came in soft at 0.3%. Perhaps more encouraging amidst +223k jobs added is the fact that wages on the services side stayed contained outside of leisure & hospitality.
Thus, markets are caught in between two forces: 1.) Central banks fighting inflation until they're certain the 2% average inflation target can be hit. 2.) The economy is renormalizing on its own, which will likely take time.
Whether the Fed and other central banks will pressure markets into a state where inflation is much lower, or the economy renormalizes by itself will matter a whole lot for risk assets. A risk free rate at 4% would be a problem if it were to stay here and therefore challenge the very idea of running war-time deficits in peace time, but there are a lot of assumptions flowing into that thesis.
Macro slides on page 2 - 4 in our chart pack.
A decrease in the more resilient component of inflation (wages) goes hand-in-hand with recent fears over the great resignation. While there may certainly be some truth to that structural force, the last NFP report offered a sigh of relief.
Less encouraging is the tightness of the job market as far as the eye can see. Despite daily reports about layoff announcements, challenger job cuts show a slight uptick in layoff announcements in 2022 compared to 2021. This is very similar to the dynamic we're seeing with initial jobless claims staying extraordinarily resilient.
After a ban on Australian coal in 2020, China is set to start buying from one of its geostrategic adversaries again. With a whole slew of reopening news, China appears to be making a 180 (although within a common prosperity framework.) Not only has Beijing accelerated its reopening timeline, but China has also decided to lower the rhetoric against adversaries. China’s Foreign Minister Qin Gang talked about being ‘deeply impressed’ by his time in Washington, representing a stark shift in tone from what was a grim relationship in 2022. Beijing also seems to backtrack on Xi Jinping’s recent agenda that ‘homes are for living, not speculation.’ Instead, we got news that Beijing plans on relaxing leverage ratios among real estate developers. Furthermore, we also got word that Beijing is in talks with Pfizer to buy its Covid antiviral drug Paxlovid. As we laid out recently, global oil consumption was 4m bb/day below 1980-2019 trend in 2021, indicating that there’s substantial consumption catch-up potential.
If China imports more commodities while accelerating its exports of consumer goods, it's not entirely clear whether the net impact will be inflationary or disinflationary.
Don't miss the first episode of Triple Play and be sure to access this week's chart pack containing macro and micro data.
Until next time, good luck & good trading.
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