🎙️ Lovin' It

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McDonald’s just posted stellar second-quarter earnings, and its stock is sitting near all-time highs this year. One of the key growth drivers? Its smartphone app, which blows away the competition.

💭 Talk about innovation: The chain launched in 1940 when a gallon of gas cost 11 cents. Nearly a century later, it’s perfected the digital formula to lure in millions of customers each day.

— Matthew, Shawn & Weronika

Here’s the rundown:

Today, we'll discuss the three biggest stories in markets:

• Exxon & Chevron remain money gushers

• Japan makes headlines in markets, again

• Americans are taking more time off

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

⛽ Exxon, Chevron Remain Gushers (WSJ)

So much for oil and gas price fluctuations meaning a lot for big oil.

The recent up-and-down commodity price cycle hasn’t impacted the cash returns of Big Oil companies such as Exxon and Chevron, which continue to beat expectations.

• Look, it’s not 2022, when oil and natural gas prices surged after Russia invaded Ukraine. That helped boost firms like Exxon to their most profitable year ever. Still, in the most recent quarter, Exxon net income was $7.9 billion, and Chevron said it earned $6 billion, about half of what it made a year earlier but 9% above Wall Street expectations.

Price is right: For Big Oil, much boils down (no pun intended) to Brent Crude oil prices, which hovered around $78 a barrel in the second quarter, down roughly a third from a year earlier. So-called “nat gas” prices fell by 50% over the same period.

• While the oil majors posted declining profits, they’re still guzzling cash. Shareholders are among those rewarded handsomely, as Exxon and Chevron alone paid shareholders $15.2 billion in the second quarter through dividends and share repurchases.
  

• That figure aligns with their payouts a year ago, when free cash flow — the money left over after day-to-day operating expenses have been paid — was 3.7 times higher.

• Both companies said Friday that they still plan to meet their $17.5 billion buyback targets this year. That’s enough money to make our heads spin.

Supply and demand: The reports come as oil prices fell sharply from their 2022 peak but have since recovered about 11% in July alone. In its latest report, the International Energy Agency forecast that oil demand is expected to outpace supply in the second half.

Why it matters: 

Predicting energy commodity prices? Good luck with that. It’s a notoriously difficult thing to forecast, as even Ivy League-educated analysts with all the computer algorithms in the world aren’t correct all the time.

• But it would likely take a dramatic event (another pandemic, for example) to stop U.S. oil majors from distributing enormous loads of cash. Exxon and Chevron’s quarterly payouts haven’t dropped below $5 billion in the past decade, even in 2020, when crude oil prices averaged less than $30 a barrel.

Plus, both companies have improved their underlying businesses amid the macroeconomic chaos since the pandemic (2020) and Russia’s invasion (2022). They’ve both become leaner, meaning even so-so commodity prices translate to profits.

• Their earnings have doubled in the last five years. And Exxon ($29.6 billion) and Chevron ($9.6 billion) have plenty of cash on their balance sheets, enough for both paying shareholders and acquisitions.

Shareholders are happy: Exxon and Chevron have returned 85% and 57%, respectively, since early 2020, compared to the S&P 500’s 50% return. Both stocks are down this year a few percent while the broader market has marched higher. But major oil companies remain cheap relative to their historical averages.

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🧨 Bank of Japan Rattles Global Markets (Bloomberg)

Japan, Japan, Japan. From its booming stock market hitting a 33-year high this month after years of poor performance to a surprise change yesterday by the Bank of Japan that jolted financial markets, the country has dominated investors’ attention this year.

What happened? Japan’s equivalent to the Federal Reserve, the Bank of Japan (BOJ), has maintained a policy of “yield curve control” for a while, interfering in the market for Japanese government bonds to ensure interest rates remain extremely low. It has set rigid limits on bond prices and, therefore, the interest rate yields that government bonds can trade at.

But its grip on government bond yields loosened yesterday, with the BOJ announcing that it would double the range that 10-year bonds can trade at — from 0.5% yields to 1%.

• Quick refresher: Bond yields express the expected rate of return on a bond investment in annual percentage terms.

In response to Covid, there was much alarm in the U.S. over the Federal Reserve’s efforts to push down interest rates and “print money” through quantitative easing, which involves the central bank buying up U.S. Treasury bonds from investors.

• While the Fed and most other central banks have sharply reversed those policies in response to inflation, the BOJ has notoriously clung to negative interest rates and yield curve control (an extreme form of quantitative easing), despite inflation hitting a four-decade high in Japan.

As a result of the BOJ’s policies, Japan’s debt markets have hardly functioned normally. Instead of private investors, the central bank owns more than half of the Japanese government’s bonds, and the BOJ is also the largest owner of Japanese stocks in the world.

• For contrast, the Fed owns no U.S. stocks.

Why it matters: 

Now, investors think the BOJ’s new governor Kazuo Ueda, may finally “normalize” Japan’s monetary policy.

What to know: The markets for governments’ debt (bonds) are among the largest financial markets in the world, especially for a major economy like Japan’s, so a central bank’s policy toward its country’s bond market can matter for many, many reasons.

• Namely, though, is that the yields on a nation’s government bonds are a primary determinant of its currency’s value.

Typically, higher interest rates = higher currency exchange value, and that’s exactly what just happened with the Japanese yen. The yen jumped on news that the BOJ would allow rates to rise.

• A weaker currency from yield curve control has supported Japanese exports, helping boost sales for carmakers, for example. However, this hurts consumers since imports are more expensive, though a shift in the BOJ’s policies could reverse this dynamic.

Another reason to care: Japanese investors are the largest foreign holders and purchasers of U.S. government debt. Thanks to yield curve control, Japanese investors have spent more than $3 trillion on investments outside Japan in search of better returns.

• But if they can earn more competitive interest rates on their own government’s debt now, Japanese investors might bring much of that money back home, adding pressure to U.S. markets.

MORE HEADLINES

💶 Goldman Sachs proclaims a “watershed moment for the euro area” and EU bonds

🌔 NASA will give 11 companies $150 million to help build permanent outposts on the moon

🛒 Proctor & Gamble sales rise slightly, fueled by higher prices

🎢 Meme mania returns with Tupperware stock

🏖️ Americans Are Taking Guilt-Free Vacations (WSJ)

Checking the team calendar amid peak vacation season?

No wonder airports and resorts are fully booked this summer. Americans are taking more paid time off (PTO) now than at any point in over a decade.

What’s happening: In the first half of 2023, more working adults opted for vacation days than before the pandemic. They’re taking more days off each time, too.

• In June, time off jumped 11% year-over-year and 20% compared with 2021. The average duration rose by 5% to 32 hours or about four days.

What’s notable: Workers, including executives, admit they opt for longer breaks, even if they don’t fully disconnect from work.

• According to a July survey, 53% of professionals said they intended to take more time off in 2023.
  

• About one-quarter of them said they don’t check in on work, while half said they do occasionally throughout vacation.

Driving the news: So-called “pent-up demand” out of the pandemic, surely, as well as a growing trend to work less and recharge. The average U.S. workweek has dropped by about half an hour in the last three years, especially among higher earners and “workaholics.”

• Meanwhile, some Americans hope artificial intelligence technology can supercharge their productivity, giving them more free time to spend with family.

Why it matters: 

Many of us have felt the guilt and stress of deciding when to take off and how long to go away without feeling we’re disappointing our bosses or colleagues.

It’s a pattern: Unlike many industrialized nations, the U.S. lacks mandatory paid vacation or holiday leave. Even when workers have paid leave, they often choose not to take it. Or, they take it, then spend hours working remotely from the hotel.

• Only about half of U.S. workers say they use all their time off, according to Pew Research.

Recruiting: For years, businesses have tried to lure talent by not only offering remote work but by giving generous PTO packages, including “unlimited PTO” or four, five, and even six weeks of PTO.

• Amid a labor shortage and still-hot labor market, many companies look for any advantage they can get to hire quality candidates.

See you next time!

That's it for today on We Study Markets!

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