Drink the energy
Stocks rose on the eve of Independence Day because it’s a new quarter, and why not… most traders were sunning themselves anyway. The last few trading sessions have featured a number of economic releases that may raise doubts about future raises in the Fed’s key lending rate.
Hazy horizons. As traders were planning the holiday cookouts the Bureau of Economic Analysis released its PCE Deflator numbers last Friday morning. For the record, PCE stands for Personal Consumption Expenditures, and it is the Fed’s favorite inflation indicator. It favors this number over the Consumer Price Index / CPI because it believes the way in which the survey is conducted yields a slightly more accurate view of inflation. Ok, Fed, you do you. The numbers, of course, are very important but what you need to know is that the numbers, inflation that is, are easing.
Never mind the actual number. As you can see by this chart the situation is improving. Last June was the high-water mark and barring 2 slight upticks the index has almost halved in the year that followed. You will also note from the chart that we are still not quite back to where we were prior to the pandemic which played a big role in expanding inflation. You don’t need my chart to know this… if you have attempted to buy just about anything recently. The Fed feels your pain, so it is going to stay on the job as long as it takes to get things back to normal… which THEY think is around +2.0%. The Fed, for its part, has hiked interest rates by more the +500 basis points in the past 15 months, considered aggressive by historical standards. Though you and I may consider the above chart as progress, the Fed may not be ready to give up on the hiking just yet, despite last month’s hiking pause.
This afternoon we will get the FOMC meeting minutes from June and get a slightly more detailed glimpse of the members’ discussions. There should be no surprise given the increasingly vocal bunch’s admissions leading up to the meeting. It is clear that the hawks have not landed just yet. Still, the FOMC members, hawks included, voted unanimously to forego another rate hike last month. What many folks may have missed is that the Fed upped its forecast for the terminal rate. That is to say the point at which the Fed will stop hiking, and that is still another +50 basis points, or a half a percentage point higher than where we are today. Now, whether the Fed actually gets there or not is not so important at this point as the fact that the forecast increase was a message, indeed, a policy move. Whether you believe in that or not, we can see how traders adjusted their views in the days that followed its release as the shape of the Fed Funds futures curve changed.
Still, it is not yet clear that the Fed will add the additional +50 basis points, as inflation does continue to ease and, despite last week’s surprise upward GDP revision, the economy continues to flash warning signs. On Monday’s abridged session ISM Manufacturing came in with a solid miss. The miss is consistent with all the other manufacturing gauges showing a weakened sector. How about that yield curve that hit a new inverted low on Monday? It’s not just inverted, it’s very, very inverted, hitting a level not seen since 1981. There have been 5 recessions since then, and curve inversions have preceded each one, though the inversions were nowhere near as severe as it is today.
These economic revelations may indeed cause the Fed to forego future hikes and wait for its handiwork to take effect, however it is clear that central bankers are hoping to cool off the hotter-than-hot labor market that it believes is causing inflation to remain sticky. Speaking of that labor market, later this week we will get a read on the US labor market in two key releases. JOLTS Job Openings will show us just how many job vacancies exist. The number is still just below an all-time record, and that means that the labor market is strong. On Friday, we will get the monthly employment numbers from the Bureau of Labor Statistics, and if economists are correct (and they usually aren’t ) the Unemployment Rate may have improved since last month. I would love to tell you that the recent events along with the data points that we will receive over the next 3 sessions will shed some additional light on the Fed’s path, but unfortunately, that path seems as hazy as… well as the weather in New York these past few days… trust me its hazy out there.
MARKET MOVERS THIS MORNING
Monster Beverage Corp (MNST) shares are higher by +2.07% in the premarket after it announced that it purchased rival Bank Energy out of bankruptcy, which was largely a result of a settlement with… Monster. Monster continues to enjoy the continued growth of the energy drink segment which has attracted quite a bit of attention from rival drink makers PepsiCo and Keurig Dr Pepper. Monster will not announce its earnings until early August. Potential average analyst target upside: +8.2%.
Moderna Inc (MRNA) shares are higher by +1.45% in the premarket after it announced that it signed an MOU to develop mRNA vaccines for China, the second largest pharma market in the world. The company also announced that it submitted its RSV vaccine for global regulatory approval. Potential average analyst target upside: +63.5% (not a typo , which means… proceed with caution if volatility is not your thing).
MONDAY’S MARKETS
Stocks gained on Monday on low volume as traders began to position for the new quarter. The S&P500 rose by +0.12%, the Dow Jones Industrial Average added +0.03%, the Nasdaq Composite Index climbed by +0.21%, and the Russell 2000 Index advanced by +0.43%. Bonds slipped and 10-year Treasury Note yields added +1 basis points to 3.85%. Cryptos jumped by +3.31% and Bitcoin advanced by +1.75%. The S&P ESG Index added +0.17%.
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