A few months ago I included a chart of the earnings estimates for 2022 that sellside analysts had believing it was fanciful thinking but here is an updated version ahead of the upcoming earnings flood and the estimate is even higher at $229 per share for the S&P 500, albeit a few pennies off its highs. Good luck Corporate America with achieving this.
The global rate hiking continued overnight with the Bank of Korea and Reserve Bank of New Zealand each raising 50 bps. For the BoK, that 50 bps increase to 2.25% is the biggest since they starting running monetary policy in 1990’s but most likely they revert back to 25 bps from here. Governor Rhee said “We raised the rate by 50 bps this time because there’s greater damage if the upward inflationary pressure grows further…If the inflation and growth trends do not change significantly, a return to 25 bps hikes looks appropriate for the time being.” Their plan seems to be to get their benchmark rate to 2.75-3% by year end. For perspective, their June CPI rose 6% y/o/y.
New Zealand’s 50 bps hike to 2.5% is the highest rate since March 2016. They said “The Committee agreed to maintain its approach of briskly lifting the OCR until it is confident that monetary conditions are sufficient to constrain inflation expectations and bring consumer price inflation to within the target range.” Inflation is expected to print 7% for Q2.
The Bank of Canada is expected to hike by 75 bps today to 2.25%.
I don’t know when it will be but as these and other central banks around the world get more aggressive with rate hikes, the US dollar will lose its interest rate differential benefit. The ECB and BoJ of course won’t be coming anywhere close to catching up while the BoE is likely to pick up its rate hiking pace to 50 bps and maybe the other currencies have a fighting chance to recover.
One mention on oil here as we debate the trade off between worries about demand destruction at the same time we have serious long term supply concerns, behind the scenes the US continues to drain its Strategic Petroleum Reserve on a weekly basis. It’s now down to 492mm barrels as of July 1st and that is the least since 1986 in NOMINAL terms when the US population was 240mm people vs 330mm today. There is one thing to make the political decision of wanting to release barrels to lower the price, but when will the decision come that enough is enough before this reserve heads to zero? I don’t know but it must come at some point and then when to refill it has to come thereafter.
SPR
As we try to figure out what the work from home pattern will be post covid and how much Zoom will replace corporate travel, this is what Delta just said in its earnings press release, “Domestic corporate sales for the quarter were about 80% recovered versus 2019, up 25 points compared to the March quarter. International corporate sales for the quarter were about 65% recovered versus 2019, up 30 points compared to the March quarter, driven by outsized improvement in Transatlantic. Recent corporate survey results show positive expectations for business travel in the September quarter, including optimism around international travel given the elimination in June of the pre-departure test requirement for flights to the US.”
As Chinese factories further opened up as did the Shanghai ports, they reported that exports rose 17.9% y/o/y in June, above the estimate of up 12.5%. Imports though, where many end up in eventual exports, rose just 1% vs the forecast of up 4%. With China’s illogical and almost maniacal approach to covid, there is only so much we can expect from the Chinese economy at the same time they are trying to manage the unwind of its residential housing excesses. Chinese A shares were little changed but the H shares were down by .6%. Iron ore, a Chinese economic proxy, is up 3% but after falling by almost 5% yesterday. Copper is little changed.
The UK economy grew by .5% m/o/m in May which was better than the estimate of up .1%. The Office for National Statistics interestingly said “a large rise in GP (Dr) appointments” was a major driver as well as travel. Spending on other retail saw weakness. Industrial production bounced helped by energy. The pound is getting a modest lift to back above $1.19 in response while gilt yields are unchanged. It’s pretty shocking to see the pound cheaper than where it bottomed right after the Brexit vote in 2016.
With the weak euro making the inflation fight that much more difficult for the ECB, Bank of France Governor Villeroy today mentioned it but didn’t really say much. “It’s good news for activity as it supports exporters, but unfortunately it raises inflation a bit. The exchange rate isn’t something we set, but we follow it because it counts for inflation.” There is another layer of delusion here on his part as he said “When we look at what’s happened since the start of the year, it’s not so much the euro that’s weak, but the dollar that’s strong, notably because it is traditionally a safe haven.” I guess he forgot that the ECB still has negative interest rates at the same time inflation is running north of 8% and maybe that is the reason for euro weakness.
We’ll finish with mortgage apps as the average 30 yr mortgage rate was unchanged w/o/w at 5.74%. Purchases fell 3.6% w/o/w and by 18% y/o/y. Refi’s rose by 2.2% but after last week’s nearly 8% drop. They remain down by 80% y/o/y. With mortgage rates at the highest level since 2008, I guess the only people that would refinance would be those switching from an expiring ARM to a fixed rate or someone who failed to refi when rates were in the 3’s and bought a house two decades ago when rates were above 6%?