Weekly Market Report: August 16th, 2024

Market Anecdotes

• Equity markets welcomed last week’s busy economic calendar following recent concern surrounding a slowdown in the U.S. economy. The inflation, retail sales, and labor market indicators generally served to soothe markets.
• Economic data and FedSpeak last week translated to reduced market expectations for aggressive rate cuts where probabilities of a 50 bps cut at the upcoming September FOMC meeting fell from 51% to 26% but a 25 bps cut is carrying a 75% probability.
• As the Fed approaches an easing cycle Bespoke noted, despite cuts already from many central banks, the GDP weighted average global policy rate has only fallen 25bps since the 6%+ level.
• The unofficial close of 2Q earnings season with the Walmart report on Thursday leaves the S&P 500 with YoY blended earnings and revenue growth were 10.9% and 5.2%, respectively.
• A recent survey by Affirm showed 59% of respondents falsely believe the U.S. is currently in recession, likely due to the difficulty of inflation pressure on lower income households. The most recent Bloomberg survey shows 30% of economists expect recession within a year.
• A hazardous materials explosion at the world’s third busiest container port, the Ningbo Port in China, leading to its indefinite closure, is expected to impact key trans-Pacific trade lanes, supply chains during peak shipping season.
• An index from Eurekahedge which tracks hedge funds who utilize AI and machine learning theory suggests that portfolio manager jobs appear to be safe, at least for now with the S&P 500 dramatically outperforming, particularly since ChatGPT was launched.

Economic Release Highlights

• July CPI YoY Headline (2.9% vs 3.0%) and Core (3.2% vs 3.2%) along with MoM Headline (0.2% vs 0.2%) and Core (0.2% vs 0.2%) both registered generally in line with consensus estimates.
• July PPI YoY Headline (2.2% vs 2.6%) and Core (2.4% vs 3.0%) along with MoM Headline (0.1% vs 0.2%) and Core (0.0% vs 0.2%) came in below both forecast and prior month readings.
• The July NY Fed Survey of Consumer Expectations reported 3-year inflation expectations fell by 0.6% to 2.3% while median 1yr (3.0%) and 5yr (2.8%) were unchanged.
• July Retail Sales were above the high end of the forecast range and well above the spot forecast for Headline (1.0% vs 0.3%), Ex-Vehicles (0.4% vs 0.1%), and Ex-Vehicles & Gas (0.4% vs 0.3%).
• Weekly Jobless Claims were below the spot forecast and toward the low end of the range (227k vs 234k). The labor market has seen tour week moving average claims fall from 241k to 236.5k.
• The July NFIB Small Business Optimism Index registered 93.7, above both the spot forecast (91.7) and toward the high end of consensus range (91.6-92.0).
• August UofM Consumer Sentiment reading of 67.8 was slightly better than spot consensus 67.0 and within the forecast range (65.0-69.1).
• The Housing Market Index dropped in August to 39, missing the consensus estimate of 42.
• July Housing Starts (1.238M vs 1.342M) and Permits (1.396M vs 1.430M) slowed down from June and came in below estimates.
• July Industrial Production cooled relative to June’s strong 0.6% reading and came in below forecast (-0.6% vs -0.1%).

Weekly Market Report: August 9th, 2024

Global equity and bond markets endured another volatile week despite a notable lack of catalysts. U.S. equity markets spent most of the week clawing back from Monday’s selloff thanks to a reappearance of the soft- landing narrative, an uptick in corporate buyback activity, and bounce momentum leading to lower systematic selling estimates. Last week saw a relatively light economic calendar and a continuation of second quarter earnings reports. U.S. equity markets were down and up during the week but ended flat (-0.04%) while international developed (+0.49%) and emerging (+1.11%) both managed marginal gains. Bond yields continued to reclaim lost ground of the past two weeks in what was a relatively parallel shift higher approximately 12 to 18 bps. The USD was unchanged against a basket of currencies, including the Yen, and commodity markets traded higher thanks in large part to a 4.5% rally in WTI crude oil which closed up 4.5% to $76.84.

Market Anecdotes

• Examining market internals and trending economic data over the past two weeks in an effort to conceptualize the sudden surge in volatility leaves our short term (neutral) and intermediate term (cautious) views largely unchanged.
• Apollo noted the low level of job cuts to reinforce the idea that the Sahm Rule does not apply to the current labor market due to the significant increase in immigration.
• A close look at the behavior of high yield credit spreads made clear there was not a material spike in perceived credit risk to go along with the material spike in equity market volatility.
• Several strategists have highlighted market leadership rotation evident since the soft July 11th CPI report, seemingly a marker for reestablishing the disinflation narrative and an associated dovish monetary policy pivot acknowledging labor market deterioration.
• Now in the later stages of the earnings season (91% of S&P 500 reported), second quarter blended earnings have grown 10.8% with beat rates of 78% and beat margins of 3.5%. Revenue grew by 5.2% with below average beat rates (59%) and beat margins (0.5%).
• Bloomberg’s Taro Kimura noted recent speculative Yen short positioning is as ‘offside’ as we’ve seen since the Yen carry trade implosion we saw back in 2007.
• The 2/10 curve which has been inverted since July 2022 ‘uninverted’ briefly last week which, in the past four recessions, has happened on average two to six months past the beginning of the recession.
• Trepp CMBS Research noted 30-day CMBS delinquencies ticked higher in July to 5.45%, up from 4.41% last year, with over 65% of newly delinquent loans coming from the office sector which is now over 8%, up sharply from 4.96% last year.
• The global geopolitical landscape remains in flux with a potentially large conflict looming in the middle east between Israel and Iran.

Economic Release Highlights

• The July ISM Services Index (51.4 vs 51.0) was generally in line and improved over June’s 48.8.
• The JPM Global Composite PMI registered a composite reading of 52.5 and services of 53.3.
• Weekly jobless claims came in below expectations (233k vs 240k) and the 4-week moving average claims increased to 240k.

Weekly Market Report: August 2nd, 2024

Market Anecdotes

• Equity markets traded in a risk-off tone toward the end of the week where bad news seemed to be received as ‘bad news’, increasing odds for more of a dovish Fed. Lower rate expectations seem to have fueled a historic July stretch of small caps outperforming large caps.
• Both slowing labor market and slowing consumer spending have fanned investor anxiety about the growth outlook and whether policy will react firmly enough to interrupt softening momentum.
• Despite a clear dovish pivot by notable economists, Bloomberg’s financial conditions index in the U.S. and Eurozone are indicating very easy conditions just as the Fed and ECB begin to embark on a rate cut campaign.
• Hulbert Ratings noted equity market returns following an initial FOMC rate cut are somewhat of a mixed bag with outcomes ultimately dependent on what market participants believe is the forward path for the economy: a soft landing or a weak economy in need of accommodation.
• Other foreign central banks saw the BoJ follow the March rate hike, its first in 17 years, with a surprise increase, moving the range from 0%-0.1% to 0.15%-0.25% and a reduction in their QT program. The BoE delivered an expected 25 bps rate cut to 5%.
• Second quarter earnings reports, now 75% complete, are sitting at a respectable 11.5% blended bottom line but a disappointing revenue beat rate and margin of 59% and 1.1% respectively.
• U.S. bond yields moved sharply lower on the risk aversion and growth concerns surfacing toward the end of the week while yield curves have been trying to un-invert.
• Healthy personal consumption data in the second quarter following a pullback in Q1, while encouraging, may be difficult to sustain given labor market conditions and overall consumer confidence and sentiment indications.
• Alpine Macro has made the case that the Sahm Rule may provide a false recession signal given the gap between labor demand and supply has been filled with surging supply as opposed to, historically, falling demand.

Economic Release Highlights

• July payrolls came in below the consensus estimate (114,000 vs 180,000) and the unemployment rate increased to 4.3% from 4.1% in June. Labor participation rate increased to 62.7% and average hourly earnings slowed to 0.2% MoM and 3.6% YoY.
• Second quarter Employment Cost Index grew QoQ (0.9% vs 1.0%) and YoY 4.1%, slightly less than first quarter growth of 4.2%
• June JOLT Survey showed 8.184M job openings, slightly higher than consensus estimate of 8.0M.
• The July U.S. ISM Manufacturing Index came in below expectations (46.8 vs 48.8), declining from June’s 48.5 reading and coming in well below the forecast range of 48.0-50.1.
• The July JPM Global Manufacturing PMI cooled to 49.7 from 50.9 in June. China’s Manufacturing PMI came in below expectations (49.8 vs 51.5), down from June’s 51.8 and India recorded 58.1.
• The Consumer Confidence Index in July increased from a 97.8 reading in June to 100.3, above the consensus estimate of 99.5 and the forecast range of 97.5 to 100.0.
• Eurozone Q2 GDP grew at a 0.3% QoQ and 0.6% YoY clip, with the former in line and the latter slightly above consensus.
• The May Case-Shiller Home Price Index rose 0.3% versus expectations for 0.5% with a YoY gain in line with expectations at 6.8%.

Weekly Market Report: July 26th, 2024

Markets last week were focused on added political uncertainty, second quarter earnings reports, and a relatively busy economic calendar which included data points on both inflation trends and growth indicators. Equity markets continued to see consolidation in larger cap and technology names while smaller cap and value areas have remained resilient. The capitalization-weighted S&P 500 fell 0.8% while the equal-weighted S&P 500 gained 0.8% and Russell 2000 rallied 3.5%. International developed (-0.15%) and emerging (-0.89%) markets both traded slightly lower. Bond yields again moved slightly lower on the week leaving the 10yr UST yielding 4.20% while commodities traded lower in sympathy with WTI falling 3.7% to close at $77.16.

Market Anecdotes

• Nearing the midpoint of the second quarter earnings season, the S&P 500 is showing blended earnings growth of 9.8% with beat rates and beat margins of 78% and 4.4%. respectively.
• Recent trading days have looked like a mirror image of the first half of the year with the ‘magnificent seven’ and growth stocks experiencing some consolidation while the ‘other 493’ companies have held up relatively well.
• Bespoke noted the twelve trading days since July 11th have seen the NASDAQ 100 fall 8.3% and Russell 2000 rise 9.3% which is the second most extreme 12-day reversal since 1985. The soft CPI report and increased odds of a Trump victory are two potential drivers behind the rotation.
• BCA noted the U.S. consumer has remained resilient right up to past recessions but labor market deterioration, tight bank lending standards, and mostly spent pandemic era excess savings do pose headwinds to the consumption-oriented U.S. economy looking forward.
• Another soft inflation read last week (PCE), particularly in the market-based core measure which Powell and FOMC members have emphasized, alongside continued softening labor market data have firmed up rate cut expectations from market participants.
• The PBoC cut the 1-year medium term LFR by 20bps to 2.3% following a 10-bps cut in three other reference rates earlier in the week. China strategists continue to view rate cuts as simply accommodative, not stimulative, holding out for more aggressive central government action.

Economic Release Highlights

• July YoY PCE inflation was generally in line with expectations for both headline (2.5%) and core (2.6%) alongside MoM readings of headline (0.1%) and core (0.18%). Personal income grew slightly less than forecast (0.2% vs 0.4%) and PCE was in line with spot consensus at 0.3%.
• The July Flash PMI (C,M,S) registered 55.0, 49.5, 56.0 with a soft read on manufacturing and strong read on services sector activity.
• July European PMIs (C,M,S) were generally in line with Eurozone (50.1, 45.6, 51.9) and U.K. (52.7, 51.8, 52.4)
• 2Q U.S. GDP of 2.8% QoQ AR (3.1% YoY) was well above consensus forecast of 2% and Personal Consumption Expenditures registered 2.3%, also above spot consensus of 1.9%.
• New (617k vs 640k) and Existing (3.890M) Home Sales both came in below consensus forecast, declining at a monthly and annual pace of 5.4%.
• Durable Goods Orders in June fell 6.6%, well below the spot consensus of 0.3% and forecast range of -2.3% to 0.8%. Ex-Transportation (0.5% vs 0.2%) and Core Capital Goods (1% vs 0.2%) both exceeded the consensus forecast.
• The UofM Consumer Sentiment index was generally in line, registering 66.4 versus spot consensus of 66.0.

Weekly Market Report: July 19th, 2024

Last week markets digested an assassination attempt on Donald Trump over the weekend and his subsequent nomination for POTUS at the RNC, the first week of 2Q corporate earnings reports, a major technology outage, and a very heavy dose of Fed Speak. Major averages in the equity markets delivered some long overdue consolidation with a good deal going on under the surface from market cap and style perspectives. The S&P 500 closed down 2% while small caps closed up 2.2% in a historic surge higher. International developed (-2.5%) and emerging (-4%) both sold off in sympathy with the U.S. Bond yields stayed relatively calm with the 10yr UST yield closing up slightly at 4.25% and credit spreads remaining at extreme lows. The USD closed up slightly in what was likely some risk aversion momentum while commodity markets traded lower across the board, bringing oil back to the $80 level.

Market Anecdotes

• Market internals with the historic surge in small caps and a shake up in growth/value leadership has been notable. Technology shares sold off on a major technology outage and an increase in political risks stemming from a strong resurgence of trade war narratives from the RNC.
• The rally in U.S. small caps reached historic levels last week hitting 1% gains in five consecutive days and closing at a record 4.42 standard deviations above its 50dma.
• One recession indicator worth noting is Weekly Jobless Claims which have continued to trend higher with a 4-week average up to 234k. Continuing Claims increasing to 1.867M have also been running above benchmark levels for the past two months.
• A key underlying premise of the BCA GIS downgrade on equities in June is the ‘kinked’ Phillips curve framework which suggests the pandemic related abnormality in job vacancies relative to unemployment has largely been worked through with normal relationships expected to resume.
• Excess savings certainly propped up the U.S. economy. However, the Atlanta Fed GDPNow modeled 220bps of contribution to Q1 GDP, with a final print of 98bps and is expecting 150bps contribution for Q2 with overall growth currently modeled at 2.7%.
• Comments from Powell last week on the labor market, inflation trends, and election cycle effects amounted to no move expected in July but increased odds of a move in September which markets are currently assigning a 97% probability.
• Earnings reports began in earnest last week with 88 companies reporting and beat rates of 78% alongside downbeat guidance (1% raised and 5% lowered guidance).
• While still over 100 days before the November elections, odds of a Republican POTUS victory increased 8.4% last week to 68.9% and odds of Republicans taking back control of the Senate are even higher. Currently DC in full Republican control seems to be the most likely outcome.
• Hopes for strong stimulus indications fell flat last week from Beijing’s closely watched Third Plenum which adjourned with no meaningful measures or indications.

Economic Release Highlights

• June Retail Sales came in well above consensus forecast on headline (0.0% vs -0.3%), Ex-Vehicles (0.4% vs 0.1%), and Ex-Vehicles & Gas (0.8% vs 0.1%).
• Industrial Production in June outpaced estimates (0.6% vs 0.3%) with healthy Manufacturing Output of 0.4% and increasing capacity utilization.
• June Housing Starts (1.353M vs 1.305M) and Permits (1.446M vs 1.395M) both increased over May’s level and came in above consensus forecasts.
• The July Housing Market Index fell from 43 to 42, versus consensus calls for no change, leaving the index at its lowest reading of the year.

Weekly Market Report: July 12th, 2024

Markets last week took in a relatively light economic calendar and digested several FOMC speaking engagements including the semi-annual congressional Humphrey Hawkins testimony. On Saturday, political violence sadly reared its head again in the U.S. in an attempt on Donald Trump’s life with many open questions swirling including potential impact on the upcoming election cycle. By Friday’s close, the S&P 500 marked another new record high, adding 0.87% on the week alongside healthy gains in international developed (+1.86%) and emerging (+2.02%) markets. Bond yields declined across the curve pushing the 10yr UST yield back below 4.20% while both the USD (-0.75%) and broad commodity markets (-2.5%) lost ground.

Market Anecdotes

• Scott Brown made an interesting technical observation that the July 5 record high occurred with less than 45% of stocks trading above their 50 dma, something that he claims has only happened one other time, December 1999.
• Second quarter earnings season kicked off last week (SIFI banks) with an overall street consensus estimate of 9.3% YoY earnings growth.
• One month does not make a trend but the June CPI report couldn’t have been much better with disinflation and cooling shelter inflation finally showing up in the data.
• As markets look toward possible September rate cuts, it’s worth noting that slowing inflation and slowing growth likely has nominal GDP at approximately 5%, which along with a Fed Funds rate of 5.5%, is veritably restrictive by most any measure.
• The semi-annual Humphrey Hawkins Fed testimony, alongside ample FedSpeak on the circuit, included standard talking points but also an important subtle shift from Powell acknowledging labor market weakness and modest progress on inflation.
• Signs of an orderly labor market slowdown seen recently remain key to addressing wage-price inflation pressures along with cooling shelter costs in the battle against inflation.
• Subdued loan demand in China and restrained public sector debt issuance was highlighted last week on the eve of the Communist Party’s Third Plenum commencing this week with potential reform announcements in play.
• A research paper from the San Francisco Fed estimated the current breakeven job creation ‘breakeven’ at 230,000, due to increased labor force participation and immigration, but made the important distinction that the estimate is dynamic and will eventually revert to the long-term average range of 70,000-90,000 per month.
• A separate Dallas Fed research paper examined the immigration surge impact on inflation and economic growth concluding the 1.2% increase in population results in a slight (0.06%-0.11%) increase in inflation but a significant increase in GDP of 0.72% annually.
• Bloomberg noted Piper Sandler & Co eliminated the routine practice of publishing annual S&P 500 return predictions, something other Wall Street firms and strategists may want to consider following suit given the spotty track record.

Economic Release Highlights

• June CPI YoY Headline (3.0% vs 3.1%) and Core (3.3% vs 3.5%) along with MoM Headline (-0.1% vs 0.1%) and Core (0.1% vs 0.2%) declined from April readings and came in below forecasts.
• June PPI YoY Headline (2.6% vs 2.3%) and Core (3.0% vs 2.3%) along with MoM Headline (0.2% vs 0.1%) and Core (0.4% vs 0.2%) came in above forecast and accelerated versus May readings.
• The July UofM Consumer Sentiment Index registered 66, slightly below consensus estimate of 68.5.