'You don't have to tell me 15 times' 'You don't have to tell me 15 times' http://www.federatedinvestors.com/mmdt/static/images/mmdt/mmdt-logo-amp.png http://www.federatedinvestors.com/mmdt/daf\images\insights\article\chess-board-knights-small.jpg June 30 2023 June 30 2023

'You don't have to tell me 15 times'

Don’t fight the Fed. Don’t fight the tape either.

Published June 30 2023

Much less twice. At his post-meeting press conference, Chair Powell restated the Fed’s commitment to the 2% inflation target 14 times! Don’t fight the Fed. Rates are going to stay high and could go higher. They hit mortgages, regional banks and CRE, and the Fed kept going. Perhaps more things will break. But when? The Bloomberg economic surprise index is at its highest level since 2020. Manufacturing looks to be bottoming. Housing likely already has. Consumers are feeling more confident and, still flush with excess savings and benefitting from rising real incomes as consumer price inflation cools more rapidly than the labor market, are keeping apace on spending. (More below on all the above.) We’re now halfway through a year that consensus said would get a recession and steep sell-off.  Slower inflation and no recession would be a major victory for Powell and fellow policymakers. This would fly in the face of historical odds. The Fed’s tightening-until-2% resolve rests on stubborn services inflation. This will determine whether we enjoy a soft landing.

Even as the U.S. economy keeps surprising ($9 trillion+ stimulus is a lot of money), there are signs of weakening the world over. Composite PMI surveys suggest eurozone growth has nearly skidded to a halt. New manufacturing orders have fallen below 45% in advanced economies, and the Ifo index plunged in Germany, the weakest and largest economy in the eurozone. Q1’s improvement in factories throughout the bloc is looking transitory, especially with the ECB and Bank of England behaving like uber hawks. To the East, China continues to disappoint, and hopes there for massive stimulus are fading. Overall, UBS believes global growth is tracking much weaker than what’s priced in markets. It’s expecting earnings and credit downgrades to pick up in the second half, credit spreads to widen, yield curves to steepen, P/Es to fall and bonds to outperform stocks. This view certainly doesn’t fit the U.S. data to date. Indeed, earnings expectations have turned, with Wall Street analysts projecting all 11 S&P 500 sectors to post earnings growth next year, four in the double digits—Consumer Discretionary (+18.7%), Communication Services (+17.9%), Information Technology (+15.6%) and Industrials (+13.4%).

All the talk about consumers burning through excess savings (estimates vary around $1 trillion left) misses two other big sources of purchasing power: continued rising wages & salaries and, Yardeni Group says, a record $7.6 trillion in unearned income, including $3.5 trillion of interest & dividends. Moreover, the combination of higher home prices and the rally in stocks off October lows has household net worth as a share of disposable income more than 10% above pre-Covid levels. There’s also $75 trillion of net worth baby boomers have amassed and are just starting to spend in earnest. That dwarfs the $40 trillion and $8 trillion that Gen Xers and millennials, respectively, have accumulated thus far. For young millennials and Gen Zers, the end of the student loan moratorium looms, a monthly hit of nearly $400 to the 45 million holding outstanding balances. And if job growth does begin to moderate sharply as consensus expects, that’s a potential double blow to the economy. For now, even with usually challenging August-September seasonality around the corner, Fundstrat reminds that history shows it rarely pays to fade rallies. As the final hours of Q2 trading wind down, the Nasdaq 100’s on track to post it’s best first six months ever, and breadth while narrow is broadening. The corollary to don’t fight Fed … don’t fight the tape.


  • Immaculate disinflation? PCE headline and core prices moderated again on a monthly and y/y basis in May, coming in below consensus forecasts. At 3.8%, May’s y/y PCE was its lowest since April 2021 and well off June 2022’s 7% peak. Elsewhere, the June average of prices-paid and prices-received gauges at five regional Feds showed inflationary pressures continuing to subside rapidly.
  • No summer vacay in the factories … Durable goods orders jumped 1.7% in May versus expectations for a decline, and April’s gain was revised higher too. Trends in core orders (non-defense capital goods ex-aircraft) have largely reversed winter’s declines, and capital goods shipments that feed into GDP estimates also rose by 1.7%, reversing April’s decline.
  • … or at homebuilding sites Last week’s unexpected surge in single-family starts was followed by this week’s surge in new home sales, lifting y/y sales to 20% and bringing the annualized pace of activity to levels last seen at the start of 2022. Of course, rising demand is pushing up prices again. The Case Shiller gauge of existing home prices rose a third consecutive month, with 19 of 20 cities posting increases. All 20 fell in December.


  • The Fed has more work to do Weekly jobless claims unexpectedly plunged the most in 20 months. Continuing claims also fell to their lowest since late winter. Meanwhile, the Conference Board measure of consumers who view jobs as plentiful versus hard to get rebounded sharply, lifting overall confidence to an 18-month high. Michigan sentiment hit a 4-month high. It’s getting harder to see the jump in joblessness so many expect.
  • Global economic distress is spreading U.S. leading indicators have fallen 9.4% over the past 17 months—that’s never happened without a recession. And all major foreign flash composite PMIs (eurozone, U.K., Japan) fell June, with services dropping even more than manufacturing.
  • CRE distress is spreading The amount of troubled assets has climbed to $64 billion, up 10% y/y. Risks loom on the horizon too, with $155 billion of commercial property assets that are potentially troubled, according to Bloomberg. Banks have sharply tightened lending standards for CRE, and those standards typically lead activity by five quarters.

What else

Contrarian positive The relative performance (or lack thereof) for S&P 500 dividend aristocrats relative to the S&P hasn’t been this negative since the height of the dot-com bubble in 1999.

Bidenomics on the ballot The president’s economic fate really comes down to whether there is a recession or not. Every president who avoided a recession two years before their reelection went on to win. And every president who had a recession in the two years before their reelection went on to lose.

The spoils of war The sale of just one seized Russian yacht for a $63 million profit increased Antigua’s GDP by 4%.

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Tags Fixed Income . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Bloomberg US Economic Surprise Index: A measure of whether economic data tops or misses Wall Street estimates.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Ifo Business Climate Index is a gauge of activity and expectations among German manufacturers

Nasdaq-100 Index: Capitalization-weighted and includes 100 of the largest non-financial companies, domestic and foreign, in the Nasdaq National Market. In addition to meeting the qualification standards for inclusion in the Nasdaq National Market, these issues have strong earnings and assets. Indexes are unmanaged and investments cannot be made in an index.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

Price-earnings multiples (P/E) reflect the ratio of stock prices to per-share common earnings. The lower the number, the lower the price of stocks relative to earnings.

Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Conference Board's Consumer Confidence Index measures how optimistic or pessimistic consumers are about the economy.

The S&P/Case-Shiller Home Price Indices measure track changes in the value of the residential real estate market in major metropolitan regions.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

Yield Curve: Graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities.

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