The Weekend Edition # 98

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and welcome to all the new subscribers this week! 

Here’s what we cover:

• Market Recap - Bumpy week

• Macro - Inflation and ECI

• Earnings Recap

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - Another busy week!

Let’s dive in ⬇️

Market Recap - 24 Jul - 28 Jul, 2023 📉📈

We got through a busy week for the markets with a whole host of earnings reports coming out, with some major names reporting. We also had the Fed’s rate announcement of a 25bps hike and the inflation numbers coming in softer.

But interestingly enough, the biggest news that rattled the market on Thursday was the leak from the BoJ that they were tweaking their Yield Curve Control. Rates shot up and the markets closed lower, recovering on Friday once the official news on the tweak was out.

Indices continue to climb upwards, with the soft landing narrative in place. Despite the Fed discussing further rate hikes, the tone of the meeting didn’t seem hawkish and strong GDP numbers of 2.4% growth QoQ, has pushed the possibility of a recession out of people’s minds.

We saw the ECB also announce a rate hike at 25bps. There’s speculation after the meeting now that the ECB could also be done raising rates.

The Fed’s indication on cuts were clear though. It doesn't seem like rate cut will be discussed until a year from now. Or at least that’s what the Fed Chair said. It remains to be seen, how this plays out and what it means for the market.

For now, our job will be to keep an eye on the major data points coming up until the next meeting - inflation numbers, and certainly unemployment numbers.

Commodities

Oil continues to inch higher. In fact, one chart that’s been making the rounds is that of gasoline. I plotted Gasoline Prices with a one quarter lag against the CPI YoY percentage change. The correlation is quite obvious and of course it makes sense. Gasoline prices are major driver of inflation. Month-to-date gasoline prices are up over +16%. Along with more challenging comparisons in the next couple of months, we now have increasing prices threatening a re-acceleration of inflation.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro Roundup - Inflation and the Employment Cost Index

Inflation

We got the Fed’s preferred measure of inflation on Friday with the PCE Price Indexes. Year-on-Year we’re seeing a nice decline but, month-on-month we saw a slight increase in the rate.

The YoY numbers show this drastic decline due to base effects. Starting next month, the comparisons against a year ago is going to get more challenging which means that without a stronger monthly deceleration we won’t get much of a change in the yearly numbers.

Looking at the disposable income is something that seems a bit troubling. We’ve seen disposable income (in blue) below fall off significantly and this is not a good sign for consumer spending and GDP growth. The savings rate saw a marginal decline but overall remains stable. This is something we expected with all the recession talk, people are putting away funds for a rainy day. Not to mention, banks are paying slightly more on deposits.

Employment Cost Index

Among the economic data that came out this week, one that the Fed watches closely is the Employment Cost Index. This data is quarterly and it’s a lagging indicator but, it’s an interesting one to watch nonetheless.

Services have increased far more than manufacturing and continues to remain higher. While we are definitely seeing a decline from the peak numbers, the index growth still remains higher than in the last 15 years.

The long-run average since 2002 has been 2.8% YoY. The number still needs to come down below the 3% level for core services inflation to decline more meaningfully.

The job market remains in a precarious position. The jobs data is coming out this Friday, and as always it will be important to track the numbers closely because it remains a key determinant of the Fed’s policies.

Earnings Season

FactSet Summary

The blended earnings decline has improved to -7.3% from -9% last week which means companies are reporting growth in earnings. The actual earnings growth recorded for earnings season until now is -1.13%.

Seven sectors are reporting year-over-year growth in revenues, led by the Consumer Discretionary and Financials sectors. On the other hand, four sectors are reporting a year-over-year decline in revenues, led by the Energy and Materials sectors.

To date, the market is punishing positive earnings surprises reported by S&P 500 companies on average. Companies that have reported positive earnings surprises for Q2 2023 have seen an average price decrease of -0.2% two days before the earnings release through two days after the earnings release.1 

One important driver of growth that we’re hearing about on the revenue number is FX. All throughout last year, a major issue that we heard about was FX headwinds. The stronger US Dollar was hitting revenues as companies translated their numbers from international operations into Dollars. That is no longer the case and if anything Microsoft says that they will benefit from a weaker Dollar starting next quarter.

The Week Ahead 📅

US Earnings Calendar

US Economic Calendar in Eastern Time 

Closing Thoughts

Next week will also be busy with a whole host of job numbers coming out. Both the July ISM manufacturing and services surveys are out next week and we’ll be watching the services number to see softening in the data which may tie into unemployment numbers and a decline in core services inflation.

We also have Central Bank rate decisions from the UK, Australia, and Brazil. The consensus is for Brazil to cut rates, following Chile’s 1% cut on Friday.

Finally, we have over 160 S&P 500 companies representing nearly 30% of the index's market cap are scheduled to report, including Apple and Amazon on Thursday.2 

Here’s wishing you safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.