Here's the story.
Domestic equity markets opened on strength on Thursday. The S&P 500 peaked about a half hour after the opening bell had signaled the start of the regular trading session at 11 Wall Street. For joy, for joy.
CPI data for July had been released an hour ahead of that opening bell, and on a month-over-month basis had printed at growth of 0.2%, which was in line with consensus and extended the weakest stretch for consumer prices in this country for headline-level inflation (to three months) and for core inflation (to two months) since the cows came home (maybe longer).
That 10 a.m. ET top for the S&P 500 coincided with the daily peak for both the Nasdaq Composite and S&P 500... and at least for the S&P 500 had created a new high point for the week, even though the index had been coming off consecutive "down" days and had closed higher the day prior (Monday). On Thursday, the index would rally hard, sell off hard, then rally once again, then sell off once again, and then close "up small" just barely above the "unchanged" mark.
That CPI print had put some pop in markets as futures traders had increased bets that the Federal Open Market Committee (FOMC) would not change short-term interest rates on Sept. 20. As the day wore on, this confidence in what the Fed might do wavered a bit as San Francisco Fed President Mary Daly, of all people, who most Fed watchers consider to be a dove, reacted hawkishly to that CPI print. Daly, who will vote on policy in 2024, said, "It is not a data point that says victory is ours. There's still more work to do. And the Fed is fully committed to resolutely bringing inflation back down to its 2% target." This statement came after Fed Governor Michelle Bowman, who as a governor has voting rights every year, had earlier this week reiterated her views that the central bank may need to raise rates further in order to restore and then maintain price stability.
Then there was a less-than-stellar Treasury Department auction of 30-year bonds that seemed to surprise after the US Treasury had quite successfully sold $80 billion of Three-Year and 10-Year notes earlier in the week. Let's dig in.
On July CPI
As mentioned above, month-over-month consumer inflation printed on Thursday morning at growth of 0.2% both at the headline and the core. This was in line with expectations and well below (to the relief of many) the Cleveland Fed's NowCast projection. Fed funds futures trading in Chicago is now pricing in a 91% probability for no rate hike on Sept. 20, up from a rough 85% probability ahead of that CPI release. The likelihood for a rate hike on Nov. 1 also dropped, to about 27% from roughly 31%.
The year-over-year prints have almost stopped improving. The headline year-over-year number rebounded from June 3% growth to growth of 3.2%, slightly below expectations for a 3.3% print. Year-over-year core inflation improved from 4.8% in June to 4.7% for July, as expected. From here -- or really the September data -- forward, the year-over-year comparisons will become more difficult, so the focus will move to the shorter-term data. The problem there is that Fed officials keep talking about their 2% inflation target, a target that could seem to move further away as we roll into 2024 even if progress is made in producing disinflation. Getting there may require outright deflation. That would likely rekindle talk of economic contraction.
Interestingly, although quite anecdotally, one can plainly see that prices for crude, gasoline, natural gas and electricity have all surged into late July/early August, but this index had apparently been completed ahead of those price spikes. For July, the data show price increases of 0.2% for gasoline and outright deflation of 0.7% for electricity. Energy on the whole, at growth of 0.1%, was a drag on the headline rate. The component for shelter, which we know to be dated information, printed at growth of 0.4% and accounted for just about all the growth in this report. July headline CPI, ex-shelter, hit the tape at "growth" of 0.0%. Core July CPI (ex-energy, ex-food) ex-shelter, printed in deflation at -0.1%.
On That Last Auction
Unfortunately, consumer inflation and expectations for monetary policy are not the only things that impact interest rates. There's demand and supply to worry about as well. We know that due the fiscal largess in Congress that the Treasury Department has had to beef up the size of its borrowings at a time when the Fed and foreign central banks really can no longer be counted on to artificially suppress the yield curve, thus reducing the expense associated. On Tuesday and Wednesday, Treasury appeared to get away with the larger issuances as the demand for three-year and 10-year paper was solid, and solid from foreign accounts at that.
On Thursday, the luck ran out. The Treasury sold $23 billion of 30-Year bonds at a high yield of 4.189%, which was the highest yield awarded for this series at auction since 2011. This also tailed the "when issued" by 1.4 basis points, which was the largest tail since February. Bid to cover landed at 2.42, which was the weakest ratio for this metric since April. Indirect (foreign) bidders took down just 67.8% of the issuance, which was their lowest share in aggregate since February, as direct bidders were awarded 19.6% of the auction, sticking dealers with a 12.5% share, again the most since February.
This announcement was made shortly after 13:00 ET. In New York, equity markets would hit their lows for the day prior to 14:00 ET as the yield for the US 10-Year Note moved up to 4.11% and as the yield for the US Two-Year Note moved up to 4.85%. Both of those series have been in rally mode this morning. I have seen the Ten-Year go by at 4.09% and the Two-Year at 4.82% as I have been working on this piece.
For the day, of the 10 indexes that I keep a close eye on, the Dow Transports led at +0.46% while the Russell 2000 lagged at -0.42%. Everything else was in between the two. The majors -- the S&P 500 and Nasdaq 100 -- both closed just north of unchanged. Across the 11 S&P sector SPDR ETFs, five funds closed in the green and six in the red. The leader was the Communications Services (XLC) sector at +0.34%, while the laggard was the REITs (XLRE) at -0.34%. Five of these funds closed between +0.1% and -0.1% for the session.
Breadth was poor but not awful. Losers beat winners at the New York Stock Exchange by a rough 5 to 4 and at the Nasdaq by close to 7 to 6. Advancing volume took a 53% share of composite NYSE-listed trade and a 46.3% share of composite Nasdaq-listed trade. Trading volume was somewhat perplexing, though. Aggregate trade expanded by 18.4% on a day-over-day basis for NYSE-listed securities but contracted by 5.2% d/d for Nasdaq-listed securities. However, trading volume decreased across the Nasdaq Composite but contracted across the S&P 500. I am not sure there is a real takeaway here in regards to what professional money was doing.
One thing I think we do know is that the "rally" has not been broadening as it was. However, the selloff is accelerating away from the major indexes. The Russell 2000 has now been down for seven of the past eight sessions and stands more than 4% off of its late July highs. The S&P MidCap 400 is also lower for seven of eight days and closed on Thursday 3% below its late July apex. By comparison, the S&P 500 stands 3% below its recent highs and the Nasdaq Composite now stands down 4.9% from its recent high. Long-term investors may have cut their losses (slightly) by rotating out of large-caps broadly, but they have not been spared.
That said, there have been places to hide. As the Technology SPDR (XLK) has taken a 2.05% hit over the past month, Energy (XLE) has soared by 8.74%. I have expanded my exposure to the energy sector during that time, but not nearly enough. From like "very small" to "small," so no, I cannot say that I have timed this market evolution very well. You all know that I had been long Chevron (CVX) and had recently added Exxon Mobil (XOM) to the mix, but that's it. Time to ramp that part of the book up?
On That Note...
On Friday morning, the IEA (International Energy Agency), not to be confused with the EIA (Energy Information Administration), which is domestic, downgraded its forecast for growth in demand for crude for 2024 to 1 million barrels per day. It's still growing , but it's less than the 1.15 million barrel per day of growth that the agency had projected in its last forecast.
As for the current year, the IEA sees demand averaging 102.2 million barrel per day for the entire year, with China accounting for more than 70% of the 2.2% year-over-year growth that this number would represent. What if China just can't be that kind of engine in 2024? Right now, that economy seems to be struggling mightily, and that's what Beijing is admitting to. Who knows what it's really like over there?
For those keeping track, the current four-year labor contract between the legacy automakers and the United Auto Workers expires on Sept. 14. Earlier this week, UAW President Shawn Fain said Stellantis (STLA) had broken a pledge not to seek givebacks in the ongoing negotiations and literally threw the company's proposal into a trash can for show.
The UAW is said to be pushing for a 40% pay increase over four years with a 20% pop from the start. Bloomberg estimates that what the UAW demands would add more than $80 billion to each of the three largest US automakers' labor costs. For the day on Thursday, General Motors (GM) was down 5.8%, while Ford Motor (F) was off 4.5% and STLA gave up 1.8%.
This probably does not bode well for these businesses going forward, with labor-related overhead about to explode, and that's only if there is no work stoppage... all as 17.1% of all Americans financing a new car are making monthly payments of $1,000 or more. That number is up from 4.3% pre-pandemic. I may never buy a new car again.
Economics (All Times Eastern)
08:30 - PPI (Jul): Expecting 0.2% m/m, Last 0.1% m/m.
08:30 - Core PPI (Jul): Expecting 0.2% m/m, Last 0.1% m/m.
08:30 - PPI (Jul): Expecting 0.7% y/y, Last 0.1% y/y.
08:30 - Core PPI (Jul): Expecting 2.3% y/y, Last 2.4% y/y.
10:00 - U of M Consumer Sentiment (Aug-adv): Expecting 71.3, Last 71.6.
10:00 - U of M One Year Inflation Expectations (Aug-adv): Last 3.4%.
10:00 - U of M Five Year Inflation Expectations (Aug-adv): Last 3.0%.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 525.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 659.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (SPB) (0.51)
After the Close: (KROS) (-1.35)