Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
From Strong To Soft Patch?
Check out the accompanying pdf and chart collection. Executive Summary: Is the surprising Q3 strength in the economy sustainable? Clues in the latest data releases suggest not, and our forecast calls for a renewed soft landing. A stronger-for-longer economy wouldn’t jibe with the Fed’s higher-for-longer interest-rate stance. ... But the economic outlook hinges much on what consumers do next. We don’t see them slamming on the spending brakes, as the hard-landers predict will happen when excess savings are depleted. But they might start tapping on the brakes, especially given the imminent resumption of student loan payments and tightening credit conditions.
Powell’s Ideal Economy
Executive Summary: What would it take for the Fed to abandon its hawkish stance? Three things, suggested Fed Chair Powell’s recent Jackson Hole speech: core PCED inflation dropping closer to 2% y/y, demand for labor dropping closer to the supply of it, and consumer spending cooling off a bit. All that can happen without a recession, as it has twice before in recent history, and the latest data on all three parameters suggest progress in the right direction. … Today, we review the data showing rebalancing of the labor market, slowing consumer spending, and moderating inflation. … Dr. Ed also reviews “The Crowded Room” (+).
Hooray! The Job Market Is Rebalancing
Executive Summary: The stock market has proven resilient so far this week, rallying despite the Fed chair’s hawkish speech Friday. Several tailwinds have helped: The JOLTs report on Tuesday suggested the labor market is rebalancing, upping the odds that the Fed is done tightening. Joe’s data show that analysts have been raising earnings estimates in recent weeks for all future periods they forecast and that more companies’ outlooks have improved over the past three months than was true at the data’s recent low point last year. The rolling recession in goods-related industries looks poised for a rolling recovery soon. … Also: Loan growth has been falling in the US and Europe, but the US economy remains resilient.
Consumers Spending Selectively
Executive Summary: The rolling recession hit the retail industry during the first half of this year. Demand for many retailers’ merchandise plummeted during Q2, even as consumers paid up for services like travel and dining and big-ticket items like new cars and homes. Jackie examines how the shift in consumer behavior affected the earnings of particular retailers last quarter as well as the ytd performance of particular Consumer Discretionary industries’ share price indexes. … Also: US households are in good shape right now with unemployment low. But consumer debt has been on the rise, and other factors may weigh on consumer spending soon—including the resumption of student loan payments.
Wishing Upon An R-Star
Executive Summary: The Fed has no North Star. Steering monetary policy toward the ideal outcome that would keep both inflation and unemployment low requires knowing where the “neutral” federal funds rate is, i.e., the rate that wouldn’t influence either—a.k.a. “r-star.” But r-star is a theoretical construct only, neither measurable nor constant. … Also: Joe provides an update on the MegaCap-8 stocks, which haven’t been the bullish driving force behind the S&P 500’s performance that they were for most of this year. Quite the opposite.
The Chairman’s Speech
Executive Summary: Today, we examine Fed Chair Jerome Powell’s Jackson Hole speech on Friday. The tone was more hawkish than we expected, with Powell saying that the Fed wouldn’t hesitate to raise interest rates further if needed to bring inflation back down to the Fed’s 2.0% target but failing to say what it would take for the Fed to lower interest rates given that inflation has been moderating. … We also examine 12 sets of economic data that Powell monitors, sharing what he said their recent readings indicate and our observations on each. … And Dr. Ed reviews “Painkiller” (+).
Morning Briefing 2023-08-24
Executive Summary: The Federal Trade Commission has been taking aim at tech giants, with investigations targeting Amazon, Meta, and Microsoft. It’s also out to prevent big tech companies generally from using AI to gain unfair advantages and from buying their way into market dominance by acquiring smaller companies. Jackie examines where FTC Chair Lina Khan is leading the agency. … And in our Disruptive Technologies segment, a look at scientists’ nascent efforts to harness the power of fusion to generate energy in the hopes that it can someday replace the burning of fossil fuels.
Dueling Composite Indicators
Executive Summary: The Conference Board’s trio of economic indicators flashed conflicting messages in their recently reported July readings. The leading indicator says a recession is overdue. The coincident indicator keeps scaling new heights. The lagging indicator has been peaking, as it does after recessions are almost over! Today, we explore explanations in the specific components that each index measures. … Also: The CPI services inflation rate significantly lags the CPI goods inflation rate. Services’ inclusion of rent is much of the reason. … And: Q2 earnings reporting season is nearly over. Joe analyzes the near-final data on Q2 earnings growth and the encouraging estimate revisions trend.
Bond Yields Returning To Normal
Executive Summary: My bond market outlook over the past 40 years was misrepresented in a Bloomberg story on Friday. To set the record straight, I was bullish on bonds from 1983-2021, not regularly predicting a return of the Bond Vigilantes as reported. … But they are back now, driving up the 10-year Treasury bond yield on concerns about the mounting federal deficit. The Bond Vigilantes still care about inflation (which is moderating), but they also care more about supply and demand than in the past, with the federal government straining both (via fiscal spending and QT). … What’s next? We think the Treasury bond yield is returning to normal around 4.50%-4.75% as the economy returns to its Old Normal.
No Hard Feelings
Executive Summary: Is the strength of the economy a double-edged sword that means higher-for-longer inflation, further monetary tightening, and a recession? Or will the tightening that’s already occurred fell the economy still? Or is the mounting federal budget deficit the economy’s Achilles’ Heel? While we remain in the light-side camp, we do share the deficit concerns of dark-side prognosticators: Profligate government spending combined with falling revenues as a percent of GDP points to nowhere good. The bond market is concerned too. Fed Chairman Powell will have a chance to calm the bond market at Jackson Hole on Friday. Much depends on whether he does. … And: Dr. Ed reviews “Breaking” (+ +).
China, Consumers & Alzheimer’s Breakthroughs
Executive Summary: China’s property development companies are going bankrupt left and right, with real estate prices tanking and monthly residential property sales their slowest in a decade. What China needs is a US-style restructuring of its real estate market. Jackie surveys the past week’s wreckage. … Also: Consumers these days! They know what they want: Amazon products, Teslas, newly built homes, and travel. Related stocks did the heavy lifting to hoist the S&P 500 Consumer Discretionary stock price index 32% ytd. … And: Can Baby Boomers forget about getting Alzheimer’s? Maybe someday if some of the many ongoing R&D efforts targeting its eradication succeed.
Hard Landing In China, No Landing In US
Executive Summary: China’s economic pain has been the US’s economic gain, as it has lowered the prices Americans pay for goods from China, pulling US inflation lower. Today, we examine how China got into its economic morass and what policymakers there hope to do about it. … Also: With the US economy flying high and US retail sales in July up from June levels, might American consumers return China’s favor? It may be too soon to bet on a resumption of US consumers’ halted goods buying binge. … And: Joe pulls back the curtain on S&P 500 sector reclassification changes for an apples-to-apples look at technology companies’ changing market-cap representation in the index.
The 1970s All Over Again?
Executive Summary: The current alignment of economic forces—resulting in a growing economy with low unemployment, falling inflation, and stimulative fiscal policy balancing out restrictive monetary policy—seems too good to be sustainable. Is stagflation what comes next? … We doubt it. We don’t see inflation turning back up and economic growth slowing down as the decade progresses. We continue to place greater odds on “The Roaring 2020s” scenario (65% odds), a reboot of productivity driven growth à la the 1920s, than we do on “The Great Inflation 2.0” scenario (35%), a replay of the 1970s/early 1980s stagflation story.
Disinversion
Executive Summary: Is the federal budget deficit getting too big for the bond market to fund without yields moving higher? That seems to be a growing concern in both the bond and stock markets. In the past, bond yields were determined mostly by the Fed’s response to inflation, which is moderating; supply and demand didn’t matter much, but they may now. Today, we examine why this period of deficit widening is different than past ones. … We also examine two scenarios that could unwind the inversion of the yield curve—one bullish, one bearish—and recap data supporting both. … And: Dr. Ed reviews “The Man Who Saved the Game” (+ + +).
Semis, Ag & FinTech
Executive Summary: The semiconductor industry appears to be entering a heyday, with sales rising on m/m and q/q bases, though not yet y/y. Analysts’ estimates have been rising, managements have been upbeat, and investors have bid up the S&P 500 Semiconductor industry’s share price index by 79% ytd. Everyone’s enthused about the potential impact of the AI revolution on chip demand. … At the other end of the spectrum, meat processors such as Tyson Foods are down on their luck, Jackie reports. … And: Traditional banks are getting a run for their money from forays into fintech by Apple, Walmart, and other heavyweights.
Mostly About Consumers
Check out the accompanying pdf and chart collection. Executive Summary: Moody’s downgrade of several banks’ credit ratings has some investment implications: It’s bearish for Financials stocks, but only over the short term, as it will hasten M&A activity. It will facilitate the US Treasury’s ability to fund the budget deficit without increasing Treasury bond auction interest rates, supporting our belief that last year’s peak in the 10-year Treasury yield won’t be breached this year. And it drives home the point that credit conditions are tight enough, which should help deter the Fed from further tightening. … Also: A look at consumers’ credit-card usage, rent inflation, and the spending habits of an important demographic—never married singles.
Worry List Update
Check out the accompanying pdf and chart collection. Executive Summary: Most investors and analysts are newly optimistic about the economic outlook and corporate earnings prospects. Like them, we see low odds of a hard landing anytime soon. That’s notwithstanding the yield curve’s ongoing recession signal. … But six worries, should they become more worrisome, could change our sanguine stance. We’re watching closely for fallout from the US commercial real estate crisis; a reinvigorated wage-price spiral; the off chance that consumers retrench; the soaring federal deficit, which could cause Bond Vigilantes to get more vigilant; and the possibility that Fed Chair Powell might take a page from predecessor Volcker’s playbook.
Guess What?
Check out the accompanying pdf and chart collection. Executive Summary: This is ironic: Just when the most widely anticipated recession of all times is no longer widely anticipated, July’s employment report suggests that the Index of Coincident Economic Indicators is weakening. … With the consensus now elbow-to-elbow with us in the no-recession camp, our contrarian instincts are on full alert. The alternative scenarios of two prominent financial market prognosticators may give investors pause and keep the stock market treading water through September. … Also: Friday’s employment report does support a scenario of gradually moderating inflation, notwithstanding some observers’ views to the contrary. … And: Dr. Ed reviews “The Beanie Bubble” (+ + +).
Oil, Cat & Flying Cars
Check out the accompanying pdf and chart collection. Executive Summary: With US economic growth so strong and OPEC so disciplined, oil inventories are rapidly depleting. The surpluses that have tethered global oil prices over the past year will disappear next year as consumption overtakes production, forecasts the EIA. Jackie examines the reasons and the recent performance of the S&P 500 Energy sector and its component industries. … Also: The US economy’s vitality was evident in Caterpillar’s remarkable Q2, a testament to the strength of demand for building new homes, mining minerals, and constructing factories. … And in our Disruptive Technologies segment: Will cars ever fly?
Global Smorgasbord
Check out the accompanying pdf and chart collection. Executive Summary: While the economies of China and the Eurozone countries have been lethargic, with a contracting M-PMI in China and declining industrial sentiment in the EU, the US economy has been anything but. The Atlanta Fed’s GDPNow model shows Q3 GDP growth tracking at 3.9%. We’re increasingly confident about our no-landing/rolling-recovery outlook over the next 18 months, to which we ascribe 85% subjective odds. … Also: S&P 500 forward earnings continues to recover. … And Joe reports reassuring takeaways from recently released July data on analysts’ estimate revisions for earnings and revenues.
Mostly All About Inflation
Check out the accompanying pdf and chart collection. Executive Summary: Rates of inflation are a function of the business cycle as well as the monetary cycle, and there tends to be symmetry to their ascents and descents, especially for goods inflation. … The latest bout of high inflation was triggered by demand shocks resulting from the pandemic, which led to supply shocks, aggravated by the Ukraine war. … Since last summer, however, inflation in the US has been on a disinflationary trend. Deflation in China’s PPI suggests that the US could experience immaculate disinflation, i.e. lower inflation without a recession.
The Godot Recession
Check out the accompanying pdf and chart collection. Executive Summary: We’re raising the subjective odds we assign to the no-landing economic scenario through year-end 2024 (by 10% to 85%) and lowering our odds of a hard landing (by 10% to 15%). But we’re keeping close tabs on hard-landers’ latest arguments. Today, we summarize the main ones and give our rebuttals. … The biggest issue dividing the two camps is the outlook for consumer spending, representing over two-thirds of nominal GDP. If consumers don’t pull back on spending once their pandemic-related savings run out, an economy-wide recession would be a stretch. We say they won’t retrench, having other sources of purchasing power. ... And: Dr. Ed reviews “Barbie” (+).
Industrials, Tech & Identifying Humans
Check out the accompanying pdf and chart collection. Executive Summary: US government incentives offered to entice manufacturers to set up shop in the USA have hit their mark: Manufacturers in huge numbers, domestic and foreign, have been revamping their supply chains to relocate their production facilities to the US. It’s not always easy, as Jackie explains. But the boost to US economic activity is quantifiable and growing. … Also: AI is here, but all the ways it may disrupt markets are still unknown; will it dislodge the leaders in search and office software, Alphabet and Microsoft? … And: The dilemma of how to tell whether online content was human- or AI-generated has a solution, says one father of AI, involving eyeballs, orbs, and Worldcoin.
Over There & Over Here
Check out the accompanying pdf and chart collection. Executive Summary: We keep tabs on how well the world economy is faring by monitoring our Global Growth Barometer as well as the “flash” S&P Global PMIs for the major developed economies. “Soft landing” best describes what the global economy has been undergoing, while “no landing” characterizes the slowly growing US economy. … China’s economy has struggled under the weight of several problems; we doubt the leadership can fix them as promised. … In the US, the latest consumer confidence survey shows that the labor market remains strong.
Workers Of The World: Strike!
Check out the accompanying pdf and chart collection. Executive Summary: What’s on our worry list? Yesterday, we covered urban office real estate, which adds credit availability concerns to our worry list. Today, we look at the labor market, specifically the unrest fomented by the effects of the pandemic and inflation. … Labor unions have grown in might, their members are striking, and employers are being forced to meet their demands. … So we are adding a renewed wage-price spiral to our worry list, which could happen if a rebound in wage inflation leads to resurgent consumer price inflation.