All three major stock market averages notched their second straight winning week, with energy topping Friday’s sector leaderboard as crude oil advanced to nearly $120 per barrel following drone attacks on a Saudi Arabian fuel depot. The sector helped the S&P 500 to a 0.5% gain on Friday and a 1.8% rise for the week, while the tech-heavy Nasdaq fell slightly on Friday but led the major indexes for the week with a 2% rally and the Dow Jones ticked up 0.3%. The stock market’s rebound has come even as the war in Ukraine continues with little sign of being resolved shortly and with interest rates shooting higher as the Federal Reserve stays on track to raise rates throughout the year. Two-year Treasury yields surged 15 basis points and the 10-year yield added 12 basis points on the week.
Shares of Nike (NKE) rose 5.5% in after-hours trading on Monday as the sneaker giant posted a set of impressive results. Revenues climbed 5% Y/Y to $10.9B during the holiday quarter (beating estimates of $10.6B), while adjusted EPS came in at $0.87 (topping expectations of $0.72). In terms of guidance, the company anticipates revenue for FY22 to grow mid-single digits versus the prior year, though specifics will be provided next quarter given “several new dynamics creating higher levels of volatility.”
By the numbers: A drop in revenue in Greater China (-5%) was more than offset by gains in Asia Pacific & Latin America (+11%), North America (+9%) and Europe, Middle East, & Africa (+7%). Footwear sales were up 2% to $6.7B, while apparel sales rose 9% to $3.2B. Nike Direct sales rose 15% during the quarter to $4.6B and were up 17% on a currency-neutral basis.
“Fueled by deep consumer connections, compelling product innovation and an expanding digital advantage, we have the right playbook to navigate volatility and create value through our relentless drive to serve the future of sport,” said CEO John Donahoe.
Growth potential: Given the strong results, Nike was quick to flag that its direct-to-consumer model was working. The strategy was rolled out in 2017, but recently saw Nike even move away from Foot Locker (FL) and DSW (DBI) in favor of its own apps, websites and stores. “Marketplace demand continues to significantly exceed available inventory supply, with a healthy pull market across our geographies,” added CFO Matt Friend, in a statement that was noted by investors. (34 comments)
Powell gets aggressive
A bond selloff deepened this week after comments from Jerome Powell, which said the Fed is prepared to act even more aggressively to tackle inflation. The yield on the 10-year Treasury soared 20 basis points to 2.32% on Monday, and have climbed even further since then. Meanwhile, the 2-year Treasury yield broke above the 2% level to reach 2.19%, as the yield curve hurtles towards an inversion (or one of the best indicators of a coming recession).
Quote: “If we determine that we need to tighten beyond common measures of neutral (i.e. an interest rate that neither hinders nor fuels economic growth) and into a more restrictive stance, we will do that,” Jerome Powell announced during a speech at the National Association for Business Economics. He even went as far to say that the central bank is prepared to raise interest rates by 50 basis points at the next policy meeting. Consumer prices took a turn for the worse in February as CPI growth rose by 7.9%, representing the largest 12-month increase since January 1982.
What happened to transitory? “In my view, an important part of the explanation is that forecasters widely underestimated the severity and persistence of supply-side frictions, which, when combined with strong demand, especially for durable goods, produced surprisingly high inflation,” Powell declared at the conference. However, he’s somewhat optimistic that central bankers will be able to engineer a so-called soft landing, in which the rate is raised high enough to keep the economy from overheating but not so much that it triggers a recession. “While some have argued that history stacks the odds against achieving” this, there are three episodes – in 1965, 1984, and 1994 – where the Fed “significantly” raised rates without a downturn. “I hasten to add that no one expects that bringing about a soft landing will be straightforward in the current context – very little is straightforward in the current context.”
Analyst commentary: “Investors are taking Powell’s transparency as a step further to say ‘he’s just preparing us for the worst,’ whereas, the bond market is saying, ‘no, no, he’s telling you he’s going to do at least seven [rate hikes], and you aren’t listening,'” said Shannon Saccocia, chief investment officer at Boston Private. “For the long term, 2.3% on the 10-year is not such a high figure at all,” added Linda Duessel, senior equity strategist at Federated Hermes. “What spooks the market is when you have very quick moves, such as what we’re having now.” (56 comments)
Gas tax holiday
With gas prices soaring nationwide, Maryland and Georgia became the first states in the country to temporarily suspend their gas taxes. The measure in Maryland will be in effect for 30 days, saving drivers 36.1 cents per gallon on gas, or 36.85 cents per gallon on diesel fuel. Georgia’s suspension will last through May 31, suspending levies of 29.1 cents per gallon on gas, and 32.6 cents per gallon of diesel.
Bigger picture: A dozen other states are considering similar measures, with Connecticut signing its own gas tax holiday later in the week. There are also several proposals on Capitol Hill to suspend the federal gas tax, which is 18.4 cents per gallon, though such a move would be unprecedented. There has never been a federal gas tax holiday in the history of the U.S., while past breaks on state gas taxes have mostly been limited to a few days.
Over in Maryland, the gas tax holiday will save the average consumer around $15 over the course of the month, but it will end up costing the state over $100M in revenue. While the measure is overwhelmingly popular, some warn it could eventually add to the tab of the taxpayer down the road, hurting budgets and infrastructure spending. “Producers are going to be the ones to really get the benefit of that tax decrease,” added Kent Smetters, a former economist at the Congressional Budget Office. “They’re the ones with the power here.”
Other ideas: The White House has reportedly dropped a proposal to send out pre-paid gas cards, given strong opposition in Congress over the plan’s viability and effectiveness. Delivering the cards could also distract the IRS in the middle of the tax filing season. Regular gasoline now averages $4.24 per gallon, according to AAA, down about 3 cents from a week earlier, but up from $2.87 one year ago. (126 comments)
In a move that has the potential to be one of the most symbolic in its history, Uber (UBER) will soon begin listing all New York City taxis on its app as a ride-hailing option for its customers. The partnership marks a form of peace between the nation’s largest, and most-famous taxi fleet, and the company that was set up to explicitly disrupt and change an industry that had operated virtually unchallenged for more than a century. The partnership could also help Uber overcome a driver shortage in its biggest U.S. market when it goes into effect later this spring.
Quote: “It’s bigger and bolder than anything we’ve done,” said Andrew Macdonald, SVP of Global Mobility.
All 14,000 of NYC’s iconic yellow cabs will integrate their technological system with Uber’s so that riders will be able to hail taxi rides as well through the Uber app. The company plans to make sure passengers are charged approximately the same rates for taxi bookings as they are for rides through the UberX ride-hailing option. With regards to how drivers are to be paid, a driver will see on their app how much they can expect to earn from the fare before they accept an Uber ride, giving them the ability to turn down a ride if they choose.
Market movement: Following the news on Thursday, Uber shares advanced 5%, while Medallion Financial (MFIN), which finances taxi medallions for drivers in New York and elsewhere, inched higher. (6 comments)
End of globalization
The economic globalization seen since the end of the Cold War is coming to a close, which relied heavily on the interconnectedness of national economies for cross-border movement of goods, services, technology, and capital. Protectionism and self-reliance have stepped in over the last few years, replacing free trade agreements and the promotion of economic liberalization. What started off as trade wars and increasing tariffs has morphed into an outright rejection of the complex multinational supply chain, with pandemic restrictions exacerbating supply shortages and now the war in Ukraine endangering food and energy security.
Economist Adam Posen, President of the Peterson Institute: “It now seems likely that the world economy really will split into blocs, each attempting to insulate itself from and then diminish the influence of the other. With less economic interconnectedness, the world will see lower trend growth and less innovation. Domestic incumbent companies and industries will have more power to demand special protections. Altogether, the real returns on investments made by households and corporations will go down.”
Atlanta Fed President Raphael Bostic: “The tragic war in eastern Europe will further momentum toward reorienting production and supply networks away from pure cost minimization and toward resilience and risk tolerance. Supply chain disruptions [also] caused by the coronavirus pandemic prompted business leaders to start diversifying supplier locations and firms, increasing inventories, and bringing production closer to final markets to maximize reliability. Think of it as a shift to just-in-case inventories from just-in-time.”
Oaktree Capital’s Howard Marks: “The availability of ever-cheaper goods like cars, appliances and furniture produced abroad was a major contributor to the benign U.S. inflation picture in this quarter-century. On the other hand, offshoring also led to the elimination of millions of U.S. jobs, the hollowing out of the manufacturing regions and middle class of our country, and most likely the weakening of private-sector labor unions. The recognition of these negative aspects of globalization has now caused the pendulum to swing back toward local sourcing. Rather than the cheapest, easiest and greenest sources, there’ll probably be more of a premium put on the safest and surest.”
BlackRock CEO Larry Fink: “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades. We had already seen connectivity between nations, companies and even people strained by two years of the pandemic. It has left many communities and people feeling isolated and looking inward. I believe this has exacerbated the polarization and extremist behavior we are seeing across society today.” (62 comments)