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Is the Baltimore Bridge Collapse a Risk to Inflation?

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What’s in Today’s Report:

  • Could the Baltimore Bridge Collapse Spark a Rebound in Inflation?
  • Durable Goods Orders Takeaways (More Weak Revisions)
  • Philly Fed Nonmanufacturing Survey (Another Whiff of Stagflation)
  • Consumer Confidence Shows Fading Household Financial Situations – Chart

Stock futures are rebounding from yesterday’s late session selloff as economic data overnight was mostly market-friendly while traders eye continued volatility in the yen.

Economically, Chinese Industrial Profits jumped by 10.2% y/y in the first two months of the year and the Eurozone Economic Sentiment headline rose to 96.3 vs. (E) 95.8. The overseas data helped ease global growth concerns.

The yen is attempting to stabilize this morning after falling to its lowest level against the dollar since 1990 overnight. A short-squeeze in the yen is a threat stocks and other risk assets as it would force traditional carry trades to unwind. The yen warrants close attention into the end of the week here.

There is no economic data today and just one Fed speaker after the close: Waller 6:00 p.m. ET.

There is a 7-Yr Treasury Note auction at 1:00 p.m. ET today. Yesterday’s 5-Yr auction was solid and investors will be looking for more strong demand for Treasuries in the belly of the duration curve today (a rise in yields would weigh on stocks).

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What’s Changed Since February? (Other than the S&P 500, Not Much)

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What’s in Today’s Report:

  • What’s Changed Since February?  (Other than the S&P 500, Not Much)

Futures are slightly lower on potentially negative U.S./China trade headlines and after more hawkish rhetoric from ECB members.

A WSJ article released late Tuesday stated the U.S. was considering more restrictions on chip exports to China, and that’s weighing on sentiment and the chip stocks.

Multiple ECB members made hawkish comments overnight, increasing the expectation for two more rate hikes.

Today there are no notable economic reports, but Fed Chair Powell does speak at 9:30 a.m. ET.  However, if he just reiterates his previous message (progress has been made on inflation but the work isn’t done, meaning another rate hike) then his comments shouldn’t materially move markets.

Now What? Updated Market Outlook

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What’s in Today’s Report:

  • Now What?  Updated Market Outlook
  • Weekly Market Preview:  Will Yields Keep Rising?
  • Weekly Economic Cheat Sheet:  Key Growth Updates This Week

Futures are modestly higher on a bounce back from last week’s losses following a generally quiet weekend of news.

Economic data was sparse and the only notable report was EU M3 money supply, which rose less than expected (3.5% vs. (E) 3.9%).

Geopolitically, fears are easing that China will send arms to Russia (concerns about this weighed on stocks late last week and an easing of them is helping futures rally).

Today focus will remain on economic data and the two notable reports are Durable Goods (E: -4.0%) and Pending Home Sales (E: 1.0%).  While neither should be a major market mover, markets will want to see stable data (so reports that don’t imply growth is too strong, or too weak).  We also get one Fed speaker, Jefferson (10:30 a.m. ET).

Earnings Season Update (What MSFT’s Results Mean for Markets)

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What’s in Today’s Report:

  • Earnings Season Update (What MSFT’s Results Mean for Markets)
  • EIA Analysis and Oil Market Update

Futures are slightly higher thanks mostly to momentum from Wednesday’s rebound and as earnings overnight were no worse than feared.

On earnings, TSLA rallied 6% after hours as Elon Musk teased more deliveries on the call in ‘23 than actual guidance, while IBM results were slightly disappointing.

Today focus will be on economic data and the key reports today are:  Durable Goods (E: 2.8%), Jobless Claims (E: 202K), Q4 ’22 GDP (E: 2.7%), and New Home Sales (E: 614K).  As has been the case through the end of ’22 and early ’23, moderation in the data, not an outright collapse, is what stocks and bonds need to extend yesterday’s rally.

On earnings, the key report today comes after the close with INTC ($0.20), while other notable reports include: V $($2.01), MA ($2.56), AAL ($1.14), JBLU ($0.19), and VLO ($7.45).

A Warning Sign from One of the Best

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What’s in Today’s Report:

  • A (Kind Of) Warning Sign from One of the Best
  • What to Make of the Wealth Tax Chatter

Stock futures are little changed this morning as investors digest some mildly disappointing earnings from Europe and an uptick in tensions between the U.S. and China.

Asian shares underperformed overnight after the FCC banned China Telecom from doing business in the U.S., raising concerns about the political relationship between the world’s two largest economies.

Looking into today’s session there are two economic reports to watch: Durable Goods Orders (E: -0.9%) and International Trade in Goods (E: -$87.9B), both due out in the morning, while no Fed officials are scheduled to speak.

There is a 5-Yr Treasury auction at 1:00 p.m. ET that could move yields and ultimately impact equities, but bonds have been fairly quiet this week as focus shifts ahead to central bank decisions later this week and next.

Finally, we are in the heart of earnings season and there are several more big names reporting Q3 results today: BA (-$0.17), GM ($0.89), KO ($0.58), MCD ($2.46), HOG ($0.81), BMY ($1.91), F ($0.28), EBAY ($0.89).

Vaccine Mandates vs. Mask Mandates

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What’s in Today’s Report:

  • Vaccine Mandates vs. Mask Mandates
  • Durable Goods Data Takeaways

U.S. equity futures are little changed this morning as Chinese markets began to stabilize amid easing concerns about increased regulation while focus turns to the Fed.

In company specific news, MSFT and GOOGL are trading higher after reporting record earnings while AAPL is down on disappointing guidance.

There are no notable economic reports today which will leave markets focused on the FOMC Decision (2:00 p.m. ET) and Fed Chair Powell’s Press Conference (2:30 p.m. ET). But as long as there is not a materially hawkish shift in tone, the market reaction should be relatively muted.

Additionally, there are some major companies releasing Q2 earnings results today including: PFE ($0.98), BA (-$0.65), MCD ($2.12), GD ($2.52) before the open, and FB ($3.03), PYPL ($1.14), and QCOM ($1.67) after the close.

What’s Next for U.S.-China Trade?

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What’s in Today’s Report:

  • What’s Next for U.S.-China Trade?
  • Durable Goods Report Takeaways

It’s a mixed morning in the global financial markets as equity indexes are largely directionless while safe-haven assets have a mild bid after a mostly quiet night of news.

Longer duration Treasuries are outperforming so far today which is resulting in the 10s-2s Treasury yield spread inverting to new cycle lows, below –2 basis points as of this writing.

Economically, Chinese Industrial Profits rose +2.6% in July from –2.4% in June while Q2 German GDP met estimates at +0.4% year/year, but neither release materially moved markets.

Looking into today’s session, there are no Fed speakers, but several economic reports to watch: S&P CoreLogic Case-Shiller HPI (E: 2.3%), FHFA House Price Index (E: 0.3%), and Consumer Confidence (E: 130.0).

There is also a 2-Yr Treasury Note auction today (1:00 p.m. ET) and if demand is soft (so yields rise), it could further invert the yield curve and cause another wave of recession fears as we saw earlier this month.

Lastly, another round of U.S. – China trade talks were scheduled for today although there have been no updates on the topic. So any positive news regarding those talks will be well received by investors, while if they end up not actually taking place, that will weigh on stocks and other risk assets today.

Reflation On? Why the Durable Goods Number Was Important, September 28, 2017

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Durable Goods
• August Durable Goods rose 1.7% vs. (E) 1.5%.

Takeaway
Wednesday’s Durable Goods report was a surprisingly strong number, and if it’s the start of a trend in the data, then we could finally be seeing an economic reflation.

The reason the Durable Goods number was so strong wasn’t because of the headline (it was a mild beat, but revisions largely offset it), but instead because of the key New Orders for Non-Defense Capital Goods ex-Aircraft (NDCGXA). NDCGXA surged 0.9% vs. (E) 0.3%, and the July number was revised sharply higher to 1.1% from 0.4%, signaling that business spending and investment accelerated during the summer.

That’s a legitimately positive surprise, as business spending and investment have been lackluster so far in 2017.

But if we see that activity pick up (and importantly close the gap between actual data and survey data), then that will help push broad economic growth higher. And if inflation keeps accelerating, then we’ve got a legitimate reflation.

Stocks reacted accordingly to this surprisingly good data, as the market rallied (growth is good) and was led higher by our “reflation basket” of banks (KRE), industrials, smalls caps, and inverse bond ETFs. That carried through to other assets, as bond yields surged on the news to new multi-week highs while the dollar also broke above 93.00.

Bottom line, this was a legitimately positive surprise for markets, and stocks and the dollar/bonds reacted accordingly. However, one number does not make a trend, so we’ll need to see continued acceleration in other data (industrial production) before we can confidently say the gap between very strong, “soft” survey data and actual, hard economic numbers is closing in a bullish way. Still, yesterday’s number was definitely a good start.

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Weekly Market Preview, September 25, 2017

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Last Week in Review

The most important occurrence last week was that the Fed clearly signaled it still intends to hike rates in December, as long as inflation and economic growth don’t decline further, and that declaration weighed on stocks modestly but boosted reflation-sensitive sectors.

Looking at the Fed meeting, it wasn’t that it was surprisingly hawkish, it wasn’t. In virtually every way, the Fed met consensus expectations. It announced commencement of balance sheet reduction in October, it barely made any changes to the statement (other than referencing the hurricanes), and the “dots” were unchanged for both 2017 (median showing one more hike) and 2018 (median showing three hikes).

Yet as we have cautioned, the market had a somewhat illogically dovish expectation of the Fed, and as such we saw the Fed decision push bond yields and the dollar higher, and weigh modestly on stocks.

Now, that dovish expectation has been corrected, as Fed fund futures are pricing in a 70% chance of a rate hike (which is probably about right at this point).

With the Fed confirming that rates are still moving higher, absent a roll over in inflation or growth data, that puts the onus on economic activity to accelerate and avoid a potentially “stagflationary” outcome, and unfortunately the lone piece of notable data last week wasn’t very good.

The September flash manufacturing PMI met expectations at 53.0 (up from 52.5 in August), but the composite number (manufacturing and services) missed estimates at 54.6 vs. 54.9.

Now, to be fair, these are all still strong readings on an absolute level, but the absolute level isn’t as important as the rate of change. Unfortunately, the rate of change in economic growth is not significantly positive (at least not hard economic data).

That is a potential problem, because if the market is going to accept the Fed is hiking rates in December, then we need economic growth to accelerate and create the economic reflation that will push stocks higher. If that doesn’t happen, we’ve got the Fed hiking into a stagnant growth environment, and that’s not a great scenario for stocks.

This Week’s Preview

In many ways, this week is the relative “calm before the storm” of next week, which will contain the final global September PMIs and the September jobs report.

That said, there are a few important numbers we need to watch, primary of which is Friday’s Personal Income and Outlays Report.

The reason this report is important is because it contains the Core PCE Price Index, the Fed’s preferred measure of inflation. If it shows firming similar to what we saw in the recent CPI report, from a stock standpoint it will put more pressure on Treasury yields and the reflation trade, and from a macro standpoint it will put more pressure on economic growth to accelerate.

Away from the Core PCE Price Index, the next notable number is Durable Goods (Wednesday). Remember, while regional PMIs have been very strong, actual hard economic data has not, and we’ve still got a big discrepancy between surveys and real activity. If durable goods bounces, that will be a good sign that actual economic growth is rising to meet the strong survey data.

Outside of those two reports, the next most important event is the Chinese September PMIs, out Thursday and Friday night. Chinese data has been a touch underwhelming lately, but growth expectations haven’t changed. If they do start to be changed lower that could be a surprise headwind on stocks.

Bottom line, this week we get more color on the state of inflation and growth, but really, it’s next week’s data that will be the next major economic influence on markets.

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Weekly Market Cheat Sheet, August 28, 2017

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Last Week in Review

There were only two notable economic reports last week, and neither were particularly controversial… and neither did anything to change the current market expectation of 1) High 2% to low 3% GDP growth in Q3, or 2) Fed reduction of the balance sheet in September.

Neither data point gave us any incremental color on whether the Fed will hike rates in December, although
we’ll get a lot more color on that issue this week. Looking at the data, the most important number last week was the August flash composite PMIs. The headline number beat at 56 vs. (E) 54.3, but that strong aggregate number hid some pretty significant discrepancies in the details.

The reason the PMIs beat was because of a surge in service companies. Flash service sector PMI rose to 56.9 vs. 54.8. But, the more important manufacturing PMI dropped to 52.5 vs. 53.2 (the manufacturing PMI is just a better reading of activity, so it’s more heavily weighted in the minds of economists).

So, despite the headline beat, this number was actually a disappointment, although I want to be clear that it was not an outright negative (PMIs need to drop below 50 before they imply economic activity is slowing). Bottom line, this is not the type of August reading that would make us think we’re seeing an economic acceleration.

Turning to Durable Goods, they were in line. Yes, the headline reading missed expectations as orders for Durable Goods fell -6.8% vs. (E) -5.8%. But, longer-time readers of this Report know you should ignore the headline as it’s massively skewed by airplane orders. The more important number is New Orders for Non-Defense Capital Goods ex Aircraft (NDCGXA) and it rose 0.4% vs. (E) 0.5%, although June data was revised 0.1% higher, so it was an in-line reading.

Again, we watch NDCGXA because it’s the best proxy for business spending and investment. And, similar to the flash PMI, while the number isn’t an outright negative, it’s not the kind of number that makes us think a broad economic acceleration is coming.

Bottom line, both numbers last week implied continued steady, but unspectacular, economic growth, and that’s simply not enough to cause a rising.

This Week’s Preview

This will be one of the busiest weeks of the year from an economic data standpoint, and it will come during one of the lowest liquidity weeks of the year… so the potential for data-based volatility this week is high.

The key reports this week (in order of importance) are: Jobs Report (Friday), Personal Income and Outlays (Thursday) and Global Manufacturing PMIs (Thursday night/Friday morning).

The reason those reports are ranked like that is because of inflation. Remember, barring a shockingly week Jobs Report on Friday, nothing is going to stop the Fed from reducing the balance sheet in September.

But, whether they hike rates in December remains uncertain, and the key variable that will decide that is inflation. So, that means that the wage number in Friday’s Jobs Report, and the Core PCE Price Index (the Fed’s preferred measure of inflation, which is contained in the Personal Income and Outlays report) will be the two key numbers this week.

If they run hotter than expected, you will see markets begin to price in the chance of a December rate hike, which would likely be a near-term headwind on stocks as a rate hike is not priced in to bond yields, the dollar or equities.

Turning to measures of economic growth, the August manufacturing PMIs are always important, but again there really shouldn’t be any major surprises here. A firm number in the US that refuted the soft flash PMI from last week would be welcomed as we need better growth to push stocks higher, but really the focus will be on inflation this week.

Looking at the dovish possibilities, we could easily see the data this week push the 10-year Treasury yield to new lows if the inflation data is underwhelming, and we would view that as a negative for stocks broadly.

Bottom line, I know this is a heavy vacation week, but it’s important one for Fed and ECB expectations, and that has the potential to move markets, especially given the precarious technical situation the S&P 500 is sitting in.

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