Head of Saxo Strats
Summary: While yesterday's inflation did little to move markets as the headline and core inflation in the US for July came in as expected. However, looking at the stickier parts of the inflation report including the services CPI excluding energy are still underscoring that inflation is not under control. In today's equity note we are also focusing on next week's earnings which will have a focus on large consumer oriented companies such as Home Depot, Tencent, Walmart, Carlsberg, and JD.com.
Yesterday’s US July inflation report saw headline and core inflation hitting 0.2% m/m as expected creating little disturbance in financial markets. Investors are likely looking through this report as commodity markets have turned around since May with energy prices running higher and rice prices hitting highest levels since 2008. While the inflation report looked okay July marked a turnaround in the super core parts of the CPI basket up 4.1% y/y increasing a bit from June.
Our own preferred measure is the services inflation excluding energy which came down to 4.9% y/y but is still at an elevated level. With the US labour market still being tight we expect services inflation to remain hot paving the way for the next inflation should commodity markets extend their tightness in the second half and the global economy avoiding an outright recession. If we are right in our recent big macroeconomic call that the global economy is headed towards stagflation light, then read our equity note from yesterday on our to position in such an environment.
The earnings season has been positive for equity markets confirming that the outlook remains stable and earnings growth is improving. Next week, our earnings focus will be on the consumer oriented companies reporting such as Meituan, Xiaomi, Tencent, and JD.com all linked to consumer and spending in the Chinese economy. Given the good Q2 results from Alibaba yesterday, we expect these companies to show good progress in Q2 except maybe for Xiaomi that like Apple is hit harder by inflation as electronic consumer goods have been impacted a lot from inflation eating into disposable income.
In emerging markets NU Holdings (parent of Nubank which is the largest online bank in Brazil/Latin America) and Sea Ltd (biggest e-commerce business in Southeast Asia) will each provide a good temperature on the emerging market consumer outside China.
In the US, our earnings focus will be on Home Depot and Walmart that both are massive players in the US consumer sector. With new housing and permits stabilising this year we expect Home Depot to slowly adjust their outlook in a more positive direction.
In Europe, our earnings focus is on Carlsberg (one of the largest breweries), Adyen (important payments company), and Nibe Industrier which is a good proxy on green transformation investments from households due to the heat pump business.
Next week’s most important earnings releases across the markets we track during the earnings season.
2024: The wasted year
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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.
