By now, the news is stale. Reader's likely already know that the US Senate has passed a climate, tax and healthcare focused bill, known as the "Inflation Reduction Act" along strictly partisan lines, using a method called "reconciliation."
This process allows for a simple majority to advance a bill in the US legislative branch's upper chamber provided that the contents of said bill be strictly related to the budget. This bill passed 51-50, with all 50 senators that caucus with the Democrats voting for, all 50 Republican senators voting against and Vice President Kamala Harris casting the tie-breaking vote in favor.
The bill still needs to pass in the House of Representatives where a vote is expected this Friday, and then will head to the president's desk for a signature. Neither of those steps is seen as an impediment.
I know, you have tried to read through the bill only to find yourself thinking about cheeseburgers and baseball a few minutes later. What? Like I'm the only one (one eyebrow raised)?
The bill lays out a large amount of spending on green energy programs, including measures allowing the government to negotiate lower prescription prices on a handful of drugs, while capping out of pocket prescription drug costs for Medicare beneficiaries. The bill also establishes a corporate minimum tax and an excise tax on corporate repurchase programs.
Overview
At its core, this is a spending plan estimated at between $374B and $430B over a decade. For the green crowd, there are expanded tax credits for renewable energy projects, money for solar panels, wind turbines, batteries, geothermal plants, and advanced nuclear reactors. (Nuclear power is the answer. That's my opinion. Always has been.) Buyers of electric vehicles will be pleased to learn that this bill would end limits for the $7,500 tax credit purchases of new electric vehicles (made here) while creating a $4K credit for the purchase of used electric vehicles for households earning less than $150K per year.
On the corporate front, the bill, once passed into law, would establish a 15% corporate minimum tax on the largest, most profitable firms. An estimated 150 companies will be negatively impacted. A 1% excise tax would also be placed upon corporate repurchases of common stock.
This could force more companies intent on returning capital to shareholders to instead favor doing so through increased dividends rather than doing so through the open market. The question would be if 1% is enough to provoke such an evolution. Offer me, as a shareholder, a share repurchase program or a dividend, I'll take the dividend. Offer me neither? Now, I'm angry.
As mentioned, this is a fiscal spending plan, which is dangerous in times of higher inflation, that should in some way damage corporate margins. This would also likely place upward pressure on consumer prices. Is the bill misnamed? The inflation reduction side of the bill comes from the healthcare focused portion of what's inside. The answer to that question is probably... yes. The name of the bill is really political marketing as it is probably exaggerated. This is in my humble opinion, a green energy focused bill that gropes around the corporate universe for "pay-fors."
On the healthcare side, the bill would redesign Medicare Part D in such a way that would limit out of pocket drug costs for beneficiaries to $2K per year. This would have worked in favor for an estimated 1.4M individuals with Medicare for the year 2020. The part of the bill that would allow the government to negotiate drug prices is clearly exaggerated. Starting in 2026, the bill will require renegotiation for the 10 (yes, a whopping 10) drugs with the highest Part D spending that have been on the market for at least nine to 13 years and lack generic competition.
Interpretation?
This bill is a win for those most interested in implementing green energy focused policy. This bill is a win on drug costs for older Americans. Beyond those Medicare reliant folks, it's difficult to see how this bill is a broad win on inflation.
This bill is also about enforcement, as large firms will face the corporate minimum tax, share buybacks will be taxed and the IRS will get an $80B boost. That means that in order to be efficient, the IRS has to produce more than $80B in additional revenue from taxpayers.
On Employment
The headline event for last week was Friday's BLS Employment Report for July. Taken at face value? Just...wow !! Strength everywhere. Of the two surveys, the Establishment Survey showed seasonally adjusted job creation of 528K positions. This crushed professional expectations for less than half that much, while both May and June were upwardly revised. In addition, wage growth of 0.5% (m/m) and 5.2% (y/y) were also both stronger than expected.
Now, I don't want to be the wet sock here, but I find it utterly amazing that so many simply take these numbers at face value and run with them. Obviously, the already strong and still strengthening labor market data makes a contrary argument against those who would otherwise see the nation already in a state of economic recession. I had been talking up the potential for a slightly (not aggressive) dovish pivot by the FOMC at Jackson Hole later this month. Safe to say that idea just went out the window. The Fed has all of the ammo it needs to stay on an overtly hawkish trajectory for policy.
Unfortunately, the BLS also does a household survey that (incredibly) almost the entire political, academic and financial media universes choose to pretend doesn't even exist. It does, however, exist, and it paints a far less rosy picture of the current state of US employment. How much less rosy? The household survey showed only a seasonally adjusted 179K more employed persons for July, which fell well short of expectations. The disparity between the two surveys is far worse than that though.
Check this out. We'll start with the data posted for March, (So, we are talking about four months.), which frames a period since that has been generally remarkable for its unexpectedly strong labor markets despite weaker overall macroeconomic performance. Going solely off of the Establishment survey (Non-Farm Payrolls), there has been seasonally adjusted aggregate job creation of 1.68M positions for an average of 420K new jobs per month. Impressive.
You're going to love this. I promise. Going off of the Household survey, over those same four months, there has been aggregate job destruction (not creation) of 168K employed persons for an average of -42K employed individuals per month. Rather awful.
Something funny going on? I would not go that far. I will, however... go as far as to say that something is seriously deficient in the way that the government collects employment data. These two surveys must be reconciled in some way in order to validate, or invalidate either one or both. To choose one survey over the other when the two present as anything but two parallel lines (In fact, they are moving in opposite directions.) is irresponsible journalism, economic malpractice... and amounts to simple cheerleading.
On Earnings
Second quarter earnings season is now winding down. All that is left as far as headliners are concerned is the Walt Disney Company (DIS) this Wednesday, and a bevy of retailers out beyond this week.
According to FactSet, which has long been my "go-to", 87% of the S&P 500 has now reported. 75% of S&P 500 constituents have reported earnings beats, while 70% have beaten on revenues. For this reporting period, the blended (results & projections) rate of earnings growth for the S&P 500 is now 6.7%, which is up from 6.0% just one week ago. The rate of revenue growth jumped from 12.3% (annually) one week ago to 13.6% coming into this week.
While the second quarter just keeps getting better and better, the consensus outlook for the current (Q3) quarter keeps getting softer.
The outlook for the current quarter is now for earnings growth of 5.8%. That is down from 6.7% and 9.2% in one week and two weeks' time, which is incredible. Projected revenue growth has contracted from 9.8% to 9.4% to 9.1% over that same time. The inference taken would be that margin pressure of a magnitude so far unrealized in the data, is being experienced in real time.
In the meantime, as estimates have come in, the S&P 500 has rallied, stretching forward looking valuations to an aggregate 17.5 times forward looking earnings. This is up from an even 17 times one week ago, and while still well below its five year average (18.6 times), starts the week above its 10 year average (17.0 times).
Just for some background knowledge, the Financials and Materials are the only two sectors that, as a whole, are trading below both their five and 10 year average valuations. Discretionaries, Technology, Staples, and Utilities all as a whole are trading above both their five and 10 year valuations.
The Fed, Futures & The Macro
Right now, I am tracking exactly zero public appearances to be made this week by any Fed officials that matter. I imagine that in the wake of that July Employment report that this could change. What futures markets trading in Chicago are expecting certainly has evolved.
This morning, those futures markets are now pricing in a 69% probability for a 75 basis point increase to be made to the Fed Funds Rate target on September 21st. Then, what's priced in, slows down to 25 basis points a piece for the November and December meetings to close out the year with a Fed Funds Rate target of 3.5% to 3.75%.
The first rate cut of this tightening cycle is not priced in at this point until July 2023. That's been pushed out one month from where it was last week. As of last Wednesday, the Fed still had $8,874,620,000 on the balance sheet. As for this week's headline events from a macroeconomic point of view, the Bureau of Labor Statistics will drop July CPI on Wednesday, as well as July PPI on Thursday.
Concerning July CPI, expectations are for a cooling from June's headline print of 9.1% y/y growth to 8.7%, but with the core rate stubbornly increasing from 5.9% to 6.1%. The headline rate peaked last month, while the core rate peaked in March (6.5%). The PPI data gets a lot less attention than does the CPI, but it can at least (at times) project the trajectory for future consumer pricing. For July PPI, the pros see headline inflation of 10.3% (y/y), down from June's 11.3%,. and core inflation of 7.7%, down from June's 8.2%. Headline PPI (11.5%) and Core PPI (9.6%) both apexed in March as well.
Economics (All Times Eastern)
No significant domestic macroeconomic data scheduled for release.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BNTX) (-1.13), (PLTR) (.03), (TSN) (1.97)
After the Close: (AIG) (1.13), (LMND) (-1.31), (NVAX) (5.18), (UPST) (.08)
