EQX - Wall Street Lunch: Holiday Prepping

2023-09-19 11:20:00 ET

Summary

• Mastercard SpendingPulse predicts a 3.7% year-over-year increase in holiday retail sales.
• August housing starts plunges to an annual rate of 1.283 million.
• Palladium and aluminum face the biggest demand slack in the case of a lengthy Detroit strike - J.P. Morgan.

Listen below or on the go on Apple Podcasts and Spotify

Games and gadgets to boost holiday retail sales , MasterCard says. (0:15) Are hedge funds putting the whole Treasury market at risk ? (3:25) Two metals look vulnerable to the UAW strike. (4:27)

This is an abridged transcript of the podcast.

Our top story so far in today’s session:

Halloween is still more than a month away, but it’s already time to think about that holiday shopping list.

Mastercard SpendingPulse is out with its forecast for holiday retail sales , which are expected to rise 3.7% year-over-year.

The anticipated growth in retail would reinforce the narrative of U.S. consumer resilience in the face of inflation, high interest rates, the resumption of student loan payments, and other macro headwinds.

After years of inventory and spending habits being in flux, the 2023 season is anticipated to bring a broader rebalancing across categories, channels, and sectors.

Michelle Meyer, U.S. chief economist at the Mastercard Economics Institute, says that while the consumer of holidays past may have struggled to find their footing, "the consumer of holidays present has taken their power back," and she expects them "to impressively navigate the holiday season, making choices and trade-offs that best suit their lifestyles."

E-commerce sales are expected to increase +6.7% year-over-year, and in-store sales to increase +2.9% year-over-year. That is a smaller gap than during the pandemic years, when Amazon (AMZN), Etsy (ETSY), and Wayfair ( W ) saw huge sales gains.

The expectation is that electronics, gadgets, and gaming might be at the top of many wish lists this year as AI, immersive experiences, and digital workspaces continue to evolve the way consumers work and play.

The restaurant sector is expected to continue its growth streak, but apparel sales are only seen rising +1.0% as the challenges may continue for department store operators.

In today’s trading, stocks continued to stay in a holding pattern as the Fed begins its two-day meeting.

The S&P (SP500), Dow (DJI), and Nasdaq ( COMP.IND ) were slightly lower after closing barely higher in the previous session.

But longer rates were up after some mixed housing data. The 10-year Treasury yield (US10Y) is battling to move above 4.35% again.

August housing starts plunged to an annual rate of 1.283 million, the lowest level since June 2020. The forecast was for little change at 1.435 million. But building permits rose unexpectedly to 1.543 million.

Pantheon Macro economist Ian Shepherdson says the "plunge in starts is concentrated in the multi-family component, down 26% month-to-month, while single-family starts fell by a less dramatic 4.3%."

He says the "collapse in multi-family starts continues the trend of recent months. The surge in rents during the pandemic triggered a wave of multi-family construction, but rent growth has now slowed to a crawl, according to the Zillow data, and construction is mean-reverting towards the pre-Covid trend."

Among active stocks:

Aurora Cannabis ( ACB ) got the OK to transfer its common shares from the Nasdaq Global Select Market to the Nasdaq Capital Market. The transfer effective today is expected to allow the company to seek an additional 180 days to regain compliance with the Nasdaq Listing Rule on minimum bid price.

Equinox Gold ( EQX:CA ) ( EQX ) slumped after it announced it entered into a bought-deal agreement to offer $150 million in unsecured convertible senior notes due 2028.

Amazon (AMZN), Alphabet ( GOOG ) (GOOGL), and Meta Platforms ( META ) are still the top tech stocks at investment firm Wedbush Securities due to their exposure to AI and its impact on the consumer internet. Analyst Dan Ives says the use cases for AI have been "exploding" and the next phase of spending on the technology is at hand.

In other news of note:

The increased use of heavily leveraged bets by some hedge funds against U.S. Treasury futures while they go long U.S. Treasurys poses a "financial vulnerability worth monitoring because of the margin spirals it could potentially trigger." That’s according to the Bank of International Settlements.

The "basis trade" is a common trading strategy that seeks to profit when Treasury futures are priced at a premium to the bonds they're based on. As such, traders sell futures forward, matched by bond purchases. To bolster their profits on the very narrow price gap, they use high amounts of leverage.

Unwinding the leveraged short positions in Treasury futures, "if disorderly, has the potential to dislocate core fixed income markets," the BIS says. Such a dislocation has the potential to trigger a systemic event. U.S. Treasurys alone are a $25 trillion market and trade around $750 billion daily.

BIS economists say that in recent months, hedge funds have built up net short positions in U.S. Treasury futures of about $600 billion, with more than 40% of the net shorts concentrated in two-year contracts.

And in the Wall Street Research Corner:

J.P. Morgan’s global asset strategy team takes a look at how the metals markets could be hit by softening demand from a prolonged Detroit auto strike.

They say palladium ( XPDUSD:CUR ) and aluminum (LMAHDS03:COM) are the most vulnerable if a strike drags on. The UAW says it plans more targeted strikes at the Big 3 if substantial progress towards a deal isn’t made by Friday.

Strategist Marko Kolanovic notes that the "last significant US autoworker strike was in late-2019" and "in terms of metals prices, North America steel prices were the hardest hit over the six-week GM strike in 2019, with HRC prices ( HRC:COM ) falling more than 15%."

"Aluminum prices fell by ~5% over the duration of the strike. Copper prices (HG1:COM) ( CPER ) also fell by 5% over the initial weeks of the strike, while Palladium prices largely shrugged off the strike action in 2019."

Palladium is down 30% for the year and near a 52-week low currently.

Overall, Kolanovic is staying Overweight on commodities with room for further upside, and investor allocation is currently lower. He says the odds of a soft landing for the U.S. economy are getting longer due to "higher oil prices, inflation persistency, geopolitics, and the risk of steeper curves."

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