The soft-landing and inflation easing narrative is thriving

Peter Garnry

Chief Investment Strategist

Summary:  The easing inflation narrative has been building strength for six weeks now and the short-term vindication in the US CPI release on Wednesday has bolstered the bulls. However, the structural issues in the supply-side of the economy have been resolved and wages combined with rents will add more pressure on inflation going forward. We also highlight the unfolding scandal around the heartburn drug Zantac as it has erased $40bn in market value from Sanofi and GSK. Finally, we take a look at next week's earnings.


It is too early to call inflation is tamed

The US July CPI release on Wednesday has bolstered the soft-landing and easing inflation trade catapulting high duration assets higher. S&P 500 futures are attempting to push higher and the 200-day moving average sitting around the 4,325 level is suddenly not an outrageous gravitational point for US equities in the near-term.

While the equity market is buying the all good scenario on inflation we would emphasise that it is too early to call. The Fed will like to see the 6-month average on the US CPI core m/m to go back to 0.2% before easing policy and that is simply not possible until at least the end of Q1 next year. Many of the structural issues except maybe for logistics, and this pain could come back again this winter if China gets another big Covid outbreak, are still not solved as capital expenditures in real terms are still not coming up in the global mining and energy industry. Labour markets remain tight with especially the US being the worst hit having lost around 1.5%-point of its labour force due to the pandemic and these people are likely never coming back.

Rent dynamics are also heating up in both the US and Europe, and this winter will test the strength of the European population as the energy crisis could get much worse. We encourage investors to watch the US 10-year yield as a break above 3% again should cause a negative reaction in global equities.

S&P 500 continuous futures | Source: Saxo Group
US CPI core m/m | Source: Bloomberg

Potential gigantic Zantac liabilities hit Sanofi, GSK, and Pfizer

Health care is typically associated with stability, high valuations, and high predictability in the underlying cash flows, but the industry is being rocked by increasing concerns over the heartburn drug Zantac. Sanofi, GSK, and Pfizer have lost combined market value of $40bn and analysts are estimating that damage liabilities could reach $10-45bn. Zantac was removed from the market in 2019 by the FDA as the drug appears to be producing unacceptably high levels of a cancer-causing chemical. There is case coming up in Illinois on 22 August which will give the first indications of where this is going. There will continue to be short-term headwinds for both Sanofi and GSK where Pfizer seems to have been selling the drug for a much more reduced period than the two others.

Weekly share prices of Sanofi, GSK, and Pfizer | Source: Bloomberg

Earnings to watch next week

The Q2 earnings season is slowly coming to end and what a quarter it has been with earnings jumping to a new all-time high (see chart) driven by a significant increase in profits in the energy sector. The technology sector measure by the Nasdaq 100 had another bad quarter with earnings declining reinforcing the need to cut costs of many of these previously fast growing technology companies.

Next week’s most important earnings are highlighted below with the names in bold being those that can move market or industry sentiment. Meituan on Monday is important for gauging consumer spending and behaviour in China. BHP Group is must watch on Monday as the Australian miner is tapped into China’s growth and demand for iron ore. On Tuesday, earnings from Walmart and Home Depot can provide an updated picture on global supply chains and price pressures across a wide range of consumer products. Tencent reports on Wednesday and is an important earnings release for investors watching Chinese technology stocks as the recent amendment to China’s anti-monopoly laws is adding more pressure on the big technology platform companies. In the payments industry, Adyen’s result on Thursday will be highly watched as Adyen is really challenging PayPal on growth and dominance in the industry.

  • Monday: China Construction Bank, Agricultural Bank of China, Meituan, China Life Insurance, China Shenhua Energy, China Petroleum & Chemical, BHP Group, COSCO Shipping, Li Auto, Trip.com Group, DiDi Global
  • Tuesday: China Telecom, Walmart, Agilent Technologies, Home Depot, Sea Ltd
  • Wednesday: Tencent, Hong Kong Exchanges & Clearing, Analog Devices, Cisco Systems, Synopsys, Lowe’s, CSL, Target, TJX, Coloplast, Carlsberg, Wolfspeed
  • Thursday: Applied Materials, Estee Lauder, NetEase, Adyen, Nibe Industrier, Geberit
  • Friday: China Merchants Bank, CNOOC, Shenzhen Mindray, Xiaomi, Deere

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.