Stocks surged and U.S. Treasury yields fell Friday after Federal Reserve Bank of San Francisco President Mary Daly said future interest rate increases could come in smaller increments to achieve the Fed’s target neutral rate. While the Fed seems set to again lift its benchmark rate by 75 basis points at the November policy meeting, there may be some debate among Fed officials over whether to slow down aggressive rate hikes thereafter. Shares of Snap plunged Friday after a disappointing quarterly report, but more than 70% of S&P 500 companies so far have reported a “positive” surprise in terms of earnings per share. The major market indexes all scored their biggest weekly percentage gains since June, with the S&P 500 finishing up 4.8% for the week, The Dow Jones rising 4.9%, and the Nasdaq Composite popping 5.2%.
China President Xi Jinping reasserted his policies in a two-hour speech at the 20th National Congress of the Communist Party of China on Sunday. Xi said that per-capita GDP would rise to the level of a “medium-developed country” in a “giant new leap” by 2035. While he did not give a specific number, economists told Bloomberg that would mean doubling GDP and per-capita income, with an average GDP growth rate of 4.7%.
Bigger picture: Xi focused on economic development that he said would not sacrifice national security. Importantly, he announced no changes to his zero-COVID policy. “In responding to the sudden attack of COVID-19, we put the people and their lives above all else and tenaciously pursued a dynamic Zero COVID policy,” Xi declared. “We have protected the people’s health and safety to the greatest extent possible and made tremendously encouraging achievements in both epidemic response and economic and social development.” Still, there is a chance that policy evolves.
Xi also hit the regular themes of economic development as a priority and “common prosperity.” “High-quality development is the top priority of building a socialist modern country in all aspects. Development is the party’s top priority in governing. We will promote equality of opportunity, increase the income of low income earners and expand the size of the middle income group. We will keep income distribution and the means of accumulating wealth well regulated.”
Global impact: The speech did little to quell concerns about an adversarial relationship between China and the West. Chip stocks were rattled last week, as companies and investors continued to assess the implications of new U.S. rules designed to keep certain semiconductor technologies out of the hands of the Chinese military. The regulations that went into effect earlier in the month prevent American companies from working with Chinese chip manufacturers. By mid-week, several U.S. chip-equipment makers such as Lam Research (LRCX) and Applied Materials (AMAT) had reportedly begun pausing their operations in China in order to get in line with the new guidelines. (26 comments)
Great numbers from Netflix (NFLX) sent the stock up 13% after the bell on Tuesday as investors applauded the streamer’s return to growth. The company added 2.41M customers in the third quarter, expanding in every region and topping Wall Street’s expectations. The company also expects additions of 4.5M subs in the fourth quarter, and co-CEO Reed Hastings suggested in his mind, the worst was over.
Quotes: “Thank God we’re done with shrinking quarters,” he declared, adding that it’s “a big deal to go back to the positivity.” Fourth-quarter guidance is “reasonable, not fantastic,” but “then we’ve got to pick up the momentum” in all areas. Foreign exchange is a “huge hit” that’s not going to go away, but “other than that, all the stars are lining up very well for us.”
Netflix is still shifting its focus to revenue as its primary top line metric, as it develops new revenue streams – advertising and paid password sharing – where membership is just one component of its revenue growth. Netflix also highlighted its profitability vs. streaming rivals like Disney+ (DIS), Discovery+ (WBD) and Paramount+ (PARA). “Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard. We estimate they are all losing money, with combined 2022 operating losses well over $10B, vs. Netflix’s $5B-$6B of annual operating profit.”
Outlook: As for $17B in annual content spending, co-CEO Ted Sarandos announced the company is now getting more bang for its buck, noting the popularity of Stranger Things Season 4 and Monster: The Jeffrey Dahmer Story. “Both the scope and scale as well as the range and the cadence of hits is improving,” he said, “so that I feel better and better about that $17B of content spend, because what we have to do is get better and better at getting more impact per billion dollars spent than anybody else.” Spending is “about the right level,” he continued, though as the company reaccelerates revenue, “we’ll revisit that number, of course.” (25 comments)
Oil sales from the U.S. Strategic Petroleum Reserve were only supposed to last until October, and then through November, but the Biden administration this week extended the releases into December. While the time frame keeps getting prolonged, the next 15M barrels coming to market will be part of the original 180M barrel release that was first authorized in March – due to inflationary shocks from the war in Ukraine. So far, 165M barrels have been sold from the SPR this year, bringing volumes in the emergency stockpile to just 405M barrels, marking their lowest level since 1984.
Snapshot: The extension intends to offset any market volatility that is expected once a European oil embargo goes into effect on Dec. 5, and to ensure prices keep falling from the historic highs recorded earlier this year. It also comes after OPEC and its Russia-led allies agreed to slash output by a whopping 2M barrels per day from November. Don’t forget that midterm elections are around the corner, and prices at the pump have been said to be a defining factor of any outcome, especially with voters worried about inflation and the economy.
What remains to be seen is if the administration will go beyond its mega 180M barrel release, and if it does, how much farther will it go. Biden also reiterated calls for oil companies to lower their profit margins and pass savings along to consumers, while putting a mechanism in place to replenish the reserves at a fixed price. Only time will tell if the “buy low, sell high” strategy will work out, but the plan is to scoop up crude when costs are at or below about $67-$72 per barrel, an approach that “will protect taxpayers and help create certainty around future demand for crude oil.”
Commentary: “The SPR was built for crisis – we’re in a crisis, and it’s not getting any easier,” related Daniel Yergin, Vice Chairman of S&P Global. Others say that the U.S. should be better prepared for a return of sky-high oil prices of over $120/bbl, given new shortfalls from geopolitical tensions, an energy war with OPEC and Russia, and higher global demand as China emerges from pandemic lockdowns. “That’s when you really need the SPR,” noted Neil Beveridge, senior analyst at Sanford C. Bernstein. “And if the SPR has been partially exhausted, it can lead to a steeper escalation in prices.” (109 comments)
A top line miss from Tesla (TSLA) sent shares of the EV maker down 6.3% AH on Wednesday, dinging more investor confidence amid a rout in tech stocks. TSLA last hit the $208 level in June 2021 – when factoring in the summer split – and shares are now down nearly 50% since the beginning of the year. Production bottlenecks were cited as causes for the sales miss, as well as logistical issues with deliveries and battery supply chain pressures.
Quote: “There weren’t enough boats, there weren’t enough trains, there weren’t enough car carriers. Tesla got too big,” Elon Musk said on a conference call. “I can’t emphasize enough we have excellent demand for [the fourth quarter] and we expect to sell every car we can make as far in the future as we can see. To be frank, we’re very pedal to the metal come rain or shine. We are not reducing our production in any meaningful way, recession or not recession.”
Strong vehicle pricing still helped Tesla generate nearly $3.3B in quarterly profit, almost matching the company’s record in Q1, though it expects to finish the year just shy of its 2022 target of boosting vehicle deliveries by 50% Y/Y. In order to do so, the automaker would have to hand over 500K cars in the final three months of the year, which would be 45% more than its prior record for quarterly deliveries. Musk also floated the idea of a stock buyback of around $5B-$10B in 2023, and sees a potential path for Tesla (whose market cap is now under $700B) to be worth more than Apple (AAPL) and Saudi Aramco combined (they are currently valued at $2.3T and $2.1T, respectively).
Elsewhere: Musk commented on his pending $44B acquisition of Twitter (TWTR) after recently changing course to follow through on his purchase agreement. “I am excited about the Twitter situation,” he declared, calling it “an asset that has sort of languished for a long time but has incredible potential.” “The long-term potential for Twitter is an order of magnitude greater than its current value, although obviously, myself and the other investors are obviously overpaying for it with Twitter right now.” (98 comments)
What a difference 24 hours can make. It was only on Wednesday that U.K. Prime Minister Liz Truss said she was “a fighter not a quitter,” before the reality set in that she would need to step down after only 45 days on the job. “I came into office at a time of great economic and international instability,” she said in front of No. 10 Downing Street on Thursday. “We set out a vision for a low-tax, high-growth economy that would take advantage of the freedoms of Brexit. I recognize, though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative party.”
What happened? Truss saw her leadership flounder after the introduction of her mini-budget that called for big spending to help with the surge in cost of living while at the same time proposing a number of big tax cuts. Along with approaching QT from the Bank of England, the budget spurred a liquidity crisis in the U.K. bond market. Chaos ensued with the effect on pension funds and the mortgage market forcing the BoE to step in and buy long-dated debt. The 30-year gilt yield even topped 5% and the pound approached parity with the greenback, touching $1.03.
Truss tried to right the ship, replacing her Chancellor of the Exchequer. New finance minister Jeremy Hunt rolled back almost all the tax cuts and the markets steadied, but the political damage was already done. She fired her Home Secretary on Wednesday and faced other resignations, leading to a loss of confidence across the Conservative Party. She will remain prime minister until a successor is chosen, but will go on record as the shortest-serving premier in the 300-year history of the office.
Go deeper: Whoever will replace Truss will come in learning an important fiscal lesson. Political leaders are no longer able to promise growth by borrowing money without detailing how they will repay it. Long gone are the days where governments had the support of quantitative easing, as central banks tighten policy to stave off inflation. In terms of candidates, the latest contest is likely to pit ex-finance chief Rishi Sunak against House of Commons leader Penny Mordaunt, but could also see the return of Boris Johnson, who was ousted as prime minister in July. (219 comments)
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