Cost of flying high is getting lower

Stocks edged higher yesterday as investors clicked the ‘like’ button on economic numbers. US PMIs where not as bad as the Eurozone’s, but they were not too good either.

Unexpected turbulence. Well, is there going to be a recession or what? Lord knows, there has certainly been a fair amount of speculation on it. The debate has certainly made quite a few visits to my daily note, and for good reason. Predicting a recession can be tricky business as so many factors go into the official designation. What’s more, there are ‘non-quantitative’ factors considered by the firm responsible for bestowing the label. I am not saying that a voting member’s rough commute can result in a ‘yes’ vote, but there is still some mystery around whether a prolonged decline in GDP growth is simply that, or whether it is officially a recession. I prefer to focus more on the probability of an economic contraction than a label. That is a more practical approach, though it is still quite challenging.

There are hordes of economists who are less pragmatic than I, and they relish the opportunity to get it right and garner credit for predicting the official recession. Bloomberg is good enough to tally the opinions and models of some 60+ very prominent economic outfits and report a probability of recession within the next 12 months. Currently, that tally puts a 60% probability on recession. On Wall Street, anything above 50% garners focus. But there is some good news. Just a few days ago, that probability was at 65%. Cold comfort, perhaps. In fact, why don’t I just show you what those predictions are looking like over the past year or check out the following chart of the recession probability forecast over the past year. Check it out and keep reading.

You can see on the chart how the probability skyrocketed from 33% to 67% in less than a year as the Fed aggressively tightened its grip lowering the chances of a soft landing. When it seemed that the Fed was ready to loosen its grip earlier this year, the probability pulled back only to pop back up as the mini-banking crisis took hold in March. With that seemingly behind us, perhaps this latest downward move will persist this time around.

It would appear that the ball is in the court of the Fed. FOMC members will start their 2-day debate on policy today which is expected to result in a +25 basis-point hike tomorrow. That is largely expected, and futures put a low probability (37%) of any further hikes. But as you know, THINGS CAN CHANGE, and they… um, have quite a few times in these past few years. The Fed is likely to soft-signal a hiking hiatus and keep the embers glowing by stating that it will remain data-dependent. That really means that they can do anything, anytime. That ambiguity is why the bond market has been more volatile than it has been in a long time. Really since the Global Financial Crisis, to be more precise. Check out this chart of the MOVE Index which captures bond volatility similar to how the VIX captures equity volatility. Notable here is that BONDS ARE NOT SUPPOSED TO BE VOLATILE… at least, based on history. I will spare you another chart and tell you the VIX chart shows that stock volatility is right around where it was prior to the pandemic, in sharp contrast to bonds. These are just further reminders that the current investment climate remains challenging with little chance of relenting anytime soon.

EARLY MORNING MOVERS

Alaska Air Group Inc (ALK) shares are lower by -4.56% after the company announced that it exceeded EPS and Revenue targets. The CFO warned however, that a decline in ticket prices will affect the carrier in coming quarters. That is good news for inflation but not good news for the airline’s revenues. Potential average analyst target upside: +25.2%.

General Electric Co (GE) shares are higher by +4.35% after the company announced that it beat EPS and Revenue estimates by +46.83% and +13.35% respectively. The company also raised its full-year guidance citing increased demand for its aerospace offerings. Dividend yield: 0.29%. Potential average analyst target upside: +3.3%.

Also, this morning: Dow, Danaher, Polaris, TransUnion, Pulte Group, 3M, General Motors, Raytheon, Ares Capital, Sherwin-Williams, Kimberly-Clark, and Moody’s beat on EPS and Sales, while Corning, ADM, and Verizon came up short.

YESTERDAY’S MARKETS

Stocks gained yesterday as investors prepared for the Fed and the onslaught of economic numbers and mega-cap tech earnings. The S&P500 rose by +0.40%, the Dow Jones Industrial Average climbed by +0.52%, the Nasdaq Composite Index notched higher by +0.19%, and the Russell 2000 Index advanced by +0.28%. Bonds slipped and 10-year Treasury Note yields added +3 basis points to 3.87%. Cryptos fell by -3.77% and Bitcoin gave up -3.32%. The S&P ESG Index added +0.14%.

NEXT UP

• FHFA House Price Index (May) is expected to have climbed by +0.6%, slightly less than the prior month’s +0.7% increase.
• Conference Board Consumer Confidence (July) may have improved to 112.0 from 109.7.
• Earnings after the closing bell: CoStar, Waste Management, Snap, PacWest, Visa, Texas Instruments, Alphabet, Microsoft, and Teladoc.