Friday, August 4, 2023

Wall Street Breakfast: Bottled-in-Bond

There's an interesting story playing out in the bond market, and while the narrative may be hard to identify, it's easy to spot some themes with yields hitting fresh 2023 highs. Things began escalating a week ago following the Bank of Japan's policy tweak, but since then, Fitch downgraded America's debt and the Treasury increased the size of longer-term debt sales to address mounting borrowing needs. It comes as hedge funds have been shorting Treasuries en masse, prompting Bill Ackman to bet against the 30-year bond, though others like Warren Buffett have since said this is "one thing" that investors do not need to "worry about." Snapshot: The resilience of the labor market is another area that's being eyed by bond watchers, with the possibility that the data-dependent Fed will need to continue raising its policy rate as it responds to strong readings. Wednesday's private sector ADP jobs report was another blowout, and while that doesn't necessarily convey what the government's monthly figure will show, investors are paying extra attention to today's nonfarm payrolls release at 8:30 AM ET. Economists expect 200K new jobs were added in July, down modestly from the 209K reported in June, while the unemployment rate is seen staying at 3.6%. Also watch for the Labor Department's revisions to June and May numbers, as well as average hourly earnings growth, which is forecast to cool to 4.2% Y/Y compared with 4.4% in June. If there is any slowdown on that front, it can suggest that the central bank's rate hikes are having their intended effect on the economy, while helping the Fed take its foot off the accelerator in its fight against inflation. SA commentary: "Cognitive bias is a pernicious aspect of human thought that can make even the best among us unknowing victims," writes analyst Christopher Robb in July Jobs Report Likely Bolsters Soft Landing Narrative. "Wall Street is a 'tribe' in some ways, like any other industry or group. It has an orthodoxy on monetary policy and inflation that has blinded many in finance and resulted in spurious conclusions. Properly navigating economic cycles is difficult in the first place - even more so when you throw in simultaneous demand and supply shocks of an intensity never experienced. Accepting that many correlations that have traditionally provided insight may no longer be functional is essential to navigating today's markets."
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There's an interesting story playing out in the bond market, and while the narrative may be hard to identify, it's easy to spot some themes with yields hitting fresh 2023 highs. Things began escalating a week ago following the Bank of Japan's policy tweak, but since then, Fitch downgraded America's debt and the Treasury increased the size of longer-term debt sales to address mounting borrowing needs. It comes as hedge funds have been shorting Treasuries en masse, prompting Bill Ackman to bet against the 30-year bond, though others like Warren Buffett have since said this is "one thing" that investors do not need to "worry about."

Snapshot: The resilience of the labor market is another area that's being eyed by bond watchers, with the possibility that the data-dependent Fed will need to continue raising its policy rate as it responds to strong readings. Wednesday's private sector ADP jobs report was another blowout, and while that doesn't necessarily convey what the government's monthly figure will show, investors are paying extra attention to today's nonfarm payrolls release at 8:30 AM ET.

Economists expect 200K new jobs were added in July, down modestly from the 209K reported in June, while the unemployment rate is seen staying at 3.6%. Also watch for the Labor Department's revisions to June and May numbers, as well as average hourly earnings growth, which is forecast to cool to 4.2% Y/Y compared with 4.4% in June. If there is any slowdown on that front, it can suggest that the central bank's rate hikes are having their intended effect on the economy, while helping the Fed take its foot off the accelerator in its fight against inflation.

SA commentary: "Cognitive bias is a pernicious aspect of human thought that can make even the best among us unknowing victims," writes analyst Christopher Robb in July Jobs Report Likely Bolsters Soft Landing Narrative. "Wall Street is a 'tribe' in some ways, like any other industry or group. It has an orthodoxy on monetary policy and inflation that has blinded many in finance and resulted in spurious conclusions. Properly navigating economic cycles is difficult in the first place - even more so when you throw in simultaneous demand and supply shocks of an intensity never experienced. Accepting that many correlations that have traditionally provided insight may no longer be functional is essential to navigating today's markets."
     
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Tech
Apple (AAPL) shares slipped 2.1% in after-hours trading on Thursday as the tech giant saw its sales decline for the third consecutive quarter. Pressures are expected to continue into Q4, with CFO Luca Maestri forecasting a double-digit decline in iPad and Mac sales due to tough comparisons with the prior year. On the positive side, iPhone sales are expected to improve sequentially, while Services revenue reached an all-time high of $21.2B driven by more than a billion subscriptions to offerings like iCloud, Apple Music, News, TV+ and more. Reports also suggest that Apple may be gearing up to unveil its new iPhone on September 13. (161 comments)
     
Consumer
Helped by cost optimization efforts and the fastest delivery speeds it has ever recorded, Amazon (AMZN) rose 8.7% AH as its Q2 revenue handily beat estimates. The e-commerce giant also set ambitious Q3 targets and related that every one of its businesses has multiple ongoing generative AI initiatives. CFO Brian Olsavsky further confirmed on an earnings call that AWS - which saw slowing sales as customers cut back on spending - is now stabilizing and cost optimizations are moderating, with Q2 trends continuing into July. Following the report, SA analyst Tradevestor said Amazon's ecosystem is enough reason to remain bullish long-term, while Bill Maurer warned against buying the stock, given potential headwinds expected later this year. (60 comments)
     
Energy
Crude is headed for its sixth weekly gain after Saudi Arabia extended its unilateral 1M bbl/day oil production cut by another month, and said it could be prolonged or even deepened. The move adds to other voluntary reductions by some OPEC members, while Russia will continue to reduce its crude supply into September. An OPEC+ panel is also scheduled to meet today amid growing concerns about oil supplies, but no policy changes are expected. With crude prices expected to rise further, Investing Group Leader Avi Gilburt is expecting a "sizable rally" over the coming years, but is not convinced that all charts have bottomed. (20 comments)
     
Today's Markets
In Asia, Japan flat. Hong Kong +0.8%. China +0.2%. India +0.7%.
In Europe, at midday, London -0.3%. Paris +0.2%. Frankfurt -0.3%.
Futures at 7:00, Dow +0.1%. S&P +0.2%. Nasdaq +0.3%. Crude +0.5% to $81.94. Gold -0.1% to $1,966.80. Bitcoin flat at $29,129.
Ten-year Treasury Yield flat at 4.19%.
Today's Economic Calendar
What else is happening...
Bank of England raises interest rates again, Brazil first to cut.

Moderna (MRNA) ups COVID jab sales outlook despite Q2 drop.

KKR (KKR) in talks to buy Paramount's Simon & Schuster for $1.65B.

Warner Bros. Discovery's (WBD) earnings miss, but cash flow impresses.

Tupperware (TUP) surges 51% before the bell on debt restructuring deal.

AstraZeneca (AZN), Sanofi (SNY) RSV drug endorsed by CDC panel.

Upbeat guidance as Airbnb (ABNB) results and bookings top estimates.

Block (SQ) boosts outlook; Q2 gross payment volume disappoints.

CoreWeave raises $2.3B in debt backed by Nvidia's (NVDA) AI chips.

ConocoPhillips (COP) slips after miss, raises production outlook.

AB InBev (BUD) rallies after recording 7% revenue growth in Q2.
Seeking Alpha's Wall Street Breakfast Podcast
Seeking Alpha's Wall Street Breakfast podcast brings you all the news you need to know for your market day. Released by 8:00 AM ET each morning, it is a quick listen that you can put on as you get ready to start your working day.
 

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