Launch Pad
Daily market commentary

 

Thursday August 22, 2019
  
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Today
Yesterday’s FOMC minutes caused some pause in the markets as the notes reveal that the cut in rates was not as much of a slam dunk as most believed.  While the 25 bp cut was the result, some members didn’t want to change and some wanted to cut 50 bps.  In any case “flexibility” was the buzz word and the FOMC must certainly be looking at the failure of negative rates and QE in Europe in stimulating some inflation and growth with an eye towards different monetary tools.
 
We aren’t seeing much action this morning, with Europe mixed and futures modestly higher.  Bonds are giving some back this morning with the US long bond hovering around 2.10% after testing the sub-2% range last week.  After the massive move in August, it is only natural to see some consolidation here.
 
It’s all about WeWork since the company filed its S-1.  We’ve mentioned before how the disclosure reveal some pretty shaky corporate governance practices, but it pays to analyze the bull case as well… someone thinks it is worth tens of billions of dollars.  The business model itself is interesting to ponder.  To make a businesses real estate expenses variable instead of fixed would certainly be powerful.  They believe they are to real estate what Amazon Web Services is to a business owning its own servers. Stratechery pulls some of the language from the filing and discusses more.
 
Popeyes new chicken sandwich was trending on Twitter yesterday, not that much of surprise apparently its pretty good. It also sparked a twitter war with Wendy’s and Chick-fil-A Though, with Wendy’s stepping in with its always on point twitter game to settle the score. A little entertaining, but really who cares. Conor Sen at Bloomberg had a great opinion piece to add some depth and a little history fast food battle. Like the Whopper and the Big Mac, new food menu items are added during economic booms to help a fast-food chain discreetly raise prices. Afterall it’s all about margins, not really who has the best sandwich. What better time to experiment with pricier menu options than when your customers are employed and with a little extra cash in their wallets. Who knew that some economic good times give gifts that last forever; like a Big Mac, or now the Impossible Burger or even a new chicken sandwich. The chart below from the article bring a new economic indicator to the market lexicon, the large sandwich indicator.


We have noticed something that may be of interest as the earnings season wraps up.  One Industry (that is the next classification down beneath the Sector classification) that has been experiencing some of the biggest positive price reactions to earnings results has been Retailing.  This is a pretty wide industry with companies from Amazon to Nordstrom. The group has averaged a +2.03% price reaction to earnings, which is pretty high as only two other industries enjoyed gains averaging over 2% this earnings season (based on S&P 1500 Index).  Perhaps the good news is the consumer remains relatively healthy and that has created an environment for more positive surprises.  Alternatively, expectations in this beaten down industry (most other companies outside Amazon) were ripe for a bounce.  It looks like more the latter as the degree of earnings and sales surprises were not very high.  

The new Disney company is coming in strong to the Canadian market, swooping in with a new powerful streaming platform Disney+ in November, giving just another reason (next to Netflix of course) for consumers to drop cable all together. In fact, this new menu of Marvel superheroes and Pixar characters is charging only $8.99 a month, or $89.99 per year.

Diversion:  Couldn’t you use .ORG?  The most expensive domain name sales ever.
 
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Company news

CIBC saw a spike in non-conforming loans over the last quarter but was still able to beat street expectations on bottom line profits. They also announced that their CFO Kevin Glass will be stepping down October 31. Kinder Morgan is the latest foreign company to exit the Canadian energy patch as they have agreed to sell their Canadian business to Pembina Pipeline. Apple is revamping their hardware lineup and planning to come out with a iPhone Pro, as well as upgrading iPads and launching the largest Macbook yet. The release is expected at their annual symposium in September. Bank of New York Mellon lost one of their biggest customers, VanEck Associates, to State Street. The firm manages nearly $50 billion and is a blow to BNY Mellon who has been pushing to be a bigger player in the market for servicing ETFs.
 

Commodities

Oil prices advanced higher after EIA data posted a larger than expected decline in U.S. inventories; at the time of writing, WTI Crude is up +74 bps to US$56.09.  Amidst a background of concern about global economic growth, traders are shifting their focus in search of potential signals for further rate cuts ahead of Friday’s Jackson Hole summit.  Mr. Powell’s remarks bleed into crude markets because of the implications they can have on the greenback; a lower greenback tends to support prices.  Elsewhere, traders raced to exit bearish options in U.S. crude this week after the market began pricing in tighter supplies at a key Cushing, Oklahoma storage hub.  Inventories have dropped for seven consecutive weeks at a faster than anticipated rate.  The structure of the trade in question takes the form of U.S. crude spreads, which is a proxy for expected inventories in Cushing.  Trades such as these (also structured as calendar-spread options), however, often go days without activity, unlike actively traded underlying futures contracts.  CSOs are usually used by oil producers and traders to hedge against, or speculate on, a change in the shape of the oil futures market structure.
 
Gold prices slipped as investors continued to look ahead to the Fed minutes; at the time of writing, the spot price for gold is down -72 bps to US$1,504.80.  It seems that, much like a few months ago, many players are okay with taking their chips off the table.  In other commodities news, North Dakota farmers are reeling as their bet on Chinese soybean demand may prove to be wrong.  China – the world’s largest soybean importer – has neglected U.S. farmers for a second growing season in a row.  However, China has also been the buyer of 70% of the state’s soybeans.  Hence, the current situation has left the state taking a more sizeable hit than most others.



Fixed income and economics

The data calendar contains mostly second tier data today but will be no less insignificant to the market action given the indirection at the moment. Weekly jobless claims clocked in at 209K ending August 17 that was better than consensus and the lowest print in a month. The all-time low is 193K and the 52 week average is 248.8K so the print is unlikely to stray too far away from either level given in the near-term given the expected dovish policy the economy is about to be hit with. Continuing claims ending August 10 fell sharply to 1.674 million Americans currently receiving government unemployment assistance --- a -54K drop from prior and the fewest since early June. Markit’s manufacturing, services and composite PMI figures for August are out shortly after the equity open with all expected to be little changed from the prior month. Note that the former printed a preliminary reading of 50.0 at the beginning of July before being revised upward to 50.4 afterwards. Watch out for this release as any retracement back to the expansionary/contractionary threshold will be a likely harbinger of further recessionary undertones. The Kansas City Fed is out with their own manufacturing gauge update at 11AM EST as well. July’s print came in at -1.0 for the first negative reading in three years. Consensus is expecting sentiment to recover to +1.0 this month.
 

Chart of the day
 

Markets

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- Bernard Baruch

Contributors: J. Price, C. Basinger, D. Benedet, C. Kerlow, D. Mak, A. Tjiang, E. LaPlante, S. Sethi, G. Cheng

Charts are sourced to Bloomberg unless otherwise noted.

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