Nobody wears heels in Warren PA!
Might this rally be due for some consolidation?
So said a local at the brewery (a new speaking venue to add to my list—still need a jail gig, though), who wasn’t appreciating my Manolo Blahniks. She even shamed my favorite regional consultant into taking off his tie! With a population of just 9,000, Warren is home to the headquarters of the Allegheny National Forest and the Chief Cornplanter Council, the oldest continuously chartered Boy Scouts of America Council. They love the outdoors. Numerous guests went kayaking today, and fishing is very popular as are big backyards. A gentleman owns 250 acres, where he “grows deer for hunting.” Sharing my own woodland projects, I was advised, “You need to get a root slayer.” (Had to look that up.) Speaking of up, the S&P 500’s 23% rise off last October’s lows matches the average gain at this stage of all advances (not preceded by a recession) since ’57. With Tech leading, breadth expanding, positioning “offsides” (still a lot of bears around), seasonality “onsides” (a 10%+ first half typically sees a 10%+ second half) and seemingly macro peaks in the dollar, inflation expectations, policy rates and credit spreads, soft landing odds are rising. Q2’s GDP report added to them (more below). This is good for small caps, where an historic performance gap relative to large caps has started to narrow. Breaking through resistance at 2,000 on the Russell 2000 would be a good sign this reversion trade can continue.
Jerome doesn’t want a ’70s’ redux. Recession no longer is the Fed’s base case, and Chair Powell thinks inflation can be lowered to 2% by ’25 without one. He also said after Wednesday’s quarter-point bump that the Fed’s quarterly survey of senior loan officers that’s coming out Monday “gives a picture of pretty tight credit conditions in the economy.” Still, he was guarded about backing off too soon, insisting policymakers weren’t close to considering rate cuts. No one wants a repeat of the “stop and go” policy of the ’70s when accelerations in M2 preceded the three accelerations in inflation. Not to worry, so far—M2 has contracted at a 4% rate YTD. Immaculate disinflation (more below) alongside continued low unemployment, solid labor demand (more below) and stronger-than-expected growth feed Fed worries that it’s still insufficiently tight. “I would say what our eyes are telling us is policy has not been restrictive enough for long enough,” Powell said. A day after the Fed meeting, the ECB also raised its policy rate another quarter point and said rates will continue to be “set at sufficiently restrictive levels for as long as necessary” to achieve a return to 2% inflation. Bank of Japan followed with a softening of yield control, sending its 10-year bond yield soaring. Seems everyone got the memo.
Advisors in Erie also love the outdoors! Making the ’23 Forbes list as one of the top 10 best—and most affordable—places to live in the U.S., it is known as the “Gem City” because of Lake Erie’s sparkling appearance. A backyard focus dominated the first 20 minutes of our advisor meeting, with stories of firepits, pools, hot tubs, tree removal, and a tall tree that stymied a cat (police won’t rescue them anymore) and challenged a homeowner whose drone got stuck (his bow and arrow recovery attempt didn’t work). A fisherman reports that his walleye catches are delicious! Dow Theory followers like what the market has been serving, with both the Dow and Dow Jones Transportation Averages hitting 52-week highs, historically a strong sign of confirmation. Yesterday ended a record stretch for the bellwether Dow, which had climbed 13 straight sessions. Fundstrat expects the uptrend to continue but cautions the market looks stretched near-term. It expects a pullback, particularly with the arrival of August. The month tends to present seasonal challenges through mid-September. Might a disappointing inflation print be a catalyst? Maybe. The Cleveland Fed’s real-time tracking gauge shows July inflation, which gets reported mid-August, reaccelerating. Speaking of August, time to get outdoors. Those heels need a rest and my dogs are barking!
Positives
- Consumer reigns supreme The first read on Q2 GDP growth surprised, accelerating to 2.4% annualized from Q1’s 2%—six-tenths of a point above consensus. The composition was strong as consumption growth slowed less than expected, business fixed investment jumped 8% annualized and prices decelerated more than forecast (more below). June data released this morning show consumer spending rising more than expected, accelerating to 0.5% m/m from an upwardly revised 0.2% in May.
- Consumer reigns supreme July Conference Board consumer confidence blew through consensus, hitting a 2-year high as the present situation component hit a fresh cycle high and the expectation component climbed to its highest level since January ’22. The labor differential—the difference between the percent saying jobs are plentiful vs. hard to get—rose a fourth straight month to its highest level since February. Inflation expectations moderated and family finances improved.
- Immaculate disinflation Core PCE prices rose at a 3.8% annual rate in Q2, below expectations for a 4% print and the Fed’s Q4 projection of 3.9%. The headline y/y increase was 2.6%, more than a point below consensus and down from 4.1% a year ago. Wage and other compensation costs slowed. June’s core reading also came in below consensus, posting its smallest increase since September ’21. Globally, headline and core CPI rose a respective quarter point and 0.22%, the latter a 2-year low.
Negatives
- Hopefully, manufacturing is making a bottom S&P Global’s initial U.S. PMI for July improved but remained in contraction. June durable goods orders ex-volatile transportation also slowed to a 0.6% increase, while non-defense capital goods ex-aircraft—the core component that feeds into GDP equipment spending—barely rose. Still, both measures beat consensus. Manufacturing jobs have reached 13 million, their highest level since November ’08, and overall goods producing jobs (including construction, mining, agriculture, oil & gas) are at a 15-year high.
- Hopefully, housing is making a bottom New single-family home sales fell more than expected to a 697k annualized rate in June, and May’s jump was mostly revised away. New home sales still are trending higher since last year’s trough, though settling into a pace in line with the level of sales heading into the pandemic. Price declines are helping to offset the higher mortgage interest costs. New home prices declined 6.7% in the first half of this year and are down 5% y/y. June pending sales rose modestly, suggesting the prolonged decline in existing home sales may be ending.
- Is Europe making a bottom or in a recession? Tuesday’s German IFO survey corroborates the downbeat message from Monday’s flash PMI, which put the country at a sharply contractionary 38.8. The IFO slipped to its lowest level since last November. Overall, the eurozone PMI has been below breakeven 50 since last July, with the latest monthly reading its lowest since May ’20. Services are still expanding but at their slowest rate since January.
What else
German measles A quarter century after The Economist called Germany “the sick man of the euro,” the debate about its economic future is back, suggests Deutsche Bank. The end of cheap Russian gas, a realization that China will become a much more difficult market for German exports and companies, and the understanding that Germany needs to invest substantially more in its own security (alongside climate, demographic and regulatory challenges) are threatening the underpinning of its export-oriented, industrial and qualified workforce-based growth model.
Consumers and voters care a lot about gasoline prices And they hit an 8-month high this week, according to AAA, part of a broadening price trend across commodities. WTI and Brent crude prices are back above their 200-day moving averages, as are both Bloomberg and S&P commodity gauges. Wheat, corn and soybean prices have jumped due to extreme weather and Russia’s exit from a deal allowing Ukraine wheat exports from Black Sea ports. All this—and strong EM ex-China growth—has Gavekal Research overweighting commodities (both high-beta metals/energy and low-beta foodstuffs).
Seems bloody unlikely BCA Research calculates monthly nonfarm payroll growth would have to average between -37k and +87k for the next six months for the jobless rate to hit the Fed’s 4.1% year-end forecast.