Central Banks Shake, Not Stir Stocks

Oil majors made record profits last year on high oil prices and refining margins. However, falling prices through the first half of this year have weighed on results. Let’s take a look. 👀

Exxon Mobil reported adjusted earnings per share of $1.94 vs. the $2.03 expected. Revenues of $82.9 billion topped estimates of $81.80 billion. 

A 40% YoY decline in natural gas prices drove the fall, which had been partially forecasted by management. Executives revised their estimates lower by 12% over the last month as the stock pulled back. But overall, the company says we’re back to a more normal environment for prices and profits. 🔻

Chevron’s results also echoed that sentiment. Although its $3.08 earnings per share topped estimates of $2.91, revenue slipped 29% to $48.90 billion. Net production grew 4% to a new quarterly record of 1.22 million barrels of oil equivalent per day, driven by Permian Basin strength. 🛢️

The company continues to invest in U.S. production, purchasing PDC Energy in May for $6.3 billion.

Overall, the days of bumper profits for the oil giants are behind us. But they’re still above pre-pandemic levels, and the recent uptick in energy commodities suggests they could have a tailwind in the year’s second half. Despite that, investors remain cautious about the stocks after their strong performance since late 2020. ⚠️

After a decade-long period of monetary easing, the Bank of Japan is finally making some adjustments. The central bank surprised markets by allowing the 10-year Japanese government bond yield to rise to a nearly nine-year high. 📈

Governor Kazuo Ueda said this doesn’t mean the bank is giving up his predecessor, Haruhiko Kuroda’s, easy policy that included negative short-term rates and capping the bond yield through large government bond purchases. However, it does mean it’s giving the market more freedom to affect yields.

More specifically, it’s keeping the 0.5% yield cap on the 10-year bond and setting a new rigid limit at 1%. It hopes this new policy will “improve the sustainability of the country’s monetary easing framework.”🔺

Recently, inflation has been rising in the country. As a result, many market participants believe this is the first of more moves the Bank of Japan will make to manage prices in the year ahead.

Higher rates would certainly shake up markets, both in Japan and globally. That’s because Japan’s Yen has been a major “carry trade” for foreign investors over the last decade. Low-interest rates in Japan meant investors could sell Yen for U.S. Dollars (or other foreign currencies) and then invest in higher-yielding assets in those countries. But, that could start to slowly unwind as the cost of that trade becomes higher and domestic Japanese investments become more attractive. 💱

Ultimately, the market does expect a gradual rise in rates, especially compared to the more aggressive hiking cycles in the U.S., Europe, and elsewhere. Clearly, the Bank of Japan wants to maintain control of its bond market but is slowly allowing the free market to express its views. Otherwise, it risks inflation getting out of control.

Time will tell how it plays out. But for now, investors are taking the weekend to assess the situation and adjust their views on the country accordingly. 👀

Falling volumes remain the trend in consumer goods land, with several big players reaffirming that trend during their earnings release. 📉

Procter & Gamble’s fiscal 2024 outlook fell short of Wall Street expectations, with overall volume falling for the fifth consecutive quarter. Executives believe volumes will begin to increase in 2024 and expect to rise prices by only 1% to 1.5%.

Colgate-Palmolive beat revenue and earnings expectations, raising its full-year outlook. The company said an 11% price increase helped offset a 1.5% decline in volume. Gross margins also increased as supply chains improved and costs fell marginally.

Mondelez International experienced 17% organic net revenue growth during the quarter, as strong demand for its snacks offset its high cost of goods. Executives say pricing drove organic net revenue growth, as its volume/mix was flat during the second quarter. Looking ahead, they raised organic net revenue and adjusted EPS growth outlook to 12%+. But it shows that even with solid demand, volumes can’t seem to grow in the current environment.

Overall, these companies continue to face several headwinds. They’ve got inflation-strapped consumers trading down to private-label brands to save on necessities. Additionally, with supply chains stabilizing, their pricing power in the market is also dwindling. Plus, commodity price volatility could push costs if they begin to rally through the back half of the year. ⚠️

Executives are preparing for volatile results over the next year. They remain cautiously optimistic about the economy and overall consumer health. We’ll have to see if they’re right as their stocks continue to consolidate near all-time highs. 🤷