Capital 19 Catch-Up

The Fed Reserve Indicate Earlier Rate Rises As China Makes Efforts To Control Metal Prices

The major indices had a tough time of it last week as the Federal Reserve met for its monthly two-day meeting and indicated bringing forward potential interest rate rises. In a double-whammy, there was also a hit to commodity prices which dragged down the materials and industrial sectors. However, the big tech stocks managed to escape much of the selloff as investors moved back into the sector and away from the reopening favourites of travel and hospitality.

The tech stock revival helped the Nasdaq to be the best performing of the indices, falling just short of a positive week and losing just 0.2%. The two big hitters weren’t quite as fortunate, with the headlining Dow having its worst week since October 2020 and dropping 3.5%, while the S&P500 fared a little better but still lost 1.9% over the five sessions.

The focus for the week was held firmly with the FOMC’s two-day interest rate meeting that was held on Tuesday and Wednesday. The Fed has been at pains to point out recently that they were expecting a lift in inflation, and that in their opinion it would be transitory and short-lived. However, the outcome of the meeting left Wall Street wondering exactly how much they still believed this to be true.

The dot plot projections, where each member predicts when and where the next interest rate movement will be, suggested that we could now see two rises as early as 2022, where the Fed had recently suggested there wouldn’t be any movement until 2023. Inflation predictions for 2021 were also increased, with Fed members now expecting a 3.4% rise, when the number was as little as 2.4% just a few months ago.

Stocks fell instantly on the news but later managed to bounce off of session lows as Fed Chair Jerome Powell spoke to the media. He recommended that we should all take the dot plot projections with ” a grain of salt” confirming that any rate rises would be well into the future. He also hosed down speculation of an imminent end to the tapering of bond purchases, making sure that markets would receive plenty of advanced warning of any changes.

It is part of the Chairman’s job to allay market fears, and rate rises and stopping stimulus are the highest fears on the list. Powell knows that rates are going to have to rise at some point and the Fed will have to bite the bullet and make a call. He also knows the market will be rocked when it happens and is bending over backwards to soften the blow. He stated in his media conference “you can think of this meeting that we had as the ‘talking about talking about’ meeting. In coming meetings, the committee will continue to assess the economy’s progress toward our goals. As we have said, we will provide advance notice before announcing any decision to make changes to our purchases.” I would say that that is our warning about future warnings. We have been warned.

Also on Wednesday, China announced it would be attempting to curb price rises in commodity prices by releasing industrial metals such as copper, aluminium, and zinc from its national reserves. It’s a move we haven’t seen for ten years and analysts expect it is more an attempt to manage market expectations and deter speculators than it is to resolve any actual material shortages. China is the world’s largest consumer of metals and has been battling factory gate prices which are now at their highest levels in ten years.

The S&P500 energy sector fell hard on the news, dropping 5.2% for the week. The industrials were also 3.8% lower as Dow components Dow Inc (DOW) and Caterpillar (CAT) helped to drag down the index. Copper lost 5% and is now in correction mode (down more than 10% from recent highs), while other metals such as palladium and platinum dropped 11% and 7% respectively. The lumbar and oil sectors were also hit hard in the selloff.

Earnings announcements were thin on the ground as we await the new earnings season to kick off in a few weeks time. One bright note was Capital 19’s recent stock recommendation Chewy which smashed expectations on both the top and bottom line. The pet food manufacturer saw net sales of $2.14 billion which were up 32% year over year. While net income hit $38.7 million and adjusted earnings went to $77.4 million. Altogether active users increased by 600,000 active customers, which increases total users to 19.2 million. Chewy was up 4.6% for the week when the rest of the market was going lower.

The list for the week ahead is again small but there are a few notable results to be digested. Nike (NKE) and FedEx (FDX) are the two biggest names to report. Other companies to announce will include KB Home (KBH), Carnival (CCL), Darden Restaurants (DRI), and Matthew’s favourite Blackberry (BB). It will also be a big week for big tech with the US House Judiciary Committee voting on the antitrust bills. The bills apply to only the biggest hitters including Apple (AAPL), Amazon (AMZN), Facebook (FB), Google (GOOGL), and partially Microsoft (MSFT).

Amazon will also hold its annual Amazon Prime Day early in the week. It is hoping to offer more than two million deals from the likes of Under Armour (UAA), Mattel (MAT), and Columbia Sportswear (COLM) to name but a few. It is expected to bring in sales of $11-12 billion globally.

Economic data for the week will include manufacturing and services PMI for June, durable goods orders, consumer spending and the Core PCE price index.

Have a great week.