Weekly Market Report: July 14th, 2023
Markets followed up a holiday shortened week with a healthy rally across risk assets on the back of an abbreviated but favorable economic calendar and a ‘relative’ good start to second quarter earnings season. U.S. equity markets posted a nice rally, up 2.5%-3.5% across the cap spectrum while developed (+4.2%) and emerging (+4.1%) international rallied even more so, benefiting from a notably weakening USD (- 2.3%). Interest rates 2yrs and beyond pulled back a fair amount leaving the 10yr UST (-0.23%) back to 3.83% while commodity markets posted a relatively broad-based rally across energy, grains, and industrial metals.
Market Anecdotes
- With a relatively narrow market driving the S&P 500 up 17% year to date and 23% off the October 2022 low, concerns are bubbling again regarding short term overbought conditions. However, we are seeing improving breadth and participation over the past few weeks.
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The 2Q earnings season began last week by weaving a silver lining on a red earnings number (blended – 7.1%) with strong beat rates (80%) and beat magnitudes (8.8%). Revenue is coming in at -0.4% with historically average beat rates (63%) and beat magnitudes (1.6%).
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MRB highlighted the ‘Implausible Trinity’ of central banks’ mission of providing liquidity enough to maintain relatively constructive sentiment, support risk asset prices, tighten monetary policy sufficient to achieve a 2% core inflation rate, and sustain global economic growth.
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Inflation dynamics, labor market, and ensuing Fed policy are key market variables at this time and an item of note was last week’s low CPI print not influencing July fed funds futures at all and in fact, the probability of a 25bps rate hike increased to 96%.
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Bianco Research is making a strong point that the CPI base effect from 2022 inflation readings suggests the July – December window will be much more challenging to maintain the same deflationary trends that what we’ve seen in the first half.
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While the inverted yield curve is suggestive of recession historically, the long end today is clearly influenced by the Fed’s 2.5% long-term equilibrium rate as well as QE.
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BCA Political Research estimate on government spending impact on 2024 GDP from the 2023 FRA and SCOTUS decision on student debt forgiveness to modify the fiscal drag from -0.12% to 0.49% in 2024.
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A healthy consumer thanks to a robust job market and well capitalized balance sheets (excess savings) have a significantly larger influence on U.S. GDP than government spending.
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A Stanford research paper on work from home trends estimated average commuter time savings of 72 minutes per day (2 weeks/yr) and a value to workers of approximately 8% of their salaries – suggesting employees would take a pay cut to maintain work from home privileges.
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Markets received more indications of China’s weak post-reopening recovery in the form of deflationary readings for CPI (0%) and PPI (-5.4%).
Economic Release Highlights
- June CPI declined further than expected on both headline (YOY 3%a vs 3.1%e) (MoM 0.2%a vs 0.3%e) and core (YOY 4.8%a vs 5%e) (MoM 0.2%a vs 0.3%e) readings.
- Consumer Sentiment improved by a larger than expected margin, registering 72.6 versus consensus estimate of 65.5.
- The June NFIB Small Business Optimism Index improved to 91 from an 89.4 reading in May, above consensus forecast of 89.8 and the forecast range of 89.0-90.3.
