Macro Commentary
Are we back to where the market wants newly released economic information to thread the needle between “too good” and “too bad”? Economic data released in the US this week continues to show that the economy is not on the verge of recession, but also is not rocketing to a level which may compel the Fed to act aggressively. Two weeks before the Fed’s next meeting, a survey of economic activity in the 12 districts of the central bank (officially called the “Beige Book”) shows that US dollar strength has already done a little tightening of economic conditions. Not surprisingly, USD sensitive industries such as manufacturing, energy, and tourism showed the biggest impact. This was followed on Thursday by an inflation report that, excluding what the central bank considers to be a temporary impact from falling energy prices, marked a slight uptick in inflation that moved closer but is still below the central bank target of 2%. The market-implied probability of a Fed funds rate hike hovers near 1/3rd. In response, the US Dollar has weakened relative to most other currencies, gold and silver prices have bounced, global interest rates remain low.
On the corporate side, we are in the early stages of earnings announcements in the United States. The sample is not yet big enough to see any consistent and strong messages, but it feels like companies are taking the opportunity to get potential bad news out early. While earnings revisions for Q3 and full year 2015 have already come down significantly, there has been little adjustment to 2016. With expectations lowered, companies may see a benefit in the long run by announcing any news they just want to get off their chest. That is not to say that the market will take this news lightly. Wal-Mart is a case in point. This week, the huge retailer announced earnings and then focused most of their forward guidance on investments that would impact earnings in fiscal year 2017 – two years from now. Specifically, they expect to incorporate a wage increase and training programs for their workers which may cause earnings per share to fall two years from now for a brief period before rising higher after these investments mature. Perhaps management thought a $20bln share repurchase may help make lemonade out of lemons today, but the market was left with a bitter taste. In one of the worst single-day market performances for Wal-Mart, the stock fell 10%. Time will tell whether getting the “bad” news out early will end up being a win in the end for more long-term focused shareholders.