Stocks climbed on Friday after a modestly positive week of economic releases gave investors the motivation to celebrate. Consumer sentiment staged a mild comeback according to Michigan’s sentiment indicator.
Too much joy? Steam is building, positive steam; whether there is enough to restart the bull engine of years past remains to be seen. Where are we, really? Let’s do a quick recap and prepare for the week ahead.
The big news last week was that headline inflation, as measured by the Consumer Price Index / CPI came in lower than expected and more importantly, quite a bit lower than the prior month. That’s right, inflation moderated from June to July. Notice my precise choice of words. I did not say inflation was moderating, rather than that inflation moderated from month to month…and it was more than anticipated. That can be looked upon as positive progress but by no means, a triumph. Similarly, the Producer Price Index / PPI also pulled back more than expected and lower than June’s number. That number tracks input costs to the producers WHO ACTUALLY CONTROL WHAT YOU PAY IN THE STORE. The theory there is that if producers’ costs are going down, they will be able to pass those savings on to us consumers. Let’s see how quickly they bestow such benevolence. All in all, inflation is THE key driver for the Fed rate hikes, which are designed to cause enough pain to consumers so that they reduce demand for goods and cause prices to moderate. Those rate hikes have also had a big hand at pushing growth stocks off their perch from late last year through the end of June of this year. So, naturally all investors would like to know when the Fed will stop hiking those rates. Last week’s news provided those investors who would like to see rate hikes moderated some positive news.
In the prior week, we learned that the employment situation in the US is in fine form. That is good news because if the labor market falls apart and goes sideways, we can almost guarantee that the current technical recession in the US will become a full-blown, and painful actual recession, though the official title will not be bestowed for many months (talk about rapid feedback). So, the fact that the Unemployment Rate is 3.5%, which just happens to be where it was before the pandemic, AT AN ALMOST 55 YEAR LOW, is a good thing for the economy. That may not be a good thing for investors hoping for rate hike moderation. The strong labor market gives the Fed more confidence that its brake-pumping endeavors will not land the economy head-on into a utility pole – a painful recession.
So far, we have two bits of good news for the economy, which we learned just 3 weeks ago was in a technical recession. Of course, there are numerous other factors that go into a Fed rate policy decision, but those are certainly some of the more influential ones. One that I harp on an awful lot is consumer sentiment. Consumers are responsible for the bulk of GDP, some ~70% to be exact. So, if we consumers lose confidence for whatever reason, be it the threatening Fed, deteriorating health conditions, fear of job loss, higher interest rates, or greater inflation, well that can spell doom for GDP, and a mild technical recession can quickly spiral into a deep and distressing recession. Last Friday, we got a bit of positive news on that front. The University of Michigan Sentiment indicator showed that sentiment increased from last month’s all-time low. The number was better than economists had hoped for with the big gain being attributed to expectations in a year for now, while assessments of current conditions deteriorated since July. The overall number is important in that it shows that consumers are maintaining their cool. Interestingly this thesis is somewhat supported by the now-three-weeks-old dip in GDP. If we look at the breakdown of the release, we note that the quarterly decline in output was mostly attributed to less business investment, while consumer spending still grew in the second quarter. That brings us to the week ahead.
I refer to this week as the consumers’ rubber-meets-the-road week. We will not only get the Retail Sales economic release, but also earnings from some of the top retailers. Those include Walmart, Target, Costco, Lowe’s, TJX, Kohl’s, Ross Stores, and BJ’s Wholesale. That is a nice all-star cast, and more important than whether or not they beat estimates last quarter is what they are willing to tell us about the demand trends they are seeing at the retail level, whether they expect changes to impact forward guidance, and how they plan to counter any negative trends. We have already gotten some pre-release guidance from some of the larger players that indicate troublesome demand shift trends and investors ALONG WITH THE FED will be watching for any further cues on what to do next. On that note, we are due to get the minutes from the Fed’s July 27th +75 basis-point-rate-hike meeting and in it we may glean further knowledge on why it chose that path and what it may be looking to do in the future. So, where does that all leave us? Perhaps a quote by San Francisco Fed President Mary Daly can summarize. She noted of last week’s cooler-than-expected inflation numbers that they were “significant in that they are saying that we’re seeing some improvement but they’re not victory.” In other words, the battle continues to rage. Stay tuned…stay focused.
FRIDAY’S MARKETS
Positive sentiment over lower inflation carried through to Friday’s session propelling stocks higher. The S&P500 Index gained +1.73%, the Dow Jones Industrial Average traded higher by +1.27%, the Nasdaq Composite Index advanced by +2.09%, and the Russell 2000 Index raced higher by +2.09% as well. Bonds gained ground and 10-year Treasury Note Yields pulled back by -5 basis points to 2.83%. Cryptos traded higher by +0.96% and Bitcoin bubbled higher by +0.10%.
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