Commentary
The catalyst this week for the stock market gyrations is the Japanese carry trade, where Japanese investors benefit from the U.S. dollar’s appreciation versus the Japanese yen as higher U.S. Treasury yields compare to equivalent interest rates in Japan. However, as recession fears mounted, U.S. Treasury yields collapsed and the Japanese carry trade came temporally unwound, so the Nikkei 225 plunged 12.40% on Monday, only to resurge 10.23% on Tuesday.
Complicating matters is that we are in August, where “air pockets” exist since many Wall Street pros, plus Europe are on vacation. So I expecting that this down, up, down market action to persist until the trading volume is exhausted.
Here are the most important market news items and what this news means:
– The American consumer remains stressed. The latest evidence came from McDonald’s, which announced its first quarterly sales decline since 2020. Specifically, in the second quarter, McDonald’s same-store sales declined by 1%. This is not that big of a surprise, since French Fry supplier, Lamb Weston, also reported disappointing sales to restaurants and consumers. However, there is also evidence that some of this sales decline may be attributable to deflation. McDonald’s CEO said its $5 meal deal is a big hit and will be extended to boost sales. Additionally, Burger King and KFC have also introduced $5 meal options. Furthermore, Target, Walmart, and Aldi have lowered prices on food and some household staples, plus Amazon, Walgreens, and Best Buy have announced price cuts on selected items.
– The other big consumer news was that Diageo warned that consumers are facing an “extraordinary environment” and announced its first decline in sales since 2020. Specifically, the maker of Smirnoff vodka, Casamigos tequila and Johnny Walker whisky said its annual sales declined by 1.4% and its unit sales dropped 5% as consumers cut back on consumption. In other words, there are now signs of consumer distress everywhere, especially for the bottom 20% of consumers who are struggling with inflation and trying to make ends meet. If the Fed ever needed a sign of consumer distress, McDonald’s first sales decline in 13 quarters was it, so hopefully this will help coax the Fed to cut key interest rates sooner than later.
– If you are wondering how the U.S. economy can grow when consumer spending is erratic, the answer can be traced to productivity. The Labor Department on Thursday reported that U.S. productivity rose at a 2.3% annual pace in the second quarter, compared to a revised 0.4% in the first quarter. This was much better than economists’ consensus estimates of a 1.8% productivity increase. In theory, some of the productivity increases can be attributable to AI as well as better inventory management. As long as profits rise faster than labor costs, productivity will continue to rise.
– There is still a lot of chaos around the world, as the recent contested election in Venezuela demonstrated. The Middle East remains a tinder box in the wake of Israel’s attack on the Hamas leader at his home in Teheran as well as a Hezbollah commander in Beirut. Iranian Supreme Leader Ayatollah Ali Khamenei said that he had a “duty to seek vengeance” and that Israel should prepare for “severe punishment.” Clearly, crude oil prices will remain high as long as Iran and its proxies continue to threaten Israel.
– Although the July ISM service sector survey was stronger than many economists expected, the fact that 8 service sectors are still contracting is concerning. The Institute of Supply Management (ISM) reported that its non-manufacturing, service index rose to 51.4 in July, up from 48.8 in June. Fully, 10 of the 18 service industries surveyed reported an expansion in July. The eight ISM service industries that are lagging are (1) Agriculture, Forestry, Fishing and Hunting; (2) Real Estate, Rental and Leasing; (3) Wholesale Trade; (4) Retail Trade; (5) Professional, Scientific and Technical Services; (6) Information; (7) Educational Services; and (8) Other Services.
In summary, recession fears have materialized, and the Fed needs to act immediately, and August looks like it is going to be a long hot month. The collapse in Treasury yields is very bullish and the Fed cannot fight market rates much longer. Fortunately, the Fed will be cutting key interest rates no later than September 18th and help provide the U.S. economy with a “turbo boost.”
*Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.