The best news the US economy has seen in a long time came from June’s inflation statistics. Both the Consumer Price Index (CPI) and Producer Price Indexes (PPI) recorded better-than-expected increases, with 0% month-on-month and 8.5% year-over-year, and -0.5% month-on-month and 9.8% on a year earlier basis. Of course, these figures are only one month old, but they may indicate a brighter second half of the year for investors concerned about earnings growth slowing down in 2019/2020 due to trade war concerns exacerbated by economic uncertainty.
However, it is also true that the biggest reason for the greater-than-anticipated number in July for both indices was lower energy prices (e.g., reduced gasoline costs). I’m well aware that there are a lot of economists/analysts who like to look on the bright side, so we’ll take the “not-so-followed path” of attempting to see the glass half full.
As a result, the most crucial number in the CPI report wasn’t the total number, which incorporates energy costs; rather, it was the core CPI, which does not account for energy or food prices and rose by just 0.3 percent during July—the lowest monthly increase since March of this year when it was also 0.3 percent. This figure is important to the Federal Reserve (Fed). If core CPI numbers continue to be low, there will be less pressure on them to raise federal funds too quickly and too much.
The Fed will need to see evidence that, even if energy and food costs rise, these increases do not seep into the core figures. If this is the case in the following several months, the Federal Reserve may reconsider its interest rate hikes.
That is not to say that the decision went smoothly; on the contrary, it’s safe to argue that it was a contentious one. The Federal Reserve, however, must take this path because they have no way of preventing potentially higher energy and food costs in the future, so they may be forced to ‘play it safe’ and go ahead with a larger interest rate increase than we anticipate. As a result, even more than this week’s CPI number, next month’s PCE price index excluding food and energy will be an important indicator of inflation.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Tuesday
- Housing Starts
- Building Permits
Wednesday
- Retail Sales
Thursday
- Initial Claims
- continuing Claims
- Existing Home Sales
Global Spotlight
On August 15, a Turkish delegation will visit Washington to discuss U.S. President Joe Biden’s pledge to expedite the approval of a sale of F-16 fighter jets to Turkey. This meeting comes as the two countries attempt to repair their strained relationship, which has been further complicated by Turkey’s recent purchase of the Russian S-400 air defense system. While the U.S. has been critical of this purchase, Turkey has defended its decision, saying that it needs the S-400 to defend its borders. The meeting on August 15 is a first step towards resolving these differences and improving relations between the two countries.
On August 18, a meeting between Serbian President Aleksandar Vucic and Kosovar Prime Minister Albin Kurti will take place in Brussels. This meeting is being facilitated by the European Union and comes after a recent flare-up of tensions between Serbia and Kosovo. The dispute concerns license plates that have been an issue since at least September 2021. Kosovo wants to exert increased influence on the ethnic Serb minority concentrated in the north of the country, while Serbia opposes any changes that would reduce its own control over this population. The meeting in Brussels is an attempt to resolve this disagreement and help normalize relations between the two countries.
As Iran and the other countries involved in the JCPOA talks near the Aug. 15 deadline set by the European Union, Tehran is likely to miss the deadline. However, the new draft text proposed by the EU includes a concession to Iran that could result in the International Atomic Energy Agency (IAEA) ending its probe into nuclear material found at three undeclared nuclear sites, one of Tehran’s key demands. This concession could lead to a breakthrough in the talks and pave the way for a return to the JCPOA. Meanwhile, the United States is watching the talks closely and has said that it is willing to return to the agreement if Iran meets all of its commitments.
The National Front for the Defense of the Constitution (FNDC) will continue with its plans for nationwide protests in Guinea on August 17, despite being dissolved by the country’s ruling junta. This comes as tensions continue to mount in the wake of the military coup that took place earlier this month. The FNDC has called for a General Strike on August 17, to force the junta to step down and return power to civilian rule. The opposition coalition has also vowed to hold protests every day until their demands are met. The junta has responded by threatening to use force to quell any demonstrations. This has led to fears that the situation could escalate into violence. The Economic Community of West African States (ECOWAS) has warned that it will impose sanctions on Guinea if the junta does not hand over power to civilian rule within the next two weeks. It remains to be seen how the situation will play out in the coming days and weeks. However, the people of Guinea are living in a state of uncertainty and fear.
Japanese Prime Minister Fumio Kishida will order a government panel to discuss steps to address the rising energy and food costs Aug. 15. Japanese inflation has been over the 2% mark set by the central bank for three straight months, which has made it difficult for consumers to balance their budgets. Kishida will draw from the government’s reserves to cushion against the economic strains. The panel is scheduled to meet again on Sept. 5 to discuss further stimulus measures.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Weeks Numbers
The stock market started the day on a high note and remained elevated throughout the session, closing at or near session highs. The S&P 500 completed its fourth winning week and surpassed the 4,231 mark, which represented a 50% retracement of the losses it registered from the Jan. 3 low (4796.56) and June 16 high (3666.77). Today’s buying was fueled by falling oil prices and the better-than-expected preliminary August University of Michigan Consumer Sentiment number. The cost of importing items from abroad, on the other hand, has risen to an all-time high. In addition, July’s Import-Export Price Index added to this week’s CPI and PPI data, suggesting that prices may be approaching their peak. The S&P 500 gained 3.3% week-to-date; the Nasdaq surged 3.1%; and the Dow Jones Industrial Average increased 2.9% week-to-date. Including this week’s gains, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average are up 17.7%, 23.5%, and 13.7% year to date from their mid-June lows. Last Friday’s buying activity was broad-based, with all 11 S&P 500 sectors ending in the green with gains ranging from 0.8 percent (energy) to 2.3% (consumer discretionary).
Review Last weeks numbers here.
Earnings
The earnings season for the second quarter of 2022 is coming to a close, with only a handful of companies left to report. Overall, earnings are expected to be up 9.7% from the same period last year. Excluding the energy sector, which has been struggling, earnings are still expected to be down 0.9%.
Despite the overall positive picture, there are still some companies that are expected to miss estimates. Of the 456 companies in the S&P 500 that have reported earnings so far, 77.6% have come in above analyst expectations. This is higher than the long-term average of 66.1%, but lower than the recent four-quarter average of 80.6%.
- 22Q2 Y/Y earnings are expected to be 9.7%. Excluding the energy sector, the Y/Y earnings estimate is -0.9%.
- Of the 456 companies in the S&P 500 that have reported earnings to date for 22Q2, 77.6% have reported earnings above analyst estimates. This compares to a long-term average of 66.1% and prior four quarter average of 80.6%.
- During the week of Aug. 15, 20 S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Macro Market
Recent economic data has suggested that the economy is slowing down even more. Even though the US dollar was strong throughout the second quarter of 2018, exports contributed to economic growth, especially during the second quarter. The good news on the economy, if this can be interpreted as goods good news, is that this decline has been a calm one, fueled by higher inflation, higher interest rates, lower real disposable personal income, and decreased real personal consumption expenditures.
However, as it has always been the case, in the most volatile sector of the economy, that is, investment or gross private domestic investment, ‘orderly’ has a far more significant meaning. The second quarter of 2019 marked a turning point for the economy, and GDP declined to negative territory during the period. The most volatile sector of GDP, as well as one of the most revised components of GDP, is investment. For example, investment was initially reported to have increased by 0.1 percent in the first quarter of the year, but it was upped to 5.0 percent during the third GDP growth estimate. Estimating investment is also a difficult process. The graph below displays the difference in behavior over time between two components of GDP, personal consumption expenditures (PCE) and gross private domestic investment (GPDI). The fact that consumer spending (PCE) is the more consistent of these two elements of GDP becomes apparent.
In general, everyone anticipated a drop in investment during the second quarter since it is the most interest rate sensitive sector of GDP. The US is seeing the largest increase in borrowing since last year, but due to higher rates and yet lower investment spending, GDP growth expectations were lowered for Q2. However, the only uncertainty today is whether the 13.5% drop in gross private domestic investment (GPDI) documented in Q2 was accurate, greater, or lesser. This will decide whether GDP for the second quarter stays as it is, is increased, or decreased, respectively.
