Welcome back to our weekly roundup, where we shed light on the ever-evolving economic landscape. As we embark on another bustling week of economic news, I find myself particularly focused on the rhythm of housing and manufacturing. These two sectors, caught in the tightening grip of last year’s higher interest rates, sit at the heart of our economic discourse this week. The pivotal question we’re wrestling with is whether they will regain their momentum before the consumer and labor market exhibit any sign of slowing. This could indeed pose a challenging conundrum for the Fed and a unique narrative for us to follow.
Recent data has been a bucket of cold water on the re-acceleration narrative, nudging us more towards stabilization than an upswing. Take June’s industrial production for instance, where manufacturing output tumbled by 0.3% month-on-month, with motor vehicle production sliding 3.0%. Meanwhile, the housing sector, once a beacon of growth, is showing signs of slowing, as housing starts in June fell to 1.43 million units.
Yet, it’s not all gloom and doom. Amidst these fluctuations, the promise of resilience shines through. For example, motor vehicle and parts production could remain resilient, offering downside protection to growth, even if it doesn’t necessarily spur growth acceleration.
In this week’s economic review, I’ll be diving deeper into these trends, dissecting what they mean for the future of our economy. As always, we’ll be keeping a close eye on the FOMC announcement on Wednesday – arguably the most anticipated economic announcement of the week.
So, buckle up and join me as we navigate this intriguing economic terrain together. Remember, in these shifting economic sands, understanding the journey is just as important as predicting the destination. Let’s unravel the story together.
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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, July 24
Today, I expect a slight improvement in the S&P Global US manufacturing PMI for July, rising to 47.0 from June’s 46.3. This still indicates a modest downturn in the sector, with indices for output and new orders likely remaining below 50. In contrast, the US services PMI, which has consistently been above 50 since February, may see a slight decline to 54.0 from June’s 54.4. This reaffirms my belief that the services sector continues to expand, backed by a shift towards services and persistent consumer spending.
Tuesday, July 25
Tomorrow, I’m projecting a further dip of 1.0% year-on-year in the S&P CoreLogic Case Shiller national home prices for May, following the 0.24% year-on-year decline seen in April. Sequential growth, however, seems positive, which I believe indicates a possible bottoming out of the housing market. In terms of consumer confidence, I expect an uplift to 113.0 from June’s 109.7, thanks to reduced inflation and recession worries.
Wednesday, July 26
Come Wednesday, I anticipate a slight cool-off in new home sales to 730k saar in June, from 763k saar in May, amid ongoing affordability challenges. The highlight of the day, however, will be the FOMC’s expected 25bp rate hike, taking the Federal funds rate target range to 5.25-5.50%. I believe the Fed isn’t quite ready to signal the end of its tightening cycle yet, and we should listen for reaffirmations to the 2% inflation target and potential further policy tightening.
Thursday, July 27
On Thursday, I predict an increase in initial jobless claims to 240k for the week ending July 22, following a decrease to 228k in the previous week, due to recent holidays and increasing WARN notices. The BEA’s advance estimate of 2Q US GDP, expected at 1.5% quarter-on-quarter saar, signifies a slow but ongoing deceleration in the US economy, predominantly led by fixed investment. Moreover, I foresee an increase in durable goods orders by 2.5% month-on-month in June, due to a bounce-back from Boeing, and a widening of the June advance goods trade deficit to $92.5B. Finally, I expect a 0.5% month-on-month decline in pending home sales for May.
Friday, July 28
As we wrap up the week on Friday, I project a robust 0.6% rise in nominal personal income for June, outpacing the expected 0.5% increase in nominal spending. I anticipate a 0.2% increase in both core and headline PCE inflation for June, resulting in year-on-year rates of 4.2% and 3.0%, respectively. I also foresee a 1.1% quarter-on-quarter rise in the employment cost index for the second quarter, signifying a slight drop from the first quarter. Lastly, I predict a final reading of 73.0 for the University of Michigan consumer sentiment index in July, marking the highest level since September 2021. All in all, this week’s economic activity will revolve around the FOMC announcement on Wednesday, but each day carries its own significance in the broader economic narrative.
Macro Market
Growth
I’ve adjusted my predictions for the US economy, moving our expected slowdown further by two quarters. I now anticipate a growth in real GDP of 1.2% in the fourth quarter of this year, a positive shift from the previously expected -0.2%. Moving onto 2024, my predictions point towards a flat year-on-year growth in the fourth quarter, down from an earlier forecast of 0.9%. I suspect that growth will dip into the negative for the first two quarters of 2024, with -1.0% and -0.5% quarter-on-quarter seasonally adjusted annual rates for the first and second quarters respectively. But remember, this projected downturn is quite modest when compared with historical standards.
Inflation
The June CPI figures inspire further confidence that we can achieve disinflation without significant disruption to the labor markets. I am currently forecasting that the core personal consumption expenditure (PCE) inflation will round off the year at 3.5% on a year-on-year basis and that it will stand at 2.4% at the close of next year. I am of the belief that we are likely to see price stability by 2025.
Federal Reserve
I am anticipating that the Fed will implement 25bp hikes in the forthcoming July meeting as well as September, landing us at a terminal rate between 5.5-5.75%. The Fed might choose to make the last hike in November, though. I’ve shifted my expectations for the first rate cut and the conclusion of quantitative tightening (QT) to May 2024, a change from the previously predicted March 2024. I foresee the Fed beginning discussions on whether QT should persist beyond the first rate cut, as part of a soft landing strategy.
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.
Keeping up with its recent winning streak, the S&P 500 has once again ended the week on a high note. It’s a back-to-back celebration, with the index seeing an uptick of 0.69% compared to last Friday. Now, if we cast our eyes a bit wider to take in the whole of the year, the S&P 500 is shining brightly with an impressive 18.62% increase. Although it’s worth noting, we’re still 5.43% shy of the towering record close that kicked off 2022 on January 3rd. The game continues, folks, and we’re eager to see how this financial narrative unfolds.
Source: Jennifer Nash
Earnings
Aggregate Estimates and Revisions
- 23Q2 Y/Y earnings are expected to be -7.9%. Excluding the energy sector, the Y/Y earnings estimate is -2.2%.
- Of the 89 companies in the S&P 500 that have reported earnings to date for 23Q2, 73.0% 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. 24, 173 S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Recommended Book.
And you thought I was bearish! I’ve had the privilege of reading and following the world’s best Demographer, Neil Howe, since his first publication, Generations. I couldn’t be more excited to read his new book: The Fourth Turning Is Here.
In Chapter 1, “Winter Is Here”, Neil starts by reminding us that “in the mid-2000s, most voters still read the same news and trusted their government… then came the GFC, the rise of populism, and the pandemic…”
“79% of voters agree that America is falling apart. 76% worry about losing American democracy. 62% say the country is in a crisis.” I guess that’s why my US GDP Nowcast has no economic recovery in it as far as my Quads can see!
I am already through the book and the insights are illuminating.
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