strong labor market

Gold

Gold’s is poised for a third straight weekly advance as Wall Street anticipates the Fed could be done with their rate hiking cycle after next week. 

A strong labor market however keeps the risk for more tightening to occur in the fall, so gold isn’t quite ready to make a move back above the $2000 level.  The FOMC decision will be key for gold and could trigger a corrective move below the $1,960 level if the Fed decides to keep optionality on the table for September.  If Powell is able to signal that it seems they are done tightening, gold may attempt to capture the $1980 level, with $2,000 being a major psychological barrier.

 

Unraveling the Resilience: US Growth, Corporate Debt, and Market Surprises in 2023

Federal Reserve Holds Rates, Signals Hawkish Stance Amid Strong Labor Market and Inflation Concerns

Matt Weller CFA Matt Weller CFA 19.06.2023 10:13
FXMAG.COM: Could you please comment on the FOMC decision?  Fed Downshifts with "Hawkish Hold," All Eyes on Economic Data Heading into the Summer   The Federal Reserve (Fed) held its meeting and decided to maintain interest rates at their current levels, as widely anticipated. However, there were notable developments and insights provided during the meeting and subsequent press conference. Chairman Powell reaffirmed a hawkish stance and reiterated the Fed's commitment to achieving 2% inflation and a strong labor market. Powell highlighted that the full effects of tightening have not yet been felt, indicating the potential for further rate hikes in the future. The Fed's Summary of Economic Projections revealed an upward revision in GDP growth forecasts for 2023, reflecting an improved outlook for the US economy. Additionally, the dot plot indicated that the median FOMC member expects interest rates to be higher by the end of the year.  During the press conference, Chairman Powell emphasized that the labor market remains tight, although there are signs of supply and demand coming into better balance. He acknowledged that labor demand still exceeds the available workforce. Powell expressed caution regarding inflation, stating that getting it back to the target of 2% requires continued efforts. He highlighted that reducing inflation may necessitate below-trend growth and some softening of labor conditions. Powell also mentioned that decisions will be made meeting by meeting based on evolving data and the outlook. Looking ahead, the Fed's next meeting in July is expected to be significant, as Powell referred to it as a "live meeting." This indicates that decisions regarding interest rates and monetary policy may be made during that meeting. The Fed will closely monitor incoming data, the evolving outlook, and assess the impact of policy decisions before making any changes. Overall, the Fed's meeting underscored a hawkish tone, with an acknowledgment of the strong labor market and a willingness to address inflation concerns through potential rate hikes in the future.   Read more
Unlocking the Future: Reforms in Korea's FX Market Amid Demographic Shifts

Amidst Rising Inflation Concerns And Gold Consolidates Amid Hawkish Central Bank Actions

Matt Weller CFA Matt Weller CFA 16.06.2023 08:50
In the ever-evolving landscape of financial markets, decisions made by major central banks have a significant impact on shaping trends. We recently had the opportunity to speak with Matthew Weller, an analyst at StoneX, to gain insights into the current state of affairs.   Read more   The European Central Bank (ECB) recently made headlines with its "Hawkish Hike," raising its key interest rate by 25 basis points to 3.5%. This move aims to combat the escalating inflation in the eurozone, marking the eighth consecutive rate hike since July 2022. The ECB's determination to bring inflation down from its current 6.1% to its target of 2% is evident. ECB President Christine Lagarde has hinted at the possibility of further rate hikes at the next meeting in July, emphasizing the need to tackle inflation head-on. Lagarde made it clear that the ECB has no plans to pause its rate hikes. While the ECB focuses on inflation control, other central banks, such as the US Federal Reserve, have taken a pause in their rate hikes to assess their impact on economic growth and employment. However, the Fed's projections indicate the potential for two more rate hikes this year. Similarly, central banks in Australia and Canada have resumed rate increases after a temporary pause, underscoring the global challenge of high inflation. The ECB's decision to raise rates comes at a time of economic uncertainty, influenced by factors such as the ongoing conflict between Russia and Ukraine and potential wage agreements that may further fuel inflationary pressures. The ECB acknowledges that short-term economic growth may remain subdued, but it expects improvements as inflation subsides and supply disruptions ease. While concerns persist regarding the potential negative impact of higher rates on the economy and the risk of a recession, the ECB remains committed to addressing inflation as a top priority   FXMAG.COM: Could you give as your point of view about how the gold prices would behave in next weeks? Is there a chance that there will be new ATH? Gold Consolidates Amid Hawkish Central Bank Actions   With major central banks continuing to tighten monetary policy and inflation still receding (if more gradually than before) gold prices are likely to remain on the back foot in the near term. As of writing, the yellow metal is trading in the mid-$1900s, where it has spent the last three weeks consolidating. Bulls will be looking for a break above the June high near $1990 to signal a potential retest of the record highs near $2075 as we move into July, whereas a confirmed break below $1930 could open the door for a retest of the 200-day EMA near $1900 next.
Pound Slides as Market Reacts Dovishly to Wage Developments

Expert opinion on the aluminum market: an overview on the opportunities, risks and future of the sector

Maxim Manturov Maxim Manturov 19.06.2023 12:52
The aluminum industry plays a critical role in various sectors including transportation, building & construction, electrical engineering, consumer goods production, foil & packaging, machinery & equipment and many others. By some estimations, the global aluminum market is projected to grow from roughly $169 billion in 2022 to almost $256 billion by 2029, at a CAGR of 6.1% in the forecast period. Current economic cooldown shouldn’t be a barrier for increased global demand for aluminum. Two major sectors, the transport, which accounts for almost a third of the global aluminum market share, and construction, are the two main drivers for the aluminum market. Another major growth factor is machinery demand, which has been growing in the aftermath of COVID-19 as industrial activities picked up. Some of the factors driving the demand for aluminum are the implementation of strict greenhouse gas (GHG) and carbon emission requirements, increase in focus on the use of lightweight aluminum for the fabrication of vehicle durable components, and low hazardous emission. Here are some key possibilities and risks emerging from the growing demand for aluminum worldwide.   Possibilities: Growing demand: Demand for aluminum is expected to increase due to its lightness, recyclability and its use in sectors such as electric vehicles, renewable energy infrastructure and lightweight building materials. Sustainability Focus: Aluminum's recyclability and low carbon footprint make it attractive to industries looking for sustainable solutions, making it attractive to companies and investors looking for sustainability. Technological advances: Continuous research and development is aimed at improving the properties and applications of aluminum, opening the door to new opportunities in various industries.   Risks: Price Volatility: The aluminum market is subject to price fluctuations, which are affected by factors such as global economic conditions, supply and demand dynamics, energy costs and geopolitical events. Raw material availability: Aluminum production is dependent on the availability and cost of raw materials such as bauxite and alumina. Any disruptions or price fluctuations in these markets could affect the profitability of aluminum companies. Regulatory and trade policy: Changes in regulations and trade policy, including tariffs and export restrictions, could affect the global aluminum market, which could lead to problems for companies operating in this sector. As the market is being shaped by these possibilities and possible risks, its future is ultimately dependent on whether it could satisfy the increased focus on sustainability and the transition to a low-carbon economy.  Demand for aluminum is expected to continue to grow as industries seek lightweight and energy efficient materials, especially fir the global infrastructure development projects in emerging markets, and the market could see significant growth if it succeeds in technological innovation.
Unraveling the Resilience: US Growth, Corporate Debt, and Market Surprises in 2023

Best stocks for soft economy landing according to Goldman Sachs

Maxim Manturov Maxim Manturov 19.06.2023 12:55
Despite the weak GDP growth data, economists at Goldman Sachs still believe that the US economy will avoid a recession. Goldman Sachs' estimates are based on bold corporate earnings forecasts, steady decline in inflation and strong labour market data. While the economy is headed for a so-called soft landing, the investment bank recommends focusing on value stocks with strong balance sheets.   Goldman Sachs presented a list of the Russell 3000 stocks, which demonstrate stable financial performance and have reasonable valuations. Analysts from a Freedom Finance Europe, a company operating Freedom24 online brokerage platform, analysed the Goldman Sachs list and chose three stocks which have the best potential return per unit of risk accepted: 3M Company (MMM) PayPal Holdings (PYPL) Sealed Air Corporation (SEE)   3M Company: Manufacturing business with stable prospects Ticker: MMM.US Entry price: $99–$101 Target price: $129 Horizon: 12 months  About company   3M Company (MMM) is a diversified business conglomerate offering a wide range of products including adhesives, abrasives, laminates, medical dressings and healthcare information systems. 3M Company operates through four business segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer.   Why do we like 3M Company? 3M Company has a strong competitive position thanks to its broad portfolio of over 100,000 patents, a recognizable brand and a corporate culture focused on innovation. Continuous investment in research and development allows the company to introduce new products and register more than 3,500 patents annually, which improves product quality and production efficiency. 3M owns 51 technology platforms covering areas such as ceramics, abrasives, adhesives, and nanotechnology. 3M serves a large number of end markets, including the most dynamic and promising markets of personal protective equipment and medical software. The growth of the personal protective equipment market is fueled by the increasing companies’ attention to the health and safety of employees, also monitored by government agencies. According to Grand View Research, in the US, the market will grow at a compound annual rate (CAGR) of 6.7% until 2030 and reach $32.5 billion by the end of the period. The global market for personal protective equipment is also likely to grow, helped by rapid industrialisation in developing countries.  The medical software market is also experiencing strong tailwinds amid the rising rates of wound infections, diabetes and chronic diseases, and ageing population. According to Acumen Research and Consulting, the global healthcare software market was estimated at $41.2 billion in 2021 and is expected to reach $104.1 billion by 2030, implying a CAGR of 10.9%. Last year, 3M announced a plan to spin-off its medical solutions business into a separate firm. With the medical equipment and healthcare companies trading at a significant premium to industrial enterprises, we expect the transaction to help 3M to unlock its value potential. The spin-off is expected to be completed by the end of 2023.   3M is a so-called dividend aristocrat, as the company has maintained dividend payments for more than 100 years and has increased its annual dividend for 64 years in a row. At the current market value, the dividend yield of the stock is about 6%, which is the highest level since 1996. We believe that 3M is able to maintain the current level of dividend payments because of the following reasons: In 2022, the company allocated 87.7% of free cash flow to dividends, which is a reasonable level for a mature business. Given the company’s restrained investment programme, we believe that 3M will continue to generate significant free cash flow. In Q1 2023, 3M announced a plan to improve operational efficiency, including a reduction in headcount by 6,000 people. The company plans to increase operating profit by $700–$900 million by the end of the year. That is, the payout ratio will decrease organically, due to the growth of cash flow. 3M has a healthy balance sheet (more below) with no significant debt repayments expected in coming years.   Financial performance 3M Company's financial performance in the trailing twelve months (TTM) can be summarised as follows: TTM revenue amounted to $33.43 billion, down by 2.3% from the end of the last year. The decrease was observed in all segments except healthcare. Gross profit decreased slightly from $15.00 billion to $14.41 billion. Gross margin stood at 43.11% against 43.81% for the year. Operating profit amounted to $6.14 billion versus $6.54 billion at the end of the last year. Operating margin decreased from 19.10% to 18.36%. Net income was down from $5.78 billion to $5.45 billion. Net margin decreased from 16.88% to 16.31%. Cash from operations increased from $5.59 billion to $5.86 billion, driven by a decrease in net working capital. Free cash flow rose from $3.84 billion to $4.06 billion.   During the latest conference call, the company's management announced efficiency measures that include cutting jobs, simplifying the structure of the supply chain and optimising operating expenses. In case of successful implementation of the presented measures, 3M is likely to return to the moderate growth trajectory.   Stock valuation Market headwinds have been overly reflected in the current 3M stock value. However, it does not fully reflect the business potential in case of successful implementation of efficiency measures. 3M currently trades at a significant discount to peers. The minimum price target from investment banks set by Crispidea is $103 per share. At the same time, Langenberg estimates MMM at $210 per share. According to the Wall Street consensus, the stock’s fair market value is $114, implying a 14.5% upside potential. Our estimate is based on industry average multiples. The sector average EV/Sales multiple is 1.71x (-17.79% to the current price), EV/EBITDA is 11.73x (+53.13%), P/Cash flow is 14.29x (+51.86%), and P/E is 19.30x (+86.47%). For each multiple, we assigned a specific gravity of 0.125. As noted above, the Wall Street consensus implies a 14.5% upside potential. We assigned a specific gravity for this factor at 0.50. Thus, we determined the stock’s fair market value at $129 per share, implying a 29% upside potential.   Key risks 3M Company operates in a highly cyclical industry. Although we believe that macroeconomic challenges have already been priced in, there is a possibility that the deterioration in consumer sentiment will have a greater impact than we think. In this case, the stock may remain under for an extended period of time. 3M’ margins have been declining steadily since 2020. If the efficiency plan is not implemented or does not produce the expected results, the stock could remain under pressure.   PayPal Holdings: Online payments benefiting from the market growth Ticker: PYPL.US Entry price: $63–$65 Target price: $93 Horizon: 12 months   About company PayPal Holdings (PYPL) operates a technology platform that allows users to make digital payments worldwide in 150 currencies and withdraw funds to their bank accounts. The company provides a digital alternative to traditional money transfer methods. PayPal was founded in 1998 and is headquartered in San Jose, California.   Why do we like PayPal Holdings? Over the past few years, PayPal’s stock has shown disappointing returns. The lifting of Covid-19 restrictions, global supply chain issues, deteriorating consumer sentiment, monetary tightening and the war in Ukraine have all weighed on the firm's financials and growth potential. Changes in the company's management did not add confidence to investors either. As a result, one of the largest online payments market players has lost about 80% of its market cap compared to its highs of 2021. During the Investor Day 2021, PayPal’s management set a goal to increase the number of active accounts from 377 million to 750 million over five years, i.e. more than 70 million a year. However, already in Q4 of the same year, the company announced that it would not be able to achieve the goal and in 2022 the number of accounts would  increase by only 15–20 million. In fact, PayPal managed to attract only 9 million new customers in 2022, and the number decreased by 2 million in Q1 2023. The company’s inability to maintain growth was the main reason behind the stock price depreciation. However, in our view, the market has overreacted to the growth slowdown. PayPal is a mature business with a high penetration level. According to Oberlo, 8.2% of all digital shoppers in the world used PayPal in 2022. With this level of penetration, it is difficult for the company to continue to grow market share, and given the overall decline in sales in the e-commerce sector, PayPal's headwinds seem completely natural. The long-term outlook for the digital payments market remains promising. According to Mordor Intelligence, the market size will grow from $8.7 trillion in 2023 to $14.8 trillion by 2028, implying a CAGR of 11.08% over the forecast period. With its large user base, network effect, brand strength and business scale, PayPal has a significant competitive advantage. The company has 433 million active accounts and serves 35 million merchants worldwide. Over the last 12 months, the firm has processed payments worth $1.39 trillion, earned $28 billion in fee and commission income, and $5.1 billion in free cash flow. PayPal has been actively investing in its future. The company owns one of the leading digital wallets, Venmo, and plans to develop another “super app” that would provide users with a complete set of commercial and communication services in one package. According to the company, citing third-party research, 60% of consumers choose PayPal as their primary tool for making online transactions. Only 8% of respondents were in favour of the closest competitor. PayPal customers are twice as likely to make a purchase when they see the company’s icon. PayPal has significantly increased the number of new and repeating purchases, as well as improved the placed orders’ conversion rate. In other words, PayPal is an essential tool for any online merchant. The company seeks to maximise shareholder value through share buybacks. In Q2 2022, PayPal’s board of directors authorised a $15 billion buyback programme, of which only $4.1 billion was spent. Thus, the current programme allows the firm to buy back shares worth $10.9 billion, or about 15% of PayPal's current cap.   Financial performance PayPal’s financial performance in the trailing 12 months (TTM) can be summarised as follows: TTM revenue was $28.08 billion, up 2.0% YoY. The largest increase was observed in the company’s key market of the US (+13%). Operating income increased from $3.84 billion to $4.13 billion. Operating margin rose from 13.94% to 14.69%. Net income amounted to $2.71 billion versus $2.42 billion at the end of the last year. Net margin increased from 8.79% to 9.63%. Cash from operations declined slightly from $5.81 billion to $5.77 billion, driven by an increase in net working capital. Free cash flow amounted to $5.08 billion against $5.11 billion at the end of 2022. PayPal’s management seeks to increase business margins by cutting costs and focusing on the most active and profitable users. This strategy is already showing positive results: the firm raised its net income guidance twice in the past two quarters. PayPal has a strong balance sheet, with total debt of $10.48 billion, cash equivalents and short-term investments of $10.66 billion, and net debt of -$179 million.   Stock valuation PayPal trades at a significant discount to the industry average. The minimum price target from investment banks set by BNP Paribas is $58 per share. At the same time, Berenberg estimates PYPL at $145 per share. According to the Wall Street consensus, the stock’s fair market value is $93, implying a 46.4% upside potential.   Key risks Working in the market of cross-border money transfers makes PayPal susceptible to macroeconomic conditions. High inflation, tight monetary policy and a slowdown in economic growth — all these factors carry risks for people’s payment activity and, as a result, for the company's financial performance. Amid the rapidly increasing popularity of fintech platforms, competition in the cross-border money transfer market has intensified. Companies such as Wise, Payoneer and Revolut have established strong market presence and are constantly increasing their market shares. The current trend threatens PayPal's position.   Sealed Air Corp.: Packaging supplier with good chances to rise Ticker: SEE.US Entry price: $38–$40 Target price: $54 Horizon: 12 months    About company Sealed Air Corp. (SEE) provides packaging solutions for food, consumer goods, pharmaceutical and medical devices, and industrial manufacturing markets. The company operates through two business segments: Food and Protective. Sealed Air was founded in 1960 and is headquartered in Charlotte, North Carolina.   Why do we like Sealed Air Corp.? As a major supplier of consumer packaging, Sealed Air has benefited greatly from the tailwinds in the e-commerce sector during the pandemic. However, declining demand in the protective packaging segment and weakness in the retail end markets affected the company’s financials and market value. Over the past year, Sealed Air’s market cap has lost more than 36%. Sealed Air is not the only cyclical business company facing consumer weakness and destocking. Similar headwinds have been experienced by intermodal railroads and retailers, who continue to cut inventories to cope with declining consumer demand. However, headwinds are temporary. Sealed Air's management expects the challenges to remain in Q2 2023, but predict the market environment to normalise in H2 2023. The company cites China’s recovery from Covid lockdowns as one of the growth drivers. The long-term potentials of Sealed Air's target markets remain favourable. According to Grand View Research, the global food packaging market is valued at $362.9 billion and is expected to reach $565.4 billion by 2030, implying a CAGR of 5.7% over the forecast period. The segment accounts for more than half of Sealed Air's revenue. The industrial packaging market is also expected to grow faster than inflation. According to Mordor Intelligence, the industrial packaging market is forecast to grow at a CAGR of 5.0% and reach $80.9 billion by 2028. Sealed Air has been regularly increasing its target markets by adding new offerings. In November 2022, the company signed a definitive agreement to acquire Liquibox and use its packaging solutions, such as bag-in-box, to expand into new markets. The company's management expects liquid packaging sales to reach $1 billion by 2027. Another area with significant potential is Automated Protective Solutions, which currently account for about 35% of Sealed Air's business. The segment targetes a variety of customers, from industrial enterprises to e-commerce. The company has been working to expand and optimise its existing portfolio while increasing its market penetration. The segment’s address market is estimated at $15 billion. Sealed Air plans to expand its portfolio by implementing a comprehensive strategy and aggressively expanding its fibre solutions and equipment independent systems. This will create new opportunities and provide an additional growth driver. Sealed Air seeks to maximise shareholder value through a prudent capital allocation strategy. The stock’s current dividend yield of 2% is not very high, but the company is buying back its shares. Under the current $1 billion share buyback programme, authorised by the board in August 2021, Sealed Air can purchase shares worth $537 million, or about 10% of the firm's current market cap.   Financial performance  Sealed Air's financial results in the trailing 12 months (TTM) can be summarised as follows: TTM revenue was $5.57 billion, down 1.2% YoY. The decline was driven by weak results in Q1, which saw the Protective segment shed 19% and the food segment up 6%. Gross profit decreased from $1.77 billion to $1.70 billion. Gross margin fell from 31.42% to 30.52%. Operating profit amounted to $852.2 million versus $944.8 million at the end of 2022. Operating margin decreased from 16.75% to 15.29%. Net profit amounted to $404.3 million against $491.6 million at the end of 2022. Net margin decreased from 8.71% to 7.25%. Cash from operations slightly increased from $613.3 million to $616.8 million due to a decrease in net working capital. Free cash flow amounted to $381.6 million versus $376.0 million at the end of the year.   The decline in financial performance in the last reporting period was due to the cyclical nature of the Protective segment, which offers packaging materials for consumer goods, pharmaceutical and medical devices, as well as industrial markets. We expect the segment to recover as end-market inventory levels stabilise, declining steadily after abnormal growth amid global supply chain issues. Sealed Air is heavily leveraged, with total debt of $4.83 billion, cash and cash equivalents of $303.1 million, and net debt of $4.53 billion. However, we do not see any risks to the firm's financial stability, as the interest coverage ratio remains within normal levels. In addition, the next repayment of the company's debt in the amount of $423.7 million is not expected until December 2024.   Stock valuation Sealed Air currently trades at the industry average on the main multiples: EV/Sales — 1.67x, EV/EBITDA — 9.21x, P/Cash flow — 9.04x, P/E — 13.98x, FWD P/E — 10.20x. However, the company enjoys a stronger market position compared to its peers as it has better margins (meaning the firm's cash flow is less volatile) and significant exposure for the non-discretionary and less cyclical food segment. The minimum price target from investment banks set by Morgan Stanley is $48 per share. At the same time, UBS values SEE at $59 per share. According to the Wall Street consensus, the stock’s fair market value is $54, implying a 40% upside potential.   Key risks Sealed Air operates in a highly cyclical industry. Although we believe that macroeconomic challenges have already been priced in, there is a possibility that the deterioration in consumer sentiment will have a greater impact than we think. In this case, the stock may remain under pressure for an extended period of time.   While we see no risks to Sealed Air's financial strength, the company's high leverage, coupled with the cyclical nature of the industry, could increase the volatility of the firm's stock.
European Bond Markets See Bear Steepening Amid Real Rate Rise

US Dollar Gains Momentum Amid Rate Hike Expectations

Ed Moya Ed Moya 06.07.2023 08:23
The first half of the year was rather choppy for the US dollar as massive bets of weakness were scaled down.  Many on Wall Street expected the dollar to weaken as most of the other major currencies were about to deliver significantly more tightening.  Regional growth rotations on an improving outlook from a roaring Chinese economy were also supposed to support the case for strengthening commodity demand. The dollar might be positioned for a little more short-term strength here as the odds for more rate hikes have steadily increased while rate cut bets get pushed into next year.  The Fed’s higher for longer stance on rates seems to slowly be winning over some traders. Macro traders will undoubtedly be following the NFP report, but may fixate over next week’s inflation report.  We could actually get a soft report that gives us a  headline 2.9% year over year reading.  The June inflation report might be a short-term bottom for the disinflation process as the base effects will be responsible for a large part of the decline.  By the end of summer, inflation might prove to be sticky given the current drivers, which includes economic resilience, a strong labor market, and decent spending.   USD/JPY Sell signals are emerging and intervention talk is brewing given we are at levels that triggered Japanese intervention last year.  Many yen traders are focused on the 145.50 region and the 143.75 level.  Technical traders that follow DeMark indicators are eyeing a potential sell countdown, which would require a drop below the 143.90 level.  If prices closed above the 145.51 level, further upside could target the 150 zone.  Last year, the Demark countdown finished in mid-July and it soon saw an over 6% drop.    

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