Jul 13, 2022
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“Inflation is like toothpaste. Once it’s out, you can hardly get it back in again.” – Karl Otto Pöhl
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The big CPI report that everyone is waiting for is finally here, and most investors appear to be leaning on the side of a stronger-than-expected report. However, after two weak days for equities futures are indicated higher in early trading.
Update – The report was just released and headline CPI came in at 1.3% compared to the forecast for 1.1%. On a core basis, CPI rose by 0.7% compared to forecasts for growth of 0.5%.
Earlier this morning, the IMF cut its forecast for US GDP growth down to 2.3% from 2.9%. This news is notable for two reasons. First, it comes less than a month after the IMF downgraded its growth forecast down to 2.9% in late June. Second, given the indication from the Atlanta Fed’s GDPNow model, which is calling for a Q2 contraction of 1.2% following Q1’s decline of 1.6%, the US economy would need to grow by 3.2% in the second half in order to reach that goal. Based on the trend in recent data and the Fed’s tightening bias, that level of growth seems optimistic.
In today’s Morning Lineup, we discuss moves in Asian and European markets, Chinese trade data, and economic data from around the world.
The days of the monthly employment report being ‘the most important indicator’ are long gone, and the new flavor of the month is CPI. Unfortunately for bulls, the trend of recent reports hasn’t been particularly market-friendly. As we have highlighted repeatedly in recent months, the headline CPI report has rarely come in weaker than expected. In the two years through May’s report, there have only been two weaker-than-expected headline CPI reports, which is easily the lowest number over a two-year span in at least twenty years.
When times are tough, there’s a stage in the process where people think that if they only wish hard enough, things will go their way. Unfortunately, elevated levels of inflation are a reality economists can’t simply hope away by consistently low-balling estimates.
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Jul 12, 2022
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“The euro was born with great hopes. Reality has proven otherwise.” – Joseph Stiglitz
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As the European economy continues to crater given rampant inflation, geopolitical instability, and labor/supply issues, the collapse in the bloc’s currency continued overnight as the euro reached parity with the US dollar for the first time since December 2002. While the round number generates a lot of headlines, it really means little in the broader picture of a weak European economy and what looks to be an even weaker outlook in the months ahead.
Over here in the US, things don’t seem all that much better. The week has started off slowly in terms of economic data, but this morning’s report from the NFIB on small business optimism came in much weaker than expected at 89.5 versus estimates for a reading of 92.5. Would you believe that sentiment among small businesses is now lower than it was at any point during the COVID lockdowns? Admittedly, the NFIB survey does tend to lean Republican, so with Democrats in control of DC, it’s not a complete surprise to see sentiment so weak. Given the macro backdrop, though, you can’t fault small business owners for being pessimistic. The last time the headline index from the NFIB was as low as it is now was in January 2013 at the beginning of President Obama’s second term. With the NFIB report behind us, the focus will now shift to tomorrow’s CPI.
In today’s Morning Lineup, we discuss moves in Asian and European markets, the latest developments on the war in Ukraine, and economic data from around the world.
Here is a surprising aspect of recent market events. With what seems like a near-constant focus that the ARK Innovation ETF (ARKK) gets, we were surprised that given the near 7% decline in the ETF yesterday there wasn’t more attention given to the fact that it had one of its 15 worst days since its inception in late 2016. The chart below shows the performance of ARKK since the start of 2017, and we have included red dots to show each of the 15 largest daily percentage declines in the ETF’s history. In the five-plus years that the ETF has been trading, all fifteen of the largest daily percentage declines occurred in either 2020 or 2022. Even more surprising is the fact that seven of the fifteen largest declines have all occurred since the start of May. What does it mean when extreme moves become the norm?
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Jul 11, 2022
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“I have thought it my duty to exhibit things as they are, not as they ought to be.” – Alexander Hamilton
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After a nice week to kick off the quarter, we are seeing some giveback this morning as all of the major US averages are indicated to open lower. Along with weaker stock prices, crude oil, gold, and crypto are joining the downward bias. Treasuries, however, have bucked the trend with the 10-year yield trading down near 3%.
This week will be an important one for the markets with some key economic data (CPI, PPI, and Retail Sales) as well as the start of earnings season, but it’s starting off slow as there are no significant economic reports and the only earnings report of note is from Pepsi (PEP) after the close.
In today’s Morning Lineup, we discuss moves in Asian and European markets and economic data from around the world.
Last week was a pretty good one for US equities with the S&P 500 up nearly 2% and the Nasdaq up over 4%. Even after the gains, both the Nasdaq and the S&P 500 failed to close above their 50-day moving averages (DMA). The Nasdaq is just fractionally below that level, and the S&P 500 is over 1.5% below its 50-DMA. While the Nasdaq wasn’t able to re-take its 50-DMA, it does appear to have broken a downtrend that has been in place since the Spring. The S&P 500, on the other hand, also remains below its downtrend from the Spring, so it still has more work to do on the upside. Just as the 50-DMA tends to act as support in uptrends, it tends to act as a headwind during downtrends, so this week should prove to be a critical one as we get deeper into Q3. A failure on the part of the indices to break above their respective downtrends or reclaim their short-term moving averages could set the market up for a long earnings season.
Last week’s rally was dominated by the ‘trash’ as the year’s three worst performing sectors were the leaders last week. Consumer Discretionary rallied 6.5% over the last five trading days (July 1st through last Friday), while Technology and Communication Services both surged 4%. Even after these gains, all three sectors are still down well over 20% YTD. On the downside, it was generally the year’s winners that lagged last week as Energy and Utilities both experienced fractional declines. One outlier to the trend was Materials. It was the worst-performing sector over the last five trading days and it is also the fifth worst-performing sector YTD, and one of just two oversold sectors.
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Jul 8, 2022
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“Our predecessors overcame many troubles and much suffering, but each time got back up stronger than before.” – Shinzo Abe
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US futures have been negative most of the morning ahead of today’s jobs report, but they have been improving from earlier levels, and the Dow is even indicated to open slightly higher as we type this. This is all subject to change, though, as the June employment report will be released shortly. Expectations are for an increase of 268K, which would be the lowest monthly reading since the start of 2021, but the real focus will likely be on average hourly earnings which are expected to increase by 0.3%.
Outside of equities, US treasury yields are modestly lower, but the 2s10s yield curve remains inverted for the fourth straight day. Crude oil and gold are basically flat, and copper is down nearly 2%.
In today’s Morning Lineup, we discuss moves in Asian and European markets and economic data from around the world.
With a good deal of emphasis being placed on today’s employment report, we wanted to take a quick look at how the headline payrolls report has come in relative to expectations over the last year. In the last 12 monthly reports, the headline number has exceeded expectations seven times and missed forecasts five times. Looking at the chart, though, the margin of the misses has been much larger than the magnitude of the beats. In four of the five misses, the actual reading came in more than 250K below forecasts, and the overall average miss was 291K. In the seven beats, however, the average beat was just 143K or less than half of the magnitude of the average miss. Applying the average miss to today’s report, if the June report missed expectations by the ‘average’ amount of the last year, it would be a negative reading. A lot of ifs there, but just helps to put things in perspective.
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Jul 7, 2022
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“Politics is not a game, but a serious business.” – Winston Churchill
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Given the state of politics on both sides of the Atlantic, most would probably take issue with Churchill’s description of the political process, especially the second part. Anyway, it’s always interesting to see instances where a CEO announces his or her resignation from a company and its stock rallies. How must the individual leaving the company feel watching the market cap of the company rise now that they’re gone? Talk about a lack of a value-add! Anyway, as bad as it must make a CEO feel, how must Boris Johnson feel today that British stocks and the pound are all rallying on news of his resignation? There’s a reason you need a thick skin to be successful in politics.
Stocks aren’t just rallying in Europe this morning as major indices around Europe and the world along with US futures are all in positive territory. The S&P 500 has been higher in each of the last three trading days, and if early gains hold today would be the fourth straight day of gains. In order to get there, though, we’ll have to get through Jobless Claims at 8:30, Energy inventories at 10:30, and then two Fed speeches from Waller and Bullard this afternoon. Jobless claims came in at 235K which was slightly higher than expected and the highest level in nearly six months.
In today’s Morning Lineup, we discuss moves in Asian and European markets, reports of a $200+ stimulus plan in China, and economic data from around the world.
As mentioned above, if today’s early gains hold today would be the fourth straight day of gains for the S&P 500. That may not sound all that impressive (it isn’t), but in a year like 2022, it is enough to be tied for the longest winning streak of the year. Earlier this year in Q1, there were three other streaks of similar duration, but in Q2, the best the S&P 500 could do was three days.
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Jul 6, 2022
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“There is no free market for oil. It’s controlled by a cartel, OPEC.” – Frederick W. Smith
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Stocks are poised for a lower open this morning, oil prices are clinging to $100, and the 2s10s yield curve is modestly inverted. While equity futures have been lower all morning, they have been trading in a relatively tight range. That’s likely to change at around 10 AM Eastern with the release of the ISM Services report and the May JOLTS report. Then at 2 PM, we’ll get the release of the Fed minutes from the June meeting.
In today’s Morning Lineup, we discuss moves in Asian and European markets, along with a quick look at the latest moves in the euro and the developments in UK politics.
Less than a month ago today on June 8th, the S&P 500 Energy sector was up over 65% YTD, up more than 60 percentage points more than the next closest sector, and 90 percentage points ahead of the worst performing sector (Consumer Discretionary). Since then, Energy stocks have come crashing back down to earth, and while it remains the only sector up YTD, its lead over other sectors has narrowed.
With a YTD gain of 28.1%, the Energy sector ETF (XLE) leads the next closest sector, Utilities, by nearly 30 percentage points and still has a lead of nearly 60 percentage points over the worst-performing sector – Consumer Discretionary.
When we look at how far the Energy sector has declined from its 52-week high and compare that decline to how far other sectors have dropped from their 52-week highs, Energy is no longer a standout. In fact, with Energy down 25.3%, it has now declined more from its 52-week high than the S&P 500 has declined from its high (-20.4%). Of the eleven sectors, only three – Technology (XLK), Consumer Discretionary (XLY), and Communication Services (XLC) – have seen larger drawdowns from their respective highs than the Energy sector.
Investors tend to view their holdings from the lens of where they are trading relative to their peaks. With Energy now down just as much or more than most other sectors, plus the fact that a lot of inflows into the sector likely came closer to the June high, even the one sector that has been a bright spot for the market is probably not making too many investors happy these days.
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