Wentz Weekly Insights
Resilient Economy, Strong Consumer, and Lower Inflation Drive Stocks to New 52-Week High
Recent Economic Data
- Inflation expectations, through several surveys, are continuing to come down. The NY Fed’s survey of consumer expectations showed inflation expectations over the next year are at 3.8%, dropping for the third consecutive month, the lowest level since the beginning of 2021 and down from 4.1% in the May survey. However, expectations over the longer-term (5-year) moved to 3.0% which was above the May survey of 2.7% and the highest since March 2022. Sentiment on the jobs market fell to the lowest in 14 months. The expected growth in spending over the next year was 3.2%, falling another 0.1% in the month.
- Consumer inflation was 0.2% in June, up slightly from the 0.1% increase in May but lower than the 0.3% increase that was expected, according to June’s consumer price index. Inflation over the past year saw a 3.0% rate in June, slowing from the 4.0% annual increase in May and the lowest level of annual inflation since March 2021, however due mostly to high inflation readings from May last year rolling off the 12 month comparison. In addition, most of the slowdown in inflation is due to a 16.7% drop in energy prices, including a 36.6% decline in fuel prices. Other categories helping bring inflation lower include used car prices, down 5.2% over the past year and medical services, down 0.8% over the past year. More importantly, core prices, which exclude food and energy prices, rose 0.2% in June which was slightly below the 0.3% increase expected and down from the 0.4% pace in May, and the lowest monthly increase since August 2021. The annual rate in core prices was 4.8%, down from 5.3% in May. Important categories include shelter which is up 7.8% over the past year, transportation prices up 8.2%, vehicle insurance up 16.9%, hospital services up 4.1%, and apparel up 3.1%.
- Producer prices for final demand increased 0.1% in June, slightly lower than the 0.2% expected but higher than the 0.3% decline in May. The index for producer prices is up 0.1% from a year ago, dropping substantially over the past several months and down from the 1.1% annual rate in May. Energy prices for producers picked back up by 0.7% while food prices saw a slight decline. Excluding trade services and these two volatile categories, prices were up 0.1% in June and up 2.6% over the past 12 months. The prices index for final demand services remains higher, rising 0.3% in the month driven by categories like transportation but offset by categories like warehousing. Over the past 12 month final demand services index is higher by 2.3%
- The price index for goods and services imported to the U.S. fell 0.2% in June which follows a 0.4% decline in May and has declined 10 of the past 12 months. Fuel prices were up 0.8% in the month and import prices excluding fuel were down 0.4%, being driven by industrial supplies, consumer goods, and capital goods. The price index for imports over the past 12 months is down 6.1% for the fifth consecutive month of seeing an annual decline and coming after a record 13.0% annual increase March 2022. The price index for exports declined 0.9% in June after a 1.9% decline in May and also falling 10 of the past 12 months. The decline was driven by agricultural goods prices, which fell 1.6%, as well as declines in industrial supplies, which was offset by increases in capital goods, consumer goods, and vehicles. The price index for exports over the past year was down 12.0%, the steepest annual decline since the data started in 1984 and comes after a record high increase of 18.6% just one year ago.
- The University of Michigan’s consumer sentiment mid-July survey resulted in an index level of 72.6 which is higher than the expectation of 66.0 and the best level since September. The sharp rise was attributed to the slowdown in inflation, stability in the labor markets, and sharp rise in equities. Furthermore, the index on current conditions was 76.5, up from 69.0 in June and the best level since October 2021, while the index on consumer expectations was 69.4, up from 61.5 in June and the best level since July 2021. The disappointing part is the expectation on inflation over the next year was 3.4%, up from 3.3% in June.
- Consumer credit rose $7.24 billion in May, or at an annual rate of 1.8%, bringing the total amount of consumer credit (which does not include mortgages) to $4.865 trillion, and slowing from its 5.0% annual rate in April. Revolving credit (like credit cards) rose 0.7% to $8.5 billion in May on a seasonally adjusted basis (1.7% not seasonally adjusted), and is up 8.2% on an annualized rate, while still growing strong is lower than the 13.8% annualized rate the prior two month. Non-revolving credit, which is a much larger component making up 74% of all consumer credit, declined $1.3 billion, or 0.4% on an annualized basis.
- The number of unemployment claims seen by the states for the week ended July 8 was 237,000, a drop of 12k from the prior week with the four-week average at 246,750. The number of continuing claims was 1.729 million, an increase of 11k from the prior week which was lowest since February, with the four-week average at 1.735 million.
- Freddie Mac’s weekly mortgage survey showed the average prime 30-year mortgage rate was 6.96% last week, up another 15 basis points from the week prior, the highest since it hit 7.08% in November which was the highest since early 2000. The low this year was in February when the 30-year rate averaged 6.09%.
- PepsiCo reported its quarterly results where its sales and earnings were better than what was expected, but this was largely driven by price increases. Its organic sales growth was 13%, beating expectations of 10%, however this was all due to higher prices as volumes declined 3% for its food business and declined 1% for its beverage business. Earnings were 17% lower from a year ago, but still beat expectations.
- Banks reported solid results, most of which beat analysts expectations. JPMorgan saw its net interest income in the quarter rise 44% to $21.8 billion (beating expectations of $21.0 billion). This allowed the company to increase its net interest income forecast to $87 billion (up from $81 billion in the previous forecast). Its results were helped by its acquisition of the failed bank First Republic Bank but it had $1.7 billion in provisions for credit losses attributed to the bank, and another $1.2 billion for JPMorgan. It also noted strong results for consumer and community banking. Meanwhile, CEO Jamie Dimon made upbeat comments on the economy – it has remained resilient, consumer balance sheets are healthy, and consumers are still spending strongly but at a slower pace, while maintaining his warning risks remain and a recession is likely though is uncertain how severe it will be.
- In a very crucial step for the deal, the US District Court denied the Federal Trade Commission’s motion for injunction to block Microsoft from closing on its $68.7 billion acquisition of Activision Blizzard. The court said the “FTC has not shown it is likely to succeed on its assertion the combined firm will probably pull Call of Duty from Sony PlayStation, or that its ownership of Activision content will substantially lessen competition in the video game library subscription and cloud gaming markets.” Shares of Activision Blizzard rose 10% the day of the Court’s announcement, closer to its $95 takeover price. Microsoft later offered to make a small divesture to meet the objections of UK regulators. Later in the week, as what somewhat expected, the FTC filed an appeal on the Court’s decision.
- Broadcom’s pending purchase of VMWare was given a conditional approval by European regulators subject to commitments offered by Broadcom that would no longer raise competition concerns. Broadcom recently announced its intent to acquire VMWare for $61 billion.
- Shares of Roku gained over 10% after it announced a partnership with Shopify where it will give merchants access to streaming users with shoppable advertising. The new feature will allow users of Roku to use a single click in an ad to learn about and purchase a product directly from their TV using Roku Pay, then return to what they were watching.
- Salesforce stock gained after it announced it will raise its list prices for new and existing customers an average of 9% across its cloud services, the first increase in seven years.
- Disney said it has extended its contract with Bob Iger as CEO by another two years, keeping him as CEO through 2026. In addition, Iger suggested the company may look at strategic options that could include a sale of its traditional TV assets, saying the company would take an expansive look at the business. Iger added, in his interview with CNBC, the current distribution model of its linear TV assets is “definitely broken” and it may not be core to Disney’s strategy anymore. Iger said it views ESPN differently than its other linear networks like ABC and FX.
- Elon Musk said he has launched a new company xAI for the goal of understanding the “true nature of the universe” and what he believes will help humanity understand reality.
- The NASDAQ 100 index (and index of 100 of the largest non-financial companies in the NASDAQ) will undergo a ‘special rebalance’ to adjust the weight of its 100 components due to the significant outperformance and high weighting of the “magnificent seven” stocks that include Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta. It will take place before the market open Monday July 24. The index has only seen a special rebalance twice in its history – in December 1998 and May 2011. The weighting changes will be announced Friday and no stocks will be added or removed.
- According to data from the International Data Corporation, global shipments of personal computers (PC) declined by 13.4% in the second quarter, the sixth consecutive quarter of declines, however not as large of a decline as feared and slowing from the 29% decline in shipments in the first quarter. PC demand has been weak since the post-pandemic economic reopening and now producers sit on a high amount of inventories after building inventories during the Covid boom that suddenly slowed sharply when the economy reopened.
- Federal Reserve Vice Chair for Supervision released proposals that would address the recent bank failures and increase capital requirements in the financial system for some of the largest banks. Vice Chair Michael Barr said the new regulation will include how the Fed regulates and supervises liquidity, interest rate risk, and incentive compensation, as well as improving the speed and force of the Fed’s supervision.
- Bloomberg reported China’s Central Bank is hinting at adjustments to some of its policy including the reserve requirement ratio and lending facility to provide more support for its economy, as well as easing property controls.
- The Bank of Canada raised its policy interest rate by 25 bps to 5.0% which was as expected, and said it will continue it quantitative tightening. The statement noted inflation is easing but a stronger economy than expected, tight labor markets, and more momentum in demand are causing persistent inflationary pressures in services.
- Fed updates:
- St Louis Fed President James Bullard, who has been one of the more hawkish Fed members, said he will step down from his role effective August 14 to take a position as the dean of Purdue University’s business school.
- Cleveland Fed President Loretta Mester said the economy has “shown more underlying strength” this year but inflation has been stubbornly high and progress on core inflation has stalled which supports her view more rate increases are needed. She also said sticky wage growth is one of the measure that still needs to be contained in order to achieve 2% inflation, something that suggests the Fed is aiming for an increase in unemployment to bring wage inflation down.
- San Francisco’s Mary Daly said it has been surprising how strong the economy has remained and the stronger data indicates the Fed’s need to raise rates further to “bridle that economy more.” She still believes the risk of doing too little outweighs the risks of doing too much. Later in the week Daly said the economy is seeing a lot of momentum still, even after over 5% of rate increases, which is why she expects the Fed to continue with rate increases to keep fighting inflationary pressures.
- Federal Reserve Governor Chris Waller said in his prepared remarks at a public event last week he sees two more rate increases over the four remaining FOMC meetings this year in order to continue the battle to bring inflation down to target. He added he supports a rate hike at the July meeting but if inflation data comes in better than expected he could see the Fed foregoing the second hike later this year. He said it will depend on the data but if the upcoming inflation reports “look like the last two, the data would suggest maybe stopping.” He went on to suggest that the tightening in policy that has already occurred (over 5% of rate increases) has already worked its way through the economy which means there is not much more slowing of demand left from tightening and pausing rate increases now would not make sense.
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The Week Ahead
Markets will be focused on earnings the next three weeks as it will be the busiest of this earnings season with the number of earnings reports picking up this week with at least 10% of S&P 500 companies reporting second quarter results. Notable quarterly results will come from Bank of America, Morgan Stanley, Lockheed Martin, JB Hunt on Tuesday; Elevance (Anthem), Halliburton, Goldman Sachs, IBM, United Airlines, Netflix, Tesla on Wednesday, Taiwan Semiconductor, Johnson & Johnson, CSX on Thursday, and American Express on Friday. The economic calendar will include several reports on the housing market for the month of June including the housing market index on Tuesday, housing starts and permits on Wednesday, and existing home sales on Thursday. We will see updates on the manufacturing sector with the Empire State Manufacturing index Monday, June industrial production on Tuesday, and the Philly Fed manufacturing index on Thursday. Elsewhere, data on June retail sales comes out Tuesday where economist and analysts estimate a 0.5% increase in sales, and 0.3% increase in core sales (excluding gasoline and food sales), as well as jobless claims on Thursday. Another item on the calendar is the Senior Loan Officer Opinion Survey on Bank Lending Practices, which became more important after the bank failures in April and May and provides additional insight to banks’ lending conditions. We will not hear from any Fed member this week as policymakers are in a blackout period prior to the FOMC’s next meeting on July 26.