Are there signs that the PC market is about to stage a recovery?

Stocks rose yesterday after a Fed report found that consumers are expecting lower inflation in the future. Markets are predicting a +25 basis-point hike at either this month’s or September’s FOMC meeting.

One last thing. Yes, rates are still very much on the mind of markets these days as we just rounded the halfway mark of the year. Will the Fed return to its former market blistering hiking or will it watch and wait for its handiwork to take effect. Markets are factoring just 1 more small hike before the end of the year, but as we have learned, that view can change rather rapidly if conditions on the ground warrant it.

You may recall that just several weeks ago, markets were predicting no more interest rate hikes for the year. In fact, markets were predicting rate CUTS before the new year. So, I suppose that when I report to you that Fed Funds Futures are predicting just 1 rate hike either this month or in September, I should add the modifier “right now.” So, if that is the case, RIGHT NOW, what might change the Fed’s course going forward?

Well, the most obvious thing is… um, inflation itself. Tomorrow, we will get a report on June’s Consumer Price Index / CPI, and inflation is, after all the whole reason for this drawn-out and painful discourse. Inflation has, indeed slowed from last year’s abnormally high level, but it is still not where the Fed would like it to be. So, do we just keep our bags packed until inflation is literally back to +2% (the Fed’s target)? If we want to be really conservative, I suppose the answer is “yes,” but the stock markets are in the business of predicting the future, so if markets are expecting inflation to get back to normal and the Fed to stop hiking, stocks are likely to get a boost. If we wait for that +2% print, we may end up missing the train.

That said, stock investors are obsessed with anything that might give them a sign that inflation may be trending in one direction or another. Inflation itself, is indeed trending downward, which is one of the principal reasons that markets have performed as well as they have year to date. As we are not quite there yet, or, as the Fed itself so often puts it “there’s a ways to go,” verbatim, there is still some room for speculation.

Yesterday, we got an interesting signal from the Fed itself when it released its monthly consumer survey. It reflected that consumers are lowering their expectations for inflation in a year from now. In fact, it was the third consecutive release of lowered expectations. That is a positive, and Fed-friendly sign. When consumers are expecting lower inflation, they are less likely to accept price hikes and demand less. That is the first step in lowering inflation. By demanding less, consumers are literally forcing suppliers to lower their prices… or else. In a more practical explanation, if you are expecting prices to be lower in the future, you are likely to put off a purchase. That pressures sellers into coming up with incentives to get you to buy today. You get the picture. The Fed is very keen on tracking “inflation expectations” because the opposite of our example means that consumers are willing to accept inflation which leads to what is commonly referred to as “sticky,” or prolonged inflation.

A few weeks back on the eve of the unofficial Independence Day holiday weekend in the US (the holiday was technically on the following Tuesday), the PCE Deflator showed a decrease in inflation, which was celebrated by the market. Hidden in the report was another data series, Personal Spending. Personal spending is part of what I so often obsess over, CONSUMPTION. Consumption is obviously a key driver of economic growth, but it is also a driver of inflation. I am going to spare you the chart that shows huge monthly spikes in 2021 and a monthly run rate of around +1% for all of last year. We did get a +2% monthly spike earlier this year, which was alarming, but since then, monthly increases have been subdued with the last print coming in at just +0.1%. That is also a Fed-friendly number.

So, we will get one last look at inflation with tomorrow's and Thursday’s economic releases, then it is on to earnings season and yes, another Fed meeting where the grey-suited bankers will cast their votes and possibly set the stage for second half of the year stock market behavior. As we have learned in recent weeks, the market is sure to change its opinion in either direction leading right up to the FOMC meeting.

PREMARKET MOVERS

HP Inc (HPQ) shares are higher by +1.24% after Citi opened what it refers to as a “positive catalyst watch” on the stock. The analysts believe that there are signs that point to a recovery in the pc market, which has been under pressure for the last several quarters of reduced demand. A turn-around would be a good thing for HP, which has lagged in performance. HP will announce its Q2 results in late August. Dividend yield: 3.32%. Potential average analyst target upside: -3.2%. WHY IS THIS NUMBER NEGATIVE? Because the stock is currently trading higher than median average price targets of analysts. While that can be interpreted as the stock being overpriced, it does not mean that the stock will not continue to climb as analysts potentially raise price targets.

Newell Brands Inc (NWL)  shares are higher by +1.46% in the premarket after it received a BUY rating and price target of $13 from Canaccord, representing a +46% increase from its current price. The company will announce its Q2 results later this month. Dividend yield: 3.14%. Potential average analyst target upside: +40.2%.

YESTERDAY’S MARKETS

Stocks rallied yesterday after the Fed reported that inflation may not be so “sticky” after all. The S&P500 gained +0.24%, the Dow Jones Industrial Average climbed by +0.62%, the Nasdaq Composite Index rose by +0.18%, and the Russell 2000 Index advanced by +1.64%. Bonds climbed and 10-year Treasury Note yields slipped by -6 basis points to 3.99%. Cryptos gained +2.11% and Bitcoin climbed by +1.94%. The S&P ESG Index added +0.01%.

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