"Reality is merely an illusion, albeit a very persistent one."
- Albert Einstein
The beauty of the stock market game is that while you can sometimes run from reality, you ultimately can not hide. Incremental news or data about a company or economy will eventually matter. Sometimes this news is already priced in, but more often than not (especially in a #Quad4 environment) it isn't.
This morning we have global shipping company Fed-Ex getting absolutely speed bagged in the pre-market at down some -20%. Now for those of you that are long of $FDX, I'm not trying to rub it in. It is merely the reality you face this morning. Ultimately, maybe it is a great buying opportunity!
More interesting, though, is the commentary from $FDX about the global macro environment. Specifically, this is what the CEO said:
"Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the US. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first-quarter results are below our expectations.”
Yikes, sounds a lot like a #Quad4 earnings announcement! Perhaps some of this is a result of increased competition from the likes of Amazon, but the earnings decline was both decisive and precipitous. In fact, $FDX took down earnings guidance for the current fiscal quarter by some -50% from ~$5.48 share to ~$2.75 per share.
As we head into pre-announcement season, the risk with global stocks is that the reporting of reality may be just beginning. This all occurs with corporate black outs in place, so companies can’t buy back their stock.
Back to the Global Macro Grind…
Last night I had a conversation with the CIO of a major hedge fund and we were both commenting / lamenting that none of us, including his boss who's in his 60s, have invested in an environment in which financial conditions are tightening so quickly. Most of us have had the fortune of playing this game in an environment in which rates are steadily going lower. Not only that, QE has juiced this declining interest rate environment.
This time may actually be different. Not only have interest rates increased at their most rapid pace in more than four decades, quantitative tightening is about to begin for real. We are now a long ways from the period this summer when many investors were gaming for a Fed “pivot”. In fact, Fed Funds Futures are now at new highs in terms of pricing in hikes through the end of 2022.
Currently, there are 7.65 hikes priced in for the remainder of 2022. This equivalent to almost 2 full percent of incremental interest rates by year-end. This also likely includes a jumbo hike of 1.0%. Given that the labor market (albeit a lagging indicator) has stayed largely healthy as we saw yesterday with weekly jobless claims at +213,000, it is unlikely that the Fed gets off this path anytime soon.
As Fed-Ex alluded to in their pre-announcement, more concerning is the global environment. Consider some of the CPI reports we’ve received this week:
- Eurozone CPI +9.1%;
- Austria CPI +9.3%;
- U.K. CPI +9.9%;
- Spain CPI +10.5%; and
- Argentina CPI at 78.5% (highest since 1922).
To be intellectually honest, we have seen some slight deceleration in certain country level inflation readings, but by and large global CPI is accelerating and remains near decade highs. If you didn’t know, now you know . . . the global consumer is getting absolutely squeezed.
We saw this in spades in today’s U.K. retail sales report, which came in at -5.4% Y/Y. This was actually a volume number, with the value spent up roughly the same at +5.4%. Putting that in perspective though, the U.K. consumer had to spend +5% more to get -5% less product in the month of August. That is not pretty.
While it is not pretty, it is also not surprising. Consider the Chart of the Day below, which looks at U.K. GDP, Retail Sales, and Consumer Confidence. The leading indicator of consumer confidence has collapsed and is near all-time low levels of -45. As expected, retail sales is following closely behind given today’s report and no doubt GDP will be the next to flip negative. We will likely see this same story around the globe.
Reality can be ugly . . . unless you are proactively prepared for it.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 3.20-3.51% (bullish)
UST 2yr Yield 3.44-3.93% (bullish)
High Yield (HYG) 73.16-75.66 (bearish)
SPX 3 (bearish)
NASDAQ 11,215-12,062 (bearish)
RUT 1 (bearish)
Tech (XLK) 127-137 (bearish)
Utilities (XLU) 73.48-78.75 (bullish)
Energy (XLE) 77.13-82.82 (bullish) `
Shanghai Comp 3101-3244 (bearish)
Nikkei 27,166-28,770 (bullish)
DAX 12,609-13,275 (bearish)
VIX 23.06-29.18 (bullish)
USD 108.45-110.67 (bullish)
EUR/USD 0.987-1.012 (bearish)
USD/YEN 140.02-145.36 (bullish)
GBP/USD 1.140-1.168 (bearish)
Oil (WTI) 81.99-90.12 (bearish)
Gold 1 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
