Weekly Market Wrap | 1 July 2023

#US_GDP #Yen/USD #NikeResults

US GDP revised upwards, job market shows strength

US GDP growth rates (Source: TRADINGECONOMICS.COM)

What happened?

In a recent development, the US first quarter GDP growth has experienced a significant upward revision, surging to 2%. Adding to the economic landscape, a separate report released recently revealed a decrease in initial jobless claims for the week ending June 24. The figures from the Labor Department indicate a drop of 26,000, bringing the number down to 239,000—lower than what analysts had anticipated. 

Why did it happen?

The revision of the US first quarter GDP growth to 2% signifies an upward adjustment in economic performance during that period. The decline in initial jobless claims indicates a relatively tight labor market, suggesting potential labor shortages and increasing pressures for wage growth. 

What does it mean for investors?

For investors, the revised first quarter GDP growth rate presents a mixed picture. While the upward revision signifies improved economic performance, the risks of further rate hikes may introduce uncertainties. 

It should be noted that the effects of rate hikes have historically been lagged. Therefore, the potential slowing of economic growth due to the lagged effects of rate hikes and the impact of credit tightening on business decisions should be considered. Nevertheless, there is a glimmer of hope as the household sector backed by job growth could serve as a support system, potentially helping the US economy avoid a contraction.

Yen depreciates to a level that triggered intervention last year

Dollar-Yen Chart with interventions in the past year (Source: Bloomberg)

The Japanese yen has dropped below 145 per dollar, reaching its lowest level since November and approaching a threshold that prompted Japan to intervene last year for the first time since 1998. This highlights the ever-spoken about case of divergence in monetary policies between Japan and its major counterparts. 

The yen’s decline is attributed to the disparity between Japan’s accommodative monetary policy and the more hawkish stance of other central banks, such as the US Federal Reserve. The 145 number could be a very important number as it could trigger interventions going forward.

The recent rise in global yields has favored currencies of other countries, while Japan continues to grapple with negative interest rates. Investors speculate that Japanese authorities may opt for a limited-scale intervention in the coming weeks to maintain uncertainty among speculators. Japanese officials have reiterated their watchfulness over the yen’s movements and readiness to take action if necessary.

The Japanese government employed direct yen purchases worth $65 billion last year to counter the currency’s depreciation against the US dollar. However, the response from policymakers and business leaders appears more subdued compared to last year’s currency collapse, suggesting they may perceive the current weakness as temporary.

What does it mean for the investors?

Investors all around the world are considering this to be the biggest test of the negative interest rate stance that the policy-makers have taken since a long time. Valuing securities with negative interest rates prevailing has been quite difficult as risk free rates are generally a starting point for all build-up models. Even forming short-term capital market expectations is further complicated. Only time will tell if negative interest rates are really the optimal way to increase consumer spending and enhance borrowing in an economy. 

Nike result gives mixed signals to the investors

Nike price chart (Source: Syfe Trade)

Global athletic footwear and apparel leader, Nike Inc., has reported its financial results for the fourth quarter and full year of fiscal 2023. In Q4, revenues reached $12.8 billion, up 5% (8% on a currency-neutral basis). However, net income for the quarter declined by 28% to $1 billion, with diluted earnings per share down by 27% to 66 cents.

Nike’s President and CEO, John Donahoe, expressed satisfaction with the company’s performance, citing their investment in innovation and digital leadership as key drivers of growth across their brands. 

Direct revenues increased by 15% to $5.5 billion, driven by a 24% growth in Nike-owned stores and a 14% growth in Nike brand digital sales. However, Converse revenues declined by 1% to $586 million.

Gross margin decreased by 250 basis points to 43.5% for the full year, and net income declined by 16% to $5.1 billion, with diluted earnings per share down by 14% to $3.23. During the fourth quarter, Nike returned approximately $1.9 billion to shareholders, including dividends of $524 million (a 9% increase from the prior year).

While Nike’s revenue growth and digital investments are commendable, the decline in net income and gross margin indicate ongoing challenges that the company must address to maintain profitability.

IndexLevel1 Week1 MonthFrom Jan 1 2023
S&P 500 (US Stocks)4,450+2.34%+5.53%+16.38%
Nasdaq 100 (US Tech Stocks)15,179+2.10%+5.11%+39.74%
CSI-300 (Chinese Stocks)3,842+0.23%-0.50%-1.17%
Bitcoin (in USD)30,408+0.45%+13.40%+83.13%

Source: Syfe Trade Bloomberg, Yahoo Finance, CNBC, Financial Times, Reuters, Business Times, CNN, The Jakarta Post, Fashion United

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