Private Wealth

Weekly Research Briefing: Summertime Sadness

August 30, 2022
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Time for that official last ride, wave, hike, and drink of summer. While the loss of extra down time is a bit of a letdown, leaving these 90-degree temperatures is something to look forward to. With the right bookend to summer hitting this weekend, expect this to be a very slow week of news and work in the financial markets (apologies to those who must work Friday's jobs numbers). While you clean out the beach house and pack up the wagon, know that a very big September lies ahead. The conference calendars are again full, and investors will be on edge looking for that next earnings pre-announcement or insight into their public and private investments.

Jerome Powell took the mic from Lana del Rey on Friday. While we all knew the lyrics to his song, the delivery left some investors in tears and sent growth stock investors jumping headfirst into Lake Jackson. We wanted a hawkish statement and MC Powell and his band delivered. But maybe the forcefulness of the message and his inclusion of the word 'pain' was just too much for some investors looking at two month 15-20% gains off the recent lows. Or maybe the buyers were all on vacation on Friday while the sellers ran the trading desks. Who knows? The market is a funny beast. But the message was spot on to both take on inflation and to turn the screws on the economy if that is what it takes. Meanwhile, economic data continued to soften in housing, purchasing manager surveys and even in some big corporate earnings. Prices continued to moderate as did inflation expectations as surveyed by the University of Michigan. The bond market kept its head last week, with the yield on the 2-year Treasury rising to 3.4% and the market still undecided on a 50 or 75 basis point hike at the September Fed meeting. Longer term, the market is now believing that the FOMC will lift the Fed Funds rate 150 basis points through year end and then just let it sit at 3.75% through next summer. Of course, everything is data dependent and this Friday's jobs data will be a big read until we get the next CPI figures on September 13.

Have a great long weekend. Queue up the Don Henley. Travel safe back to wherever you are headed.


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U.S. Federal Reserve Chair Jerome Powell speaking at 6,200 feet somehow sounds different to equity investors...

"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance."

"While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers. Inflation is running well above 2 percent, and high inflation has continued to spread through the economy."

"While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down."

"While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

@TheTranscript_


As Goldman Sachs noted, just not much different tone from the July Fed minutes that came out two weeks ago...

First, he repeated that 75bp hikes are “unusually large.”
Second, he noted that the growth data has “clearly slowed.”
Third, he repeated that the FOMC aims to rebalance supply and demand through below-potential growth, not a recession.
Fourth, he replaced “expeditiously” with “purposefully” when characterizing the pace of tightening.

Goldman Sachs


The market now expects 150 bps of rate hikes through year end and then no changes higher or lower through next summer...

CME Group


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The story is the same overseas...

"The story is pretty clear. Inflation is much too high. And so the answer in a situation like this is also obvious. This is what central banks have to do in a situation like that. We have to raise rates" - German Bundesbank Governor Jens Weidmann

"Central banks must act decisively to bring inflation back to target and anchor inflation expectations...the pandemic and war suggest that temporary supply shocks may have broader and more persistent effects on inflation when an economy is very strong, or the shocks are very large. Under such conditions, central banks may need to react more aggressively to control inflation" - International Monetary Fund Deputy Managing Director Gita Gopinath

“In this environment, central banks need to act forcefully. They need to lean with determination against the risk of people starting to doubt the long-term stability of our fiat currencies -- In other words, central banks are likely to face a higher sacrifice ratio compared with the 1980s, even if prices were to respond more strongly to changes in domestic economic conditions, as the globalization of inflation makes it more difficult for central banks to control price pressures" - ECB Board Member Isabel Schnabel

@TheTranscript_


Euro bond markets are also pricing in solid hikes in their ECB rate for year-end...

The Daily Shot


All this work to get inflation to cool which looks to be in the cards...

Global inflation is finally coming off the boil, even if it’s set to remain far too hot for the liking of the world’s central bankers.

As economic growth slows, prices for key raw materials — from oil to copper and wheat — have cooled in recent weeks, taking pressure off the cost of manufactured goods and food. And it’s getting cheaper to move those things around, as supply chains slowly recover from the pandemic.

After the worst price shock in decades, the speed at which relief arrives will vary, with Europe in particular still struggling. But for the world as a whole, analysts at JPMorgan Chase & Co. estimate that consumer-price inflation will fall to 5.1% in the second half of this year — roughly half of what it was in the six months through June.

“The inflation fever is breaking,” says Bruce Kasman, the bank’s chief economist.

Bloomberg


Even shipping prices have returned to normal...

@LizAnnSonders: Baltic Exchange Dry Index continues to collapse and is now back to summer 2020 levels


Prices paid are falling as reported by all Fed districts...


And consumers continue to reel in their inflation expectations...

The Daily Shot


The financial markets are also reeling in their inflation outlook pretty significantly...

@C_Barraud: On Friday, 1-year #inflation breakeven hit 2.45% (lowest since Sep. 2021) - Bloomberg data


The 2-year Treasury yield is a 10+ bagger in less than 12 months...

TINA no more! But is cash still trash in a real return world with current inflation running in the high single digits?


U.S. refinancing index just hit a 22-year low...

I am guessing it could remain at these levels for a very long time because few homeowners are going to want to trade in a mortgage with a two handle on it.

@C_Barraud


If homeowners fall in love with their 2-3% mortgage interest rates, investment in existing homes could surge...

"We are operating in a unique environment with many crosscurrents, inflation and interest rates, and supply chain disruptions and the like. But given all that, our customer in our markets has been incredibly resilient. As Jeff said, project demand is incredibly strong." - Home Depot CEO Edward Decker

@TheTranscript_


Speaking of: Last week's New Home Sales missed significantly and have now fallen to six-year lows...

Best Year for Commodities

@charliebilello


As new home sales fall and inventory rises, months of supply moves toward record territory...

Best Year for Commodities

@EPBResearch


And as finished new homes go unsold, the value of lot prices falls...

@johnburnsjbrec: Say goodbye to land price appreciation. Land prices have stopped rising for the first time since the pandemic started.

Best Year for Commodities

Not only housing, but the U.S. PMI fell to a 27-month low in August...

"US private sector firms signaled a sharper fall in business activity...The headline Flash US PMI Composite Output Index registered 45.0 in Aug, down from 47.7 in July & indicated a 2nd successive monthly decrease in total business activity" (S&P Global)

Best Year for Commodities

S&P Global


Big software technology is also feeling the slowdown...

“Now for those of you who have been on these calls with us, we've all been through a number of these economic cycles. And we've especially seen that over our last 23 years. And once like this come around, we see customers becoming more measured in the way they buy. Sales cycles can get stretched. Deals are inspected by higher levels of management, and all of this, we began to start to see in July. Nearly everyone I've talked to is taking a more measured approach to their business” - Salesforce Co-CEO Marc Benioff

@TheTranscript_


This was a very interesting deal that Intel struck last week...

Using another's capital to grow your business. Hmmm. I am intrigued.

Intel Corp. has struck an unusual $30 billion funding partnership with Brookfield Asset Management Inc. to help finance its factory-expansion ambitions, signaling some big investors are upbeat about the long-term demand for semiconductors.

The agreement with the publicly traded Canadian asset-management firm is the first of what could be a series of such arrangements Intel pursues to underpin Chief Executive Pat Gelsinger’s push to make the company a leading contract chip maker and regain its manufacturing advantage over competitors in Taiwan and South Korea.

Under the deal, which company executives described as a first of its kind for the industry, Intel would fund 51% of the cost of building new chip-making facilities in Chandler, Ariz., and will have a controlling stake in the financing vehicle that would own the new factories, Intel Chief Financial Officer David Zinsner said. Brookfield will own the remainder of the equity and the companies will split the revenue that comes out of the factories, he added.

Scott Peak, a managing partner in Brookfield’s infrastructure group, said such deals are common in industries including energy and telecommunications and are now trickling into the chip business because of its growing capital needs. Brookfield, which has more than $750 billion in assets under management, sees the Intel deal as a good fit with the company’s experience in large and complex deals, he said.

S&P 500

WSJ


Nuclear energy U-turns: First Germany and now Japan...

Nuclear is clean, green and not Russia dependent. Do more of this.

Prime Minister Fumio Kishida has moved to restore Japan’s status as a nuclear-powered nation for the first time since the 2011 Fukushima crisis, accelerating the restart of reactors and signalling the construction of new plants.

Kishida’s decision to throw his political weight behind the nuclear power sector is intended to rein in soaring energy costs for households and companies and to support Japan’s nuclear technology manufacturers.

“As a result of Russia’s invasion of Ukraine, the global energy situation has drastically changed,” Kishida said on Wednesday.

“Whatever happens globally, we need to prepare every possible measure in advance to minimise the impact on people’s lives,” he said, adding that the government would aim to come up with concrete plans for the nuclear sector by the end of the year.

The plan to research the construction of new nuclear reactors, which experts say could be safer than those using existing technologies, marks a U-turn in government policy since the Fukushima crisis.

Financial Times


Five 1 in 1,000 events in the same two weeks...

Insurance companies had better re-run their models. Or begin buying disaster recovery companies.

In the last five weeks, five areas across the United States have all experienced what should have been very unlikely -- if not impossible -- one in 1,000-year flooding events.

The most recent historic flooding event occurred in Dallas on Monday, Aug. 22, where 8 to 16 inches of rain fell over a 24-hour stretch. The heavy rain flooded buildings, submerged cars on interstates and also caused the Trinity River to swell well beyond its normal water line. All of this resulted in billions of dollars worth of damage, according to an AccuWeather estimate.

AccuWeather Founder and CEO Dr. Joel N. Myers, who has for decades closely studied the economic impacts of extreme weather, estimated that the total damage and economic loss resulting from the catastrophic flash flooding would range between $4.5 billion and $6 billion.

This flooding occurred after a 67-day dry streak in the city, and according to Allen Li, a researcher at the University of Oklahoma, this weather whiplash is not only more common due to climate change but could happen again, even multiple times over the next 1,000 years.

S&P 500

Accuweather



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5The 2021 capital committed includes all primary commitments that closed during the year 2021 for which Hamilton Lane retains which Hamilton Lane performed due diligence and made an investment recommendation. Direct Investments includes all discretion closed during 2021. Secondaries includes all discretionary and nondiscretionary advisory secondary investments with a signing a signing date during 2021.

The author has current equity ownership in: Home Depot Inc.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

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