Ear to the Ground

May 26 2022

Economic data has been on the quieter side this week relative to the recent barrage which we have had over recent weeks. Wednesday did however see the release of the latest US Federal Reserve minutes. There was nothing really new to come out from this, however. The minutes confirmed that the Committee is likely to apply a 0.5% increase at the next couple of meetings, which would take the Fed Funds Rate to the range 1.75% to 2%. They continue to believe that reducing policy accommodation is appropriate given the inflation environment which we are currently in and that implementing these increases will leave them well positioned to assess the effects later this year. They do also recognise, however, that the economic outlook is currently highly uncertain.

US equities ended on a firmer note following the announcement, perhaps due to the probability of a 0.75% hike now looking less likely. US Treasury yields also came off session highs. Having traded over 3% in recent weeks the 10 year now yields a little over 2.7% at the time of writing. The expectation of higher interest rates to combat inflation, coupled with concerns over economic growth due to the impact of the higher cost of living for the consumer, leaves the US Treasury yield curve very flat, with little difference between the 5, 10 and 30 year yield. It is perhaps a little too early just yet to rule out further inflationary shocks, particularly if we were to see a spike in, for example, wages.

Signs that the global economy however is certainly evident. In the US, Eurozone and China we have seen a fall in Manufacturing PMI’s. For now, Japan appears to be holding up a little better. The Citigroup Economic Surprise Index meanwhile remains in negative territory, telling us that we are currently seeing more surprises to the downside rather than upside. If the long term relationship between this and the US 10 year Treasury were to hold true, perhaps this could mean that its yield could fall further still. For now however, investors err on the side of caution.

In the world of technology stocks it is Snap this week which has caught the limelight. This is a camera and social media company which developed and maintains Snapchat. The company was very much one of the darlings of the COVID lockdown era. Prior to its COVID low the share price had shown little movement compared to that which was subsequently seen. On the 20 March 2020 the share price closed at $10.09. By the 24 September 2021 close it had rocketed to $83.11, a mammoth 723% rise.

Coming back to the present, on the 25 May the stock languishes back at $14.16. Whilst this represents a healthy 40% return from its March 2020 low, it represents a near 83% fall from its 2021 closing peak. The company is the latest in this area to issue a profit warning, with the company concerned that revenue could be negatively impacted by the economy, which has deteriorated further and faster than it anticipated. It now believes that second quarter revenue will be below its guidance range.

When I started my career in the financial sector, way back in 1996, I was passed some valuable insight when it comes to running a business. That was; “Turnover is vanity, profit is sanity, cash is king.” Those words appear just as relevant today as they did way back then.

Ear to the Ground will take a break next week but will return the following.

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