Morning Reads
- Now They’re Thinking Twice.
- Semiconductor Subsidies, Tariffs Are the Price of Reducing Dependence on China
- Jack Ma Plans to Cede Control of Ant Group
- Climate Change Is Probably a Drag on Growth, but It’s Unclear How Much
- The Strong Dollar Is Wreaking Havoc Globally — And It’s Just Getting Started
- Fed Fights Inflation With Another Big Rate Increase
- Fed Watchers Say Markets Got It All Wrong on Powell ‘Pivot’
- Inventory Swing Is a Key Culprit Behind U.S. Recession Talk
- JetBlue Agrees to Buy Spirit Airlines for $3.8 Billion
- Boeing Profit Falls as Executives Point to Turnaround
- F.T.C. Sues to Block Meta’s Virtual Reality Deal as It Confronts Big Tech
- Facebook Parent Meta Platforms Reports First Ever Revenue Drop
- Shell Smashes Record Again With $11.5 Billion Profit
- Ford CEO Farley Says Automaker ‘Absolutely Has Too Many People’
- Ford Wants Cops to Go Electric By Buying Its New F-150 Pickup Truck
- Comcast Fails to Add Broadband Subscribers
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Get ready for a contentious GDP readout that will be the talk of the markets for the rest of the day (and the coming sessions and weeks ahead). The first estimate of gross domestic product for the second-quarter will be reported at 8:30 a.m. ET, with most forecasts ranging anywhere from a 1% increase to a 1% decline. The stakes couldn't be higher as annualized growth in Q1 contracted 1.6%, meaning if the U.S. sees another quarter of negative growth it could already be in a recession. Or is it?
Snapshot: "Recession" has become a charged term in recent weeks, with the phrase being traditionally identified as two consecutive quarters of negative economic growth. While that may be a technical definition (and the one that's possibly more important to the markets), the official pronouncement boils down to a team of eight economists chosen by the National Bureau of Economic Research. Called the "Business Cycle Dating Committee," the group has been responsible for identifying recessions, and has set the dates of peaks and troughs of the U.S. economy since 1978.
The funny thing is, that the committee generally waits a while after a recession has begun to officially pronounce it, and on occasion, even after it is already over. In the meantime, inflation is running at more than four times the Fed's 2% target, while many companies have already frozen hiring and higher borrowing costs are expected to slow investment. Industrial production additionally fell in June, while personal consumption data has triggered a whole host of gloomy forecasts.
Interesting times: Since the end of WWII, a recession has never been declared without a loss of employment (hundreds of thousands of jobs in the U.S. are currently being added every month, while the unemployment rate has fallen to 3.6%, from 4% in January). That has some economists warning of a milder "growth recession," though the market may be fearful of something bigger. The widely followed 2y10y Treasury yield curve has remained inverted since early July, while the benchmark S&P 500 continues to weave in and out of bear market territory. (6 comments)
In a similar vein to the GDP drama, economists are still haggling over whether the Fed appeared "dovish" or "hawkish" during yesterday's meeting. The central bank raised the federal funds rate by three quarters of a percentage point for the second month in a row - to a range of 2.25% to 2.5% - but Jay Powell's vision of an end to the current rate-hiking cycle excited investors and triggered an equity rally during the session. According to the Fed, rates are now "right in the range" of "neutral" (i.e. an interest rate that neither hinders nor fuels economic growth), while Power expressed further doubt that the U.S. was in a recession - given the low unemployment rate and solid job gains.
Mixed messaging: "These rate hikes have been large and they have come quickly, and it's likely that their full effect has not been felt by the economy. So there's probably some additional significant tightening in the pipeline... As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how are our accumulative policy adjustments are affecting the economy and inflation."
"We do see there are two-sided risks: There would be the risk of doing too much - imposing more of a downturn on the economy than was necessary, but the risk of doing too little and leaving the economy with this entrenched inflation - it only raises the costs of dealing with it later to the extent that people start to see it as part of their economic lives on a sustained basis. I don't think that's happened yet, but when that starts to happen, it just gets that much harder and the pain will be that much greater... Restoring price stability is just something we have got to do. There isn't an option to fail."
Outlook: Over the past few press conferences, Powell was clearer than usual about telegraphing what lay ahead at coming gatherings, though this time around, things were less specific. "While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then," he said on Wednesday. "It's time to just go to a meeting-by-meeting basis and to not provide the kind of clear guidance that we had provided." That could make things more opaque going into the second half of 2022, though it's not as extreme as the ECB, which last week scrapped forward guidance "of any kind." (6 comments)
Shares of Meta Platforms (META) fell about 5% AH during a Q2 earnings call on Wednesday as CEO Mark Zuckerberg took the mic. It came after the Facebook-parent posted its first decline in revenue as a public company, on the heels of its first-ever decline in users just three months ago. A full-year forecast also showed that current-quarter revenues would fall somewhere from 6%-14% short of expectations as marketing departments shrink their budgets and Apple's (AAPL) privacy rules make ads less effective.
Quote: "Engagement trends on Facebook have generally been stronger than we anticipated and strong real growth is continuing to drive engagement across Facebook and Instagram," Zuckerberg declared. "That said, we seem to have entered an economic downturn that will have a broad impact on the digital advertising business. And it's always hard to predict how deep or how long these cycles will be, but I'd say that the situation seems worse than it did a quarter ago."
As a result, the company may look to speed up its transition to the metaverse, with sales and marketing costs climbing 10% Y/Y to $3.6B in Q2. Revenue at Meta's Reality Labs division rose 48% to $452M during the quarter, but it recorded a loss of $2.8B (and is expected to generate less revenue in Q3). The company also announced some executive news, saying current CFO David Wehner will become the company's first chief strategy officer - overseeing strategy and corporate development - while Susan Li will be promoted to chief financial officer.
Earnings season: The last Thursday of July is always the busiest date on the earnings calendar and today is no different. A total of 55 constituents of S&P 500 - with a combined market value of $6.8T - are scheduled to post Q2 results. Big Tech will be primarily in the spotlight with highly-anticipated results from Amazon (AMZN) and Apple. (34 comments)
Speaking of a recession, Russia keeps cutting back on its gas supplies to Europe, raising overall economic risks for the continent. The key Nord Stream 1 pipeline is now pumping at only 20% of capacity, according to Gazprom (OTCPK:OGZPY), which cited maintenance problems and turbine issues that haven't been resolved. The latest announcement will make it harder and costlier for the bloc to fill up storage ahead of the winter, and saw Dutch TTF natural gas futures, a European benchmark, jump as much as 12% to €179/MWhr on Wednesday.
Bigger picture: While Moscow has blamed the supply cuts on servicing delays and sanctions, the EU has accused the Kremlin of energy blackmail and is hastily making backup plans. Each European government is trying to source as much alternative fuel supplies as they can, while working together on a strategy to reduce gas consumption by 15%. The joint proposal opens the door for rationing across the bloc, forcing heavy industry and factories to shut down for certain periods of time. Households and essential services, like hospitals and schools, will remain protected unless the crisis takes a turn for the worse, but targets could become mandatory in case of an emergency.
"Russia is playing a strategic game here," declared Simone Tagliapietra, senior fellow at economic think tank Bruegel. "Fluctuating already low flows is better than a full cutoff as it manipulates the market and optimizes geopolitical impact."
Go deeper: The EU's conservation measures may not be enough if Russia completely cuts off the flows. Europe has made itself super dependent on Russian energy in recent years, building out its natural gas pipeline network to Moscow instead of diversifying via LNG import terminals or beefing up sources like nuclear and coal. The eurozone will also release its latest GDP print tomorrow, which is expected to show that growth is stagnating, while casting a shadow on the second half of the 2022.
Today's Markets
In Asia, Japan +0.4%. Hong Kong -0.2%. China +0.2%. India +1.9%.
In Europe, at midday, London -0.1%. Paris flat. Frankfurt -0.1%.
Futures at 6:20, Dow -0.2%. S&P -0.3%. Nasdaq -0.6%. Crude +2.1% to $99.34. Gold +2.2% to $1756.30. Bitcoin +8.1% to $23,048.
Ten-year Treasury Yield +6 bps to 2.79%
Today's Economic Calendar
8:30 GDP Q2
8:30 Initial Jobless Claims
10:30 EIA Natural Gas Inventory
11:00 Kansas City Fed Mfg Survey
1:00 PM Results of $38B, 7-Year Note Auction
4:30 PM Fed Balance Sheet