S&P 500: 2.42% DOW: 2.29% NASDAQ: 3.32% 10-YR: 3.82%
Last Week on WallStreet - July 15th, 2023
Market indexes rallied on higher probabilities of a goldilocks scenario in the US; softening inflation with fairly robust economic growth. We are now entering earnings season where expectations are downbeat. According to FactSet forecasts are calling for a 7% year-over-year decline in S&P 500 earnings. Still, investors will likely cheer companies that outperform these lowered bars as they did last quarter.
Beneath the surface, we saw outperformance on the week from the year's largest outperformers: Communications, Consumer Discretionary, and Technology. Although they were in the green, Consumer Staples and Energy were the week's biggest laggards.
Inflation Rose Less Than Expected as Consumers get Break From Price Increases
- The Consumer Price Index rose 0.2% in June and was up 3% from a year ago
- This was the lowest level since March 2021
- Airfares fell 8.1%, Hotels fell 2%, and Used Car prices fell for the first time in 3 months
- Shelter costs accounted for more than 70% of the overall monthly advance
- A separate report from manufacturers saw PPI rise only 0.1% vs the expected 2%
The key takeaway - Price pressures have clearly peaked over the last year, aided by interest rate hikes and easing demand. The favorable print fueled a rally in assets as the number bolsters the argument for less rate hikes ahead. As we move towards the end of the year, some worry that the base effects that were tailwinds to bring inflation down quickly might become headwinds and cause prices to remain sticky. Still, as it stands an inflation print of 3% is still higher than the Fed's target. The Fed's job is not done, and with a resilient labor market causing continued spending by the consumer, we will likely need to see a material slowdown in the economy to get back to 2%.
Fed's Beige Book Points to Continued Slow Economic Growth
- The Fed's business contacts reported activity increased only slightly in May and June
- They expected the slow growth to continue
- 5 of 12 districts reported slight or modest growth, 5 noted flat activity, 2 noted slight or modest declines
- Wages continued to rise but more moderate
The key takeaway - The Fed's Beige Book is based on anecdotal information from businesses in each of the 12 Fed districts. Overall, the reports on the ground suggest that many parts of the US economy are growing at a moderate pace, yet there are headwinds that could weigh on growth in the coming months. This has been the story and theme as of late, the timing of which is left up to interpretation. Parts of the fixed-income market are pricing in slower growth, yet equities have climbed the wall of worry.
China's Worse Than Expected Exports Deal New Blow to Economy
- China's exports fell 12.4% in dollar terms in June from a year earlier
- the second straight month of declines and the biggest drop since the pandemic
- Imports slumped 6.8%
- Both numbers were worse than expected
The key takeaway - The drop in exports highlights a weakening global economy while the drop in imports exposes dampening domestic demand. Over the last 3 years, global demand has been a strong driver of China's growth. However, since late 2022 that growth spurt began to fade as exports have now fallen 4 out of the last 6 months. Given the coordinated hiking cycle by global central banks and likely slowdown in the US and Eurozone, it will be tough sledding for the world's second-largest economy to rebound strongly. The PBOC has announced that it will use policy tools such as the reserve requirement ratio and medium-term lending facility to weather some of these challenges.
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