Can wage inflation be tamed?

Can wage inflation be tamed?
  • Corporate Earnings news
  • Global market indices
  • Currencies
  • Cryptocurrencies
  • Fixed Income
  • Commodity sector news
  • Key data to move markets this week
  • Global macro updates

Corporate Earnings News

According to Refinitiv I/B/E/S data, Q2 was a resilient quarter on the earnings front (again) which saw both a beat rate and an earnings surprise rate reaching a multi-quarter high. Q/Q earnings growth was also positive for the second consecutive quarter. Ex-energy year-over-year (y/y) growth also turned positive after four quarters of negative growth, highlighting improved breadth in earnings growth. All in all, earnings growth in the first half of the year turned out better than originally forecasted.

This contrasts to a weaker revenue quarter which saw the revenue beat rate reach a multi-year low along with an in-line revenue surprise rate. The revenue beat rate was the lowest since 2020 Q1 and will be a trend to monitor in Q3. 

Corporate earning calendar 17 August - 24 August 2023

Thursday: Walmart, Applied Materials, Ross Stores
Friday:Deere & Co., The Estee Lauder Companies, XPeng, Palo Alto Networks
Monday:Zoom Video Communications, Nordson Corp.
Tuesday: Baidu, Medtronic, Lowe's Companies, Dick's Sporting Goods
Wednesday: Nvidia, Snowflake, Analog Devices Inc., Autodesk, NetApp Inc., Splunk
Thursday:Intuit, The Toronto-Dominion Bank, Dollar Tree, Burlington Stores, The Toro Company

US Stock Indices

Nasdaq 100 -5.59% MTD and +35.99% YTD
Dow Jones Industrial Average -1.72% MTD and +5.43% YTD
NYSE -3.71% MTD and +4.17% YTD
S&P 500 -2.16% MTD and +16.94% YTD

Equities had a rough week with the S&P 500 near one-month lows as sticky core inflation and a resilient economy worry markets that interest rates will stay higher for longer.

Mega caps: A bad week for the mega caps with Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Tesla all down. Nvidia is slightly up as investors await Wednesday’s earnings report.

Energy stocks had a generally poor week as worries over lower Chinese demand and the prospect of higher US interest rates for longer following the release of FOMC minutes. Apa Corp (US), ConocoPhillips, Chevron, Phillips 66, Occidental Petroleum, Shell, Halliburton, Baker Hughes, and Energy Fuelsare all down this week.

Materials and Mining stocks were mixed this week as lithium prices continued to drag and copper dropped. Newmont Mining, Yara International, Sibanye Stillwater, Freeport-McMoran, DuPont de Nemours Inc., CF Industries Holdings, Mosaic, and Albemarle Corporation are all down this week, while Nucor Corporation is slightly up on the week.

European Stock Indices

Stoxx 600 -3.41% MTD and +7.15% YTD
DAX -4.00% MTD and +13.40% YTD
CAC 40 -3.17% MTD and +12.15% YTD
IBEX 35 -3.02% MTD and +13.63% YTD
FTSE MIB -4.97% MTD and +18.83% YTD
FTSE 100 -4.45% MTD and -1.27% YTD

Other Global Stock Indices 

MSCI World Index -4.05% MTD and +12.07% YTD
Hang Seng -8.71% MTD and -7.34% YTD

Currencies

The USD rose this week on indications of a resilient economy and FOMC minutes which indicated that rates are likely to be kept higher for longer. The GBP is +5.24%YTD but -0.83% for the month against the USD. It did rise this week as markets factored in the growing likelihood of higher Bank of England rates following the release of inflation data which showed core inflation still at 6.9%, above expectations, and wage data at a record high 7.8% higher than a year earlier in the three months to June. Traders will be looking closely at UK retail data due Friday and PMI data next Wednesday to see how resilient the UK economy is in the face of continued rate rises. The EUR is +1.65%YTD but -1.04% for the month against the USD.

Cryptocurrencies

Bitcoin-0.96%MTD and +74.50%YTD
Ethereum-2.50%MTD and+50.78%YTD

Fixed Income

US 10-year yield to 4.27%.
German 10-year yield to 2.65%.
UK 10-year yield to 4.65%.

Treasury yields reached their highest level since October after the release of the July meeting’s FOMC minutes which indicated that the majority of policymakers still think tightening is needed to get inflation under control. Rising bond yields are putting pressure on equities as concerns start to mount over whether rising rates will bring on an economic slowdown. This comes despite US July industrial output rose 1.0%, beating expectations for a 0.3% gain. Data on Tuesday also showed that retail sales rose 0.7% in July and June sales were revised up to 0.3% instead of the previously reported 0.2%, thus demonstrating the resilience of the US economy. The FOMC minutes made clear that the likelihood of interest rates staying higher for longer remains strong. This has also helped push the yields up on European bonds, with German Bunds, the regional benchmark in Europe, also rising.

Commodities

Gold futures to $1,922.40 an ounce.
Silver futures to $22.47 per ounce.
West Texas Intermediate crude to $79.38 a barrel.
Brent crude to $83.45 a barrel.

Oil was largely down this week despite falling supplies as OPEC member Saudi Arabia continues to cut production and US crude oil inventories fell by nearly 6 million barrels, despite crude production rising to its highest since the start of the Coronavirus pandemic. The price falls were largely due to rising worries about the deepening property crisis in China as real estate developer, Country Garden, missed payments for the first time and as the continuing poor economic news from China diminishes hopes of increased demand for oil. Chinese retail sales were only up 2.5% y/o/y in July, while industrial production only expanded 3.7%, below June’s figures of 3.1% and 4.4%, respectively. The general unemployment rate was 5.3% in July, up from June’s 5.2%. Oil also fell after the release of the Fed’s minutes from its July meeting which showed a division among policymakers over the need for more interest rate hikes. Higher interest rates increase borrowing costs for businesses and consumers, which could slow economic growth and reduce oil demand.

Gold prices continued to fall this week after data pointed to a resilient US economy, with solid retail sales, up 0.7% in July, and an uptick in house building, and after FOMC minutes suggested continued tightening may be necessary. This led to further rises in the USD, with yields also rising. Both are negative for gold as a stronger dollar makes gold more expensive for international buyers, and higher yields also weigh on non-yielding bullion.

Note: As of 5 pm EDT 16 August 2023

Key data to move markets this week

EUROPE 

Friday: Eurozone Harmonized Index of Consumer Prices and a speech by ECB Chief Economist Philip Lane.
Monday: German Producer Price Index and German Bundesbank Monthly Report.
Wednesday: German HCOB Composite, Manufacturing and Services PMIs, Eurozone HCOB Composite, Manufacturing and Services PMIs, and Eurozone Consumer Confidence.
Thursday: ECB Monetary Policy Meeting Accounts.

UK

Friday: Retail Sales.
Wednesday: S&P Global/CIPS Composite, Manufacturing and Services PMIs. 
Thursday: GfK Consumer Confidence.

US

Thursday: Initial jobless claims and Philadelphia Fed Manufacturing Survey.
Monday: Chicago Fed National Activity Index.
Tuesday: Existing Home Sales data.
Wednesday: S&P Global Composite, Manufacturing and Services PMIs and New Home Sales data. 
Thursday: Initial jobless claims, Durable Goods Orders, Nondefense Capital Goods Orders, and Jackson Hole Symposium.

China

Monday: People’s Bank of China (PBoC) Interest Rate Decision.

Global Macro Updates

US Fed minutes shake the market. The minutes of the Fed's July monetary policy meeting showed most policymakers continued to see significant upside risks to inflation, which could require further tightening of monetary policy, adding to uncertainty among investors about the outlook for interest rates. "Participants remained resolute in their commitment to bring inflation down to the 2% objective," the minutes said. However, the minutes also noted that the policymakers discussed several risk-management considerations that could bear on future policy decisions and though a majority kept inflation as the paramount risk, "some participants commented that even though economic activity had been resilient and the labour market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate." For now it appears that rates will remain higher for longer as policymakers weigh the ongoing resilience of the US economy with wages continuing to rise above the target rate, and a still strong labour market vs a gradual slowing of the economy. The next Fed focus will be the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming between 24 and 26 August.

No relief for the BoE. After raising rates in August for the 14th consecutive time, UK headline inflation fell to 6.8% in July, down from 7.9% in June and well below October’s peak of 11.1%. It is the lowest rate of price increases since February last year. However, core inflation is still very high, coming in at an annual rate of 6.9%. In addition, the rate of growth in the price of services rose to 7.4% in July from 7.2%. With wages rising at a record annual pace in the three months to June, up 7.8% y/o/y, and a still tight labour market, services inflation will likely stay uncomfortably high for some time yet and there will be no easing of pressure on the Bank of England (BoE) to do more to tame price rises.

What’s really happening in the Eurozone? Eurozone industrial production was up by 0.5% in June, beating expectations for a 0.2% rise, while GDP was up 0.3% in the second quarter, unchanged on preliminary data, the EU's statistics agency said on Wednesday. However, as noted by Reuters, underlying growth was probably weaker, as data may be distorted by a 3.3% jump in Irish GDP, which was likely driven by the impact of large foreign companies based there for tax reasons. Prospects for the Eurozone were also diminished by industrial production falling 1.2% in June 2023 compared with June 2022. The Eurozone economy has pretty much stagnated for the past three quarters due to a manufacturing recession in Germany and still high costs for food and energy. However, with Eurozone unemployment at record lows, coming in at 6.4% in June, the still tight labour market may contribute to consumer demand and be supportive to Eurozone resilience. It may also contribute to further rises in core inflation, causing the ECB to maintain its tightening cycle and thereby causing further headwinds for Eurozone growth.

Coinbase for the win? As noted by Reuters,Coinbase Global said on Wednesday it had secured approval from the National Futures Association (NFA), a self-regulatory organisation designated by the Commodity Futures Trading Commission (CFTC), to offer Bitcoin and Ether futures directly to US retail customers. It had previously only been allowed to offer these to its institutional clients. The right to offer these derivatives is a potential game changer for Coinbase. Derivatives markets account for nearly three-quarters of daily trading on crypto markets and typically deals worth around $2bn a day change hands, according to CCData. Its research shows that in July, crypto derivatives trading volumes globally totaled about $1.85 trillion. According to the Financial Times, the NFA move also marks the first time a crypto group has been designated a futures commission merchant, or FCM, and puts the company in competition with traditional futures brokers.

This has been considered a major win for Coinbase as it battles a lawsuit from the Securities and Exchange Commission (SEC). In June the SEC alleged that Coinbase offered unregistered securities and operated an unregistered broker, national securities exchange and clearing agency. Coinbase denies the charges. The SEC and the CFTC have argued for several years over which agency has the right to regulate the trade in cryptocurrency products. 

DISCLAIMER: While every effort has been made to verify the accuracy of this information, EXT Ltd. (hereafter known as “EXANTE”) cannot accept any responsibility or liability for reliance by any person on this publication or any of the information, opinions, or conclusions contained in this publication. The findings and views expressed in this publication do not necessarily reflect the views of EXANTE. Any action taken upon the information contained in this publication is strictly at your own risk. EXANTE will not be liable for any loss or damage in connection with this publication.

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