Saxo Spotlight: Nasdaq 100 rebalance, US soft-landing narrative, Tesla earnings awaited – July 17-21
APAC Strategy Team
Summary: Nasdaq 100 special rebalance trims the top 7 stocks’ weighting to 43.7% from 55.6%. Softer US inflation data supports the notion of a soft landing for the economy, but upcoming retail sales and industrial production figures will provide further insights. China's Q2 GDP grew by 6.3% Y/Y, slightly below expectations and its sequential growth slowed to 0.8% but industrial production in June rose by 4.4% Y/Y, exceeding forecasts. The UK's August rate hike decision will be influenced by the June CPI report, with expectations for cooling headline CPI but firm core figures. The Bank of Japan faces reduced pressure to adjust policy following a drop in Treasury yields, and upcoming June inflation data will be closely watched. Investors will focus on earnings reports from Tesla, ASML, and TSMC, particularly Tesla's revenue growth and delivery outlook.
Nasdaq 100 special rebalance trims the top 7 stocks’ weighting to 43.7% from 55.6%
The details of new weightings of the Nasdaq 100 Index special rebalance were announced last Friday, with the combined weighting of the top seven stocks trimmed to 43.7% from 55.6%. The specific changes to the top seven stocks are set out in Figure 1.
The top five stocks that benefit from an increase in weighting are listed in figure 2.
The changes will take effect before the market opens on Monday July 24
US data: More impetus for soft-landing narrative?
The cooling inflation data out of the US last week, together with the sustained activity and sentiment indicators, have tilted the US economic balance steadily in favor of a soft landing. This narrative will continue to be tested in the run up to the Fed’s July meeting where a 25bps rate hike is almost fully priced in, but the path ahead remains uncertain. June retail sales and industrial production out on Tuesday will be the key focus. Higher car sales following price cuts could drive retail sales and manufacturing activity higher, although expectations for industrial production remain muted with softening manufacturing PMIs. Bloomberg consensus expects retail sales for the control group (which feeds into the GDP) to increase by 0.3% MoM from 0.2% MoM in May, while industrial production is expected to be flat from -0.2% MoM in May. In-line data could keep the soft-landing narrative alive but strong upside surprises could reinforce Fed’s higher-for-longer message and disrupt the recent dollar downtrend.
China’s Q2 GDP grows 6.3% Y/Y, June industrial production increases 4.4% Y/Y
On Monday, China’s Q2 GDP came in at +6.3% Y/Y slightly weaker than the 7.1% expected but higher than the 4.5% in Q1. The increase in the Y/Y growth rate in Q2 was due to the low base effect resulting from the Shanghai lockdown last year. Sequentially, growth slowed to +0.8% seasonally adjusted unannualized in Q2 from +2.2% in Q1. For the first half of the year, GDP grew 5.5% Y/Y, above the 5% target for 2023. Industrial production grew 4.4% Y/Y in June, surpassing the 2.5% median forecast and 3.5% in May. June retail sales slowed to +3.1% Y/Y, from 12.7% in May, largely due to a high base in retail sales last June when Shanghai came out of lockdown. Year-to-date fixed asset investment fell to 3.8% Y/Y from 4% but it was better than the 3.4% projected by economists surveyed. Year-to-date property investment however contracted 7.9%, more than -7.5% expected and -7.2% in May. The unemployment rate remained at 5.2% nationwide as well as for the 31 major cities. The unemployment rate for youth (16-24 age group) increased to 21.3% in June from 20.8% in May.
GBP strength on test: UK CPI due on Wednesday
Sterling was up 2% against the US dollar last week, but weakened against the EUR. Wednesday’s UK CPI report for June will be a key input for Bank of England’s August rate hike decision and the next big test for GBP strength. Headline CPI is expected to cool to 8.2% YoY from 8.7% previously, while core is expected to be firm at 7.1% YoY after an unexpected advance last month. If core drops below 7%, expectations of a 50bps rate hike at the August meeting could be downplayed, which could bring GBP downside. But wage metrics have remained strong, and another higher-than-expected core CPI print could bring volatility in Gilts and sterling.
BOJ policy expectations: Japan CPI on watch
The pressure for the Bank of Japan to tweak policy has come off with a massive drop in Treasury yields last week. That has helped Japanese yen to recover, most prominently with gains of 2.4% against the US dollar and ~2% against the CAD. Still, expectations of a July tweak in yield curve control from the Bank of Japan are rampant and June inflation due this Friday could be key. If there are signs that inflation is cooling, as was evident in the Tokyo CPI readings for June, that could further take the pressure off the BOJ. Nonetheless, BOJ remains adept at surprising the markets and will likely tweak its YCC policy when the market pressures are possibly not pressing its nerves in order to maintain credibility. Consensus expectations have marked headline CPI for June to remain unchanged at 3.2% YoY while the ex-fresh food measure is expected to be a notch higher at 3.3% YoY from 3.2% previously even as ex-fresh food and energy is seen lower at 4.2% YoY from 4.3% previously.
Procyclical currencies on watch: Australia employment and NZ CPI
After a strong employment report in June, expectations for this Thursday’s jobs data out of Australia are more modest. Full time employment for June is expected to have risen by 15k after a solid 75.9k gain in May. Labor supply is being boosted by a surge in migration, and unemployment rate could creep higher in the coming months despite heightened volatility of this monthly release. The RBA minutes from the July 4 meeting will also be key for AUD and comments on inflation and path of monetary policy will be the focus. NZD strength, meanwhile, will be tested by the Q2 NZ CPI release scheduled for Wednesday with consensus expectations pointing to a cooling in headline inflation to 5.9% YoY from 6.7% in Q1 but still way above the central bank’s 1-3% target range.
Commodities: Grain deal in balance
The Black Sea grain deal hangs in balance with Russia still deliberating on whether it will extend the pact after it expires on June 18. The Black Sea grain deal allows for commercial food and fertilizer exports from three key Ukrainian ports in the Black Sea despite the Russian invasion of the country. Exports have dropped off in recent weeks, which has prompted concerns that Russia may not extend the deal as its interests have not been taken into account. Further delays in extending the deal could mean more stress on grain export availability and could continue to lift grain futures after Wheat futures rose by 3.4% on Friday. Weather stress in China is further adding to the woes.
Earnings on tap: Tesla, ASML and TSMC
Among the companies reporting results this week, investors are likely to focus on Tesla (TSLA:xnas). While Tesla has been extremely successful and executed beyond expectations for many years, the current valuation demands that Tesla deliver high double-digit revenue growth in the next ten years, as per Peter Garnry's analysis here. For Q2, the consensus estimate, as per the Bloomberg survey, projects revenue to grow at 45% Y/Y, reaching USD 24.54 billion, and the adjusted net income to grow 33% Y/Y to USD 2.87 billion. Investors will also pay close attention to the EV giant's delivery and revenue outlooks.
The results from the Dutch semiconductor equipment maker ASML (ASML:xams) and the Taiwanese microchip foundry TSMC (TSM:xnys) will provide investors a glimpse of global demand and outlook for semiconductors, with significant investment implications much beyond these two companies.
Earnings this week:
TUE: Bank of America, Morgan Stanley, Bank of NY Mellon, PNC Financial, Charles Schwab, Lockheed Martin, Prologis, Novartis
WED: Tesla, Netflix, IBM, Goldman Sachs, Elevance, ASML
THU: Johnson & Johnson, Blackstone, CSX, Freeport-McMoran, TSMC, SAP
FRI: American Express, Schlumberger
Key economic events this week:
MON: US Empire State Manufacturing Index (July), China Real GDP (Q2), China Retail Sales (Jun), China Industrial Production (Jun), China Fixed Investment (Jun)
TUE: US Retail Sales (Jun), US Industrial Production (Jun), RBA minutes (Jul 4), New Zealand CPI (Q2)
WED: US Housing Starts & Building Permits (Jun), Germany PPI (Jun), Eurozone CPI (Jun, final), UK CPI, RPI, & PPI (Jun)
THU: China PBoC LPR, Philly Fed Survey (Jul), US Existing Home Sales (Jun), France Business Confidence (Jul), Eurozone Consumer Confidence (Jul), Japan Imports & Exports (Jun), Hong Kong CPI (Jun), Australia Employment (Jun)
FRI: UK Retail Sales (Jun), Japan CPI (Jun), South Korea Exports (Jul first 20 days)
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