Ho, hum, it’s a quiet week with nothing much going on. Oh, except for the meeting the Federal Reserve’s interest-rate setting Open Market Committee on Wednesday, July 26. Oh, and earnings from Microsoft (MSFT) and Alphabet (GOOG) on July 25, and Meta Platform (META aka Facebook) on July 26. Apple (AAPL) and Amazon (AMZN report on August 3.
Tesla (TSLA) delivered a big beat over Wall Street estimates when the company reported second quarter earnings after the close yesterday. The company reported earnings of 91 cents a share, well above the Wall Street projection of 80 cents a share. But in after hours trading, the stock still fell by 4.20%. Today, July 20, the shares are down 7.17% as of 10:45 a.m. New York time. And this comes despite another record quarter of unit sales. The problem?
Yesterday, the Bureau of Labor Statistics reported that all-items inflation rose at just a 3% annual rate in June. That was a huge drop from the 4% annual rate reported in May. The inflation numbers immediately prompted Wall Street to, again, declare that the Federal Reserve’s cycle of interest rate increases would end “soon.” “Soon” is now defined as after the Fed’s July 26 meeting. Fed officials have been so adamant in recent days about the need for more interest rate increases that the odds of 25 basis point increase at the July 26 meeting barely budged after the June CPI report. Today the CME FedWatch Took, which calculates the odds of a Fed move by looking at prices in the Fed Funds Futures market (and is, thus, a measure of investor sentiment rather than speculation on Fed thinking) puts the odds of a July 26 25 basis point increase at 92.4%. That’s down only slightly from the 94.2% odds before the CPI inflation report. The big move has been in the odds for a second 25 basis point increase at the Fed’s September 20 meeting. Today, the odds are just 11.1%. That’s down from 13.2% odds of a 25 basis point move in September on July 12. And down big from 27.5% odds of another interest rate increase in September on July 6. And there’s the Fed’s problem.
U.S. consumers are reducing spending on staples such as toothpaste, laundry detergent, and toilet paper. The bad news for investors is that consumer staples stocks, seen as a safe haven as the economy slows and inflation continues above 3%, aren’t a safe as assumed in so many portfolios.
China’s consumer inflation rate was flat in June with the consumer price index unchanged year over year, according to data release by the National Bureau of Statistics today. That was the lower inflation rate since February 2021 when slumping pork prices dragged the index into deflationary territory. Aside from that brief period of deflation, China hasn’t experienced prolonged consumer price deflation since 2009 during the global financial crisis. The fall in what are called factory-gate prices, the equivalent of producer prices in the United States, says there aren’t inflationary pressures ready to ride to the rescue. Producer prices fell 5.4% from a year earlier, the deepest pace since December 2015. Core inflation, which excludes volatile food and energy costs, slowed to a year-over-yrar rate of 0.4% from 0.6%. The problem is falling consumer demand
Look for big news on inflation and earnings this week. But I think the news is baked into stock prices so I don’t expect much of a move on the news.
Total nonfarm employment rose in June by 209,000, the Bureau of Labor Statistics reported this morning. That was above the 200,000 projected by economists. But way below the 497,000 jobs added in June according to the ADP Research Institute in its report yesterday. The result is a mild uptick in stocks as of 2 p.m. today with the Standard & Poor’s 500 up 0.46%, the Dow Jones Industrial Average ahead 0.16%, and the NASDAQ Composite higher by 0.73%. Why not a stronger response?
Earlier this week economists were projecting the official government jobs report due on Friday, that is tomorrow, would show that the U.S. economy added just 200,000 jobs in June. This morning, however, the ADP Research Institute’s survey of private employers showed the economy added 497,000 jobs in June. That’s more than twice the 220,000 gain that economists had projected for this report. And way above the 267,000 jobs reported by this survey in May.
Right now economists are projecting that the U.S. economy didn’t slip into a recession in the second quarter that ended on June 30. But those same forecasts are looking for a further slowdown in economic growth in the quarter.
On July 3 the GDPNow forecast from the Atlanta Federal Reserve Bank put second quarter growth at an adjusted annual rate of 1.9%. That’s down from the model’s 2.2% forecast on Jone 30. And that rate of growth would be a further deceleration from the 2.0% growth rate (that was an upward revision from a first estimate of just a 1.3% growth rate) in the first quarter and the 2.6% growth in the fourth quarter of 2020. The very recent downward revision in the GDPNow forecast is a result of a drop in private domestic investment growth to 8.8% from 10.4%.So now recession–good news–but a further slowdown in the economy–expected with the Federal Reserve raising interest rates. And a continued drop in company profits.
I think the Friday, July 7, jobs report for June will be decisive in the Federal Reserve’s Jury 26 decision to raise/not-to-raise its benchmark interest rates. The CME FedWatch Tool current calculates the odds of a 25 basis point in create at 86.2%. The Bureau of Labor will release the Employment Situation Report on Friday. Economists are projecting that the economy added just 200,000 jobs in June. In May the economy added 339,000 jobs. Economists product that the unemployment rate will hold steady 3.7%.
This morning all the way in New York I could hear the gnashing of teeth from Jerome Powell’s office at the Federal Reserve. “What do we have to do to slow consumer spending in the Untied States?” he cried after this morning’s economic data. Today the Commerce Department sharply raised its judgement on first quarter GDP growth. The last revision to the data showed the U.S. economy growing at a 2% annual rate from January through March. That was a huge step up from the 1.3% growth repoRrted in the previous GDP estimate.
Recently former Treasury Secretary Larry Summers has been saying that the June pause in interest rates and a simultaneous increase in the end of the year DotPlot interest rate projections to 5.6% only makes sense if Fed chair Jerome Powell cut a deal with the central bank’s inflation hawks that guarantees a 25 basis point interest rate increase at the July 26 meeting.
