Newsletter - May 18, 2022
Oil / Commodities
- The Biden administration plans to ease sanctions on Venezuelan oil in a bid to bring more of the country’s crude to Europe. The U.S. will allow European companies still operating in Venezuela to divert more oil to the continent immediately, while Chevron will be allowed to negotiate a resumption of operations in the country. The U.S.-backed Venezuelan opposition supports the move. The easing penalties come as tightening global oil supplies send the cost of crude and fuels skyward, threatening to worsen already historic inflation. More barrels from Venezuela would help alleviate the supply crunch, while also aiding Europe in weaning itself from Russian energy amid the superpower’s invasion of Ukraine. U.S. benchmark crude fell on the news. Italy’s Eni SpA and Spain’s Repsol SA are the only major European oil producers with operations in the country. They are working with the Biden administration to divert Venezuelan oil bound for China to Europe. The easing of penalties comes after officials from President Biden’s administration visited Caracas, ultimately securing the release of Americans who had been detained in the country.
- Canada’s oil production could increase by 900,000 barrels a day to make up for supply losses from Russia’s war in Ukraine according to the premium of Alberta. Premier Jason Kenney gave the estimate in testimony before a U.S. Senate Committee on Tuesday. it is about triple the estimate delivered weeks ago by Canadian Natural Resources Minister Jonathan Wilkinson. About 300,000 barrels a day of unused capacity exists in the North American pipeline system, which should be filled this year through higher output. Another 200,000 barrels of crude oil could be shipped by rail and if midstream companies get serious about it, and if regulators approve it, a further 400,000 barrels could be added through pipeline reversals and technical improvements. But boosting Canada’s oil output by that amount will not happen quickly. Canada exported about 3.9 million barrels a day of crude oil to the U.S. in the first two months of the year. By 2024, the completion of the Trans Mountain pipeline expansion project to British Columbia will give Canada even more capacity to ship oil to the U.S. Energy producers can raise shipments of crude by 200,000 barrels a day and natural gas by the equivalent of 100,000 barrels by year-end by accelerating planned projects to expand output to help compensate for the loss of Russian supply.
o https://www.bloomberg.com/news/articles/2022-05-17/alberta-says-it-can-boost-oil-output-by-900-000-barrels-a-day
Tech
- Twitter’s board said it plans to enforce its $44 billion agreement to be bought by Elon Musk, saying the transaction is in the best interest of all shareholders. The proposed takeover includes a $1 billion breakup fee for each party, which Musk will have to pay if he ends the deal or fails to deliver the acquisition funding as promised. Musk might be released from that requirement if he can show a material change in the company’s situation or the information it has provided. The board’s latest statement comes as Musk appears to be manoeuvring to ditch or renegotiate his offer. Musk said last week that the deal was on hold until he gets more information, specifically proof from Twitter that so-called spam bots make up less than 5% of its users.
- Twitter is losing three more senior employees, including two vice presidents, a reflection of the uncertainty inside the social media company as staffers wait for Elon Musk’s $44 billion acquisition to close. Ilya Brown, a VP or Product Management, Katrina Lane, VP of Twitter Service, and Max Schmeiser, head of data science, are all leaving the company. Less than a week ago, Twitter shook up its product organization, including firing two top product executives by CEO Parag Agrawal. Twitter also instituted budget cuts and implemented a hiring freeze last week, and while the company said it was not planning layoffs, Agrawal told employees in an email that leaders will continue making changes to their organizations to improve efficiencies as needed. Twitter employees have been in a state of limbo since Musk’s proposed takeover. At all-hands meetings over the past month, Twitter executives have faced questions about stock compensation and job security. During one presentation, leadership tried to motivate employees by reminding them why they should bother showing up for work. Complicating matters has been Musk’s provocative tweeting and public comments. He has criticized Twitter executives and is now saying the company may be misleading the public about how many bot and spam accounts are included in Twitter’s calculation for total users.
o https://www.bloomberg.com/news/articles/2022-05-17/twitter-loses-three-more-senior-employees-ahead-of-musk-takeover?srnd=technology-vp
- A so-called governance token named MKR, which is used to help run the decentralized DAI stablecoin, has surged about 40% in value over the past week in the wake of the collapse of the algorithmic stablecoin TerraUSD (“UST”) that shook cryptocurrency markets. DAI is part of the ecosystem of the MakerDAO, one of the first decentralized autonomous organizations in crypto, which in theory acts like a community of pooled interests with no central control. UST was also billed as a decentralized coin, though it attempted to use algorithms to balance supply to maintain a 1-to-1 peg to the dollar. That failed when the built-in arbitrage mechanism no longer worked as demand for Terra’s Luna token tumbled. More importantly, DAI seeks to overcollateralize assets. The implosion of UST likely left MakerDAO as the undisputed king of decentralized stablecoins for the time being. Stablecoins can be a bridge between wo worlds that were not designed with mixing in mind – cryptocurrencies and traditional finance. That makes them useful as a way to lock in gains from crypto trading or as a safe harbour if investors think a downturn is coming. They also make it easier to move funds onto crypto exchanges and have become a key component of the world of DeFi. DAI requires overcollateralization via Ethereum-based coins. For example, users have had to deposit $150 worth or more of Ether to get $100 worth of DAI. If the price of Ether drops, they have to add more collateral or face liquidation. MKR directly benefits when DAI does well. Certain fees that MakerDAO collect go towards buying up MKR on secondary market and burning it.
- Paramount Global surged in Ny York trading Tuesday after Warren Buffet’s Berkshire Hathaway reported purchasing an 11% stake in the media company, becoming the largest holder of non-voting shares. Berkshire may be betting on Paramount as a potential acquisition target. Like other media companies, Paramount is pushing hard into streaming – it is the owner of Paramount+ and Pluto online TV services. But despite its streaming success, Paramount is expected to remain subscale, suggesting that it eventually ill have to sell itself to a bigger media company or a deep-pocketed tech giant. The company’s digestible size (EV around $35 billion), streaming success and content-production capabilities that include a film studio make Paramount an attractive target. Given the year-to-date weakness in the communication services space and the disruption in the streaming space, valuations have been compressed and may look more attractive. Berkshire has increased its position in media and technology companies over the past several months. The company has invested in Activision Blizzard, a video-game publisher that agreed to be acquired by Microsoft, as well as HP.
- Sea Ltd. Rose more than 14% after reporting core gaming revenue grew faster than expected, offsetting a slowdown across the rest of the Southeast Asian internet giant’s business as online activity retreats from pandemic-era heights. The company’s gaming unit, its most profitable division, posted sales of $1.14 billion, topping projections of less than $930 million. However, its e-commerce business continued to underperform. Consumers emerging from prolonged lockdowns are cutting back on online purchases, especially with the war in Ukraine and rising interest rates clouding the global economic outlook. Sea revised its full-year guidance for e-commerce sales, its main source of revenue, to $8.5 billion to $9.1 billion from its previous guidance of $8.9 billion to $9.1 billion. The company also posted a wider loss for the first three months as expenses soared. Investors are now betting on Sea’s overseas forays – particularly into higher-growth arenas such as Indonesian commerce and fintech – to shore up growth over the longer-term. The company’s strong cash position also supports aggressive e-commerce and fintech global expansion plans, boding well for further revenue growth from 2022, particularly after COVID accelerated the digital boom in SEA, LatAm, and other new markets. Fintech may contribute significantly to sales in the next few years as Sea integrates its financial services and main businesses via a digital bank license, bank subsidiary and partnerships, aided by new user acquisitions in the food delivery sector. And having Tencent as an anchor investor brings credibility to its strategy.
o https://www.bloomberg.com/news/articles/2022-05-17/sea-quarterly-loss-widens-after-consumers-cool-online-spending?srnd=technology-vp
Electric Vehicles
- Auto e-retailer Carvana has fallen from its pandemic peak when used cars on the site were a popular pick. By August of last year, Carvana shares had soared above $370 apiece, valuing the company at more than $60 billion, almost 3x greater than the market cap of top used-car retailer CarMax and 8x what AutoNation, the leading U.S. auto dealership chain, was worth. In the last nine months though, the stock has come crashing down. Investors overlooked the fact that there are serious limitations still to digitizing the dirty work of inspecting and bidding for used vehicles on line, transporting them to be reconditioned, and oftentimes moving them again to where they are resold. All of this expensive and competitive work is weighing on Carvana’s operations. Over the past few years, Carvana pursued a grow-at-all-costs strategy to gobble up as much inventory as it could at a time when every player in the industry was feeling supply pressures and paying top dollar for used vehicles at auctions. But since February, Carvana has succumbed to the shortages sweeping the auto industry and reported its first-ever sequential decline in quarterly retail sales. It also acquired a physical car-auction business, Adesa, for $2.2 billion recently, which contradicts its online strategy. The seller, KAR Auction, said it was offloading 56 vehicle logistics centers across the U.S. to focus on its digital offerings. Carvana’s negative free cash flow is also concerning, burning through almost $4 billion since the beginning of last year. While it assured investors that the Adesa acquisition should meaningfully reduce capex, the company released a 53-page updated operating plan last week that detailed measures to rein in expenses and prioritize profitability and positive free cash flow. Analysts at JP Morgan cut their price target for the stock to $35 on Monday, cited that while Carvana has put to rest liquidity concerns for the time being, the stock is now a show-me story. The company’s business model is not highly superior nor disruptive to the market, with well-capitalized brick-and-mortar dealers finding ways to grow and generate solid returns in an increasingly competitive environment.
- Mercedes’ upcoming electric G-Class will offer latest battery technology to bolster the driving range per charge. Mercedes will incorporate materials developed by California’s Sila Nanotechnologies as an option for a range-extended version of the vehicle from around 2025. Sila makes a silicon anode material that goes into battery cells, boosting the amount of energy they can store. When a battery is charged, ions flow from the cathode to the anode. When it is discharged, the ions reverse course. The conventional anode material is graphite, but researchers have been looking at silicon as an alternative to develop a battery that can pack more energy. While Mercedes did not provide an update on the electric G-Class’ range, it said Sila’s technology would boost battery energy density by as much as 40%.
- Ford- and VW-backed Argo AI has started testing self-driving vehicles in Miami and Austin without a human behind the wheel. While the cars are not the first fully driverless vehicles on the road, the tests may be the toughest so far for the technology. CEO Bryan Salesky said in an interview that the company is the first to put cars on the road in major cities during rush hour with no safety driver inside. The vehicle will still carry a person in the passenger seat who can pull the car over and stop in an emergency. Self-driving vehicles are seen as a solution to automotive crashes that take more than 1.3 million lives a year globally. But the public remains wary of the technology, especially after high-profile accidents have exposed the limits of it. Further, the cost an innovation required to put more autonomous cars on the road means deep-pocketed companies, such as Apple, have to lend their support. Argo’s new tests were enabled by a lidar sensor it developed that allows cars to see 400 meters down the road. Argo’s entire test fleet, in eight cities in the U.S. and Germany, will be outfitted with the sensor by year-end. CEO Salesky said the lidar sensor, which bounces light off objects to create an image of the road ahead, is the key to commercializing its autonomous system. Argo is already testing its self-driving system with the public in pilot programs with Lyft and Walmart in Miami, Austin and Washington, D.C. Argo plans to take on more customers and is in active discussion for ride-hailing and driverless delivery deals. Argo’s fully driverless system was evaluated by TUV SUD, a German testing firm, before the vehicles hit public roads. TUV said the concept was sufficiently effective and trustworthy for testing. Eventually, driverless cars may ferry people and packages without any human minder on board.
o https://www.bloomberg.com/news/articles/2022-05-17/ford-backed-argo-goes-driverless-in-two-american-cities?srnd=technology-vp
Consumer / Retail
China Market
- China’s main bond trading platform for foreign investors has quietly stopped providing data on their transactions, a move that may heighten concerns about transparency in the nation’s $20 trillion debt market after record outflows. Daily trades by overseas investors were last provided for May 11th by the China Foreign Exchange Trade System. The data showed sizable net foreign outflows that day, with some selling also seen for most days in April. The missing data add to the uncertainty over capital flows into and out of China, as COVID lockdowns and questions over concrete policy support spur market volatility. Global funds sold record amounts of Chinese sovereign debt in February and March as their yield premium over Treasuries collapsed and money managers fretted about a supply surge. While China has taken major steps in recent years to improve foreign access to its debt and equity markets, international investors have long had concerns about the reliability of the nation’s economic statistics and other official data. Those concerns tend to rise during periods of economic and financial market turbulence. The Chinese currency had already sunk 4% against the dollar last month, which has likely stoked selling again. Some analysts are predicting more overseas investors may continue to trim Chinese bond holdings as the nation’s COVID lockdowns weigh on growth and a stronger dollar saps demand for emerging market debt.
- Fresh COVID outbreaks around key Chinese cities and the ongoing spread in Beijing are raising the spectre of more disruptive pandemic curbs, even as Shanghai slowly emerges from its six-week lockdown. Beijing’s new case number continues to increase, while city officials said the Fengtai district will lockdown some areas for the next seven days after new clusters flared, amplifying the risk of community spread. In Tianjin, cases also rose, while another cluster is blooming in Sichuan province as well.
- China’s top economic official gave an unusual public show of support for digital platform companies Tuesday, suggesting Beijing may be ready to let up on a year-long clampdown on technology giants as it battles a slowing economy. Vice Premier Liu He said the government will support the development of digital economy companies and their public listings. The Hang Seng Tech Index rallied as much as 6% Tuesday on optimism the meeting would affirm Beijing’s intention to dial back some of its restrictions. Chinese internet stocks also jumped in U.S. trading after Vice Premier Liu’s comments, taking the Nasdaq Golden Dragon China Index to its highest level in about two weeks. Beijing has made stability its core priority in a year plagued by geopolitical uncertainty and the heavy economic impact of COVID outbreaks. Now, the Chinese government is enlisting the technology industry – its biggest growth driver of the past decade – to revitalize an economy struggling with rolling urban lockdowns hitting consumption and causing supply chain bottlenecks. China’s economic activity collapsed last month, with industrial output and consumer spending sliding to the worst levels since the pandemic began and economists warning that recovery is not in sight. However, investors remain wary as they weigh a mixed bag of developments, which have included a restart of gaming approvals and also the deepening of a campaign to rein in the little-understood algorithms that internet companies employ to serve content and gather data.
- Chinese regulators told the nation’s securities industry to avoid handing out excessive short-term incentives to employees and smooth out the pace of pay disbursements, in their latest effort to rein in risks and promote common prosperity. Incentives and short-term rewards that are too big will trigger compliance risks. Pay of bankers should not be directly linked to the revenue they bring in for underwriting deals, while senior executives must be held accountable financially if the violate regulations or cause excessive risk exposure. The latest directives may pose another hurdle for global banks that are scrambling to hire talent in China to expand in everything from investment banking to trading to wealth management. Goldman Sachs and JPMorgan Chase are now under the direct oversight of Chinese securities watchdog after winning approval to own 100% of their securities ventures onshore. Policy makers have already pressured the nation’s biggest state-owned financial groups to reduce salaries and costs to support China’s recovery from the pandemic over the past two years. Under the latest guidelines, a securities firm must take into account the compliance requirement and shareholders’ interests when formulating its compensation structure with the aim to balance pay at different positions and levels. They should also pace salary payment arrangement by taking into consideration the impact of market fluctuations as well as industry development.
- JD.com logged better-than-expected 18% revenue growth, after China’s second largest e-commerce operator grew market share to cushion the blow from COVID lockdowns across the country’s biggest cities. Sales climbed to 239.7 billion yuan in the first quarter, beating the 236.7 billion yuan average consensus estimate. JD and larger rival Alibaba are grappling with the economic fallout from the COVID-related lockdowns that have snarled logistics to cities such as Shanghai. Heavily reliant on domestic sales, JD has been expanding brand offerings to tempt shoppers. Alibaba is expected to post its lowest quarterly growth in revenue since its 2014 listing. JD has largely avoided a direct hit from Beijing’s crackdown on China’s biggest tech companies so far. Fines on Alibaba by Chinese antitrust watchdogs even helped the company gain access to brands like Starbucks and Estee Lauder, which had previously been exclusively tied to Alibaba in China. But ongoing concern about China’s priorities, the fallout from the country’s COVID lockdowns, along with U.S. regulators’ plans to possibly force JD and other Chinese companies to delist, are weighing on the stock. JD’s market valuation has shrunk by about 50% from a high last year.
- Netflix said Tuesday it is laying off about 150 employees, fallout from the surprising drop in customers the streaming company reported last month. The company’s slowing revenue growth means it is going to have to slow its cost growth as a company. The firings follow the unexpected loss of 200,000 subscribers in the first quarter and a forecast for the loss of another 2 million this period. At the end of last month, Netflix had already laid off a number of contract workers at Tudum, a website that promotes movies and TV shows for Netflix, as part of a broader restructuring of its marketing department.
o https://www.bloomberg.com/news/articles/2022-05-17/netflix-lays-off-150-staffers-in-cutback-after-subscriber-loss?srnd=technology-vp
Russia-Ukraine Development
- The U.S. is preparing a military aid package of as much as $500 million for India that aims at increasing security ties and reducing its reliance on Russian weapons. Ukrainian President Zelenskiy broadened his appeals to the outside world by speaking via video link at the opening of the Cannes film festival, where he referenced Charlie Chaplin’s film about Nazi Germany – “The Great Dictator”. Russia said its recession will last longer than previously thought, while the U.S. was set to curb Moscow’s ability to make debt payments, raising the odds that President Putin’s government will be pushed to default. The U.S. is poised to prevent Russia from being able to make payments to U.S. bondholders, a move that could bring Moscow closer to defaulting its debt. The Treasury is expected to let a temporary exemption, which had enabled Russia to stay current on its payments, lapse after it expires next week. The added pressure is expected to push Russia’s GDP to contract by 7.8% this year and 0.7% in 2023 (consensus economist estimate: -12%). High energy prices will keep the cash flowing in, with the current account surplus seen reaching a record $191 billion this year. The ruble’s recent rally is likely to reverse into declines later in the year, while incomes fall, and unemployment rises. Meanwhile, Australia has sanctioned 11 individuals and 12 entities for prompting Russian propaganda and disinformation, building on the measures already taken against 32 propagandists in March. Elsewhere, regarding the long-contemplated EU ban on Russian oil, Hungary’s government told EU counterparts that it will cost at least $810 million to revamp the country’s oil industry, as Budapest continues to obstruct a bloc-wide ban on Russian crude. Hungary said 550 million euros were needed to overhaul its refineries to comply with the ban, and another 220 million euros for a pipeline from Croatia. Finland’s Gasum Oy said it will not switch to ruble payments required by Russia’s Gazprom, and it will take the companies’ long-term gas supply contract into arbitration. There is an increased risk gas flows from Russia into Finland might be halted. On the ground, the area near the International Peacekeeping and Security Center at Yavoriv in the Lviv region of western Ukraine close to the Polish border came under Russian missile attack.
o https://www.bloomberg.com/news/articles/2022-05-17/us-set-to-block-russian-debt-payments-raising-odds-of-default
Market Update
- Federal Reserve Chair Jerome Powell, in his most hawkish remarks to date, said the U.S. central bank will keep raising interest rates until there is clear and convincing evidence that inflation is in retreat. The Fed chair repeatedly stressed the need to curb the hottest inflation in decades during a brief interview Tuesday, calling price stability the bedrock of the economy and acknowledging that some pain in achieving this – including a slight rise in the unemployment rate – was a cost worth paying in order to achieve it. Chair Powell also repeated the FOMC’s guidance on a 50-bps rate hike coming June and July, while adding the near-term inflation developments would be a critical determinant of the size of coming moves. The target range for the benchmark federal funds rate currently stand at 0.75% to 1%. U.S. stocks regained session highs in Tuesday trading as investors weighed the comments from Chair Powell, while Treasury yields climbed, led by more policy-sensitive shorter-dated tenors. While inflation is set to recede further, supply chain disruptions associated with the war in Ukraine and COVID lockdowns in China will probably keep upward pressure on prices in the coming months. Chair Powell made it clear that the Fed would not be over-analysing the incoming data as it formulates near-term policy. Domestic demand remains strong even as financial conditions have tightened following comments in recent weeks from a number of Fed officials who have said they want to raise rates to neutral levels by the end of the year, which they judge to be around 2.5%. But Chair Powell has cautioned higher rates could eventually start to have a bigger impact on growth. specifically, he believed there could be some pain involved to restoring price stability, but the economy can maintain a strong labour market that is well positioned to withstand less accommodative monetary policy. The unemployment rate in April stood at 3.6%, just above the pre-pandemic low of 3.5% achieved in the last expansion. Total employment was still more than 1 million jobs below February 2020 levels, and monthly job creation remains elevated relative to the pre-pandemic expansion as Americans continue returning to work. Chair Powell also touched on the recent risk-off response in financial markets, citing such moves showed that investors were getting the Fed’s message.
- U.S. economic data and earnings from two retail bellwethers indicated American consumers are spending with plenty of gusto, though cracks in the foundation of the economy are starting to form. Recent gains in overall retail sales, combined with solid earnings reports from retailers, foreshadow strong second quarter consumption and suggest consumers are not yet deterred by higher inflation. But the spending binge, fuelled more recently by increased credit card use, might not last. Whether consumers are relying on credit, drawing down excess savings, or simply saving less of their monthly income to fund purchases, the April data shows little signs of an impending slowdown, but could wane later in the year. Consumers’ reliance on leverage supports spending in the short-term but ultimately is not going to be a sustainable source of big increases in spending, so it builds in a slowdown, sort of down the road. The value of receipts at retailers rose a broad-based 0.9% in April, indicating that demand for merchandise remains resilient despite rampant inflation. Nine of 13 retail categories rose in April, including outlays for discretionary items like apparel, electronics and furniture. U.S. factory production also continued to rise at a robust pace in April, showing manufacturers are making strides meeting steady consumer demand and investment growth. There are no imminent signs of a slowdown in demand by American consumers judging by the number of goods-laden containers arriving at the Port of LA. The figures add to signs of overheated demand that is likely to keep the Federal Reserve on track to raise interest rates by 50 bps at each of its next two meetings in June and July. While the Fed hopes to tame inflation by cooling demand, it runs the risk of going too far and tipping the U.S. into a recession.
- Bearish investors are snapping up bullish options to ensure that their defensively positioned portfolios will not be left behind if the latest rebound in U.S. stocks proves persistent. Having slashed exposures or loaded up on hedges amid the past month’s equity turbulence, traders are now rushing to add calls that will help them participate in any upside, while retaining their defensive stances overall. The put-to-call ratio for the $361 billion SPDR S&P 500 ETF Trust ETF (SPY) based on open contracts recently hit the lowest in two years. the same situation exists for the $163 billion Invesco QQQ Trust Series 1 ETF (QQQ), where outstanding call options have surged to the highest since 2008. A drop in the put-to-call ratio is usually a bullish sign as investors prepare for a move upward. This time, though, signals from elsewhere in the market’s underbelly show traders are still guarding against declines after the S&P 500 plunged within a whisker of a bear market as the Federal Reserve stepped up its fight against inflation. Open interest in puts on SPY, for example, has been rising for a month. For QQQ, it is near the highest since 2020. Short interest on the SPY is near the highest in a year. The trends suggest investors are using options to hedge themselves just in case they are wrong. The move looked prescient Tuesday, when tech shares led the market higher. Call options on both ETFs surged, with many of the highest volume contracts doubling, though the gains followed equally large losses over the past two weeks. Tech has been at the epicenter of a selloff this year as rising interest rates took the shine off expensive growth stocks.
o https://www.bloomberg.com/news/articles/2022-05-17/buying-calls-is-new-stock-hedge-for-traders-eyeing-a-big-bounce?srnd=premium-asia
- U.S. futures dipped in Asia trading Wednesday after the S&P 500 added 2% in a risk rebound; Treasuries edged up as investors weighed the latest China figures, which showed a real estate downturn, as well as hawkish comments from Fed Chair Jerome Powell
- Treasuries pared a slide from Tuesday, leaving the U.S. 10-year yield at 2.97%; bonds were pressured overnight after Chair Powell said the Fed will not hesitate to tighten policy beyond neutral to curb inflation
- Crude oil was trading around $113 a barrel
- Investor sentiment improved slightly on robust U.S. retail sales and factory output data, as well as stronger-than-expected euro-area expansion; the worry is that tougher times lie ahead as monetary settings tighten, Russia continues the war in Ukraine, and China grapples with COVID
- S&P 500 futures fell 0.2%, while the S&P 500 rose 2% to 4,088.85
- Nasdaq 100 futures fell 0.3%, while the Nasdaq 100 rose 2.6% to 12,564.10
- 10-year Treasury yield fell 2 bps to 2.97%
- WTI crude rose 0.6% to $113 a barrel
- Gold was at $1,811.66 an ounce
Summary
- Micro – U.S. equities rose on Tuesday thanks to robust U.S. retail sales and factory output data. Retail sales rose 0.9% in April, indicating that demand for merchandise remains resilient despite rampant inflation. Nine of 13 retail categories rose in April, including outlays for discretionary items like apparel, electronics and furniture. U.S. factory production also continued to rise at a robust pace in April, showing manufacturers are making strides meeting steady consumer demand and investment growth. There are no imminent signs of a slowdown in demand by American consumers judging by the number of goods-laden containers arriving at the Port of LA. This has further encouraged the Fed on an aggressive policy tightening spree to quell the hottest inflation in four decades. Despite Fed Chair Jerome Powell’s hawkish remarks on Tuesday, which cited the U.S. central bank would keep raising interest rates until there is clear and convincing evidence that inflation is in retreat despite near-term pains, stocks pared some of its losses in the latest weeks-long selling streak. However, we expect further volatility ahead as investors digest the still-fluid situation pertaining to supply chain disruptions associated with the war in Ukraine and COVID lockdowns in China will probably keep upward pressure on prices in the coming months
- Macro – Benchmark Treasury yield increased to 2.97% as selling pressure rose on the Fed’s remarks that it will not hesitate to tighten policy beyond neutral to curb inflation. Elsewhere, oil traded at $113 a barrel, a slight drop from the previous day as the Biden administration contemplates removing sanctions on Venezuelan oil for European operators to alleviate the supply risks stemming from Russia’s invasion of Ukraine and ensuing sanctions.