Mexico trounces China to become America's sweetheart

Thu, 13th Jul 2023 18:53

U.S. indexes rally: Nasdaq out front, up >1%

Comm Svcs leads sector gains; energy weakest group

Dollar down; gold edges up, crude advance; bitcoin rises <2%

U.S. 10-Year Treasury yield slides to ~3.78%

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MEXICO TROUNCES CHINA TO BECOME AMERICA'S SWEETHEART (1335 EDT/1735 GMT)

Mexico became the U.S.' top trading partner at the beginning of 2023, replacing China amid rising tensions between Beijing and Washington and Mexico's manufacturing push.

The bilateral trade between Mexico and the U.S. totaled $263 billion during the first four months of this year, said Luis Torres, a senior business economist in the San Antonio Branch of the Federal Reserve Bank of Dallas, in a note.

During the first four months of 2023, Mexico accounted for 15.4 percent of all goods imported and exported from the U.S., followed Canada at 15.2% and China at 12.0%, according to the note.

"Mexico's gains mirror its rise in manufacturing, a key component of goods moving between it and the U.S," Torres said.

Escalating trade tensions between U.S. and China, the world's biggest economies, have also helped Mexico's ascent.

"Today's global economic relationships encompass a myriad of concerns, among them national security, climate policy and supply-chain resiliency," he added.

"To the extent that frictions with China account for Mexico's ascension in the trade rankings, the higher profile comes at a cost to U.S. firms and consumers through higher input and purchase prices."

U.S. Treasury Secretary Janet Yellen's recent trip to China has raised hopes in Beijing that Trump-era tariffs on Chinese imports may be eased as she tries to smooth relations between the two nations, but strong anti-China sentiment in the U.S. may make that impossible.

STOCKS CAN KEEP RUNNING THANKS TO SOLID MOMENTUM, RESILIENT ECONOMY -CARSON GROUP (1332 EDT/1732 GMT)

On the heels of one of the worst years ever last year, stocks have staged a very impressive rebound so far in 2023. The S&P 500 index now stands around 4,500, which puts it up just over 17% year-to-date.

On Wednesday, a team of analysts at The Carson Group upgraded their return expectation for stocks from 12-15% to 21-25% for 2023, on the back of solid momentum and the resilient U.S. economy. (If the SPX were to reach this return zone, it would be in the 4,645-4,800 area).

Looking ahead, The Carson Group, which did not expect a recession this year and remains in that camp, says that the headwinds from last year are fading as the economy normalizes. At the same time, they say their consumer indicators have only gotten stronger over the first half of 2023.

According to the analysts, the main risk of a recession last year was due to the Fed raising rates as fast as it did, which adversely impacted housing, financial markets and business activity.

However, as the analysts now see it, the good news is that these sectors are improving, and the drag from financial conditions is beginning to ease as the Fed gets closer to the end of rate hikes and markets rally.

"We see the potential for stocks to continue to outperform bonds and potentially make new all-time highs with more good news," writes The Carson Group team.

With this, they say that small caps and cyclical value should take the baton from tech and communications, as a broadening out of overall leadership develops.

The Carson Group says bonds still make sense in a portfolio, but they remain underweight fixed income, as sticky rates and likely better performance from stocks will continue.

(Terence Gabriel)

THE COST OF A HOLLYWOOD STRIKE (1258 EDT/1658 GMT)

It might be hard to gauge the financial impact of the Hollywood strike that is rocking the U.S. entertainment business currently. But if history is any guide, we might be looking at close to a $150 million per week hit to the TV and film businesses.

Citi analysts pointed to a 1980 Billboard article that pegged the financial cost of the 1980 strike at $40 million per week. Adjusting for inflation, the figure suggests the current strike could cost about $150 million a week.

"If accurate, this suggests the impact should be manageable if it does not extend into 2024 (or beyond)," said Citi analyst Jason Bazinet.

"We expect a resolution in 4Q23. That would mean this strike would be longer than average but would not be debilitating to the industry's financials."

Thousands of film and television writers have been on strike since early May after failing to reach an agreement for higher pay from studios such as Walt Disney Co and Netflix Inc .

Negotiators for Hollywood's actors union unanimously recommended a strike on Thursday after talks with studios broke down. If approved, Hollywood studios would face their first dual work stoppage in 63 years and be forced to shut down productions across the United States.

Shares of entertainment firms Netflix, Walt Disney, Warner Bros Discovery and Comcast came under pressure on Thursday.

The last time when actors went on strike in 1980, the box office results were robust that year, as per the Citi note, but saw a sharp decline in 1981 with much of the hit coming from a tepid slate of movies rather than the actor's strike.

(Sruthi Shankar)

CHIP INDEX REACHES 18-MONTH HIGH; NVIDIA HITS RECORD (1220 EDT/1620 GMT)

U.S. chip stocks are rallying on Thursday, with Nvidia jumping to a record high and Wall Street's semiconductor index touching its highest level in 18 months.

Graphics processor designer Nvidia is up 2% to $447.87, bringing its AI-fueled rally so far in 2023 to 206%.

Even after tripling its market capitalization this year to $1.1 trillion, Nvidia is trading at just 48 times expected earnings, down from over 60x in May before the company drastically raised its outlook on demand for its AI components. That lower PE is a result of analysts increasing their estimates for Nvidia even more than the stock has increased.

The Philadelphia semiconductor index is jumping 1.2%, touching its highest level since January 2022. The SOX has now recovered over 70% from its closing low in October 2022, and it remains down just 7% from its record closing high in December 2021.

Like other growth stocks, chipmakers have been lifted in recent months by optimism the Federal Reserve is nearing the end of its campaign of aggressive interest rate hikes.

Adding to bets that the end of rate hikes is nearing, data on Thursday showed U.S. producer prices barely rose in June.

While Nvidia was the strongest driver in the SOX's gain on Thursday, Marvell Technology, ASML Holding and Applied Materials are each jumping about 4%, also helping to lift the index.

(Noel Randewich)

THE FED'S GONNA FED: PPI COOLS, CLAIMS DIP, BUT HIKE STILL ON DECK (1105 EDT/1505 GMT)

Labor Department data on Thursday played a variation on a familiar theme - the labor market remains tight while inflation is cooling.

Kicking things off, the Producer Price index (PPI) cooperated nicely by delivering June numbers that landed below expectations across the board.

The final demand index, which measures the prices U.S. companies get for their goods and services from consumers at the figurative factory door, increased by 0.1% on both monthly and annual bases.

Without food and energy items, final demand actually decreased by 0.2%. But a 0.2% rise in services helped keep the topline number above zero.

Core PPI, which excludes food, energy and trade services, increased by 0.1% from May and 2.6% year-on-year, inching closer the Fed's average annual 2% inflation target.

The data "foreshadows a slowdown in both economic activity and a further deceleration in consumer prices throughout the balance of 2023," says Jeffrey Roach, chief economist at LPL Financial. "This is another positive report for investors desperate to see inflation dissipate."

Looking at intermediate PPI - which tracks business-to-business prices - unprocessed goods dropped 2.1% from May while services were unchanged. Stripping out food and energy, intermediate demand slid 2.4% last month.

Despite the cooling, Powell & Co remain on track to raise the Fed funds target rate by another 25 basis points at the conclusion of this month's policy meeting, with financial markets pricing in a 92.4% chance of that very thing, according to CME's FedWatch tool.

But a growing chorus of analysts think they shouldn't.

"The message from the data is obvious: The Fed does not need to hike further," writes Ian Shepherdson, chief economist at Pantheon Macroeconomics. "They will, later this month, but it will be the last hike, and it will be a mistake."

Here's a look at core PPI along with other indicators and the distance they have to travel before reaching the central bank's 2% inflation target:

Separately, the number of U.S. workers filling out first-time applications for unemployment checks unexpectedly fell by 4.8% last week to 237,000, or 13,000 south of consensus.

The overall trend has turned downward, with the four-week moving average of initial claims edging 2.7% lower, suggesting the possibility that the recent surge in planned layoffs, as reported by Challenger Gray - and which already appear to be on the wane - might not show up in the claims data, as widely expected.

While as a general rule it's rude to rejoice at longer lines outside the unemployment office, the shorter lines are evidence that the labor market remains tight, which will likely keep upward pressure on wage growth, which - as seen in the graphic above - remains the stickiest of major inflation indicators.

But many are still watching for an expected storm surge.

"We expect that jobless claims will rise steadily later in the year as the economy falls into a recession," says Nancy Vanden Houten, lead U.S. economist at Oxford Economics. "However, given our forecast for the recession to be mild, along with the difficulties employers have faced hiring workers following the pandemic, job losses in this recession will be modest compared to prior recessions."

However, ongoing claims, reported on a one-week lag, actually inched 0.6% higher to 1.73 million as it continues to hover just above the pre-pandemic "normal," hinting at the possibility that it's taking jobless Americans a tad longer to land fresh gigs. Interest rate sensitive momentum megacaps were leading the three major U.S. stock indexes higher, putting the Nasdaq out front and setting all three on course for their fourth straight session in the green.

GOOD TIMES FOR OIL WILL COME BACK SOON - BMO (1016 EDT/1416 GMT)

Recession fears continue to disturb investors' sleep as the macro scenario remains uncertain, with crude oil prices remaining weak in the first half of the year.

But BMO Capital Markets believes the supply-demand balance could begin to tighten in the fall as the growth in demand will finally outpace the one in supply, leading to a decline in oil inventories.

As a result, rising commodity prices should increase traders' appetite for energy equities in the last quarter and into 2024, after they underperformed the market so far this year, the broker notes.

Its top recommendations include Canadian Natural Resources , ConocoPhillips, Imperial Oil, Pioneer Natural Resources and PrairieSky.

The Organization of the Petroleum Exporting Countries (OPEC) raised on Thursday its 2023 demand growth forecast by 90,000 barrels per day from last month.

On a longer-term perspective, it also expects that "solid global economic growth amid continued improvements in China will boost consumption of oil" in 2024.

Despite an optimistic stance, concerns on a slowdown do not disappear overnight.

BMO points out that recent indicators such as the difference between 10-year and 3-month U.S. Treasury rate continue to suggest that a recession in the U.S. over the next 12 months is still possible, weighing on crude oil for the next several months.

Oil prices were higher on Thursday after the latest U.S. inflation data raised expectations the Federal Reserve was nearing the end of its rate hike cycle, which has softened the dollar.

U.S. STOCK FUTURES HOLD GAINS AFTER PPI, CLAIMS DATA (0845 EDT/1245 GMT)

U.S. equity index futures are holding gains in the wake of the release of the latest data on U.S. inflation, and jobless claims.

The June headline PPI month-over-month and year-over-year prints came in cooler than expected. Ex-food/energy month-over-month and year-over-year readings were also below estimates.

Initial jobless claims were fewer than expected:

According to the CME's FedWatch Tool, the probability that the Fed increases interest rates by 25 basis points at its July 25-26 meeting has not been impacted. It is now around 92% from 92% just prior to the data coming out. The chance that the Fed sits on its hands and leaves rates unchanged is now 8% from 8% just before the numbers were released.

In any event, in the wake of an expected 25bps hike later this month, the FedWatch Tool suggests the FOMC will then leave rates unchanged through year-end.

E-mini S&P 500 futures are gaining around 0.40%. The futures were up around 0.35% just before the numbers came out.

All S&P 500 sector SPDR ETFs are higher in premarket trade, with communication services, up around 0.8%, posting the biggest rise.

The SPDR S&P regional banking ETF is gaining around 0.7%.

In a note earlier on Thursday, Art Hogan, chief market strategist at B Riley Wealth wrote:

"U.S. stocks have defied skeptics and rallied this year in the face of bank collapses, constant fears of a recession, and what’s expected to be a slowdown in corporate profits. For our part, we assume that inflation will look better in the second half."

Hogan added "Core PCE [personal consumption expenditures], the inflation measure the Fed looks at, could be 3% or a bit lower by the end of the year, which suggests that the Fed will need to be less aggressive. We see markets settling into a grind higher."

Here is a premarket snapshot around 15 minutes after the data came out:

(Terence Gabriel)

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)