Global Supply Chain Issues Down
Shifts in demand, labor shortages, and lockdowns that began in 2020 with the worldwide spread of Covid-19 are some of the main drivers of the global supply chain crunch that has largely affected the prices of goods and services in the past two years. The invasion of Ukraine in 2022 and its geopolitical consequences have added more stress to an already chaotic situation. Decreasing demand for new products due to high prices and borrowing rates, and relaxation of the strict covid rules that have disrupted the supply chain for months, could be enough to lower the inflationary pressure in the next year. According to the Oxford Economics supply chain tracker, the situation has been improving over the past few months, and supply-chain conditions in the U.S. offered encouraging signs to start Q3. Cargo ship backlogs in Southern California have declined for six straight months now, and other modes of transport also signaled reduced stress. Shipping prices were flat or fell, as well. Though Ukraine War adds uncertainty to the mix, making it hard to predict when the supply chain issues will resolve, there are signs that the situation is improving and demand and supply are slowly converging towards an equilibrium.
Are Cruises Coming Back?
The past two years have been tough on the travel industry, which has first faced the abrupt drop in demand caused by the pandemic and is now confronted with understaffing issues as the appetite for travel quickly rebounds. Cruise Operators have indeed seen demand drop sharply since 2020 because of pandemic-related restrictions and passengers’ fear of contagion. This negative trend, however, may soon end. Over the past year, the U.S. has gradually been relaxing masking and testing requirements. As a result, the demand for cruise travel has started to recover. As shown in this week’s Chart, the number of passengers who traveled with Royal Caribbean, Carnival, and Norwegian Cruise Lines in Q2 2022 has bounced sharply from the small numbers seen in the same quarter in the past two years. Demand is expected to grow even more now that the CDC has dropped its vaccination requirements for cruise ship passengers. In support of this view, after the new rules were announced, Carnival reported that booking activity was almost double the activity on the same day in 2019.
Gas Down for 2nd Month
The week marked a second consecutive month of declining gas prices in the United States. The national average price for a gallon of gasoline fell to $3.99 on Thursday, down from the high of more than $5 a gallon in June, driven by a decline in global oil prices in recent months and a tax break on gasoline enacted by a number of states. On Friday, the House passed a climate, tax, and healthcare program dubbed the Inflation Reduction Act that will impose new taxes on shares’ buybacks for large corporations, provide some $80 billion to the IRS, and allow Medicare to negotiate drugs prices directly. Additionally, it will fund hundreds of billions in tax subsidies to fight climate change, targeting a 40 percent reduction in greenhouse gas emissions from 2005 levels by 2030.
Chips Act Aims to Capture Shares
The coming week will be marked again by inflation concerns, with investors focusing on the latest U.S. Consumer Price Index (CPI) announcement on Wednesday and the U.S. Producer Price Index (PPI) announcement on Thursday. The CPI figure is expected to be down from the latest report (when inflation was recorded at a 40-years high of 9.1%) following the FED’s aggressive tightening in recent months. Additionally, the PPI figure will hint at “what lies ahead” for future inflation. The Producer’s report is a leading indicator of the increasing manufacturing costs that may be passed on to consumers in the coming months. On Tuesday, President Biden is expected to sign the so-called “Chips Act” into law. The legislation aims to boost the production of semiconductors in the U.S., a strategic move that aims to capture back shares in a market that Asian countries have dominated in recent years. The move echoes the increasing tensions with China and the global chips shortage that has made it harder for U.S. companies to obtain new chips.
Best Month since Nov ’20
U.S. equities closed the month with the best performance since November of 2020. Equities rebounded from a tough first half of the year as expectations for interest rises eased and reassuring earnings from technology and energy sectors. Technology-heavy Nasdaq performed the best, gaining 12% for the month, according to the Financial Times. Shares in Amazon, Microsoft, Apple, and Google lifted the technology sector after beating consensus on earnings and giving an upbeat outlook for the rest of the year. Oil giants ExxonMobil and Chevron also exceeded expectations on earnings by reporting record quarterly profits as a result of higher oil and gas prices. So far, more than half of S&P 500 companies have beaten estimates, according to FactSet. Data showed that the U.S. economic growth was negative again in the second quarter, a technical definition of a recession. Weakening economic data indicating slowing growth has convinced investors that the Federal Reserve may have to slow its aggressive pace of monetary tightening.
Busy Week of Corporate Earnings
This week will be the busiest week of corporate earnings. Mega-cap technology companies such as Microsoft, Google, Meta Platforms, Amazon, and Apple will report their earnings. Notable names from other industries will also report, such as General Electric, Boeing, Ford Motor Company, Mastercard, Coca-Cola Company, and ExxonMobil. The Federal Reserve will hold its two-day July policy meeting on Tuesday and Wednesday, and it is expected that they will raise the federal funds rate on Wednesday by seventy-five basis points. Several important economic data will be released this week. On the housing front, the Case-Shiller National Home Price Index for May and new and pending home sales for June will be released on Tuesday and Wednesday. We will get the advance estimate for the second quarter GDP growth on Thursday. The U.S. economy contracted in the first quarter of the year, and there is a chance that we might see another quarter of GDP decline. If so, two consecutive quarters of negative growth would indicate a recession by most measures.
Dollar Hits Parity with Euro
Last week, the exchange rate between the euro and the dollar hit parity for the first time in 20 years. The de-risking sentiment of the markets has global investors looking at the dollar and dollar assets. This year, the U.S. Dollar Index, which compares the dollar to a basket of other currencies, such as the euro and the yen, is up just shy of 20%. There are two main reasons for the dollar’s strength. The first has to do with central banks. The Federal Reserve has already raised interest rates by 1.5% this year, while the European Central Bank has not. The dollar is stronger than the Japanese yen because of diverging monetary policy—Japan’s central bank intends to keep its 10-year yield near zero. The second reason for the dollar’s strength is the relative strength of the U.S. economy versus others, especially in Europe. Because of the Russia-Ukraine war and Europe’s reliance on energy from Russia, the region faces a significant energy shortage and a possible recession while the U.S. economy is still running strong.
Earnings Season for Big Banks
Earnings season starts this week as several of the largest banks and financial services firms are expected to report earnings. JPMorgan Chase, Wells Fargo, Morgan Stanley, and BlackRock are some notable financial firms reporting second-quarter earnings. A decline in mortgage revenue is expected to affect earnings from banks. Non-financial firms such as PepsiCo., Delta Airlines, and ConAgra Brands also report earnings. On the economic front, attention will be paid to June’s Producer Price Index (PPI) being released on Wednesday and the Producer Price Index (PPI) on Thursday. Headline inflation is currently running at a 40-year high, and the expectation is that prices might have increased slightly in June. Core inflation which excludes food and energy prices, is expected to fall slightly.
First Weekly Gain in 4 Weeks
US equity markets recorded their first weekly gain in four weeks as the higher risk of a recession caused investors to scale back their expectations of an aggressive Federal Reserve. For the week, technology-heavy Nasdaq outperformed the broader market. Energy shares underperformed as crude oil prices fell, as high gas prices and a weakening economic outlook increased the prospects of a decrease in demand. The University of Michigan’s final reading of June consumer sentiment was revised to the lowest level in four decades. On the bright side, the sentiment report also showed that consumers’ expectations of future inflation were lower than the previous month’s report. The Federal Reserve Chair Jerome Powell testified before Congress last week, stating that inflation expectations remained anchored, which helped boost sentiment in the equity market.
US Equities in Bear Market
Global stocks suffered another weekly drop as the aggressive pace of stimulus withdrawal by major central banks caused investors to sell equities. US equities are now in a bear market, a decline of 20% or more. The Federal Reserve, Bank of England, and the Swiss National Bank all raised interest rates last week to tame surging inflation. With economic data coming in weaker, investors are increasingly concerned with higher risk of recession. The more aggressive stance by central banks adds to headwinds for both economic growth and equities. The Federal Reserve lifted rates by 0.75% on Wednesday, the biggest hike since 1994, according to The Financial Times. Technology stocks that are more sensitive to interest rates and cyclical plays underperformed for the week. Declines were not limited to equities as cryptocurrencies such as Bitcoin dropped by more than 30% for the week. Crude oil prices also took a leg lower, closing under $110 per barrel in anticipation of lower demand from a potential slowdown in global growth.