Intel is counting on a PC recovery in the second half

Stocks slumped yesterday after strong economic data suggested that the Fed’s job may get trickier in the coming months. US GDP growth surprised economists… and the rest of us, by displaying epic resilience.

Don’t stop me now! The tagline should really read “Can’t stop me now.” Of course, I am referring to the US economy, which, despite the Fed’s best efforts continues to thrive, according to the latest figures released by the Bureau of Economic Analysis. Yesterday, the government agency released its first estimate of Q2 GDP and beat economists’ estimates by a healthy margin. Expectations were for a +1.8% annualized growth, but the number came in with a +2.4% annualized growth. That not only does increase the chances for a so-call “soft landing,” but possibly even a gold-medal, epic landing.

With a number like that, one would expect there to be cheers resounding across the US. And surely there were cheers… everywhere except for the corner of 20^th Street and Constitution Avenue in Washington DC. That is the address of Fed Headquarters . The Fed has been raising interest rates to effectively curb economic growth. In case you haven’t noticed, the central bankers have been trying really hard to slow things down and let inflation recede. Interest rates are the highest they have been since 2001! The Fed unsurprisingly raised interest rates on Wednesday. What may have been somewhat surprising to some was the fact that the vote to raise rates was unanimous, and that there were no subtle hints that the hiking was over. It is reasonable to assume that the Fed had access to the GDP data that was released a day later and if they did… well, you know why the policymakers did not relent in their tightening stance.

Yesterday’s data shows that consumption in the second quarter along with government spending. Net exports actually came in negative. If you are a regular reader and have been following my lesson plan, you would be thinking to yourself “self, I think that leaves business investment.” If you did, you would be correct, but your next thought would be, “but I thought businesses were spending less money and conserving.” Well, what they say and what they do are 2 completely different things. In the first quarter of the year Gross Private Domestic Investment (that is the official terminology for business spending) decreased by nearly -12%, which seemed logical given tight monetary policy and pending economic slowdown. Companies are rational, according to economic theory, and it is rational to cut back in challenging times. However, in Q2, it appears that business spending has come back, growing by +5.7%. Of the reported +2.4% annualized growth, business spending contributed +0.97%, so if business even came in flat the overall GDP figure would have come in at +1.43%, much closer to the expected number. You can see by the following chart of GDP components how consumption (purchases made by you and me) has moderated since the start of 2022 (the green line). You will also note the precipitous decline in business spending through Q1 of this year, and its ultimate resurgence in Q2 (light blue line). All of that information caused happy traders to sour on stocks as the possibility of more future rate hikes began to set in. The real rubber meets the road number will be released this morning when the PCE Deflator comes out. The PCE Core Deflator is expected to have moderated since its last release of +4.6% to +4.2%. That would be positive, but there is a good chance that the Fed had a heads-up on that number as well .

THIS MORNING’S EARLY BIRDS

Intel Corp (INTC) shares are higher by +6.34% after it announced that it beat estimates attributing its strong performance to a recovery to strong results from its PC business. That would be a welcome result for much of the hardware and semiconductor sectors. The company specifically called out a 2H recovery providing Q3 guidance that was above estimates. Dividend yield: 1.44%. Potential average analyst target upside: 3.5%.

Enphase Energy Inc (ENPH) shares are lower by -15.58% in the premarket after it announced a Revenue miss for Q2 while providing Q3 guidance that disappointed analysts. Potential average analyst target upside: 27.6%.

Also, this morning: Centene, Chevron, Colgate-Palmolive, Proctor & Gamble, and Newell Brands beat on EPS and Revenues while Aon, Exxon Mobil, and Charter Communications came up short.

YESTERDAY’S MARKETS

Stocks slumped on positive GDP results prompting worries that the Fed would have to continue raising interest rates. The S&P500 fell by -0.64%, the Dow Jones Industrial Average declined by -0.67%, the Nasdaq Composite Index traded lower by -0.55%, and the Russell 2000 Index dropped by -1.29%. Bonds declined and 10-year Treasury note yields gained +13 basis points to 4.00%. Cryptos slid by -0.68% and Bitcoin lost -1.51%. The S&P ESG Index gave up -0.68%.

NEXT UP

• PCE Deflator (June) is expected to have moderated to +3.0% from +3.8%.
• University of Michigan Sentiment (June) is expected to come in at 72.6% in line with prior estimates.
• Next week: lots more earnings as well as JOLTS Job Openings, PMIs, Factory Orders, and the monthly employment numbers. Check back on Monday for calendars and details.