A tall drink of cold tea at the tail end of an August heat wave. How interesting was it that the PPI, which is the Bureau of Labor Statistics' Producer Price Index, printed ice cold for July? Frosty.
Markets rejoiced at first, but then could not hold on to the gains, forgetting briefly that financial markets rarely act broadly in response to producer prices. Producer prices are important, though. When conditions are ripe for upward price pressures, it's often seen here first. Once the PPI is hot, there are only two potential outcomes at the consumer point of sale. Those two outcomes are either higher consumer prices or some kind of margin squeeze. Or, perhaps, some shade of gray in between.
For July, headline PPI printed at +9.8% year over year, which is the coolest this series has been since experiencing 8.9% annual growth in October 2021. Headline producer prices actually contracted month over month. The -0.5% print missed the +0.3% consensus expectation by a mile and was a significant drop from June's +1.1%. July 2022 was the frostiest month for this particular item since April 2020.
Core PPI printed at +0.2% month over month and +7.6% year over year. Both these numbers also were a deceleration from June and below professional expectation.
Both headline and core PPI confirm for us what we had already known, as told by both core data taken from both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) series of data points, that for all intents and purposes, US inflation apexed in March 2022, leaving the central bank in a position of being aggressively postured with supposedly the intention to stay aggressive, despite inflation already being well past peak. Keep in mind that the Federal Open Market Committee (FOMC) has already moved its fed funds rate from the zero bound to the current range of 2.25% to 2.5%, and that very little of what the committee has done has worked its way, so far, down to Main Street, USA.
As I have mentioned often, piling aggression upon aggression despite not knowing full well the impacts of previous actions is reckless. One might consider allowing the Fed's quantitative tightening program to do more of the lifting at this point and get on with the removal of the cash slosh that got the nation through the economic crisis created by the pandemic. As far as short-term rates are concerned, the Fed is groping around in the dark without a full understanding of public impact nor of the numeric location of their supposed neutral or terminal rates.
On That Note...
... the Fed's balance sheet grew by $4.5 billion for the week ended this past Wednesday, Aug. 10. Yes, I said "grew." The Fed's balance sheet carried a total asset balance of $8,879,138,000,000 on Wednesday evening. This is what that balance has looked like in 2022, peaking at $8,965,487,000,000 the week ended April 13.
To keep things in perspective, this is where the work really needs to be done, and we really do not know or understand what this unwind will do on Main Street, or even Wall Street.
This is what that same graph looks like dated back to the start of 2020. In September, the Fed will ramp its quantitative tightening (QT) program up to where it allows $95 billion of assets to roll off (mature without being reinvested) of the balance sheet. At that pace, uninterrupted, it would take about seven years and 10 months to reduce the Fed's balance sheet to zero, or half of that time to get the balance sheet to its pre-pandemic, post-financial crisis ballpark.
As an economist, I had thought that one silver lining that might come out of the Fed's tightening cycle at a time when economic growth was slowing down (or even contracting) would be that the housing market might cool and younger and middle-income adults, who have largely been shut out of this market (skewing traditional rates of household formation) might finally catch a break.
Sure, we saw higher mortgage rates. The average 30-year mortgage the week of Aug. 5 printed at 5.47% according to the Mortgage Bankers Association. This was down from 5.98% this past June, but up from the week prior, and up significantly from 2021. We have seen the pace of both new and existing home sales slow. Still, the supply side of the market has dried, and prices have not relaxed.
The National Association of Realtors (NAR) reported on Thursday that the median single-family home sales price had increased 14.2% for the second quarter to $413,500. $413.5K at the median? How on earth are young families or families without means ever going to get started in this environment?
My guess, and it really is just a guess, is that rising interest rates, a significantly reduced cash slosh and a reduction in overall economic activity should take care of these rising prices, unfortunately taking record employment with them.
In the meantime, 184 of the 185 metro areas tracked by the NAR showed higher median home prices year over year for the second quarter. Only Trenton, N.J., went backwards. An incredible 80% of these metro areas experienced median price growth of 10% or greater.
Enough With the Macro...
After all, I am a trader/investor first. Equities rallied early on Thursday only to give most or all of it back by the closing bell, dependent upon metric used. Energy commodity prices increased. Treasuries with longer-dated maturities sold off, making yield spreads look slightly less sickly. I said slightly less. By day's end, the Dow Transports, S&P MidCap 400, S&P SmallCap 600 and Russell 2000 had all hung on to gains of 0.65% or less. The S&P 500, Nasdaq Composite, Nasdaq 100 and Philadelphia Semiconductor Index had all posted daily losses of 0.65% or less.
For the day, five S&P Select Sector SPDR ETFs shaded green for the session, led by Energy (XLE) and the Financials (XLF) . Those two funds were up 3.44% and 1.18%, respectively. Losses for the six such ETFs that shaded red spanned from -0.01% (not kidding) to -0.65%. Cyclicals outperformed growth and defensives for the day.
Breadth remained positive throughout despite lackluster headline equity performance. Winners beat losers by more than 3 to 2 at the New York Stock Exchange and a rough 5 to 4 at the Nasdaq, while advancing volume took a 64.1% share of composite NYSE-listed trade and a 55.9% share of composite Nasdaq-listed trade. Trading volume expanded on Thursday from Wednesday for names listed at both of New York's primary exchanges, significantly so for Nasdaq names. Generally, I take the day as a mild positive. Leadership was provided by Disney's (DIS) post-earnings surge.
If by that you mean "Why did equities surge and then reverse lower on Thursday?" the answer is technical, for large swaths of the equity marketplace we're making their first attempt at their respective 200-day simple moving averages (SMAs). That does not mean that our brand-new bull market is over. Nor does it mean that our somewhat longer bear market is back on, though I am sure the bear is not done with us just yet. We still have a recession to go through.
But as far as our trading environment is concerned, which is what really matters if one has to rely on himself or herself to clothe and feed the family, the Dow Transports, Russell 2000, S&P SmallCap 600, S&P MidCap 400, Technology SPDR ETF (XLK) and Real Estate SPDR ETF (XLRE) all made runs at their 200-day lines on Thursday and failed to hold the level.
Will these indexes and funds take their 200-day lines? Like a moth to the flame, my thinking is that this is not a one and done. There will be another attempt, and taking that level is not some lofty thrust into the land of fantasy. Five SPDR sector ETFs are already there -- mostly defensives, but Energy and the Industrials (XLI) as well. All the market needs to do is fight the Fed. Uh oh.
Bloomberg News reported on Thursday afternoon that Apple (AAPL) has informed suppliers that it needs 90 million units of its latest iPhones this year, putting 2022 at about 220 million iPhones, which would be in line with 2021 production levels. Interestingly, this comes shortly after Foxconn, which is an Apple supplier, had said that it sees signs of reduced consumer demand for smartphones.
Hmm. What do we see here? We now have some clarity in the chart of Chevron (CVX) that I showed you earlier this month.
The developing cup that I drew up for you in early August has added a handle that worked to fill the formerly unfilled gap between $151 and $156. The stock moved higher on Thursday and could soon threaten the new pivot of $165. Relative Strength and the daily moving average convergence divergence (MACD) both exist in good but not overbought conditions. My belief is that taking and holding $165 could produce $198.
Target Price: $198 (up from $182)
Panic: $142 (break of 200-day SMA)
Economics (All Times Eastern)
08:30 - Import Prices (July): Expecting -0.9% m/m, Last 0.2% m/m.
08:30 - Export Prices (July): Expecting -0.2% m/m, Last 0.7% m/m.
10:00 - U of M Consumer Sentiment (Aug-adv): Expecting 52.2, Last 51.5.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 764.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 598.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BR) (2.65)