Easing inflation worries despite robust sales data

The market mood got a further boost yesterday after the latest data release from he US hinted that the economy is not doing that bad, after all. The retail sales rose 1% in July, more than expected by analysts, the initial jobless claims rose less than expected last week while NY Empire State and Philadelphia Fed manufacturing indices were mixed and didn’t attract much attention. Walmart, on the other hand, gave support to the positive vibes as the retailer did better than the estimates in Q2 and raised its FY revenue forecast on expectation that wealthier households will join the low-income segment in chasing good deals at its stores. The combination of encouraging economic data and robust Walmart earnings gave hope to investors that the US economy won’t collapse, revived the hope of seeing the US economy soft-land, and eased the jumbo rate-hike bets for the Federal Reserve’s (Fed) September meeting. As such, the US 2-year yield rebounded past the 4% mark and the 10-year yield shortly rose to 3.95% but eased back to around 3.90%. The S&P 500 jumped 1.61%, Nasdaq 100 rallied almost 2.50% as did the Russell 2000 index. The US dollar index bounced higher from an almost ytd low and US crude regained the 200-DMA level, near $78pb level, with however little appetite due to the sluggish Chinese growth. The oil refineries’ profits in China fell by over 90% in the first half of the year compared to the same time last year. And even the tense geopolitical situation of the Middle East and the possibility of another escalation between Iran and Israel don’t cheer up oil investors enough to bet for a rise above the $80pb level.

Easing inflation worries despite robust sales data

Even though yesterday’s retail sales data came in strong, and as another proof that the US consumers continue to spend despite high rates, high prices and high credit card debt, there are signs that hint that inflationary pressures are easing. And this brings me back to Walmart. If Walmart thinks that its sales will grow more than they previously forecasted this year, its because the wealthier segments of the market are also looking for deals to counter inflation. Walmart said yesterday that it cut the prices of 7200 products last quarter to maintain its ‘competitive price gaps’ with its rivals. And other retailers like Target, Walgreens, Aldi and Ikea also said to have done the same: cut prices to bring the inflation-squeezed customers back to stores and back to spending. Reportedly, the American cardealers also increased their discounts to the highest levels in three years and restaurants are unfolding meal deals to offer more affordable solutions to boost their customers’ appetite in hope that once they’re in, they will want to spend on non-deal items as well.

The news point that the widespread frustration with inflation is putting downward pressure on prices and could lead to more relaxed monetary policies. And if the monetary easing happens without a severe economic slowdown, Mr. Powell and investors will get the soft-landing that they were dreaming of, which could eventually keep the stock markets in a good shape, although the rotation from the technology stocks to non-technology sectors will likely tame the upside potential in major indices as the past weeks’ selloffs came as a warning that the market is oversaturated, the valuations are high and investors naturally are pickier to jump in at historically high levels without the promise of giant gains. Still, note that the latest earnings season somehow eased worries that the AI investments may not lead to the kind of profits that the companies and investors were looking for.

Too sick to play

Alibaba posted a meagre 4% revenue gain and a 27% plunge in Q2 profit. The cloud business showed a disenchanting 5.9% growth – compared to around 30% growth posted by the cloud segments of the US peers. Alibaba shares were flat in New York and gained  4% in Hong Kong, probably as the share buyback program helped countering the gloomy quarterly results. Its competitor JD.com jumped more than 4%, on the other hand, after its earnings beat expectations. But sales, there, grew just 1.2% in Q2. The numbers look too weak to take the China risks.

More broadly, things are not going well in China as you may have noticed. The fiscal and monetary stimulus measures can’t fuel growth. Investments grew slower than expected in July, the production disappointed while the property crisis continues in full swing: the prices of homes continue to fall. As such, not only the Chinese CSI 300 doesn’t benefit from a rebound in the developed markets, but the country’s biggest steelmaker Baowu Steel Group warned of the worst downturn since 2015. No wonder the iron ore prices continue to melt and Wisdomtree’s industrial metals ETF has given away almost all gains from May to July rebound. Copper futures also see resistance near the 200-DMA. The reflation trade on metals is not appetizing when China is too sick to play.