Dockworkers Make Some Waves

The clock struck midnight and, as expected, dockworkers at every major port along the U.S. Atlantic and Gulf coasts stopped working. There will be exceptions made for movement of military hardware and goods, as well as cruise ships. The International Longshoremen's Association is not only seeking a pay raise of $5 per hour per year for the next six years for its roughly 47,000 members, but probably more importantly, a pushback in the language of the just-expired, six-year contract regarding the eventual use of automated technologies at these ports that would likely reduce over time the need for human labor.

The work stoppage that stretches from the northeast to Texas, according to JP Morgan, will cost the U.S. economy between $3.8 billion and $4.5 billion per day. According to Grace Zwemmer of Oxford Economics, which I read about at Bloomberg's website, a backup from a one-week strike would take about a month to clear. On the bright side, energy shipments will be rerouted and will not be impacted. Auto shipments certainly will be hit.

Up to half, but probably more like 40%, of all U.S. trade may be halted or slowed down as nine of the 10 most active seaports in the U.S. are on either the Atlantic or Gulf coasts. On the Pacific coast, only Long Beach, California, at No. 5, makes the top 10. Houston is the most active port in the U.S., followed by Southern Louisiana, Corpus Christi and New York. Seven of the 10 most active ports in the U.S. are in either Texas or Louisiana. For those about to ask, the ILA has not endorsed a presidential candidate.

Have We Seen the Bottom for Inflation?

That depends on the length of this strike. Demand is way past peak, so there is no longer a certain level of pent-up post-pandemic, revenge type consumer activity. I think if this strike goes for more than a few days, we will at least see an increase in producer prices. I have expected consumer prices to start working their way higher as we head into late 2024 anyway.

On that matter, Chicago Fed Pres. Austan Goolsbee said: "Anything that's a negative supply shock, in our language, that's going to raise the cost of doing business and lead to shortages, is something that we're just going to have to deal with and the impacts are never good." 

Thank you, Captain Obvious.

That said, the Fed's half-percentage point rate cut, and potential for another half-point -- or three-quarter point -- worth of rate cuts this year certainly won't pressure consumer inflation. (Although there will as always be a lag in the impact of changes made to monetary policy.) Same goes for this dock strike. Should this strike stretch into a second week and beyond, I would think that consumers will start to feel something.

Boots on the Ground

Early on Tuesday morning, Israel launched a ground operation into southern Lebanon in a direct assault on the Iranian-backed terrorist group Hezbollah that the IDF is referring to as "targeted." Other than smaller-scale operations, this is Israel's first offensive into Lebanese territory since 2006.

On the U.S. side, the USS Abraham Lincoln Carrier Strike Group remains in or close to the Red Sea, while the USS Harry S. Truman Carrier Strike Group will move into the Mediterranean Sea. The Pentagon has also announced that a few thousand more troops will be deployed to the Middle East. These additional troops will be mostly made up of fighter jet squadrons.

On That Note: Boon for Boeing 

Monday was Boeing's BA day for defense contract awards. A day ago, in this column, we mentioned the large contracts awarded to Lockheed Martin LMT that also benefited RTX Corp RTX. On Monday, Boeing was awarded a ceiling (as much as) $6.9 billion in fixed price incentive, indefinite delivery / indefinite quantity contract for small diameter bombs. This contract includes foreign military sales to Japan, Bulgaria, and Ukraine. Work is expected to be completed by Dec. 31, 2035. (The contract is  "undefinitized," meaning aspects such as terms, specifications or price were not agreed on prior to the delivery.)

Boeing was also awarded a $1.677 billion modification to a previously awarded contract, providing for C-17 Globemaster III (transport / cargo) aircraft. This modification includes foreign military sales to Australia, Canada, India, Kuwait, Qatar, the UAE, and the UK. The work is expected to be completed by Oct. 31, 2027.

Lastly, Boeing was awarded a $600 million indefinite delivery / indefinite quantity contract for Joint Direct Attack Munition and Laser Joint Direct Attack Munition testing and integration services. This also involved foreign military sales to Israel, Singapore, Philippines, Indonesia and Turkey. The work is expected to be completed by Sept. 29, 2035.

It Wasn't Just Boeing...

Though Boeing led the league on Monday, Monday was bountiful for several defense contractors. Mind you, these are just some highlights. I left off every contract I saw that amounted to less than $200 million, and there were plenty of those.

• Lockheed Martin was awarded $2.112 billion for Trident II D5 missile production.

• Lockheed Martin was awarded a $1.169 billion contract to provide Trident missile fleet support.

• Lockheed Martin was awarded a $348 million contract to procure basic spares and spare parts to the F-135 Joint Strike Fighter program.

• Lockheed Martin was awarded a $245 million modification for the production support and spares to the MK Heavyweight Torpedo program.

• RTX (Pratt and Whitney) was awarded up to $1.31 billion to design, analyze, test and prep F-135 engine upgrades for the F-35 Joint Strike Fighter program.

• Northrop Grumman NOC was awarded a $387 million modification to provide continued research and development of the #-2D Advanced Hawkeye Cockpit redesign.

Marketplace

On Monday, U.S. Treasuries and equities sold off early in the afternoon in New York on some hawkish sounding words that came from Fed Chair Jerome Powell. Then, there was an unexpected (by me), algorithmic rush to get back into equities ahead of the closing bell. The yield for the U.S. Ten Year Note gave up three basis points on Monday to go out at 3.79%. Overnight, demand for U.S. Ten Year paper has taken that yield back down to 3.74%. The U.S. Two Year Note paid 3.64% by day's end on Monday, up a whopping eight basis points. That product has regained just two of those basis points overnight.

Powell was less giddy, less dovish than he had been a couple of weeks ago when unsuccessfully trying to explain a half-point rate cut, he explained that the economy was solid, and labor markets were still strong, but inflation had not yet been defeated. To regain some economic credibility, on Tuesday, Powell said: "If the economy evolves broadly as expected, policy will move over time toward a more neutral stance., but we are not on a preset course." Hmm, that doesn't sound like an additional half- to three-quarter points in 2024.

The final results across U.S. equities were muted, but on decent trading volume thanks to the afternoon churn. The S&P 500 tacked on 0.42%, while the Nasdaq 100 gained 0.26%, pressured by a Philadelphia Semiconductor Index that gave up 0.85%. The Russell 2000 gained 0.24%. Eight of the 11 S&P sector SPDR exchange-traded funds shaded into the green on Monday, but no fund among the 11 gained more than 0.86% or lost more than 0.56%. In a mildly unsettling end of day results, three of the four defensive sectors took spots among the top five slots of the day's performance table led by the Real Estate Investment Trusts XLRE. Materials XLB finished in last place for the day as the US Dollar Index strengthened on Powell's comments.

Breadth told no tales on Monday. Winners beat losers at the NYSE by a narrow 8 to 7 margin, while losers beat winners at the Nasdaq by just a smidgen. Advancing volume took just a 47.7% share of composite NYSE-listed trade where winners beat losers. However, advancing volume took a 54.1% share of composite Nasdaq-listed trade where losers beat winners. Trading volume was up in aggregate for names listed at both exchanges. Meaningful? Tie goes to the runner?

That's Not Good: Stellantis Slows Outlook

Automaker Stellantis STLA on Monday, reduced its financial outlook for 2024, citing North America has a problem as well as a global industrial downturn. The company now expects full year operating margin to land in between 5.5% and 7%, down from previous guidance of a "double-digit" operating margin. STLA was down 12.5% on Monday, followed by General Motors GM and Ford Motor F. Those two were down 3.5% and 2% respectively.

Whole Lotta Fed Heads ...

Fed speakers on the way today. Buckle up.

Economics (All Times Eastern)

08:55 - Redbook (Weekly): Last 4.4% y/y.

09:45 - S&P Global Manufacturing PMI (Sep-F): Flashed 47.0.

10:00 - ISM Manufacturing Index (Sep): Expecting 47.4, Last 47.2.



10:00 - Construction Spending (Aug): Expecting 0.2% m/m, Last -0.3% m/m.

10:00 - JOLTs Job Openings (Aug): Last 7.6763M.

10:00 - JOLTs Job Quits (Aug): Last 3.277M.

4:30 p.m. - API Oil Inventories (Weekly): Last -4.339M.

The Fed (All Times Eastern)

11:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.

11:00 - Speaker: Reserve Board Gov. Lisa Cook.

6:15 p.m. - Speaker: Richmond Fed Pres. Tom Barkin.

6:15 - Speaker: Atlanta Fed Pres. Raphael Bostic.

6:15 - Speaker: Boston Fed Pres. Susan Collins.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: AYI (4.20), MKC (.61), PAYX (1.14)

After the Close: NKE (.53)

At the time of publication, Guilfoyle was long, LMT, RTX, NOC equity.