Daily Brief: Alcoa’s Earnings Confirmed What Investors Already Knew – The Global Economy’s In A Strong Spot

Daily Brief: Alcoa’s Earnings Confirmed What Investors Already Knew – The Global Economy’s In A Strong Spot

over 2 years ago3 mins

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Alcoa – America’s largest aluminum producer – reported its highest-ever quarterly profit late last week, with the world unable to get enough of the intoxicating metal.

What does this mean?

Yep, we’re talking about aluminum. But the metal’s essential to everything from cans to car parts, which makes Alcoa a bellwether stock: the company’s sprawling business covers all sorts of regions and industries, which means its performance gives us a clue about economic growth as a whole.

Aluminum segment
Source: Alcoa

This time around, though, global economic growth might’ve given investors a clue about Alcoa’s performance: demand for aluminum – and commodities more broadly – has skyrocketed as the world economy bounces back, and its price has risen 24% this year. Analysts, for their part, shouldn’t have been afraid to dream a little bigger: the company’s second-quarter earnings came in higher than they expected. To top things off, the company raised its shipment guidance for 2021, which should – all else being equal – translate to higher-than-expected revenue for the year overall.

Alcoa rises

Why should I care?

For markets: Inflation catches up with everyone eventually.

The rising prices of metals has been great for Alcoa’s earnings, sure, but higher raw material and energy prices are bound to weigh on its own profits going forward. If the company can successfully offset those higher costs, rising profits should lead to a rising share price. But that’s a big “if”: commodity firms don’t exactly have a good track record of passing on their costs, which might be why Alcoa’s stock didn’t move much on Friday.

The bigger picture: Goldman’s a metalhead.

Goldman Sachs thinks aluminum still has plenty of potential: the investment bank is predicting the metal’s price will rise another 20% over the next year. But you could say the bank’s more in ore of another metal at the moment: Goldman thinks supply and demand for iron ore will be out of whack until at least 2023, suggesting the commodity’s “bull market” could keep running and running.

Keep reading for our next story...

The US Is Benefiting From Everyone’s Retail Therapy

US retail image

Looks like Americans have been browsing the rails for comfort after a difficult year: data out on Friday showed US retail sales in June came in way ahead of predictions.

What does this mean?

Economists had been expecting sales to drop 0.3% last month from the month before, but boy were they off the mark: sales actually rose 0.6%. There were three reasons they were right to have been skeptical, mind you. First, the effect of March’s stimulus checks should’ve worn off, meaning shoppers would have less cash to spend on nice-to-haves. Second, record-high inflation means consumers could afford less with the same amount of money (all else being equal). And third, if shoppers were expecting prices to be higher in June and beyond, they might’ve front-loaded purchases in May that they would otherwise have waited to make. Put simply, economists might not be wrong, just a little premature…

Spending again

Why should I care?

For markets: Numbers don’t lie, but they do fudge the truth.

Consumer spending on services – retailers, restaurants, bars, and so on – represents 70% of the US economy, so these strong sales are a massive driver of all-important economic growth. But while they do suggest consumers are happy to spend their money, average US disposable income (adjusted for inflation) is still at its lowest since before the global financial crisis. In reality, then, consumer spending power is falling. Throw rising wealth inequality into the mix, and economic growth looks at risk in the longer term.

The bigger picture: China stumbles.

Data out last week showed China’s retail sales were an expectation-busting 12% higher in June than they were the same time last year. But unlike the States, consumer spending only represents about 40% of the Chinese economy. The country’s overall economic growth, then, fell slightly short of forecasts in the second quarter, growing “just” 7.9% versus the same time last year.

China’s economic performance
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