Fed Fears, Bank Worries, China Struggling – Aug 18 Market Recap
Indices
- Dow 34,500, -781 or –2.21%.
- Nasdaq 13,290, -354 or -2.59%.
- MSCI EAFE 2,068.98, -60.25 or –2.83%.
- S&P 4,369, -95 or –2.13%.
- USD10Y 4.251%, +8.3bp or +1.99%.
- WTI Crude $81.25 bbl, -$1.79 or -2.16%.
Fear of the Fed
It was a tough five trading sessions for the markets this week. It started with bad news out of China’s largest property developer (more on that below) and quickly segued into Tuesday’s strong July Retail Sales report, warnings of additional credit downgrades in the financial sector by Moody’s, and potential further regulation in the regional banking sector by Minnesota Fed President Neel Kashkari. Wednesday saw a bombshell when the Atlanta Fed’s GDP Now tool forecast +5.8% GDP annualized growth for the third quarter, nearly four times the median estimate. The July FOMC minutes were also released which demonstrated that despite a few members with an inclination to pause rate hikes during the last meeting, the great majority of the committee is still requiring firm improvement in the data before they will consider the fight against inflation won.
As a result of the above, both the good news and bad news served to push the markets lower. The magnificent seven (NVDA, TSLA, MSFT, AMZN, APPL, META, GOOG) which pushed the markets higher for the first six months of the year and grew incredibly expensive have been selling off aggressively as investors take profits and money off the table. The GDP Now data and the Fed minutes stoked ongoing fears that the Fed is not yet finished hiking rates. Despite the Fed Futures tool indicating an 89% probability of a pause at their September meeting, the language in the Fed minutes suggests another 25bp hike unless the upcoming data (July PCE Aug 31, August Non-Farm Payrolls September 6, August CPI September 13 and August PPI September 14) present a compelling argument that inflation continues to recede at a rate with which the committee is comfortable.
Bank Worries (again)
The banking sector has been relatively quiet since the March debacle that saw three of the largest bank failures in U.S. history (Silicon Valley Bank, Signature Bank, and First Republic Bank). However, the sector seems to be back on the simmer as interest rates continue to climb and some banks may find themselves with the same mismatch of assets to liabilities that doomed the three aforementioned banks. This was the reason that credit agency Moody’s noted when they downgraded the debt of ten small to mid-sized banks last week, placed another six under review and shifted the “outlook” of another eleven from “stable” to “negative.” On Tuesday, Minnesota Fed President, Neel Kashkari, addressed some of the worries in the sector when he noted that additional capital requirements may need to be imposed on the banks that fall outside of the “too big to fail” category. Not to be left unscathed, credit ratings agency Fitch then announced that if they were forced to downgrade the credit worthiness of the financial sector again (they did so last in June of this year) that they would be forced to lower the ratings of any individual bank that had a higher credit rating than the sector to which they belong. This implied that the “too big to fail banks” including JPMorgan Chase (JPM) could be at risk of a future credit downgrade. Lastly, the real estate sector weighs heavily on the financial sector and there are many that fear that this exposure means there is another shoe to drop. Which bring us to…
Chinese Real Estate
Prior to Monday’s open, China’s largest property developer, Country Garden, suspended trading of 11 of its onshore bonds effective immediately. Last week the developer announced it had missed interest payments on two dollar-denominated bonds and issued a profit warning. On Thursday, the world’s most indebted real estate developer, Chinese company Evergrande, filed for Chapter 15 bankruptcy protection in Federal Court. The developer defaulted in 2021 and has had its shares suspended from trading since March of 2022. While the situation in China is much different from the real estate markets in the United States, the issues in the second largest economy in the world raise fears that Chinese growth is slowing and the implications that could have for the global economy at large.
Next Week
The last of the ten largest market capitalized companies in the world and the firm that started the dizzying first half rally of the magnificent seven, Nvidia, will report earnings on Wednesday. Retail earnings will continue to trickle in with reports expected from Dick’s Sporting Goods (DKS), Lowe’s (LOW), Macy’s (M), Kohl’s (KSS), Williams-Sonoma (WSM), Dollar Tree (DLTR), Gap Stores (GPS), and Nordstrom’s (JWN). Economic data is light this week although S&P will publish the first look at Manufacturing and Services for August and various Fed officials including Fed Chair Powell will be giving interviews and speaking from the Jackson Hole Economic Summit.
Programming Note – The Blog will take a respite next week and return the weekend of September 2-3.
Economic Calendar
- Monday – N/A. Earnings: Zoom (ZM).
- Tuesday – N/A. Earnings: Toll Brothers (TOLL), Dick’s Sporting Goods (DKS), Lowe’s (LOW), Macy’s (M).
- Wednesday – S&P August Flash Services and Manufacturing PMI. Earnings: Nvidia (NVDA), Kohl’s (KSS), Williams-Sonoma (WSM).
- Thursday – Initial Jobless Claims, July Durable Goods, Fed officials interviews from the Jackson Hole Economic Summit. Earnings: Dollar Tree (DLTR), Gap Stores (GPS), Nordstrom (JWN).
- Friday – Fed Chair Powell gives opening address and Jackson Hole Economic Summit. August University of Michigan Consumer Sentiment. Earnings: N/A.
If you know of any friends or family members who could benefit from our services and these types of communiques during these unique times, we are accepting new clients and offer a complimentary one-hour review.
Aug 18 Daily Trading Recap…
Monday – Dow +26 to 35,307, Nasdaq +143 to 13,788, S&P +25 to 4,489, USD10Y +1.6bp to 4.184%.
- Six of eleven S&P sectors traded higher, led by Technology, Communication Services, and Consumer Discretionary.
- Overnight, China’s largest property developer, Country Garden, suspended trading of 11 of its onshore bonds effective immediately. Last week the developer announced it had missed interest payments on two dollar-denominated bonds and issued a profit warning.
Tuesday – Dow -361 to 34,946, Nasdaq -157 to 13,631, S&P -51 to 4,437, USD10Y +3.7bp to 4.221%.
- All eleven S&P sectors traded down, led lower Energy, Financials, and Utilities.
- A strong July Retail Sales number (+0.7% vs +0.4% expected) was the reason for the negative market action today as traders worried that the strong number would persuade the Fed to raise rates again.
- Financials were also under pressure with the news that credit rating agency Fitch may have to downgrade multiple banks including JPMorgan Chase should it downgrade the sector again (it most recently did so in June).
- Regional banks were also solidly in the red after comments by Minnesota Fed President Neel Kashkari suggested that increasing capital requirements and regulation may be looming for the sector.
- August Empire State Manufacturing was a disaster at –19 vs -1.4 expected and vs last month’s +1.1 print.
- Earnings: Home Depot (HD) beat revenues and earnings estimates and reaffirmed yearly guidance while noting customers are still shying away from big ticket purchases; HD traded up 0.66% during the regular session.
Wednesday – Dow -180 to 34,765, Nasdaq -156 to 13,474, S&P -33 to 4,404, USD10Y +3.7bp to 4.258%
- Ten of eleven S&P sectors traded down, led lower by Consumer Discretionary, Communication Services, and Real Estate.
- The Atlanta Fed’s GDP Now estimate was released at an unbelievable +5.8% annualized GDP rate for the third quarter. The number, well above the median consensus of +1.5% growth, is being driven by strong growth in inventories which is the most volatile number in the GDP Now equation.
- The July FOMC minutes were released which demonstrated that while the vote to raise 25bp was unanimous, several participants would have supported another pause. However, most members seem to be leaning towards another rate hike on September 20, unless significant progress is made with the collective data from the following: July PCE (Aug 31), August Non-Farm Payrolls (September 6), August CPI (September 13) and August PPI (September 14).
- Earnings: Cisco Systems (CSCO) beat earnings and revenue targets and traded up +2.5% post-close. Target (TGT) beat earnings estimates, missed revenue targets and lowered its full year guidance, noting inflation is still affecting customer purchases of discretionary items. TJ Maxx (TJX) meanwhile beat their numbers and noted record store traffic as shoppers enjoy premium merchandise offloaded from other retailers.
Thursday – Dow -290 to 34,474, Nasdaq -157 to 13,316, S&P -33 to 4,370, USD10Y +5.0bp to 4.308%.
- Jobless claims fell to 239,000 vs the 240,000 forecast and last week’s revised higher print of 250,000 (originally 248,000).
- August Philadelphia Fed Manufacturing was much better than expected at +12 vs –10 expected and vs –13.5 last month.
- The world’s most indebted real estate developer, Chinese company Evergrande, filed for Chapter 15 bankruptcy protection in Federal Court today. The developer defaulted in 2021 and has had its shares suspended from trading since March of 2022.
- Earnings: Walmart (WMT), unlike Target and Home Depot, said it saw a modest improvement in discretionary spending and big-ticket items, beat both earnings and revenue expectations and raised its full year guidance. Ross Stores (ROST) beat earnings and revenue expectations.
Friday – Dow +25 to 34,500, Nasdaq -26 to 13,290, S&P -1 to 4,369, USD10Y -5.7bp to 4.251%.
- Six of the eleven S&P sectors traded higher, led by Energy, Utilities, and Consumer Staples.
If you know of any friends or family members who could benefit from our services and these types of communiques during these unique times, we are accepting new clients and offer a complimentary one-hour review.
Disclaimer: This is not a recommendation to buy or sell any of the securities listed above. I personally, or a family member whose account I control, have positions in the following securities/assets…Bitcoin, Cardano, Chainlink, Ethereum, ETHE, and GBTC.