This podcast is first and originally published by BFM 89.9 at https://www.bfm.my/podcast/morning-run/market-watch/swap-contracts-fed-rate-hikes-2023-market-equities
Tony Nash, CEO of Complete Intelligence, was featured on BFM 89.9’s Morning Run podcast, providing insights on various market trends. In terms of the US treasury market, swap contracts indicate a potential rate hike by the Federal Reserve in July, reaching a peak of 5.3%. Tony agrees with this expectation, citing inflation and a robust job market as factors supporting a rate hike.
Discussing Q1 earnings in the US, Tony notes a slight deterioration in the quality of earnings compared to the previous quarter. Companies’ ability to raise prices has been impacted, with customers feeling the burden of rising costs. This trend is exemplified by the Q2 earnings of Cracker Barrel, a mid-working class restaurant, experiencing pressure on prices and a decline in volume sales.
Tony expresses surprise at the performance of financials, which outperformed expectations, while the IT sector did not fare as well. He highlights the recent calm in IT markets following post-earnings volatility.
The conversation shifts to fixed income, with indications of a potential inverted yield curve and a bond market pointing towards a recession. In contrast, equity markets remain resilient. Tony believes that while equity markets are not as high as in September 2021, they factor in strong labor and inflation. He acknowledges that bond markets are typically more pessimistic, and the unprecedented levels of stimulus make the situation more complex. He suggests that both markets hold valid perspectives, with expectations of slower growth in the middle of the year, followed by acceleration in Q4.
Regarding oil, Tony does not foresee the US Biden administration replenishing the Strategic Petroleum Reserve (SPR) in the near future. The recent OPEC supply cut has caused oil prices to rebound, but overall demand is not as strong as anticipated. Factors such as disappointment in China’s demand and increased unofficial Russian oil supply add further complexity to the market.
These insights from Tony Nash provide a comprehensive understanding of market trends, including the potential rate hike, earnings quality, bond and equity markets, and the oil industry.
Discover forecasts for crude oil using the CI Markets AI/ML app with 94.7% accuracy.
Transcript
BFM
This is a podcast from BFM 89.9, the Business Station. BFM 89.9. It’s 7:06, Thursday, the 8 June. And, of course, you’re listening to The Morning Run with Mark Tan, and I’m Wong Shou Ning. Now, in about 30 minutes, we’ll be speaking to Elvent I, senior analyst at Bloomberg Intelligence, for reasons as to why palm oil prices continue to decline, and maybe, perhaps the second half of 2023 will it look better? But in the meantime, let’s recap how global markets closed.
BFM
Yesterday, over at the US markets, the Dow was up 0.3%. However, S&P 500 was down 0.4%, and the Nasdaq down 1.3%. In the Asian markets, we had a mixed back of results, with Nikkei down 1.8%, Hang Seng up 0.8%, Shanghai Composite up 0.1%, Straight Times Index down 0.3%, and the FBMKLCR, I believe, was also down 4.52%.
BFM
Okay, so for some insights on where international markets are heading, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Let’s talk about the treasury market in the US. Because the rate on swap contracts are suggesting that the Federal Reserve will raise rates in July, climbing to a peak of 5.3%. That’s the swap contracts. Are you in that camp that expects a rate hike?
Tony
Oh, yeah, absolutely. The Fed chair, during his speeches, has said that there is a lag in the impact on markets, but we continue to see inflation and we continue to see strong job markets. So, yes, I believe we will see a hike, and there may be a pause. There may not be a pause, but we continue to see strong activity on the labor front, which is one of the things that the Fed is watching very closely.
BFM
Tony, the US quarter one earnings have all been released. So how would you assess the quality of those earnings compared to the last quarter of 2022?
Tony
Yeah, I think they’re deteriorating a bit. The earnings have been okay, some of them have been good. But we’ve really started to see companies’ abilities to raise price erode a bit. So we had this narrative in 2022 where companies would continue to push their price rises, in many cases double digits, onto their customers, and it wouldn’t really impact their volume sales. But customers right now are becoming pretty overburdened with cost. We see credit expanding in the US at higher rates, and consumers are just exhausted. So we saw that in some Q2 earnings. So if you look at kind of a mid working class restaurant called Cracker Barrel here in the US, they just put out their earnings last week, and they talked about how there was pressure on prices. Now through 2022, cracker Barrel had real pricing power. But they’ve seen not only pressure on their prices, but they’ve always also seen volume declines. And so they’re a really interesting bellwether for what’s happening in the middle of America.
BFM
Were there any sectors that surprised you this earnings season? In terms of the strength of their results or even conversely, the weakness of their results?
Tony
Yeah, I think financials surprised me a little bit because of what we saw in banks in March. I think I expected financials to do not as well as they did. So there was a little bit of a positive surprise there. IT didn’t really perform well. So I expected IT to perform a little bit better than they did. But I guess those would be my two highlights. Now, what’s happened is we’ve seen a lot of IT names run over the past few weeks even after their earnings were out. Some of that seems to be calming down a little bit though now.
BFM
Okay, Tony, can we talk about I like to talk about fixed income. The indications are that we are looking at an inverted yield curve, perhaps. Again, it doesn’t seem to go away, does it? Because trading in the yield curve was active, especially as a 30 year treasury, like the selling pressure in the five year. I’m just curious. This indicates that the bond market is pointing towards a recession, but yet the equity market doesn’t. Who’s right, who’s wrong?
Tony
Well, that’s really interesting. I think. Well, equities are not as high as they were in September of ’22, right? So we did see markets really turn down in Q3 and Q4 of ’22 and things have done really. I’m sorry, I meant September ’21. We have seen things recover since say, September of ’22. Right? So I think what the equity markets are looking at is the fact that we continue to have strong labor, that we continue to see inflation. The bond markets, they’re always pessimist bond markets, right? Bond markets are always expecting a recession. But this is the second inversion we’ve seen in a very short time. So I think what I have to keep in mind is we are coming from, and we’re about to say the word unprecedented, right? But we are coming from unprecedented levels of stimulus. So we are not going to have a traditional exit from that stimulus because it was so much because it was monetary and fiscal because it was so quick and all this other stuff. And so the tail on that has been slow to decline and I think both markets are seeing what they want in the data.
Tony
So can I say today which one is more right? Actually, I can’t. I think it’s probably somewhere in the middle. And what we’ve expected for some time is that growth in the middle of this year would slow, not be a recession, but slow pretty dramatically and then we would start to see growth accelerate again in Q4 of this year. So I know there’s a little bit of a caveat, but I kind of think they’re both right. I think equities price in expectations of revenue performance, I just think that’s going to be put off a little bit until Q4.
BFM
Tony, let’s turn our attention to oil. The US Strategic Petroleum Reserve (SPR) is at records low after drawing down 180 million barrels in 2022. So do you see the US. Biden administration replenishing this shortfall anytime soon?
Tony
Yeah, I don’t see that. I think it’s highly unlikely because typically the Secretary of Energy will announce plans to refill the SPR when they do it. And we haven’t seen any announcements saying, hey, we’re buying 50 million barrels or 20 million barrels or whatever. And so until we see that, I just don’t think that’s a realistic expectation. And so the OPEC price rise was the OPEC sorry, supply cut, although it was relatively small, was somewhat unexpected in that I believe that the Energy Secretary had hoped that supply would continue, and maybe with growth slowing, energy prices would decline. But since we saw the OPEC price cut or supply cut come in, we’ve seen crude prices come back a little bit. I think it’s not a perfect scenario for the Energy Secretary and for refilling the SPR.
BFM
Okay, but what does this then mean for prices? Is demand so weak that even these supply cuts and this is the second round of supply cuts in a few months, OPEC has done it, did it earlier on maybe a month or two ago. Is this really due to China not taking up the demand that markets originally anticipated?
Tony
Well, I think there are a number of factors. I’ll just say I think demand is probably not as strong as people hoped. I don’t necessarily think it’s weak. I think it’s not as strong as people had hoped. We do have kind of disappointment in China, but we also have strong growth in India, so they don’t necessarily balance each other out, but India is picking up some of the slack. But also keep in mind, we have a lot of unrecorded barrels and distillates coming from Russia. So that’s unofficial, say, consumption. Right. And it’s competing with other grades of crude oil. So until that’s reformalized or until sanctions are really enforced, I just think that it’s going to be really hard to understand where those markets are going and what an OPEC cut will actually do unless it’s a dramatic cut.
BFM
All right, thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence, explaining as to why oil prices are still hovering where they are. Went up a little bit, but not significantly due to despite the fact that supply has been curtailed by OPEC Plus. So there’s some Russian oil floating around in the market.
BFM
Indeed. And it’s still way below the $80 per barrel.
BFM
That 120 at one time, I feel.
BFM
Like, yeah, that was early in the year. Some analysts said that there was still a chance for it to reach that far right, to reach that high. But I don’t see that trending that way. If you look at oil Brent crude this morning, $76.95, it is about 0.9% up from previous year, previous day, but still 8% down on a year to day basis.
BFM
Yeah. So not great. And something that’s not great is GameStop.
BFM
Okay.
BFM
It was such a hot meme stock that’s right. During COVID Remember that? There was no reason for it, it was loss making, and yet people plowed money into it thinking, okay, let’s bet against all the institutional fund managers.
BFM
So GameStop shares plunged more than 20% after the company announced that he has fired its CEO, Matthew Furlong, and appointed its board chairman, Ryan Cohen, as executive chairman, effective immediately. This was the same Day reported a revenue drop and a narrow loss in his fiscal first quarter compared to the year ago period. So GameStop has 4400 stores, bricks and mortar, with most of it in the US. And it reminds me a little bit of Blockbuster, where everybody is moving from bricks and mortar to online, and you’re selling games. So wouldn’t you be buying games online now?
BFM
I think that was part of how to say, confusion, right? When GameStop took off, its stock took off during the pandemic because especially since everyone was at home, the stores weren’t even open. So why was there so much, I guess, investor enthusiasm for this? It was really those retail stock, those stock trends that really took off during the pandemic. But sales are down for this quarter, both in US. And Canada. They are down by double digits. It dropped in Australia by 8.9%, but it did increase in Europe by 26%.
BFM
So saw a game stop shop in Dublin, I was like, hey, is this the meme stock that we talk about? Because it’s of course not here in Malaysia. Nonetheless, the stock is actually up 41% on a year to date basis. And I think I’m going to guess that the street really doesn’t like this name. I mean, it’s in structural decline, right? And I’m right, because actually there are only three analysts that cover this. Zero buys, one whole two sells at the moment. Now, let’s turn our attention to what is quite a familiar name, at least for me, because I grew up drinking this, eating it. Campbell Soup. They announced third quarter profits that were above street expectations on the back of multiple price hikes, with a 12% increase in average selling prices in the previous quarter.
BFM
Revenue rose 5% to $2.2 billion, in line with the company’s expectations. Adjusted earnings per share declined 3% year on year from seventy cents to sixty eight cents. These, however, bid analysts expectations of $0.64. So my favorite mushroom soup has gotten more expensive by the looks of it.
BFM
Everything has gotten more expensive in the shops, unfortunately. Everything. Yeah, but the stock is actually down close to 20% on a year to date basis. And let’s see, the analysts, do they like this name? Not really. Three buys, eleven holds, six sells. Target price for the stock, $52 last time, price during regular market hours is actually down four dollars and fifty one cents to forty six US dollars. Shaz, what’s your favorite flavor?
BFM
I have to say I’m with Mark on cream of mushroom soup. Right, can’t go wrong with that. Very traditional Campbell soup flavor.
BFM
You all are not drinking enough. That’s why the share price is where is probably.
BFM
Yeah, I need to stock up then.
BFM
But up next, we’ll be covering the top stories in the newspapers and portals this morning. Stay tuned. BFM 89.9 you have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.