Weekly Market Report: July 19th, 2024

Last week markets digested an assassination attempt on Donald Trump over the weekend and his subsequent nomination for POTUS at the RNC, the first week of 2Q corporate earnings reports, a major technology outage, and a very heavy dose of Fed Speak. Major averages in the equity markets delivered some long overdue consolidation with a good deal going on under the surface from market cap and style perspectives. The S&P 500 closed down 2% while small caps closed up 2.2% in a historic surge higher. International developed (-2.5%) and emerging (-4%) both sold off in sympathy with the U.S. Bond yields stayed relatively calm with the 10yr UST yield closing up slightly at 4.25% and credit spreads remaining at extreme lows. The USD closed up slightly in what was likely some risk aversion momentum while commodity markets traded lower across the board, bringing oil back to the $80 level.

Market Anecdotes

• Market internals with the historic surge in small caps and a shake up in growth/value leadership has been notable. Technology shares sold off on a major technology outage and an increase in political risks stemming from a strong resurgence of trade war narratives from the RNC.
• The rally in U.S. small caps reached historic levels last week hitting 1% gains in five consecutive days and closing at a record 4.42 standard deviations above its 50dma.
• One recession indicator worth noting is Weekly Jobless Claims which have continued to trend higher with a 4-week average up to 234k. Continuing Claims increasing to 1.867M have also been running above benchmark levels for the past two months.
• A key underlying premise of the BCA GIS downgrade on equities in June is the ‘kinked’ Phillips curve framework which suggests the pandemic related abnormality in job vacancies relative to unemployment has largely been worked through with normal relationships expected to resume.
• Excess savings certainly propped up the U.S. economy. However, the Atlanta Fed GDPNow modeled 220bps of contribution to Q1 GDP, with a final print of 98bps and is expecting 150bps contribution for Q2 with overall growth currently modeled at 2.7%.
• Comments from Powell last week on the labor market, inflation trends, and election cycle effects amounted to no move expected in July but increased odds of a move in September which markets are currently assigning a 97% probability.
• Earnings reports began in earnest last week with 88 companies reporting and beat rates of 78% alongside downbeat guidance (1% raised and 5% lowered guidance).
• While still over 100 days before the November elections, odds of a Republican POTUS victory increased 8.4% last week to 68.9% and odds of Republicans taking back control of the Senate are even higher. Currently DC in full Republican control seems to be the most likely outcome.
• Hopes for strong stimulus indications fell flat last week from Beijing’s closely watched Third Plenum which adjourned with no meaningful measures or indications.

Economic Release Highlights

• June Retail Sales came in well above consensus forecast on headline (0.0% vs -0.3%), Ex-Vehicles (0.4% vs 0.1%), and Ex-Vehicles & Gas (0.8% vs 0.1%).
• Industrial Production in June outpaced estimates (0.6% vs 0.3%) with healthy Manufacturing Output of 0.4% and increasing capacity utilization.
• June Housing Starts (1.353M vs 1.305M) and Permits (1.446M vs 1.395M) both increased over May’s level and came in above consensus forecasts.
• The July Housing Market Index fell from 43 to 42, versus consensus calls for no change, leaving the index at its lowest reading of the year.

Weekly Market Report: July 12th, 2024

Markets last week took in a relatively light economic calendar and digested several FOMC speaking engagements including the semi-annual congressional Humphrey Hawkins testimony. On Saturday, political violence sadly reared its head again in the U.S. in an attempt on Donald Trump’s life with many open questions swirling including potential impact on the upcoming election cycle. By Friday’s close, the S&P 500 marked another new record high, adding 0.87% on the week alongside healthy gains in international developed (+1.86%) and emerging (+2.02%) markets. Bond yields declined across the curve pushing the 10yr UST yield back below 4.20% while both the USD (-0.75%) and broad commodity markets (-2.5%) lost ground.

Market Anecdotes

• Scott Brown made an interesting technical observation that the July 5 record high occurred with less than 45% of stocks trading above their 50 dma, something that he claims has only happened one other time, December 1999.
• Second quarter earnings season kicked off last week (SIFI banks) with an overall street consensus estimate of 9.3% YoY earnings growth.
• One month does not make a trend but the June CPI report couldn’t have been much better with disinflation and cooling shelter inflation finally showing up in the data.
• As markets look toward possible September rate cuts, it’s worth noting that slowing inflation and slowing growth likely has nominal GDP at approximately 5%, which along with a Fed Funds rate of 5.5%, is veritably restrictive by most any measure.
• The semi-annual Humphrey Hawkins Fed testimony, alongside ample FedSpeak on the circuit, included standard talking points but also an important subtle shift from Powell acknowledging labor market weakness and modest progress on inflation.
• Signs of an orderly labor market slowdown seen recently remain key to addressing wage-price inflation pressures along with cooling shelter costs in the battle against inflation.
• Subdued loan demand in China and restrained public sector debt issuance was highlighted last week on the eve of the Communist Party’s Third Plenum commencing this week with potential reform announcements in play.
• A research paper from the San Francisco Fed estimated the current breakeven job creation ‘breakeven’ at 230,000, due to increased labor force participation and immigration, but made the important distinction that the estimate is dynamic and will eventually revert to the long-term average range of 70,000-90,000 per month.
• A separate Dallas Fed research paper examined the immigration surge impact on inflation and economic growth concluding the 1.2% increase in population results in a slight (0.06%-0.11%) increase in inflation but a significant increase in GDP of 0.72% annually.
• Bloomberg noted Piper Sandler & Co eliminated the routine practice of publishing annual S&P 500 return predictions, something other Wall Street firms and strategists may want to consider following suit given the spotty track record.

Economic Release Highlights

• June CPI YoY Headline (3.0% vs 3.1%) and Core (3.3% vs 3.5%) along with MoM Headline (-0.1% vs 0.1%) and Core (0.1% vs 0.2%) declined from April readings and came in below forecasts.
• June PPI YoY Headline (2.6% vs 2.3%) and Core (3.0% vs 2.3%) along with MoM Headline (0.2% vs 0.1%) and Core (0.4% vs 0.2%) came in above forecast and accelerated versus May readings.
• The July UofM Consumer Sentiment Index registered 66, slightly below consensus estimate of 68.5.

Weekly Market Report: July 5th, 2024

Last week, the fourth of July holiday shortened week brought us a fair amount of policy and economic data to begin the second half of 2024. Strength in big tech drove the S&P 500 (+1.95%) to a fresh record high. International developed (+2.36%) and emerging markets (2.63%) both posted strong gains as well. A strong headline jobs report countered by downward revisions in prior months and an increase in unemployment was viewed favorably with respect to marginally higher odds of a dovish pivot by the FOMC. Bond yields reversed an early week surge with the 10yr closing down 8bps to 4.28% while the USD closed down approximately 1% and commodities marked a respectable 1.5% rally.

Market Anecdotes

• With a strong first half 2024 in the books for equity markets, Bloomberg sent out a constructive reminder of what history suggests for the remainder of the year while a Ned Davis piece noted just how difficult this year has been for active stock pickers.
• An interesting piece from FactSet noted that, despite widespread expectations of economic slowdown, Wall Street analysts lowered second quarter earnings estimates by a smaller amount than average during the quarter, only 0.5% versus an average of approximately 3.4%.
• FOMC minutes didn’t reveal any surprises but there were some dovish comments from members highlighting inflation progress. Given the recent drip of slowing economic indicators, markets are leaning toward a September initial rate cut (77%).
• A research note from J.P. Morgan illustrated important differences among large, mid, and small companies with respect to profitability and interest coverage ratios with large cap blue chips looking relatively insulated relative to their smaller peers.
• The pandemic impact on the office sector and interest rate impact on the residential sector are both garnering significant attention for real estate debt defaults of the former and economic growth headwinds of the latter.

Economic Release Highlights

• June Payrolls increased 206,000, near last month’s 218,000 and slightly above the consensus forecast of 189,000. Average Hourly Earnings of 0.3% MoM and 3.9% YoY were in line with forecasts and Labor Market Participation moved one tick higher to 62.6%.
• The Unemployment Rate in June registered 4.1%, a slight increase from May’s 4.0% level and above the consensus forecast of 4.0%.
• JOLT Survey for May revealed 8.140M job openings, higher than consensus call for 7.9M.
• The June ISM Services Index slowed unexpectedly from May’s 53.8 to 48.8, also well below consensus forecast of 53.0. The June ISM Manufacturing Index of 48.5 was slightly under consensus forecast of 49.1.
• The J.P. Morgan Composite PMI (C,M,S) moved slightly lower (52.9, 50.9, 53.1) with readings including Europe (50.9, 45.8, 52.8), U.K. (52.3, 50.9, 52.1), and India (60.9, 58.3, 60.5).

Weekly Market Report: June 21st, 2024

Markets lacked any meaningful catalysts last week with a mixed bag of economic reports globally ending with the U.S. seemingly perking up and non-U.S. markets slowing down. Many eyes are cast forward to the looming end of the second quarter and various geopolitical touch points on the horizon with the French elections and first U.S. Presidential debate. Despite NVDA snapping an eight week winning streak, the U.S. S&P 500 (+0.61%) marked yet another record high close (5,505) and emerging (+1.16%) and developed (-0.95%) markets turned in mixed results. Bond yields, commodity markets, and the USD all edged slightly higher on the week leaving the 10yr UST yielding 4.25% and oil back up over the $80 market at $80.73.

Market Anecdotes

• Corporate earnings will need to be a key driver of returns going forward with little room for multiple expansion and dividend payout ratios unlikely to change. FactSet is currently seeing 11.3% growth in 2024 and 14.4% growth in 2025.
• Nvidia became the largest company in the world last week, surpassing MSFT and carrying a larger market cap than the UK and France combined.
• The equity market has been unusually friendly with 31 record closing highs so far this year, a VIX of 12.5, very few 1% daily moves, and only one 2% move this year – the fewest count of 2 handles so far this year since 2017.
• The gap between the Establishment Survey (+1.2mm jobs) and the Household Survey (-100k jobs) over the same period is perplexing to economists and investors alike. Structural labor market changes due to the pandemic and modeling intricacies are both playing a part.
• This week brought a good deal of housing market data which were soft on balance with no relief in sight as U.S. mortgage rates, while down from October 2023’s 8% level, still remain well above 7% with a ‘higher for longer’ Fedspeak echoing in the background.
• The Conference Board’s U.S. LEI has been flashing red since July 2022 and, while still contracting, the magnitude of contraction has been narrowing since April 2023. While this suggests a recession may be averted, there are many other factors still signaling choppy waters ahead.
• Fears of populism and “Frexit” due to the surprise French election outcomes have sent a charge of volatility into European equities. The upcoming snap elections on June 30th/July 7th will show whether the Macron decision to call for snap elections was genius or reckless.

Economic Release Highlights

• U.S. flash PMI for June beat consensus forecasts for both manufacturing (51.7 vs 51.0) and services (55.1 vs 53.7) with the composite coming in at a healthy 54.6.
• Eurozone flash PMI for June came in below forecast for both manufacturing (45.6 vs 48.0) and services (52.6 vs 53.3) pulling the composite (50.8 vs 52.4) down notably versus prior month. UK (C,M,S) also missed to the downside with readings at (51.7, 51.4, 51.2).
• May Retail Sales came in below consensus on the headline (0.1% vs 0.3%) as well as the Ex-Vehicles & Gas (0.1% vs 0.3%) reading.
• Industrial Production (0.9% vs 0.3%) and Manufacturing Output (0.9% vs 0.2%) both exceeded consensus forecasts in May.
• Housing Starts (1.277mm) and Permits (1.386mm) both came in under consensus forecast for May, continuing the cooling trends seen of late.
• Existing Home Sales of 4.11mm were generally in line with expectations of 4.10mm, down slightly versus the prior month.
• The Housing Market Index softened slightly from 45 to 43 for the June reading.

Weekly Market Report: June 14th, 2024

Markets took in some important inflation data and a highly anticipated FOMC meeting last week. The headline S&P 500 (+1.6%) marked a new record high supported by continued strength in the mega cap names. Small caps continued to struggle in comparison to mega caps, losing 1% last week, and are now in the red for the year. European stocks took the overall international markets lower (-4.2%) due to the tenuous political situation in France while emerging markets moved marginally higher (+0.45%). Bond yields declined sharply last week pushing the 10yr UST yield back down to 4.2%. WTI oil gained nearly 4% on the week, drawing closer to the $80 level alongside some notable strength in the USD, particularly versus the Euro.

Market Anecdotes

• Narrow U.S. equity market breadth continued last week with AI tailwinds and soft landing narrative supporting big tech while signs of slowdown in the labor market are beginning to weigh on cyclicals and smaller stocks.
• Inflation data released last week supported the disinflationary trend narrative with, notably, the “super core” measure contracting MoM for the first time since January 2021.
• While acknowledging friendly base effects in YoY CPI, researchers are challenging dovish policy forecasts by questioning rate cut expectations with headline CPI still over 3%, election year dynamics, and the fact that ‘super core’, while declining, is still 1.1% higher than October 2023.
• The FOMC and monetary policy watchers welcomed another soft inflation print with strategists now seeing two cuts later this year. The dot plot is now indicating one cut in 2024 and four cuts in 2025 with guidance that softening data must continue to present itself going forward.
• Alpine Macro recently joined BCA in forecasting a possible ‘soft patch’ this summer based on what they see as a weakening labor market/consumer. They see slowing demand for oil with WTI down 12% since April and a UST rally since late April as potential confirmation.
• Despite unemployment moving to 4%, the Sahm Rule has yet to trigger with the 3mo average U-3 of 3.9%, now sitting 0.37% above the prior 12mo low U-3 of 3.5%.
• The BoJ met last week and despite exiting NIRP back in March, soft inflation data has led them to hold rates steady for a second straight meeting and they opted to push back any changes to the bond buying program for the time being.
• The European Commission announced additional tariffs on Chinese EV imports last week of 17%-38%, on top of existing 10% tariffs.
• Political turmoil in France caught the attention of European investors with a sizable left-wing coalition forming in response to a surprise loss by Macron to the right wing National Rally party.

Economic Release Highlights

• May CPI YoY Headline (3.3% vs 3.4%) and Core (3.4% vs 3.5%) along with MoM Headline (0.0% vs 0.1%) and Core (0.2% vs 0.3%) declined from April readings and came in below forecasts.
• May PPI YoY Headline (2.2% vs 2.5%) and Core (2.3% vs 2.4%) along with MoM Headline (-0.2% vs 0.1%) and Core (0.0% vs 0.3%) declined from April readings and came in below forecasts.
• June’s Consumer Sentiment reading came in well below expectations (65.6 vs 73.0).
• The May NFIB Small Business Optimism Index improved slightly to 90.5 from April’s 89.7 reading.

Weekly Market Report: June 7th, 2024

Financial markets digested important labor market and economic survey data last week with what might be categorized as a “bad news is good news” mentality (until it’s not…). The S&P 500 (+1.3%) enjoyed a narrow rally to a new record high supported by large technology and shadow technology names across consumer discretionary, communication services, and information technology sectors. International developed (0.11%) and emerging (0.60%) both participated but were weighed down slightly by a strengthening USD (+0.20%). The Treasury yield curve flattened as longer tenured yields fell more than the short end leaving the 10yr (-8bps) yielding 4.43% and the 2yr (-2bps) yielding 4.87%. Commodities traded lower on the week (-1.54%) with WTI down 1.9% to $75 and industrial metals broadly lower.

Market Anecdotes

• Last week’s top-heavy S&P rally was a microcosm of the nature of the large cap U.S. equity market which has reached a six-decade threshold in terms of index concentration.
• Equity and bond markets seem to be laser-focused on translating the economic growth backdrop to monetary policy where stronger growth poses ‘overheating’ risks, higher/stickier inflation, and commensurately tight monetary policy.
• Higher real yields and significantly less competitive relative earnings yield have made bond markets much more appealing to investors of all sorts.
• The closely watched monthly employment report conveying robust job and wage growth translated to a bounce in UST yields and more speculation about the forward path for rates, a significant consideration impacting potential returns for bond market investors.
• The ECB and BoC both joined team dove last week by moderating the degree of restrictive rates with 25 bps rate cuts, fully anticipated by markets.
• One might think there should be very little economic gloom with unemployment under 4% for over two years, median wages up 18% (more for low wage workers), and real consumer spending up 11% right? Wrong. Whether it’s pandemic angst, hyperpartisan echo chambers, negative news bias, federal government dysfunction, or persistent inflation, negative sentiment remains prevalent in many circles.
• Markets won’t be pricing U.S. politics or elections until after July, but European Parliament elections (June 6-9) are seeing a rise in anti-establishment European right-wing parties in response to high energy costs and immigration discontent.
• Modi was re-elected for a third term as India’s prime minister making him the third longest serving PM in the country’s history. While the BJP lost its majority, Modi and the coalition are expected to continue to pursue constructive reform policies going forward.
• An FT article addressed the announced phase out of OPEC+ production curbs noting their clout is running out with the U.S. now the single largest oil producer in the world.

Economic Release Highlights

• The May jobs report came in stronger than consensus (272,000 vs 182,000) and average hourly earnings were warm at 0.4% (0.3%) MoM and 4.1% (3.9%) YoY. The unemployment rate moved one tick higher to 4% (3.9% expected) and labor participation fell two ticks to 62.5%.
• The April JOLT Survey reported 8.059M job openings in April, notably fewer than the 8.4M forecast and past several months.
• May ISM Manufacturing Index registered 48.7, below consensus forecast of 49.8. ISM Services rebounded and beat consensus (53.8 vs 50.7).
• Non-U.S. PMIs (C,M,S) released last week included India (60.5, 57.5, 60.2), Eurozone (52.2, 47.3, 53.2), U.K. (53.0, 51.2, 52.9), China (C,S: 54.1, 54.0), and JPM Global (53.7, 50.9, 54.1).
• Factory Orders in April grew in line with consensus at 0.7%, a slightly slower growth rate than March’s 1.6%.