IWR: Current Jobs Data Possibly A Blip, But Big Deltas Are Needed For Inflation

seekingalpha2024-08-07

Richard Drury The iShares Russell Mid-Cap ETF (NYSEARCA:IWR) is a US mid-cap ETF following a diversified financials and industrials heavy portfolio (over 30% of the portfolio). There have been recent ...

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There have been recent ...</p>\n\n<a href=\"https://seekingalpha.com/article/4710979-iwr-current-jobs-data-possibly-a-blip-big-deltas-needed-for-inflation\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4550","symbol_name":"红杉资本持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4710979-iwr-current-jobs-data-possibly-a-blip-big-deltas-needed-for-inflation","article_id":"2457907456","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1692418614/image_1692418614.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2457907456","pubTimestamp":1722965216,"columns":[],"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Richard Drury The iShares Russell Mid-Cap ETF (NYSEARCA:IWR) is a US mid-cap ETF following a diversified financials and industrials heavy portfolio (over 30% of the portfolio). 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There have been recent macro releases with important implications for the industrials and financials sectors, other cyclicals, as well as for other macro-led categories like real estate, materials and consumer discretionary. The jobs data in particular has caused some concern. We think that employment is one of the few relevant macro indicators right now (other than surveyed inflation) that might make the case for upcoming declines in CPI. However, a recession may be the more necessary ingredient to tamp down inflation. A recession (but with lower costs of capital) would be a bad outcome, and as we foresee either a 'no landing' or a 'hard landing' scenario, we are cautious. IWR Breakdown We will review our thesis sector by sector. This US mid-cap ETF is made up of the following sectors:    Sectors (iShares.com) Macro context First, we address the macroeconomic context, as there have been recent updates. From its latest release on July 11, CPI data is still high at 3%, above target levels. However, there are some expectations that it could come down. By Phillips Curve logic, unemployment should put downward pressure on inflation. Unemployment came up a little in the latest jobs report. The jobs data was altogether quite soft, with low wage growth (actually beneficial for inflation) and low jobs growth. As a result, the Sahm rule was triggered, which is a recession predictor when unemployment moves up quickly enough relative to a rolling average. (This precipitated a bit of a deleveraging over the past couple of days, related to Yen carry traders having taken bigger risks in equity markets with Yen-borrowed proceeds.) A recession will also put downward pressure on inflation and can impact inflation expectations. Cyclicals and real estate The ideal scenario for cyclicals and real estate would be a soft landing. (A soft landing would mean unemployment doesn't rise enough to cause a recession, but there is enough downward pressure on inflation that it comes down to target levels and borrowing rates fall again.) We maintain that a soft landing is unlikely given that surveyed inflation expectations are also at 3%, and while the Phillips Curve argument has some directional value, inflation expectations survey data remain the more important factor. While the jobs report is a start on the inflation side of things, it may also just be a blip. Hot weather and other weather effects like Hurricane Beryl may have meant temporary layoffs that could have overstated unemployment figures. A recession would be a way to re-anchor expectations, but it remains to be seen if a recession is coming. A no-landing wouldn't be great, as the industry continues to be under pressure. Of course, a hard landing would be worse because industrials and other businesses with high operating leverage will be sensitive to those changes. We think that with anchored inflation expectations, more than just a small rise in unemployment will be needed. There will need to be more significant deltas in unemployment rates, and there will need to be a shock to the system to dislodge inflation expectations. Financials Financials have different factors that affect them. Fundamentally, falling interest rates would not be good for them. Deposit rates would fall, which is a plus, and they would have a higher rate portfolio, but refinancing activity will also drive that down eventually, and any net growth in loans will be at lower rates. However, unless inflation falls, interest rates won't go down. There is chance for dissent on the FOMC in general, and many that remain hawkish. The data will have to bear out an inflation decline or something that requires the Fed to act on the growth mandate before anything happens. A soft landing isn't fantastic for financials, but also not likely in our view. A hard landing would be worse, and no landing would be alright. Bottom Line  IWR isn't that cheap either at 20x P/E. With growing concerns around the economy, and it being late in the cycle, we don't see that much reason to hazard money into cyclical investments that only have a 5% earnings yield. At the very least, it's an efficiently run portfolio with just a 0.19% expense ratio. We continue to believe that every time we approach key data, the narrative and markets engage in wishful thinking that inflation will magically fall, and then every time the Fed does its job the markets become disappointed. We need to see real changes in unemployment levels (not just higher levels) in an adjusted Phillips Curve logic in order to see inflation declines. This will almost certainly also involve some sort of recession or recessionary pressure.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.30.0","shortVersion":"4.30.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2457907456"}