Some things just stay filed away in the back of one's head for a lifetime. It was the morning of November 10th, 1982. By morning, I mean zero dark thirty. There would be no field training that day. We had just entered the mess hall on the Camp Geiger side of Camp Lejeune. Suddenly... We were stopped in our tracks by what we saw. Tablecloths on the tables. The place had been decorated. What is this? The Air Force? There were more cooks on duty that morning than we had seen before. They were preparing for something a lot bigger than mere breakfast for the masses.
It was the Marine Corps birthday. My first exposure to this annual event. This would be no normal day on base. As we waited in line with our metallic trays, someone in the kitchen put the local Jacksonville, North Carolina pop station on the mess hall's public address system. The first song I heard that morning was Olivia Newton John's "Physical." I never forgot hearing pop music in an unlikely place that day or the party atmosphere of that morning. It was kind of a fun moment for this teenager from Queens, NY. When I learned of Olivia Newton John's passing earlier this week, my brain went right back to that mess hall some 40 years ago.
For four decades now, when I do happen to hear that song, I think of that moment. I remember it was unseasonably cold that morning in North Carolina. As I mentioned, some things just stay filed away in the back of one's head for a lifetime. That's just it... Time. It flows. Never stops. Stay sharp. Stay close to what matters. Be true. Forever, honor unstained. Always Faithful.
Speaking of the time. Micron (MU) warned on fiscal fourth quarter revenue one day after Nvidia (NVDA) preannounced a weak quarter to be reported in a couple of weeks itself. Micron acknowledged weaker demand, which played into the weakening global economy narrative, which put a damper on the day overall from an equity trading perspective. Obviously, the semis would lead that market weakness on Tuesday. Tuesday... being just one day ahead of July CPI data in the US, caution would be felt across the marketplace. For this is the "most important CPI report ever", at least since the last one, and until the next one anyway.
The S&P 500 traded off just 0.42%, marking its fourth consecutive red daily candlestick. That said, none of the four red days were severe, Tuesday was easily the worst of the four. It gets worse though as one walks through the alleyway of equity indexes. The Nasdaq Composite was beaten for 1.19%, the Russell 2000 for 1.46%, and the Philadelphia Semiconductor Index for a very nasty 4.57%. It appears that receding demand and large inventories make for a nasty mix.
Losers beat winners at the NYSE by more than 2 to 1, and by a rough 5 to 2 at the Nasdaq Market Site. Advancing volume took just a 38.9% share of composite NYSE-listed trade, and a mere 23.7% of that metric for Nasdaq-listed names. However aggregate NYSE-listed trading volume decreased almost 7% from Monday, while aggregate Nasdaq-listed trade did increase slightly day over day.
The implication there could be that while market weakness was broad on Tuesday, not all of it carried the same kind of meaning. Portfolio managers reduced exposure to certain (semiconductor) stocks. I know I did. Seven of the 11 S&P sector SPDR ETFs shaded red for the session. Discretionaries (XLY) led the way lower, as recessionary fears set in. Then it was the growthy sectors that showed their weak side. Technology (XLK) gave up an even 1%, while Communication Services (XLC) gave up 0.98%. Among the semis, it was mostly the equipment providers that sold off hardest. Lam Research (LRCX) , KLA Corp (KLAC) , Marvell Technology (MRVL) and Applied Materials (AMAT) all surrendered between 7% and 8%. I did add to MRVL, while reducing elsewhere.
How nervous are investors going into the July CPI print? Let's take a look at two charts. First, we'll note that the US Two Year/Ten Year yield spread continues to plumb new depths...
.. while the stock specific (ex-indexes) version of the CBOE's Put/Call ratio spiked to its highest level since July 26th and retook both its 21 day EMA and 50 day SMA...
By 08:30 ET this morning, this daily piece will have become somewhat obsolete. That's when the Bureau of Labor Statistics will hit us over the head with its data for July CPI. We expect a softer report this month, especially where non-core goods are concerned. It's no secret that gasoline prices contracted in July, and have kept on contracting. I'm pretty sure that my weekly grocery bill, while not yet user friendly, is also slightly off of the peak as well.
This morning, Wall Street consensus, and my expectation is for a year over year headline print of 8.7%, off of June's 9.1%, which may have been the apex of this cycle. The entire range of professional expectations is rather narrow, running from 8.5% to 9.1%. On a month over month basis, which is less of a focus right now, there is greater expectation for noticeable improvement. Wall Street is looking for monthly growth of just 0.2% for July, off of June's 1.3%. This series has printed at a monthly increase of 1% or greater for three of the past four months.
At the core, consensus is for an actual increase to a year over year print of 6.1% from June's 5.9%, which is a bit disturbing. The core print peaked at 6.5% in March. The range here is really tight, spanning from a 5.9% repeat to just 6.2%. A repeat here would be most welcome. The core month over month expectation is for 0.5%, down from June's 0.7%.
While there is a chance that inflation may be moving in the right direction, readers must understand that recent spending plans passed in the US Senate will work to counteract measures being taken by the Fed to gain the upper hand on inflation. These bills, while inappropriately named, could serve to increase money supply. This chart, taken form the St. Louis Fed's website illustrates the post-pandemic growth in M2 money supply.
In order to put the Fed's progress in perspective, the quantitative tightening program, which will hit its stride in September, has a long way to run, which is why I have advocated for smaller interest rate increases going forward as the economy slows in spots.
The above chart shows the Fed's balance sheet expansion into and out of the public health crisis. The Fed's QT program directly addresses excess liquidity, while increased short-term rates from here, will exacerbate tighter conditions on Main Street, USA prior to anyone truly understanding and properly interpreting what recent rate increases have done to slow economic activity.
As readers can see below, the velocity of money (M2) has increased this year, but still remains well below pre-pandemic levels...
As I think it would be beneficial to see this ratio rise, and increased short-term rates will force lower the denominator with an approximate nine month lag. Does increasing money supply make sense, or simply make the job of the Fed's quantitative tightening program that much more difficult in reducing the numerator?
Anyone See a Problem?
On Tuesday, the Bureau of Labor Statistics (very busy crew) posted preliminary data for Q2 Productivity and Costs. It wasn't pretty. Q2 Unit Labor Costs printed at +10.8% q/q, which topped expectations for +9.3%. This came on top of Q1 Unit Labor Costs that increased 12.6% q/q.
Along with those rapidly rising labor associated costs, Non-Farm Productivity (How much butt you actually kick at work, in aggregate) hit the tape at -4.6% q/q, which was worse than the expected -4.5% and came on top of Q1 Non-Farm Productivity of -7.3% q/q.
Anyone out there think this is sustainable?
- It may be okay. It might not be. As a hedge against a potential spike in volatility this morning, I temporarily took my cash level from a 2022 low of 19.1% up to a four month high of 41.7% late Monday.
- I have not yet reduced my Disney (DIS) long since re-entry. The position is up 16.2% since initiation and has been riding its 21 day EMA since mid-July. If the market is strong after the CPI report, I will probably reduce the position by a rough 25% ahead of tonight's earnings. If the market is weak post-CPI, I expect to add something depending on depth.Economics (All Times Eastern)
08:30 - CPI (July): Expecting 8.7% y/y, Last 9.1% y/y.
08:30 - Core CPI (July): Expecting 6.1% y/y, Last 5.9% y/y.
10:00 - Wholesale Inventories (June-rev): Flashed 1.9% m/m.
10:30 - Oil Inventories (Weekly): Last +4.467M.
10:30 - Gasoline Stocks (Weekly): Last +163K.
13:00 - Ten Year Note Auction: $35B.
14:00 - Federal Budget Statement (July): Last $-89B.The Fed (All Times Eastern)
11:00 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)