Macro Matters Most
Authors: Andres Larios, Jay Sahaym
Intro:
Welcome to the Weekly BluRB, a newsletter catered to students and professionals to get the latest news and insights on global markets. Get prepared for the week by reading four weekly stories circulating equity markets, macro trends, geopolitics, and new business developments. And the best part is that we’ll give you an informed view of where we think prices, policies, and trends are going in the near future. The content in these writings is for informational purposes only and does not constitute financial or investing advice.
Equity Markets: Hello Palantir, Dell. Goodbye American Airlines, Etsy
On Friday, September 6th, S&P Global announced that big tech players Palantir and Dell will join the S&P 500 index effective September 23rd, 2024. The S&P 500 is one of the world’s most-followed stock indexes because it tracks the weighted performance of most of America’s largest companies. The additions of Palantir and Dell come at the expense of American Airlines and Etsy who will be dropping to the S&P MidCap 400 and the S&P SmallCap 600, respectively. S&P Global officials argue this decision was made as Palantir and Dell have high market capitalizations ($67 billion & $72 billion vs. S&P 500 average market cap of $33.5 billion) compared with the two firms on the out with market caps of less than $10 billion each.
This change comes amid a very volatile week in the stock market due to poor American jobs data (see US Macro Section). Furthermore, quarter earnings reports from blue-chip tech companies have over-performed their guidance, but underperformed Wall Street analyst’s predictions, leading the S&P 500 to fall almost 4% in the past five business days. The most famous story here follows how Nvidia shed 1/5th of its value in the past two weeks after markets perceived AI has lost some of its hype and due to increasing competition in the space.
Palantir and Dell shares, however, have both jumped about 5% in pre-market trading and we can expect these names to continue rising in value, even as a major index like the S&P 500 underperforms. These share values should increase due to their strong fundamentals and pivotal roles in federal contracting and AI hardware, respectively.
US Macro: It’s Decision Time, Chair Powell
“The time has come for policy to adjust,” stated Fed Chair, Jerome Powell, at Jackson Hole on August 23rd, in sharp anticipation of a September rate cut. But is the Fed a tad bit behind the yield curve? Early August saw the collapse of the Japanese Yen carry trade, used to more cheaply trade equities as the BoJ surprisingly hiked (hawked) 25 basis points, spiraling the stock market downward for a few days. Most analysts perceived this development as noise. However, recent inflation and jobs data have caused reasonable fear in global markets.
The Federal Reserve has successfully curbed post-pandemic inflation, seeing strong PCE numbers since June, which had been supportive of a July or September rate cut. At the same rate, the labor market has cooled significantly in the past few months, and markets have reacted by pricing in a 100% probability of a Fed rate cut in September. Although inflation is currently under control, jobs data since August has caused ample debate regarding an inter-meeting rate cut, a 50 bp rate cut, and even the possibility of a recession. We have seen three months straight of declining job gains, a major downward revision of August non-farm payroll data, and the apparent triggering of the Sahm rule.
What does this mean? The Fed and economic forecasters still believe we are headed towards a soft landing. A September rate cut is almost definite, but there is debate whether it will be 25 or 50 bp. Since Powell’s appointment, the Fed has stressed data-driven decision making and patience, leading us to believe the Fed will cut rates by 25 basis points on September 18th. Whether this is the right decision is tricky, especially due to a looming presidential election. The Fed maintains its independence amid former President Trump’s antics against Fed Chair Powell, however, the Fed’s apolitical identity is definitely under the limelight and may (ironically) affect policy decisions during the November meeting.
Global Macro: What Can Oil Tell Us, Today?
The underlying commodity for global economic growth is oil. Manufacturing and daily consumption demand it, and OPEC+, a small group of oil-rich countries supply most of it… sparingly at times. Now is not one of those times. The world has changed since the COVID-19 pandemic and economically, most countries are transitioning away from policies to mitigate the effects of a global shutdown and short recession. This can be seen as the biggest economies (like the USA, Japan, China, England, and Canada) are preparing or in the process of reversing their monetary policy goals amid troubling employment data (a proxy for the health of the economy).
The first half of the year saw strong global growth. Oil prices increased as energy demand increased, and OPEC+ decided to capitalize by slightly increasing production while still enjoying high prices. In the past months, however, high interest rates finally took their toll on the global economy, driving bad economic data in China and the USA, and decreasing oil demand. Thus, the second half of 2024 has seen double-digit negative returns in Crude Oil futures prices, which predicts the near-term price of a barrel of oil.
From this, we can come to two conclusions. One is that because oil prices are a proxy for global economic health, this could be a leading indicator for a global economic slowdown, and two, that oil prices will probably begin to increase shortly as OPEC+ and the US begin to increase oil reserve sizes to counteract the current market’s excess supply.
Make sure to tune in next week for more market updates and global insights!