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The Weekend Edition # 126 - Three Central Banks

Yields weigh on the Markets; Three Central Banks this Week; What Retailers' Earnings are telling us

Welcome to another issue of the Weekend Edition!

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Here's what we cover

Market Recap - Yields Weigh on the Markets

March 18 - March 22, 2024

Source: Koyfin

The market is eventually beginning to respond to higher yields. The Inflation numbers, both the CPI and PPI data, are pointing towards re-acceleration. Yields have been floating higher but, the market didn’t respond immediately, making an all-time high even after hotter-than-expected CPI inflation numbers. However, positioning has become stretched, with options premium on certain single stocks (such as NVDA) reaching unprecedented levels.

There’s a lot of discussion that all this euphoria can only lead to misery. Well, it may or may not, but what is certain is that it’s high time for positioning to become more balanced and for some correction to take place - a breather if you’d like. Parabolic moves seldom end happily.


Source: Koyfin

Oil continued its climb this week. Brent Crude crossed $85/bbl, to a four-month high. WTI Crude settled just above $81/bbl.

The IEA came out with a report earlier in the week discussing that a shortage of supply is likely to persist with the current OPEC+ cuts. China is seeing some positive signs and global growth is accelerating. Manufacturing activity has bottomed out and recession fears are behind us. All of this is leading to higher demand forecasts.

Speaking of which, Copper is also seeing some tailwinds from that. Copper rose over 5% this week. Some of that rally is also being fueled by further supply shortage fears. Last year, we saw a giant mine close down in Panama, and more recently, Zambian production is at risk.

Zambia, Africa’s second-largest copper producer, has declared the recent drought brought on by El Niño, a natural disaster. The lack of water has led to a reduction in electricity production and consequently, mining and industrial production.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - Three Central Banks

The week ahead is important. We have three major central bank rate decisions - the Bank of Japan on Tuesday (Late Mon for the US); the US Federal Reserve on Wednesday and the Bank of England on Thursday.

Bank of Japan - Tue 19 Mar 2024

If you ask me, the most watched one will be the BoJ, because traders are still betting that there will be a change to interest policy with a hike, mainly because Corporate Wage Negotiations came in positive. If there is a change, it will be a historic event.

I still think there may be an announcement of forthcoming hikes instead of a decision. Either way, it will eventually push yields higher, pulling up US yields even further.

If the BoJ hikes:

  • The Yen will soar putting pressure on the US Dollar. (USD/JPY will fall)

  • Global bond yields will rise putting pressure on bonds globally, including the US.

  • The Japanese stock market (outside the banks and perhaps insurance companies) will take a hit. As often is the case, pressure on the Nikkei will also transmit pressure to US markets to a certain extent. The correlation between the two is positive.

Nikkei & Nasdaq-100, with correlation

The US Federal Reserve - Wed 20 Mar 2024

Also, an anticipated meeting, not because we expect a change to interest rate policy but more because the Fed will release its first quarterly Summary of Economic Projections for the year. Everyone will be watching to see if there will be changes to the “dot plot”, which shows what Fed members are projecting about interest rates.

The last set of projections that we got in December showed us three cuts for 2024 and after inflation has been coming in higher, the market has finally aligned itself with that notion, down from six cuts earlier this year.

But, the Fed insisted on seeing more “good data” on inflation and unfortunately, that’s not what we have been seeing. Jan and Feb brought us two readings that were higher than expected and now the market is warming up to the idea that the Fed may delay rate cuts. Several Fed members have discussed that as well at various points.

So no big exchanges are expected, just more speculation about the future path of interest rates.

The Bank of England - Thu 21 Mar 2024

Finally, we have the Bank of England. Again we don’t expect any changes to policy rates but I definitely want to see whether they change the language in their guidance, which continues to remain vague. The UK’s last GDP growth reading came in positive from previous negative growth. And while inflation and wage growth have declined, they remain stubbornly higher than other major developed markets. All this gives the BoE some leeway to hold rates higher for longer.

The BoE’s Outlook suggests inflation is likely to come down to their 2% target in 2026.

Source: Bank of England

Our Global Outlook at the start of the year had the BoE cutting rates after the ECB and the Fed, and I still see that as the likely case here. Although, we do think that the cuts will likely be aggressive in the first few instances.

This will keep the GBP stronger than the EUR or the USD and weigh more on their equities, which are already trading at quite a discount to European markets and the US.

Earnings - What Retailers are telling us

This week's retail earnings have provided a mixed bag of results, with Dick’s Sporting Goods (DKS) standing out by surpassing analyst forecasts for Q4 and announcing an increase in its quarterly dividend, indicating relatively robust consumer spending in the sporting goods sector. DKS also plans to increase more retail outlets, which tends to make sense to me because sporting goods is still a category where people like to try items before they buy.

Ulta Beauty (ULTA) exceeded Q4 earnings, revenue, and comparable sales forecasts, and announced significant plans for international expansion and share repurchases. Despite these positive outcomes, the company’s stock dipped due to mixed FY25 guidance, reflecting investors' high expectations and the competitive pressures in the beauty industry. Ulta also announced plans for international expansion, starting with Mexico.

Meanwhile, Dollar Tree (DLTR) and Dollar General (DG) faced their own set of challenges, with DLTR announcing store closures amidst in-line revenue but disappointing EPS figures, and DG experiencing a downturn despite beating Q4 expectations. Both companies' struggles reflect the broader issue of inflation and economic pressures particularly impacting lower-income consumers—a demographic core to the dollar store business model.

Williams-Sonoma (WSM) continued to outperform analyst expectations for the fourth consecutive quarter, showcasing effective inventory management and supply chain optimizations. Despite facing a historically tough housing market, WSM's guidance suggests anticipation of macroeconomic improvements.

The two takeaways from this:

  • Inflation continues to hurt spending, particularly from lower-income consumers. The more affluent segment continues to spend.

  • Overall, spending is still slowing. Williams-Sonoma delivered better-than-expected results, but the actual numbers declined. EPS declined -1% YoY and Revenue dropped -7% YoY.

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Closing Thoughts - 840 billion reasons

These days all the news, views, and market updates seem to suggest that we’re very much at a crossroads. Even though we’re seeing the markets pull back somewhat, we’re not exactly seeing the euphoric undertone die down.

On the other hand, the macro data seems to get progressively challenging, and from what we’ve seen from the retailers’ earnings this week, consumer spending that has been driving growth has been slowing down.

The market, however, is convinced that the Fed will cut rates this year, and Chair Powell confirmed that in his congressional testimony.

There are reasons for the Fed to cut rates. About 840 billion reasons!

The projected interest payment on government debt is $870B for 2024 and is further projected to rise to $12.4 trillion in the next 10 years. Some of this burden has to be reduced.

It’s only a matter of time.

Have a great week ahead!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.


US Earnings

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.

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