Breakfast Bites - Lower Yields; Lower Markets?
Walmart Earnings, BoJ cautious on rates
Rise and shine everyone.
Happy OpEx Friday. We have $2.7T of notional options expiring today, according to GS. $1.2T of that is at the index-level (SPX) and $615B is in single stocks. After yesterday’s negative close for the US Markets, we may see OpEx support flows. US Equity Futures are mixed this morning with S&P 500 and Dow flat to lower, while the Nasdaq and Russell 2000 are higher.
Japan is seeing some action this morning. Yields are lower, the JPY is lower and the market is higher, after Core CPI came in higher, and Core-Core Inflation increased at the fastest pace since June 2023. Governor Ueda’s comments seemed to weigh further: “BOJ will respond to sharp rises in bond yields; We stand ready to respond nimbly if markets make abnormal moves.” This could mean some reversal of the reduction of bond buying and a hike later than expected.
Chinese equities continue to outperform. with the Hang Seng hitting a 3-year high, led by Alibaba and Lenovo (+10%) after strong earnings and AI-driven growth.
Markets are watching for an AfD surge beyond 25%, which could weaken the euro, raise bond yields, and hit German equities due to its euroskeptic stance. A lengthy post-election negotiation period is expected.
US natural gas futures jumped nearly 5% to $4.3/MMBtu, the highest since December 2022, with a weekly gain over 16% as an Arctic blast boosted demand, well freeze-offs cut output, and record LNG exports plus a 196 bcf EIA storage draw tightened supply.
Bond Yields and Market Moves
Yesterday was an odd day for the markets. We saw bond yields fall, the US Dollar pullback, but contrary to usual convention, the market went down as well. All major indices closed lower, led down by the small caps - Russell 2000.
The story is now one of growth. There are signs of a slowdown in growth for the US Economy, setting the stage for stagflation yet again. Recent US Retail Sales numbers came in lower than expected and housing starts are also slowing. We examined the State of the US Consumer a few weeks ago, and our conclusion was that even though the wealth effect has produced a massive buffer, this is concentrated with high income consumers. The low-income consumer is still struggling and the cumulative effects of inflation continue to weigh on spending.
Secondly, we had Walmart report. I listened to the call. Their lower guidance wasn’t so much about the weaker consumer but more about the hit to growth from a stronger USD. They estimate that if the USD stays where it is, they’d take a hit of anywhere between 1% to 2% of growth between their top and bottom line. Further, the downside guidance also took into account the VIZIO acquisition and lapping leap year.
Surprisingly, they don’t have a big inflation number baked in, and they think tariffs will be manageable. They dismissed food inflation as being a lasting concern, and rather focused on the growth in General Merchandise (Tech, TVs, Toys, Apparel etc) because of deflationary forces in that area.
“U.S. Customers remain resilient” - John Rainey, CFO, Walmart (3 times actually!)
I don’t want to say that the market got it wrong per se, but I do want to point out that the concerns are misplaced. The net result may be the same for Walmart and the economy.
We also think that some of the pressure on yields came from Scott Bessent’s Bloomberg Interview where he talked about terming out debt as being a long way off. We don’t think it’s that long though, expecting this to start by the 4th quarter.
Chart of the Day
We think it’s worth keeping an eye on longer-term bonds. We’re looking at the TLT here, and it looks like it’s looking to breakout to the upside. We’d keep an eye on the $90 level, because we may see a rally if it can cross and hold that level.
What We’re Watching
9:45 am ET: US Flash PMIs
UST Bond Yields
Calendar
(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)
