Where do we begin to explain? The past week was so full of bits and pieces of market-impacting information that writing up a neat and tidy summary becomes impossible.
As far as earnings are concerned, last week was the busiest week of this particular reporting season. The week culminated on Thursday evening when headliners such as Apple (AAPL) and Amazon (AMZN) both reported. Amazon showed striking improvement, particularly in getting expenses under control, though more work needs to be done. The crowd roared. Apple still generated a ton of free cash, sold off as overall sales printed in contraction from the firm's year ago comparison for a third consecutive quarter.
Earnings were only part of last week's song and dance, It might be argued, perhaps correctly, that maybe corporate financial results were not the headline event of a week that included both a Fitch downgrade of US sovereign debt, and concluded with an "almost" weak Bureau of Labor July employment report that brought with it a downward revision of 11.5% in terms of job creation to the already reported June numbers.
The ratings change and then the macro had a primarily negative impact on Treasury securities, especially further out on the yield curve. The US Dollar also continued to gain some upward momentum relative to its reserve currency peers for a third consecutive week. Weren't we just discussing the implications for a weaker US dollar? That's been put on hold.
Still, crude oil has soared in price, and with the underlying commodity, so have energy stocks. I paid more than $4 per gallon for the cheap stuff (regular unleaded gasoline) on Sunday morning. Imagine if the dollar wasn't rising in value. Thank goodness it's not the heating oil season right now. As warm as it has been, those days are coming. Where will the US dollar be? Relative to fuel?
Fitch Downgrades the US
This past Tuesday afternoon, Fitch Ratings downgraded US sovereign debt to a AA+ rating from its top level (AAA). To be sure, just about everyone knows, AA+ rated governments are still expected to be able to meet all of their obligations on time. The gist of the entire thing is that this amounts to a slap on the wrist just to let the US Congress and the Treasury Department know that the crew over at Fitch Ratings sees what they are doing and how they are doing it.
Fitch is well aware that US policy makers have consistently performed irresponsibly in their implementation of fiscal policy. Essentially, US policy makers have taken their position for granted. Does this shock anyone? You would think so, to hear all of the wailing and the gnashing of teeth by those taking unfair shots at Fitch to include our Secretary of the Treasury Janet Yellen.
How ironic that within a day, the US Treasury had to upwardly adjust precisely what they expect to need to borrow over the final three months of this fiscal year. Not a minor revision to that guidance, mind you. All the way from $733B to a nasty looking $1T. That's all. As the federal deficit had hit $1.39T for the first nine months of that fiscal year, the Treasury Department was forced to announce an increase in the size of nearly all forward looking scheduled auctions beyond T-Bills, literally proving Fitch's points just a day after having whined about the downgrade. T-Bills will be adjusted separately.
The US National Debt? Why worry? Closing in on $32.7T or 119% of GDP. Total US Debt to include federal, stale, and local, as well as business and household debt? Just a little under $101.8T. That's right, using the CBO's own estimate for 2023 nominal GDP, which is $26.24T, total US debt now stands at 388% of GDP. I mean if all of those sources are included when aggregating both input and output, then why exclude them when coming up with debt to GDP ratio?
The real debt to GDP ratio is about 388%. More downgrades cometh, my friends, Standard & Poors downgraded the US in 2011. They're about due. Moody's still rates the US at AAA. They're way overdue. Unless, of course... The Congress as well as state and municipal legislators all find the political will to better balance public spending versus revenue. I'm not going to hold my breath.
The yield for US Ten Year Note soared in response to this news, only to come back on increased demand thanks to the softer than expected Non-Farm Payrolls print on Friday. Take a look at this...
July Labor Market Health
Simple question. How strong was job creation in July? Pick a number, any number... we'll wait. Everyone goes home with a prize. According to the ADP Employment Report released last Wednesday morning, the private sector made 324K net new hires in July, after their June print had been revised down from a gargantuan 497K to a "mere" 455K. So, two really strong months back to back for US job creation, right?
Not so fast. According to the BLS Establishment Survey, which the financial media seems to think is the only number that counts, only 187 Non-Farm positions were filled in July after an also downwardly revised 185K Non-Farm positions were filled in June. Both of these past two months printed well below consensus view. So, forget about the ADP, it's now two straight months of below trend job creation, right?
Wait... Not so fast, my friends. According to the BLS Household survey, in July 268K new persons gained employment, after 273K new persons gained employment in June. So, then job creation is still rather strong? It all depends upon whom you ask. The firm that cuts most of the checks, thinks that 779K new folks were hired by the private sector (all alone) over the past two months. That said, if the government's surveys are in any way accurate (they both can not be), when employers are asked, they think they hired just 372K individuals over the past two months, but if you ask the hirees themselves, they think that they filled 541K new positions.
Nobody knows, gang. How can three separate sources reflect three so wildly different results? How can all three possibly be taken seriously? How are you and I or the many economists that have to look at this and come up with a thesis, or worse, a projection that actual businesses will rely upon, supposed to trust anything we read or hear? I mean, if you can search for gym equipment on the internet and then get besieged with ads for gym equipment for weeks on end afterwards, then certainly there must be an accurate way to count hires. Right now, we certainly do not have one.
Might Want to Look at This
Average hourly wages were up 0.4% month over month and 4.4% year over year in July. Both of those results were a bit hotter than economists were looking for. Uh oh. That's good for the individual worker, but bad for inflation and if inflation re-energizes then so will the FOMC in their aggressive stance in the pursuit of a 2% consumer level inflation target, right?
Again, not so fast, pal. Average weekly hours worked for full time employees dropped yet again to 34.3. We had been at this level earlier this year and also a few times over several years. Not lower though, at least not recently. This is well below what is considered normal, which is up around 34.5 or 34.6. As the economy came out of the pandemic, this metric hit 35 hours per week in 2021 and peaked at 34.7 hours per week in 2022. 34.3 hours equals the weakest demand by employers for hours worked by their employers, with the exception of March and April 2020 (mandated pandemic shutdowns) since 2011.
I'm probably not going too far out on a limb when I say that I am probably the only economist (or at least one of only a few), who is not selling a political narrative and is willing to point this potentially significant labor market warning out.
We'll know more in a few days, won't we? I mean I guess we will. July CPI will cross the tape this Thursday morning and July PPI a day later, on Friday morning. The data should show at least something of a rebound at least on a month over month basis from the significant progress that had been made in June. How this impacts the voting membership of the FOMC we'll hopefully find out in real time. Surely, one would think that we will by the time that the whole Jackson Hole clambake rolls in on August 24th.
Was June simply as good as it gets for a while. I read and hear so many economists who seem to be taking disinflation for granted, as I pump that half a tank, trying to see if I can maybe catch a lower price for gasoline down the road somewhere. We know that Russia is again trying to play games with Ukraine's ability to act as a breadbasket to large chunks of Europe and Africa.
We know that the economies of the US and China appear to be decoupling or resetting to some degree as the two play keep away with certain items like high-tech computer chips and rare earths or critical metals and minerals. We know that OPEC and OPEC+ appear to be doing what they have to in terms of reduced production in order to put a bit of "giddy-up" into crude oil prices.
WTI Crude has now put together a six week winning streak... Take a look at this.
WTI Crude has closed out the past three weeks at or near the top of those weekly ranges, and now approaches a resistance level that goes back to last November after having found consistent support at the 200 week line. What happens if and when WTI cracks that line of resistance? All it will take, as mentioned above, is a little dollar weakness.
Last week, Real Money colleague Bruce Kamich wrote what I took as a bearish piece concerning the US Dollar Index. I've been following Bruce a long time, longer than we actually know each other, and how accurate he is when projecting the US Dollar is something that has stayed in my head concerning Bruce for years. Cause for potential concern.
Just in case you're wondering, the Energy SPDR ETF (XLE) has been the top performing sector SPDR among the eleven, both for the past week as well as the past month.
The Fed has been rather quiet of late. Summertime vacations? I have no idea, Last week, both Atlanta Fed President Raphael Bostic (voter in 2024) and Chicago Fed Pres. Austan Goolsbee (votes this year) spoke publicly and both tried to come off as neutral, but actually sounded rather dovish. This Monday, Philadelphia Fed Pres. Patrick Harker (voter this year) and Fed Gov, Michele Bowman (always votes) will both speak. Bowman has been a hawk of late, while Harker has appeared to be pragmatic. I have no one on my radar after Monday.
Remember, we're only about two and a half weeks out from the Jackson Hole symposium, so there may be a reluctance to say anything that might not leave much room for flexibility ahead of that four day event.
Well, here we are again, friends. Late Sunday night oozes into Monday morning. Dark. The man in the office window isn't speaking much. They should ring a bell, and let us know... "Hey stupid, go to bed." Pero no, they never have, and they never will. They will, however, ring a bell at 11 Wall Street. As Monday begins, I see an 85% probability for no rate hike on September 20th, which, by the way, is scheduled almost a month after the Kansas City Fed's above-mentioned shindig in Wyoming.
These markets currently see the Fed Funds Rate where it is now (5.25% to 5.5%), as the terminal rate. If these futures markets prove to be prophetic, this target range will hold until March 20th, when the FOMC implements the first of what would be five rate cuts in 2024. The likeliest date for one more rate hike remains November 1st (34% probability), while these markets are pricing in just a 0.1% chance that the current range holds through the entire 2024 calendar year.
Q2 Earnings Season
The season is winding down. Better than expected, as it always seems to be, but still not good. A lot of secondary and tertiary names, not to mention most of the retailers, still need to report, but the S&P 500 is down to tag's ends.
According to FactSet, 84% (up from 51% last week) of the S&P 500 has now reported. 79% (down from 80%) of companies have beaten earnings expectations, while 65% (up from 64%) of companies have beaten revenue projections. The blended (results + expectations) rate of earnings "growth" has improved to -5.2% from -7.3% a week ago, while the consensus view for revenue "growth" has improved from 0.1% to 0.6%. For the full year, consensus is now for earnings growth of 0.8%, (up from 0.4%), on revenue growth of 2.5% (up from 2.4%).
Only three sectors (down from five) are still seen sporting contracting earnings growth from their year ago comparisons. The real losers are still expected to be the Energy and Materials (XLB) sectors that are seen experiencing year over year earnings declines of 51% and 29%, respectively. This would be a second consecutive quarter of exceedingly poor performance by the Materials sector, which was down 25% for the first quarter. Discretionaries are again seen leading the way, in just as significant fashion as they had last quarter (52.1% vs. 54.3%). That kind of performance was not seen by analysts prior to the start of the reporting season.
As if readers needed to be told, equity markets had a rather rough week last week. Equity markets started out strong enough and then struggled from Tuesday on into the week's end as Treasury yields took off and then came in. Equities tried to rally on Friday, as support was also shown for longer dated Treasury securities in response to softer jobs data. However, Friday morning's equity rally turned into Friday afternoon's selloff as portfolio managers, at least going into the weekend, had turned from dip buyers into rip sellers. There was an effort made to carry less risk over the weekend.
The Nasdaq Composite appears now to have successfully formed a small double top (with a 13,997 pivot) pattern after having made several attempts that had not taken root. Is this time different? Guess we'll let you know after we see the inflation numbers later on this week. Myself? I expect to tread lightly until then.
Readers will see that as the Nasdaq Composite over a month, has developed that mini-double top reversal, that Relative Strength has dropped from a nearly overbought technical state to something almost perfectly neutral. All as the daily MACD (moving average convergence divergence) for this index has moved from something starting to look a little bearish toward what now looks like a bearish set-up. The 12 day SMA (simple moving average) has broken well below the 26 day EMA (exponential moving average), while the 9 day EMA is as negative as it has been in months.
The S&P 500 gave up its 21 day EMA last week (as did the Nasdaq Composite), and very interestingly used that line as resistance both on Thursday and Friday. Also at stake is the potential loss of the lower trend line of our upward sloping price channel.
This index has now become uncomfortable within the price channel that we have been following. This channel was born of a nine month ascending triangle pattern with a 4,200 pivot. Take a look here...
What becomes evident now, is that the entire breakout that was born of the closing of that ascending triangle is currently at risk. Should the index fail at the lower trendline of that price channel, we will have to look to the 50 day SMA for help.
What's different here, though the small-caps also had a "down" week, was that the iShares Russell 2000 ETF (IWM) has not yet lost its 21 day EMA. That line continues to stand as support, as one might think it should considering surprisingly recent dollar strength. Will it continue to hold? I think back to Kamich's piece for an answer.
Equity Market Results
For the past week, the S&P 500 gave up 2.27%, after losing 0.53% on Friday. The S&P 500 closed last week up 16.63% year to date. The Nasdaq Composite was hit for 2.85% for the week after surrendering just 0.36% on Friday. This puts the Nasdaq Composite up 32.89% for 2023. The recently focused upon Nasdaq 100 closed down 3.02% last week. The Nasdaq 100 is still up a rather incredible 39.63% year to date.
The Philadelphia Semiconductor Index led again (as it always does) last week, but this time back in the wrong direction for the second week in the past three, ceding 3.96% for the week, after suffering a mild 0.24% hit on Friday. The "SOX" still stands up an impressive 46.09% for the year.
This leaves us with the Russell 2000. The small-cap index gave up 0.2% on Friday, and 1.21% for the week. The Russell now stands up 11.14% for 2023. The KBW Bank Index, now all but done with earnings, backed up 1.24% last week, ending a multi-candle string of "up" weeks. The KBW is now off 12.84% this year, which is truly incredible considering where it had been.
Nine of the eleven S&P sector-select SPDR ETFs shaded red this past Friday, with two funds in the green. For the week, ten of the eleven finished in the red, as only the Energy sector gained any ground, up 1.25%. Eight sector funds lost more than 1%, while five lost more than 2%, two lost more than 3% and the Utilities (XLU) surrendered 4.55%.
According to FactSet, the S&P 500 is now trading at a still red hot 19.2 times forward looking earnings, actually down from 19.4 times last week and 19.5 times the week prior. This is still well above the medium to long-term norms for this index. FactSet shows the S&P 500's five year average valuation at 18.6 times, while its ten year average stands at 17.4 times.
It's still earnings season, though the breakneck pace of high-profile releases will seriously slow. It's not "jobs week", but we will be on inflation watch. In addition to the macro that we will take in, the US Treasury will auction off $38B worth of Ten Year Notes on Wednesday and $23B worth of Thirty Year Bonds on Thursday. Both of these auctions have been beefed up in size as the federal government has gotten itself in a bit beyond it's depth for now. Who are we kidding? They're beyond their depth forever. Or at least until forced by crisis to behave responsibly.
- Central Banking
Just like last week, even without a "blackout" period in effect, nor an FOMC policy meeting anywhere in sight, nobody seems to want to get out and talk about policy. I have Bowman on Monday afternoon... and now Harker of Philadelphia has been added to Monday's docket (early) as well. Other than that.. nada. Jackson Hole is on my mind.
- The Macro
There will be some secondary data released this week, but this is "inflation week." On Thursday, the BLS will release July CPI. Wall Street looks for month over month consumer level inflation of 0.2% both at the headline and the core. The Cleveland Fed sees July CPI at growth of 0.4% at both the headline and the core. That, gang, would be a kick in the pants.
Consensus is also for year over year headline growth of 3.3%, up from 3.0% in June and core growth of 4.7%, down from 4.8% in June. Cleveland sees the headline rate at 3.4% and the core rate at 4.9%. Better hope Cleveland got something wrong on the input side.
Friday brings July PPI. Here, we are looking for month over month growth of 0.2% at both the headline and the core. In both cases that would be up from growth of 0.1% in June. Year over year PPI is seen at headline growth of 0.7%, up from 0.1% and core growth of 2.3%, down from 2.4%.
A semi-heavy earnings week is on its way. Not so heavy on high-profile names however. Highlights include Tyson Foods (TSN) and Palantir Technologies (PLTR) on Monday, then DataDog (DDOG) , Eli Lilly (LLY) , United Parcel Service (UPS) , Rivian Automotive (RIVN) and Take-Two Interactive (TTWO) on Tuesday.
The release schedule starts to slow down on Wednesday, but we'll still hear from Walt Disney (DIS) and Wynn (WYNN) that day. On Thursday, both Ralph Lauren (RL) and Dillard's (DDS) will report. The Friday docket is very thin.
As for events, Microsoft (MSFT) , Alphabet (GOOGL) and Nvidia (NVDA) will all be participating later this week in a test with other firms and the US government to see just how hackable their models for generative AI might be. Let's hope that no headlines come out of that event.
Economics (All Times Eastern)
15:00 - Consumer Credit (Jun): Last $7.24B.
The Fed (All Times Eastern)
08:15 - Speaker: Philadelphia Fed Pres. Patrick Harker.
14:00 - Speaker: Reserve Board Gov. Michele Bowman.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BNTX) (-.74), TSN (.26)