Head of Equity Strategy
Summary: The reflation theme and related trades are back across the board with UPS Q4 earnings release showing increasing price pressure on logistics services and Brent crude sprints above $57/brl for the first time since February 2020 in a sign that the market is speculating on rising energy demand driven by vaccines and stimulus. France preliminary inflation figures for January are surprising to the upside today following the trend from other major economies.
As we highlighted in yesterday’s earnings preview UPS earnings would be interesting because the company’s global logistics operation could give clues into inflationary pressures on the logistics side. The Q4 earnings published before the US market open were strong with Q4 revenue of $24.9bn vs est. $22.9bn and adjusted EPS of $2.66 vs est. $2.14 (adjusted for a big mark-to-market pension charge) driven by strong volume across its logistics network. Revenue grew 21% y/y, the fastest growth rate since Q4 2005, driven by average revenue per piece of 7.9% and the rest from volume increase. The increase in revenue per piece is a good indicator on inflationary pressures and although logistics costs are typically only around 10% of the total retail price and thus will not make headline inflation explode, it does indicate a global supply chain that is running at high capacity. UPS outlook remains strong with management proposing dividends to grow over the coming years on board approval. Shares are up 5% in pre-market trading.
Another sign of the reflation theme which is our main thesis for the next 12 months is the rising oil price today with Brent Crude pushing above $57/brl reaching the highest level since February 2020 before the pandemic started. This move will add further pressure to inflation through higher energy prices and thus begin to impact margins for some industries but also hit consumers. These rising prices are before the economy is even back to full employment and same activity levels, so with more stimulus coming over the next six months we feel more confident that inflation will continue to accelerate and put upward pressure on longer term interest rates. France preliminary inflation figures for January also exceed expectations at 0.6% y/y vs est. 0.3% y/y today following other recent inflation surprises from major economies.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
