Welcome to another exciting week ahead! As we navigate through the mid-July, we continue to embrace the dynamic ebb and flow of the markets, keeping a keen eye on global developments, economic indicators, and corporate earnings. Our optimism remains steadfast, as we continue to witness market resilience amidst changing landscapes. So let’s buckle up, tune into the rhythm of the market, and gear up for the opportunities that lie ahead in the intricate dance of investment and returns. Here’s your weekly guide to the thrilling journey on the road of finance and investment. Let’s make it another week to remember!
The Softening of Inflation
This week’s key takeaway has been the June Consumer Price Index (CPI) report, with both headline and core inflation increasing at a milder than expected rate of 0.2% m/m. This aligns with previous signs of weakening in the used car market seen in the April and May reports. As used car prices begin to reverse, we expect this to exert downward pressure on CPI inflation in the coming months.
Broad-Based Disinflation Evident
Encouragingly, the CPI report also hinted at the beginning of a broad-based disinflation. The percentage of expenditure categories in the core CPI basket witnessing over 5% annualized inflation over a three-month period fell to just 29% in June, from 50% last year. Further, core goods, core services, and overall core inflation excluding used cars and shelter, all witnessed significant deceleration in the second quarter. As a result, the Cleveland Fed’s trimmed mean CPI measure, a neutral indicator of underlying inflation, fell to its lowest reading since December 2021.
Producer Price Inflation on a Downtrend
The June Producer Price Index (PPI) report also showed weaker than anticipated growth, hinting at declining input cost pressures. This could play a significant role in keeping consumer prices on a disinflationary path. However, high margins may persist unless a significant deterioration in demand is observed.
Persistence in PCE Inflation
After analyzing data from the June CPI and PPI reports, we project core PCE inflation to increase slightly by 0.2% m/m in June. Even though it’s more than double the Fed’s target, it signals a meaningful step towards an inflation slowdown.
Fed’s Future Course
What does this mean for Fed policy? Given the recent encouraging news on inflation, we still expect the Fed to hike this month, considering the overall data flow since the last hike in May. The future policy path, however, will be highly dependent on incoming data.
Inflation Head-Fake: A Caution
Recent data, showing softer inflation and a slowdown in nonfarm payrolls, paints a picture of a benign slowdown in the US economy. However, it might be premature for the Fed to call it a victory on inflation. The Fed will likely wait for more signs of softer inflation before going on hold.
A Harder Landing Still Possible
While our forecast includes a very mild recession, a deeper downturn shouldn’t be entirely ruled out. If June’s disinflation is a result of weaker consumer demand, it’s good news for the Fed in the short term. However, should demand start to slow significantly, it might lead to more significant weakening than expected.
Investors and traders are asking:
How might the Fed’s expected policy changes affect the market and investment dynamics in the coming months?
The Federal Reserve’s expected policy adjustments are sure to set a new tempo in the market and investment dynamics over the coming months. Here’s how:
1. Interest Rate Hikes: The anticipated interest rate hikes could initially spur volatility in the market. However, a well-calibrated and effectively communicated approach by the Fed can help prevent any drastic market overreactions. Remember, the purpose of these hikes is to ensure sustainable economic growth and curb inflation, both of which are long-term benefits for investors.
2. Impact on Bonds: Higher interest rates generally lead to an increase in bond yields, which could make fixed-income instruments more appealing to some investors. This could steer some investment away from the stock market, but also provide diverse opportunities for investors looking for more predictable returns.
3. Strengthening Dollar: The potential rate hikes might also strengthen the US dollar against other currencies, which could impact companies with significant international operations. However, this could present a favorable opportunity for investors eyeing foreign markets or international mutual funds, as their purchasing power may increase.
4. Real Estate Market: Higher interest rates could lead to an increase in mortgage rates, potentially slowing down the real estate market. But remember, this cooling effect might open doors for investors who have been sidelined by the heated housing market of the past few years.
5. Equities Market: Higher interest rates often lead to a repricing of risk in the equities market, particularly in sectors that rely heavily on borrowing. While this might initially result in some market turbulence, it could also present attractive entry points for investors to buy stocks of fundamentally strong companies at lower prices.
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The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Monday 7/17/2023
Empire Manufacturing Insight
The Empire State manufacturing index, a barometer for New York State’s manufacturing health, is projected to reset to 0.0, following last month’s unexpected jump to 6.6. The recent volatility is expected to persist, however, the underlying trend signifies continued contraction in regional manufacturing activity, mirroring other surveys and certain hard data. Nonetheless, resilience in manufacturing often heralds an eventual upturn, offering a glimmer of hope for the sector.
Tuesday 07/18/2023
Anticipation for Advance Retail Sales
Utilizing BofA aggregated credit and debit card data, I’m predicting a modest 0.2% m/m increase in headline retail sales for June, just below May’s 0.3% m/m rise. While softening retail sales figures are consistent with the current nonfarm payroll slowdown, I firmly believe that we are currently navigating through a period of slower, yet not recessionary, consumer spending.
Industrial Production Forecast
For June, industrial production is expected to demonstrate a modest rise of 0.1% m/m, holding the capacity utilization rate steady at 79.6%. In spite of headwinds, resilience in the durable goods manufacturing sector may lead to overall manufacturing production growth.
NAHB Housing Market Index Expectations
Despite persisting high mortgage rates, the June NAHB homebuilder index is expected to improve to 57 from 55. With strong demand for homes and limited inventories, potential buyers are increasingly turning to the new homes market, offering support for builder sentiment.
Wednesday 7/19/2023
Housing Starts and Building Permits Outlook
Following May’s 21.7% surge in housing starts, a mild moderation to 1.50mn saar is expected for June. Though a reversal might be observed, this still aligns with the promising narrative that the housing market has likely found a floor.
Thursday 07/20/2023
Jobless Claims Prediction
Following the July 4th holiday, initial jobless claims are anticipated to rise to 246k in the week ending July 15. Despite a hint of volatility around holidays and increasing WARN notices, the job market is known for its resilience and capacity for recovery.
Philadelphia Fed Business Outlook
A slight decrease to -14 is expected for the July Philadelphia Fed manufacturing index, marking an eleventh consecutive negative reading. However, periods of contraction often precede robust expansion in the manufacturing sector.
Existing Home Sales Forecast
Existing home sales are projected to decelerate slightly to 4.20mn saar in June, influenced by low inventory and high mortgage rates. Yet, with more potential homebuyers exploring the new home sales market, we could witness a positive shift in the near future.
During these key announcements, market reactions can be unpredictable. Traders are advised to exercise caution and seize potential opportunities that may arise from these dynamic situations.
Macro Market
Growth
Shifting our outlook on the U.S. economy, I’ve decided to postpone the expected slowdown by two quarters. Now, I anticipate real GDP growth to reach 1.2% 4Q/4Q this year, a significant improvement from the -0.2% I previously forecasted. While I’ve adjusted the projected 4Q/4Q growth for 2024 to 0.0%, down from 0.9%, I believe the economy will experience a temporary contraction during the first half of 2024. However, this should be mild, with an anticipated -1.0% and -0.5% q/q saar for 1Q 24 and 2Q 24, respectively.
Inflation
Updating my predictions for core personal consumption expenditure (PCE) inflation, I now forecast a year-end rate of 3.5% 4Q/4Q, decreasing to 2.4% 4Q/4Q by the end of next year. I am optimistic that price stability can be achieved by 2025, indicating a promising trajectory for the economy.
Federal Reserve
Regarding the Federal Reserve’s actions, I anticipate two increments of 25bp rate hikes in July and September, potentially leading to a terminal rate between 5.5% and 5.75%. While there is a chance the Fed could opt for the last hike to be in November, my current belief is that the first rate cut and conclusion of quantitative tightening (QT) will occur in May 2024, slightly later than my previous March 2024 expectation.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
S&P 500 Stages a Strong Rally
This week marked an impressive comeback for the S&P 500, bolstered by encouraging inflation data from the Consumer Price Index (CPI) and Producer Price Index (PPI) reports. Despite a minor hiccup on Friday, the index experienced a robust 2.4% growth over the week, powering past the 4500-mark for the first time in 15 months. This upward momentum has lifted the index’s year-to-date performance to a formidable 17.82%, placing it just 6.07% shy of its record close recorded on January 3, 2022. This spirited recovery underscores the resilience of the market and offers a hopeful prospect for investors.
by Jennifer Nash,
Earnings
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 23Q2 Y/Y earnings are expected to be -8.1%. Excluding the energy sector, the Y/Y earnings estimate is -2.6%.
- Of the 30 companies in the S&P 500 that have reported earnings to date for 23Q2, 80.0% have reported earnings above analyst estimates. This compares to a long-term average of 66.4% and prior four quarter average of 73.4%.
- During the week of July. 17, 68 S&P 500 companies are expected to report quarterly earnings.
Global Spotlight
Revitalizing Climate Dialogue
Climate envoy John Kerry departs for Beijing on July 15, ushering a hopeful era in U.S-China climate discussions that froze following Nancy Pelosi’s controversial Taiwan visit in 2022. Despite a history of geopolitical tension, both nations, the world’s top carbon emitters, recognize the necessity of achieving climate stability. Kerry’s mission prioritizes climate talks, endeavoring to separate them from contentious bilateral issues. Environmental scientists are optimistic, underlining the crucial role of U.S.-China collaboration in curtailing global warming to the Paris Agreement’s target of 1.5 degrees Celsius above pre-industrial levels.
Strengthening Transcontinental Partnership
The EU-CELAC summit commences in Brussels, Belgium, from July 17-18, promising deeper cooperation and stronger economic ties between European and Latin American-Caribbean countries. A highlight of the summit is the EU’s keenness on importing essential resources for the clean energy transition from Latin America, like lithium, copper, green hydrogen, and iron. The summit also provides a platform for deliberating on free trade agreements and bilateral investment treaties, including the pending EU-Mercosur deal, an ambitious step towards a more integrated global economy despite environmental and protectionist concerns.
Turkish Diplomacy in the Gulf
Turkish President Recep Tayyip Erdogan embarks on a diplomatic journey to the Arab Gulf from July 17-19, marking his first overseas visit since re-election. With the aim to secure investments from the affluent region, Erdogan is poised to reassure potential investors of his administration’s commitment to reliable economic policies. Though the Arab Gulf’s financial aid cannot single-handedly resolve Turkey’s economic challenges, Erdogan’s visit signifies a positive stride towards regional economic cooperation, with the focus remaining on bolstering Turkey’s monetary stability and curbing inflation.
Black Sea Grain Deal Countdown
As the July 17 deadline looms for the Russo-Turkish grain deal, there is optimism about its renewal. The agreement has been instrumental in sustaining the global grain supply despite the Russian invasion of Ukraine in 2021, which significantly disrupted wheat and cereal exports. Current bumper harvests across Argentina, Canada, and the U.S have softened the deal’s global impact on food prices. However, its continuation remains crucial for nations like Afghanistan, Somalia, Yemen, and Ethiopia that grapple with local currency depreciation and global inflation. The potential fallout of the deal could significantly affect these vulnerable nations’ food security.
Stratfor.com
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