Economic Tug of War, Salt vs. Lithium, Mounjaro vs. Ozempic, Amazon and IRobot
Equities and debt securities in a non-TINA environment are competing directly for the flow of capital -- and one gains only by robbing from the other.
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According to the American Automobile Association, or AAA, the average price of a gallon of gasoline in the U.S. has fallen now for 60 consecutive days, which is the longest streak of its kind in over a year. That average price ($3.25) is down roughly $0.60 from its recent apex in mid-September and is about $0.30 lower than it was a year ago in late November.
While that comes as much-welcomed relief for U.S. consumers as the holiday shopping season gets into full swing, Bloomberg News conducted that agency's most recent survey of U.S. economists from November 17 through November 22. With real household disposable incomes having gone negative, pandemic-era savings seemingly exhausted, and demand for credit diminishing, the survey shows consensus expectations for core (ex-food & energy) consumer-level inflation one year out to have increased from 2.4% in October to 2.5% in November. (Remember that last week, the University of Michigan's survey of consumer sentiment showed one-year-out expectations for headline-level inflation had grown to 4.5%.) These forecasters have also increased their general expectation for current quarter (Q4 2023) growth to 1.2% (q/q, SAAR) from their 0.7% October consensus.
That said, these economists see a major slowdown in private investment weighing on the economy all the way from late 2023 into early 2025. In Monday's column we mentioned that just last week, JPMorgan Chase JPM had forecast full-year 2024 U.S. GDP growth at just 0.7%.
Where does that leave economists? Right now, pretty much torn. They see core inflation steadying above the Fed's 2% target. Headline inflation will likely remain volatile. Some see a Fed cut to short-term rates as soon as mid-2024, others still see higher rates for longer, which has been the Fed's mantra as speaker after speaker was warned that the FOMC does not consider their mission accomplished.
By the way, the Fed will be out in force today. Austan Goolsbee votes in December and then not again until 2025. Both Christopher Waller and Michele Bowman can be outspoken and Bowman has been quite the hawk of late.
Where Are 'They' Now?
As the zero dark hours pass on Tuesday morning, Fed Fund futures trading in Chicago are currently pricing in a 97% probability that no change will be made to the benchmark overnight rate on December 13. In fact, these markets are now pricing in an 89% likelihood that the FOMC is done raising rates for this tightening cycle. A first rate cut in June is supported by a 70% probability and a 51% likelihood is currently priced in for a total of four 25-basis-point rate cuts over the final seven months of 2024.
As for current quarter GDP growth, the Atlanta Fed's GDPNow model is now running at 2.1% (q/q, SAAR) and will not be revised again until this Friday. As for Atlanta's counterparts, the St. Louis Fed sees the current quarter at +2.04%, the New York Fed sees the current quarter at 2.17% and the Cleveland Fed still sees the current quarter at growth of just 0.35%. The Cleveland Fed, which goes out further than the others, then sees at least four consecutive quarters of economic contraction that starts in Q1 2024.
It would appear that oil prices, and the recent trends across the slope of the yield curve and the U.S. Dollar Index are all acting in pre-recessionary concert with one another, suggesting that Cleveland may be less of an outlier here than some think.
Monday Markets
Financial markets got the week off to a somewhat sleepy start on Monday, as it felt as if some participants just could not get their motors humming coming off of the long (for some) weekend. The feel was negative for the session, but only mildly so at the headline level.
The S&P 500 gave up 0.2% as the Nasdaq Composite, which had spent most of the middle of the day in the green, surrendered just 0.07%. Smaller caps were hit slightly harder as the Russell 2000 backed up 0.35%, but it was the Dow Transports that really took "it" on the chin, losing 1.26% for the session as the rails, truckers and airlines all shared in Monday's pain. CSX Corp. CSX was the laggard among the Dow Transports for the day at -2.14%.
Only three of the 11 S&P sector-select SPDR ETFs shaded into the green on Monday, led by the REITs XLRE at +0.35%. Health Care XLV and Communication Services XLC led the losers, at -0.63% and -0.62%, respectively.
Breadth was poor. Losers beat winners by roughly 4 to 3 at the NYSE and by about 5 to 3 at the Nasdaq. Advancing volume took just a 35.4% share of composite NYSE-listed trade and a 47.1% share of composite Nasdaq-listed action. Aggregate trading volume was lower on a week-over-week basis across both exchanges, suggesting a lack of overall interest. We took a one week look-back as day-over-day comparisons to last Friday were obviously skewed by the shortened market hours that day.
Interestingly...
Treasury securities were strong on Monday after a weak auction of $54B worth of U.S. 2-Year Notes was countered by stronger demand for $55B worth of U.S. 5-Year Notes that also went to auction. As the 2-Year tailed, the 5-Year traded through as both bid to cover and foreign demand were better for the 5-Year Notes.
Treasuries rallied from there, with the yield for the benchmark U.S. 10-Year Note dropping 10 basis points to 4.38% and the yield for that 2-Year Note ending the regular session down 7 basis points at 4.89%.
What I think is interesting here, which is something that we have started to see of late, is that Treasury securities rallied as the mid-major to major equity indexes trended from close to the flatline to down for the day. The positive correlation between the two that has been in place more often than not through the post-pandemic era is starting to break, which is actually a normalization of financial market conditions if it holds.
The fact is that equities and debt securities in a non-TINA environment are competing directly for the flow of capital, and in such an environment, one gains only by robbing from the other.
Please Pass the Salt
Who else chuckled when they read the story at Bloomberg News about sodium-based energy storage? Apparently, sodium is chemically and structurally similar enough to lithium to potentially make inroads into these markets and take some share away from lithium. While not able to match the range and performance of lithium cells as far as electric vehicles are concerned, sodium is far more abundant and far less expensive than lithium.
Additionally, according to the article, Sweden's Northvolt AB is claiming to have made a breakthrough that will improve sodium's performance. While not ready yet, even if sodium could relieve demand for lithium for at least some lower-end purposes, that would go a long way toward solving what has been until now, an issue of scarcity.
New Champ?
Okay. Maybe I'm biased as I have been long Eli Lilly LLY all year. Barron's reported on Monday that a new real-world study showed evidence Eli Lilly's obesity drug to potentially be more effective than the obesity drug offered by Novo Nordisk NVO . This study, which was conducted by Truveta, has produced a paper that had been posted as a preprint ahead of the Thanksgiving holiday and has not, to this point, been peer-reviewed, but included data from more than 40K overweight patients.
The study, according to this paper, shows that patients prescribed Lilly's Mounjaro/Zepbound lost an average of 15.2% over 12 months, while patients prescribed Wegovy/Ozempic lost 7.9%. Of patients prescribed Mounjaro/Zepbound, 42.3% achieved 15% weight loss within a calendar year, while 19.3% of patients prescribed Wegovy/Ozempic reached that milestone. Going deeper into the paper, those on Mounjaro/Zepbound took an average of 134 days to lose 5%, while those on Wegovy/Ozempic took 215 days to get that far.
Spinning Wheel
What goes up must come down
Spinning Wheel got to go 'round
-- Clayton-Thomas (Bood, Sweat & Tears), 1968
The shares of iRobot IRBT dropped a quick 17.19% on Monday, closing at $34.35 after the European Commission informed Amazon AMZN that its proposed acquisition of the smaller firm could cause problems in the market for robotic vacuum cleaners. This is, unfortunately, not a joke.
It was just this past Thursday (Thanksgiving Day) that Reuters ran a story that it looked like Amazon's $1.4B takeover of iRobot would receive unconditional approval in Europe. The stock of IRBT ran 39.08% on Friday in response to that report.
Where did IRBT close on Wednesday? $29.83, so it's still up 15% from there. Stay tuned.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 3.4% y/y.
09:00 - Case-Shiller HPI (Sep): Expecting 3.4% y/y, Last 2.2% y/y.
09:00 - FHFA HPI (Sep): Expecting 0.4% m/m,Last 0.6% m/m.
10:00 - CB Consumer Confidence (Nov): Expecting 101, Last 102.6.
10:00 - Richmond Fed Manufacturing Index (Nov): Expecting 1, Last 3.
16:30 - API Oil Inventories (Weekly): Last +9.047M.
The Fed (All Times Eastern)
10:00 - Speaker: Chicago Fed Pres. Austan Goolsbee.
10:05 - Speaker: Reserve Board Gov. Christopher Waller.
10:45 - Speaker: Reserve Board Gov. Michele Bowman.
13:05 - Speaker: Reserve Board Gov. Michael Barr.
15:30 - Speaker: Reserve Board Gov. Michael Barr.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: CRWD (0.74), HPE (0.50), INTU (1.98), SPLK (1.15), WDAY (1.41)
At the time of publication, Guilfoyle was long LLY, AMZN and CRWD equity.
