🎙️ Nirvana

“Soft landing” or not, economists’ awe at the U.S. economy’s ability to avoid a recession in 2023 (so far) is driven by hard economic data, but that hasn’t exactly aligned with regular Americans’ perceptions of economic reality 😬

A new set of Harvard polls showed that 61% of Americans think the economy is “on the wrong track,” and nearly half of all Americans believe their financial situation is worsening.

💭 Is Americans’ pessimism unwarranted, or is the economic data missing something?

— Weronika, Shawn & Matthew

Here’s the rundown:

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

• New theory predicts economic “Nirvana”

• Elon Musk teases Twitter rebrand

• Domino’s posts mixed earnings, doubles down on delivery

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

CHART(S) OF THE DAY

IN THE NEWS

✌️ New Theory Suggests “Nirvana Scenario” For U.S. Economy (Bloomberg)

As mentioned in the intro, Americans aren’t optimistic about the economy, but maybe they should be?

Many investors haven’t been upbeat about the economy’s trajectory either, staring down dramatic rate hikes in response to an almost unprecedented inflationary surge.

• Even worse, one of Wall Street’s preferred indicators for impending recession, known as a “yield curve inversion,” reared its ugly head in 2022 and has persisted since.

As economic data from unemployment to consumer spending has remained much stronger than expected, the absence of evidence for a recession — as predicted by yield curve inversion — has remained a baffling and controversial point.

Cause for optimism: Ed Yardeni, who has covered markets since the 1970s, proposes a “Nirvana Scenario,” with the benefits of an inflation slowdown without much pain (a spike in unemployment), as anticipated in conventional economic models such as the Phillips Curve.

How does this economic nirvana explain the previously mentioned yield curve inversion that has worried investors?

Let’s zoom out: The yield curve is a chart depicting the interest rates for U.S. government bonds with different maturity dates (when bonds must be repaid), ranging from three months to thirty years.

• Normally, longer-time-horizon loans to the government should have higher rates as an extra premium for tying up funds for longer.
  

• But interest rates on short-term bonds, namely on bonds maturing in less than two years, have been much higher than rates for bonds with longer maturities, hence why the curve is “inverted.”

Inversion has historically predicted recessions over the next 1-2 years from the first occurrence. Basically, investors expect rates to be high in the meantime and then drop dramatically as the Federal Reserve lowers interest rates in response to a recession.

Why it matters:

In Yardeni’s Nirvana scenario, the yield curve inversion since 2022 may signal that the Fed will successfully tame inflation without creating a recession.

Put differently: Short-term bond yields are elevated because of the Fed’s rate hikes, but as inflation moderates, the inversion that shows lower interest rates beginning next year may reflect a more natural lowering of rates in response to normalizing inflation rates, not in response to recession.

• A Bank of America strategist agreed, saying, “The (yield) curve shape is more a function of expectations for declining inflation than a deterioration in (economic) growth.”
  

• To summarize, if the Nirvana scenario proves true, analysts would be forced to reconsider their understanding of yield curve inversions, challenging the basis for much of the recession calls we’ve seen recently.

Too early? Of course, it’s too soon yet to know the answer.

• Said one Duke University professor, “It’s too early to say that yield curve inversion is a false signal.” He adds, “The big question isn’t whether the downturn is coming. It’s how severe it will be.”
  

• Evidently, the financial world remains deeply divided on the topic, but a stronger-than-anticipated economy in 2023 is prompting a review of conventional wisdom.

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 📢 Elon Musk Launches Twitter Rebranding (WSJ)

The last few months haven’t been easy at Twitter. Maybe its iconic blue bird flying away will help.

What’s happening: Advertising revenue dropped 50%. New rivals like Threads are, well, threatening. And a multi-million-dollar lawsuit by ex-employees and music publishers isn’t helping as Twitter tries to revive its image through a rebrand to…drumroll, please…”X.”

• “Soon we shall bid adieu to the Twitter brand and, gradually, all the birds,” Musk tweeted. The longtime blue bird logo has been replaced with an "X,” which is already all over its platform and San Francisco offices.

• “It’s an exceptionally rare thing—in life or business—that you get a second chance to make another big impression,” said Twitter CEO, Linda Yaccarino.

The sudden change aligns with Musk's grand vision of turning the 17-year-old service into an all-encompassing platform known as "X.com" or an "everything app."

In March, Musk speculated about the possibility of making his company the largest financial institution globally, using WeChat—a popular Chinese app that offers messaging, mobile payments, and business services—as a model.

Why it matters:

Musk is trying to change public perception after months of bad PR. Could the rebrand inject fresh excitement into the platform?

• Since Musk's takeover, the platform's revenue has declined, mainly due to advertiser pullback over content moderation concerns.

Critics say the rebrand could backfire.

• “It doesn’t make a lot of sense to replace a globally recognized brand with a generic placeholder symbol,” shared Jason Goldman, a former head of product at Twitter.

Time will tell whether the rebrand will pay off as Musk tries to grow Twitter from merely a social media site. The Tesla CEO wants his new venture to become a digital town square where anyone can chat, pay for goods and services, and earn a living by selling content.

• He also shifted its model to more of a subscription business to diversify revenues away from almost entirely advertising, which is cyclical—and a ruthless business.
  

• But the payout could be extraordinary if it all comes together: Musk said Twitter could one day be worth $250 billion, about 10 times its value today.

MORE HEADLINES

💪 The U.S. power grid has withstood record heat — so far

🎬 “Barbenheimer” weekend lives up to hype, shatters box office expectations

💸 After debt ceiling standoff, the U.S. government refills its piggy bank

🎸 Spotify increases prices for its premium subscription plans

🍕 Domino’s Beats Profit Estimates As Costs Ease (Reuters)

Another day, another earnings report. Domino’s reported earnings that beat Wall Street estimates, but revenue fell short.

The pizza chain, founded in 1960, said in its latest earnings report that sales grew 5.8% in the second quarter, while earnings per share rose 9.2% to $3.08 per share, the third consecutive increase. But revenue fell 3.8% to $1.02 billion, primarily because of lower order volumes and a price dip.

It’s all about the pizza: Domino’s stock surged in 2020 and 2021 but cratered in early 2022. Sound familiar?

• Over the past quarter, the chain added 197 stores, with 253 openings and 56 closures. Same-store sales rose 5.5%.

Partners: Domino’s announced a delivery partnership with Uber, meaning more than two-thirds of Domino’s stores worldwide will accept orders from the Uber Eats and Postmates apps.

• Domino’s hopes the partnership will bolster its delivery business amid a slowdown after food delivery sales declined 3.5% in the second quarter.
  

• As CFO Sandeep Reddy told investors, “The U.S. delivery business continues to be challenged.”

Something to like: Margins improved because of price increases. The average price increase was 3.9%, but management said that should moderate to about 2% by year-end. Executives also noted that costs have fallen just as commodity prices have fallen. “We were pleased with better-than-expected margins,” wrote one analyst.

Why it matters:

Domino’s is the world’s largest pizza company by sales and stores. But the company has fallen out of favor in some areas as consumers cook more at home amid inflation and order from competitors via delivery apps.

• Domino’s expects its Uber deal to generate a billion dollars in new sales, just like rivals Papa John’s and Pizza Hut struck deals with food-delivery providers in 2019 to broaden their reach. Both companies have said working with apps helps them secure enough drivers during peak hours. Domino’s executives said that the pandemic turned many people to ordering food through apps and that the chain can’t afford to pass up those sales.
  

• Domino’s is also launching a “new and improved” loyalty program in September, specifically targeted at delivery customers.

New life: Domino’s shares tumbled after hitting a record high in December 2021, roughly when the S&P 500 peaked. Sales have since been stagnant at Domino’s, and a labor shortage meant fewer drivers were available to deliver orders for takeout.

• But the picture is improving. Better profitability could help Domino’s compete in the still-tight labor market to retain and attract more drivers. Analysts noted that falling commodity prices and inflation overall shouldn’t hurt either.
  

• “We believe an acceleration in sales, coupled with commodity deflation and improved labor availability, should be the catalyst for franchisee profit recovery this year, accelerated domestic development, and ultimately, a much higher share price,” wrote another analyst.

See you next time!

That's it for today on We Study Markets!

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