Weekly Market Report: July 28th, 2023
Last week was jam packed with a deluge of earnings reports, several global central bank meetings, and a very full economic calendar. Disinflation traction, strong U.S. growth, and decent earnings information last week were all constructive on the margin enabling the S&P 500 to post a third consecutive weekly gain (+1%) with a nice boost from Facebook and Google. Interest rates edged higher across the curve with the 10yr UST yield briefly breaking the 4% level before settling at 3.96%. Commodity markets were up on the constructive growth backdrop with WTI posting a fifth consecutive weekly gain to take spot oil back up over $80 for the first time since April.
Market Anecdotes
- Stretched valuations, overbought technicals, decent earnings, resilient growth, strong labor markets, and a resulting mixed outlook for inflation/monetary policy suggests a differing short-term versus cyclical outlook for risk assets.
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The FOMC meeting delivered the expected 25bps hike to Fed Funds, increasing it to 5.25%. They stopped short of overtly signaling a pause, opting for a ‘meeting by meeting’ approach. Nothing changed in the post- meeting statement while Powell’s post-meeting presser acknowledged favorable inflation trends and resilient (too?) labor markets.
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The ECB meeting last week delivered the expected 25bps hike taking the deposit rate to 3.75%, equivalent to the October 2000 record high, the refi rate to 4.25%, and marginal lending facility rate to 4.5%. The BOJ kept rates unchanged but surprised markets by changing its YCC program.
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Refinitiv IBES data at the midway point of Q2 earnings season has earnings declining 6.4% alongside upside earnings surprises at 78.7% and revenue surprises at 64%.
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Public equity valuations aren’t alone in the lofty zone. Private equity (buyout) valuations look very stretched relative to historical ranges with year-end 2022 sporting purchase price multiples of 13x and debt multiples over 7x.
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China’s Politburo signaled only targeted stimulus measures as opposed to broad based fiscal or monetary loosening. The Hang Seng fell 2% on the announcement.
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Russia’s refusal to renew the Black Sea Grain Initiative after expiration on July 17th raises supply side risks in ag markets. Wheat and corn prices have surged by 16% and 11%, respectively since Russia’s action.
Economic Release Highlights
- Second quarter U.S. GDP came in well above the spot consensus forecast (2.4% vs 1.5%) and more in line with the Atlanta Fed GDPNow modeled forecast. Personal Consumption Expenditures of 1.6% came in slightly ahead of consensus but within the 1.1%-4.1% range.
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June PCE inflation data showed continued deceleration with headline readings of 3.0% YOY / 0.2% MoM alongside core readings of 4.1% YOY / 0.2% MoM.
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Second quarter Employment Cost Index grew 1% versus spot consensus of 1.1% and a forecast range of 1.0%-1.3%, a reduction from Q1 reading of 1.2%.
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Personal Consumption Expenditures of 0.5% ticked higher and slightly exceeded estimates while Personal Income of 0.3% fell slightly under the spot forecast.
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July U.S. flash PMI (C,M,S) registered 52.0, 49.0, 52.4 with manufacturing exceeding the forecast of 46.0 and services falling short of consensus forecast of 54.0.
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July’s flash non-U.S. PMIs (C,M,S) for the Eurozone (48.9,42.7,51.1) and UK (50.7,45.0,51.5) revealed some downside surprises.
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Consumer Confidence reading for July registered 117.0, well above consensus estimate of 111.8 and the forecast range of 108.0-116.0. July’s final revision to UofM Consumer Sentiment took it down from 72.6 to 71.6.
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The June Durable Goods Orders reports on New Orders (4.7% vs 0.5%), Ex-Transportation (0.6% vs -0.1%), and Core Capital Goods (0.2% vs -0.1%) beat consensus forecasts across the board.
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Case-Shiller Home Price Index for May posted a gain MoM of 1% versus consensus estimate of 0.8% and a YOY decline of 1.7% versus a consensus call for a 2.5% decline.
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New (697k) and Pending (0.3%) Home Sales were both within their respective forecast ranges.
