Wall Street Breakfast: What Moved Markets

Stocks finished mostly lower in volatile trading Friday after a surprisingly strong jobs report sparked concern from investors that the Federal Reserve would continue its aggressive interest rate hikes to cool the economy and dampen inflation. The U.S. economy added 528,000 jobs in July, the Labor Department reported, more than twice as high as expected, and the unemployment rate ticked down to 3.5%, matching the lowest level since the late 1960s. Wage growth also rose more than expected, up 0.5% for the month and 5.2% higher than a year ago, signaling that high inflation remains a problem. The jobs data triggered a surge in U.S. Treasury yields as investors priced in prospects of further jumbo-sized rate hikes from the Fed. But the S&P 500 and Nasdaq still posted gains for the week, up 0.4% and 2.2% respectively, while the Dow Jones finished with a 0.1% weekly loss.

Avoiding a food crisis

Resumed grain shipments from Ukraine are being put to the test following a recent deal that was brokered by Turkey and the United Nations. The Sierra Leone-flagged ship Razoni, carrying 26K tons of corn, departed Odesa on Monday morning, becoming the first vessel to leave the port since late February. A Russian naval blockade still threatens Ukraine’s commercial sea routes, while missile strikes have targeted several ports, as well as infrastructure for grain storage.

Quote: “We are ready to export Ukrainian grain,” Ukrainian President Volodymyr Zelenskyy said after his visit to the Black Sea. “It is important for us to remain the guarantor of global food security.”

It’s a big development for Ukraine – which has been traditionally referred to as the “Breadbasket of Europe” – as well as many developing nations that rely on its grain across Africa, the Middle East and Southeast Asia. It has also raised hopes that an international food emergency could be avoided, with prices spiraling in recent months and exacerbating an inflation crisis. Besides freeing up grain that is currently trapped in Ukraine, there is another looming challenge of how to store or export the country’s upcoming summer harvest, which is expected to yield an estimated 65M tons.

What’s next? 16 more grain ships are awaiting departure from Odesa, but much will depend on whether the agreement can hold, or if shipping firms and insurers will risk sending vessels into the mined waters. In anticipation of the deal, prices for wheat futures on the Chicago Board of Trade slid about 13% over the past month, though commodities still remain at elevated levels. A bushel of wheat is now trading around $8, which is more than double the price it was five years ago and about as expensive as late 2010 when high food costs helped spark the Arab Spring. (51 comments)

Labor dynamics

Just a week after Walmart (NYSE:WMT) slashed its quarterly and full-year guidance, cuts have come to the company payroll. The firm said it would lay off hundreds of corporate employees at divisions related to merchandising, global technology and real estate. Walmart painted the move as an effort to reorganize itself as it marks down apparel and other items that have piled up in its stores.

Bigger picture: Other retailers have also been caught off guard as consumers shifted spending this spring from higher-margin goods that had been in demand for much of the pandemic. Shoppers are now more keen on basics like food and toiletries, as discretionary spending takes a hit from the current inflationary environment. Target (TGT) and Best Buy (BBY) also recently cut their outlooks as they look to right-size their inventory for the remainder of the year, which could lead to further discounts and lower profits.

“The signal this sends is not a good one,” noted Neil Saunders, retail analyst at GlobalData. “This could further sour the economy and consumer confidence with it.”

Is the job market showing cracks? Like many economic indicators these days, it’s a mixed bag of segmented data. Companies are reducing the pace of new hires, and even freezing or cutting roles, but hiring is still taking place in areas that are growing (the latest jobs report is out tomorrow). In the case of Walmart, the retailer even noted that while it is downsizing corporate, the restructuring will create new roles in e-commerce, health and wellness, supply chain services and advertising sales. (19 comments)

Dire straights

Taiwanese leader Tsai Ing-wen greeted U.S. House Speaker Nancy Pelosi at the presidential office on Wednesday in a high-stakes visit that continues to enrage Beijing. Pelosi reaffirmed a pledge that the U.S. wouldn’t abandon Taiwan, saying solidarity was more important than ever in a “world [that] faces a choice between autocracy and democracy.” The two also discussed deepening economic cooperation and supply chain resilience, while the White House sought to distance itself from the visit and emphasized that the trip does not signal a change in its ‘One China’ policy.

Backdrop: The last high-ranking U.S. official to visit Taiwan was then-speaker Newt Gingrich in 1997, which occurred in the aftermath of the Third Taiwan Strait Crisis and the island’s first democratic presidential election in 1996. At the time, the Clinton administration responded to the Chinese military buildup in the Fujian province by sailing all of its most powerful weapons through the Strait of Taiwan and staging the biggest display of American military might in Asia since the Vietnam War. China backed down in response, but a lot has changed in recent decades with a more powerful Chinese military and a new zeal to “reunite” Taiwan with the mainland under President Xi Jinping.

Within minutes of Pelosi’s arrival, the People’s Liberation Army announced six exclusion zones encircling Taiwan to facilitate live-fire military drills from Thursday to Sunday. While the size and scope of the areas could disrupt traffic and shipping in the Taiwan Strait – one of the world’s busiest trade routes – the exercises would come after Pelosi’s scheduled departure. Cyber warfare also hit Taiwan before the visit, with the presidential office going dark for 20 minutes due to an alleged distributed denial-of-service attack.

Sanctions: Beijing has moved to ban imports of various goods from Taiwan, from fish and fruit to baby food and cookies. According to Chinese customs data, China’s imports from Taiwan reached $122.5B in the first half of the year, up 7.3% from a year earlier. Exports of natural sand to Taiwan – that are widely used for construction and in concrete – were also banned, while China vowed to take “disciplinary actions” against Taiwanese foundations that engage in pro-independence or separatist activities. (74 comments)

It’s an emergency

The Biden administration on Thursday declared the current monkeypox outbreak a public health emergency in a bid to marshal resources and raise awareness to contain the virus. The designation will allow the FDA to speed up the authorization of measures to prevent and treat monkeypox – such as tests, therapeutics, and vaccines – and was a provision the agency relied on heavily during the COVID-19 pandemic. Cases of the virus have topped 6,600 across 48 states, Washington, D.C., and Puerto Rico.

Quote: “We’re prepared to take our response to the next level in addressing this virus, and we urge every American to take monkeypox seriously,” Health and Human Services Secretary Xavier Becerra said at a briefing.

Monkeypox is an orthopoxvirus that is mostly spread by close physical contact and results in similar symptoms to smallpox. Men who have sex with men are at highest risk right now, but anyone can catch the virus, which could start to spread more broadly and has already been seen in children. People who contract the monkeypox experience flu-like conditions and a blistery rash that lasts anywhere from two to four weeks, though a very small percentage develop sepsis or other life-threatening reactions.

Dose-sparing: The FDA is examining ways to maximize limited supplies of the only approved monkeypox vaccine, as well as boost access to antiviral medicines that could see wider use for the virus. That includes giving one-fifth of a full jab of Bavarian Nordic’s (OTCPK:BVNKF) Jynneos between skin layers, as opposed to under the fat layer of the skin. While the method is less protective than a full shot, the strategy was also used during previous shortages of the flu vaccine. (140 comments)

Cyber Roundup

“Welcome to the Giga Texas,” Elon Musk declared as he took the stage at Tesla’s (NASDAQ:TSLA) Cyber Roundup down in Austin. The annual shareholder meeting came just weeks after Tesla reported Q2 earnings, which showed compressed automotive margins even as the company grew year-over-year.

Highlights: “We’re aiming to achieve a 2M vehicle run-rate by the end of the year,” he announced, adding that Tesla just produced its 3 millionth car. Shareholders also approved a 3-for-1 stock split, the second in two years, though it’s not clear when that will take effect. Free cash flow generation was on the radar as well, with Musk pointing to $7B of FCF over the past four quarters, driven by a ramp-up in the Model 3.

“We have autonomy to some degree, but solving autonomy will really be an amplification of free cash flow to a degree that is… you run the numbers and it’s like, wow, could it really be that crazy? It could be that crazy,” Musk continued, jokingly adding “this year I swear.” “We’re now at over 40M miles [on the FSD Beta program] and I suspect by this year we’re gonna have well over 100M miles. We’re still tracking very much to have widespread deployment of FSD beta this year in North America.”

Outlook: “Making macroeconomic prognostications is a recipe for disaster,” but Musk estimates “we are past peak inflation” and likely to see a “relatively mild recession for something like 18 months.” He also teased another factory location this year, saying the company would “end up building at least 10 or 12 Gigafactories.” On the Supercharger front, Musk promised some “cool stuff,” and suggested that Cybertruck specifications and pricing will be different than disclosed back in 2019 due to soaring inflation. (11 comments)