So with its 80 pt S&P 500 rally in 4 trading days, the market was ok with the escalation of the trade battle with the actual implementation of a major round of taxes but now it’s bothered with a potential further intensity of this skirmish? At this point I’m hoping for more science in searching for a deal and less art. China seems to have no interest in bending as the Vice Minister of Commerce said that China “never yields to threat or blackmail” and they will retaliate. Are there back channel negotiations going on between the two parties because I’m not aware of anything scheduled?
Not only are global stock markets all down (Shanghai comp in particular lower by 1.8%) but copper is breaking by 3% to the lowest level in a year. Soybean prices are back to a 10 yr low. Someone go tell the American farmer who will be harvesting their crop in a few months that this is all part of the negotiating process.
I stated on Monday my main focus this week on Fastenal’s earnings as we will get a great snapshot on the state of the economy, the price pressures being experienced and the impact of tariffs. Well, Fastenal reported a better than expected 2nd quarter with both sales (up 13.1% y/o/y and slightly above the estimate) and eps exceeding expectations by .08. They said the increase in sales “was driven by higher unit sales related primarily to continued strength in underlying market demand and contribution from our sales growth…A lesser contributor to our sales growth in the second quarter of 2018 was higher pricing instituted at the end of Q4 of 2017 to mitigate inflation in the marketplace.” The end result was a drop in gross margins of 110 bps as higher price pressures to them “began to reduce the gross profit margin.” Also, “higher freight expenses and changes in product and customer mix” did as well. Fortunately for Fastenal, they are extremely well run and was able to improve “freight management” to help offset higher costs. With respect to labor costs, they jumped 10% y/o/y due to an increase in their full time head count, “inflation in base wages” and “higher bonuses and commissions due to growth in net sales and net earnings.” I look forward to the earnings call at 10am est to hear about guidance and how much of the sales gains was a product grab due to all the supply constraints seen in the industrial space where companies double order to make sure they get what they need and how much is organic and sustainable. This, along with the cost and tariff side.
Thanks to a 5 week low in the average 30 yr mortgage rate, buyers of homes stepped up as the MBA said purchases applications rose 6.5% w/o/w and 7.7% y/o/y. Buyers are also buoyed I’m sure by a strong labor market and rising wages. The drop in rates though did nothing for refi’s though as they fell for a 3rd straight week, down by 3.8% w/o/w and 21% y/o/y.
Seemingly solely following price, the number of Bulls this week according to II rose to 52.4 from 47 last week.
Expect a rate hike from the Bank of Canada at 10am est of 25 bps to 1.50%. It was 2009 the last time it was there.
The BoJ keeps getting the inflation that it wants at least at the wholesale level. PPI rose 2.8% y/o/y as expected in June and that is the most since December. They also reported that import prices spiked by 11.3% y/o/y boosted by a weaker yen and rising energy prices. As the market only seems to focus on CPI, JGB yields are doing nothing in response. Japan also reported a decline in machinery orders in May of 3.7% but that wasn’t as much as the 4.9% decline that was estimated. It’s a good measure of capital spending but hugely volatile month to month. The Nikkei closed down 1.2% in response to the you know what.