27 Aug Capital 19 Catch-Up – Aug 27

Markets seemed to be on track for a relatively stable week leading into Friday’s session. Bond yields had risen during the week, following last week’s inversion, and earnings had impressed in key sectors of the economy.

The farce of Friday’s Twitter debacle

It was going to be all down to Fed Chairman Jerome Powell and his speech at Jackson Hole on Friday, to determine whether Wall St would have a positive week after suffering through three straight losses to start August. He wasn’t expected to say anything too controversial. Just the usual “we’ll see how the economy is faring and act accordingly” type of spiel.

And that is exactly what he delivered. He stated the Fed was certainly willing to cut rates if necessary, however, unemployment is low and consumer spending is healthy, so any future moves will be data-dependent, as they always are. Possibly where all the trouble started was when he set out to describe the limitations of the Fed monetary policy in the event of a trade war, ” While monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rule book for international trade”. It was a subtle dig at the White House’s trade policy, namely the feuding with China and other markets.

Overall, the markets reacted positively to the speech and the major indices were slightly higher in the aftermath. The calmness wasn’t to last however as the President decided to jump onto his Twitter account with a few choice words for Powell and anyone else listening – which is everybody when you’re the President.

It started with this beauty: ” As usual, the Fed did NOTHING! It is incredible that they can “speak” without knowing or asking what I am doing, which will be announced shortly. We have a very strong dollar and a very weak Fed. I will work “brilliantly” with both, and the U.S. will do great…….My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”

Nothing too bad in that one. Just a bit of Fed bashing from the President, who had already claimed earlier in the week that Powell was like a golfer who couldn’t putt – and had “no touch”. He probably could have done without calling the leader of the US’s biggest trading partner an “enemy”, but President Xi was probably just collateral damage, right? Nope.

It was the next three tweets which really set the cat amongst the pigeons. I’ve collated them here: “Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far……better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing…..your companies HOME and making your products in the USA. I will be responding to China’s Tariffs this afternoon. This is a GREAT opportunity for the United States. Also, I am ordering all carriers, including Fed Ex, Amazon, UPS and the Post Office, to SEARCH FOR & REFUSE”.

The tweeting didn’t stop there either, it went on for quite a while, but you can get the basic gist from the comments above. As you can imagine Wall St didn’t take too kindly to instructions from the President ordering companies out of China. Even though he has no power to act on it,  and despite his assertions that he could if he wanted to – which he can’t, the move would cripple the economy and have him out of office faster than a Jofra Archer bouncer at Steve Smith.

It was a strange move from Trump. He likes to take credit when the stock market is going well, and blame the Fed when it’s going badly. But to send out tweets that could potentially do irreparable damage to trade negotiations with your biggest trading partner seems a little unhinged even for him. Cue the Trump supporters writing to complain – but even they would have to admit this wasn’t his shrewdest political move.

There was a half-hearted back down from the comments over the weekend when Trump was asked whether he had second thoughts on escalating the trade war and replied “Yeah, sure why not?” adding “Might as well, might as well – I have second thoughts about everything”. But the White House then clarified the comments saying Trump has been misconstrued and had actually meant he wanted to raise tariffs higher. The message was again different on Monday with both parties “getting back to the table”.

The drama pushed the major indices back into losses for the week with the Nasdaq the worst hit, losing 3% on Friday to take the tech-led index to a 1.8% weekly loss. The Dow was down 2.4% on Friday and 1% for the week, while the S&P500 lost 2.6% on Friday and 1.4% overall.

A positive week for the economy

Despite the farce of Friday’s Twitter debacle, it was actually a really positive week for the economy and for stocks in general. Bond yields rose for most of the week, and earnings results were positive across some key sectors.

Home improvement stocks Home Depot (HD) and Lowe’s (LOW) both surged higher on second-quarter earnings reports. Home Depot profits were off the charts despite a fall in lumber prices which account for 8% of the company’s total sales. The stock rose 4.5% despite a warning from the CEO that tariffs already in place would increase costs by $2 billion.

Lowe’s was even more impressive, with same-store sales up by 3.2%. Like Home Depot they were also impacted by the deflating price of lumber, however, sales in its paint section more than made up for the losses, with the share price rising 10.4% for the day. Both results are a positive sign for the housing market and for the economy as a whole.

Retail operator Target (TGT) was also a winner, citing increased profit thanks to new in-store pickup and same-day delivery options increasing customer expenditure. Profit was up 17% and the TGT share price was up 20%. The company’s plan to move from a physical to an online base to compete with the Amazon’s of this world sounds like it is starting to pay dividends. It’s also another positive sign for the economy with consumers still spending big across the board. Almost all of the big retailers have outperformed in the second quarter.

The Apple Card is here

My favourite news from last week, however, came from one of the CatchUps all-time favourites Apple (AAPL), who released the much anticipated Apple Card. A collaboration with Goldman Sachs (GS) and Mastercard (MA) which will see Apple customers using their iPhones as a credit card.

It’s the first of the major tech companies to offer such a product and heralds a changing of the guard for the financial industry. There are some important advantages to consumers to get them using Apple Card. You can apply straight from the phone, real-time transactions which are categorised and colour coded to help with managing your finances, Apple Maps and location integration for each transaction, financial wellness tools (whatever that means) and no fees. Not even international transaction fees – although I’ll be interested to see what spread there is on the exchange rate.

There are also rewards for users, who get 3% cashback on Apple purchases, 2% cashback with any Eftpos using Apple Pay which is the vast majority (99%), and 1% for any other transactions. That’s money straight back into the pocket of the consumer to do with whatever they wish. There’s an interest rate, of course, if you don’t pay off the balance, but Apple says it will be kept lower than bigger providers. It is currently 12.99% to 23.99% depending on your credit score.

It seems nothing but a winner and it will interesting to see how much revenue Apple can extract from such a system. Currently, it’s available to everyone in the US and they are looking to expand globally, although there is no news on whether it will hit our shores any time soon. Watch out banks. The tech titans are coming for you.

Looking ahead

The week ahead will no doubt focus on the trade dispute and how the US and China handle Friday’s kerfuffle. We’ll also see some important data drops with durable goods and consumer confidence earlier in the week, and personal spending and consumption on Friday. Personal consumption includes the PCE deflator, which is the Fed’s preferred indicator of inflation, so it could be a market mover.

Earnings wise we’ll see another week concentrating on the retailers, with Tiffany (TIF), Guess (GES), and PVH (PVH) on Wednesday, with Best Buy (BBY), American Outdoor Brands (AOBC), Abercrombie & Fitch (ANF) and Dollar General (DG) on Thursday. On top of this, we’ll have results from Hewlett Packard (HPE), H&R Block (HRB), Dell (DELL), Dollar Tree (DLTR) and Campbell Soup (CPB).

Please take a look below for all of the earnings and data for the rest of the week.

Cheers, Paul.

Earnings:

• Tuesday: Autodesk (ADSK), Hewlett Packard (HPE),
• Wednesday: Tiffany (TIF), Guess (GES), Shoe Carnival (SCVL), PVH (PVH)
• Thursday: Best Buy (BBY), Dell (DELL), Workday (WDAY), Marvell +Tech (MRVL), American Outdoor Brands (AOBC), Dollar General (DG), Dollar Tree (DLTR), Abercrombie & Fitch (ANF)
• Friday: Campbell Soup (CPB)

Economic Data:

• Tuesday: Case-Schiller home price index, consumer confidence
• Wednesday: None
• Thursday: Weekly jobless claims, GDP revision, Advance trade in goods, Pending home sales
• Friday: Personal income, Consumer spending, Core inflation, Chicago PMI, Consumer sentiment