One of the big reasons "core inflation" has remained hot is because housing/shelter inflation has just recently started to ease a bit. Unfortunately, we might not see a big drop in housing prices as available inventory remains extremely tight.
Wall Street still widely expects the US Federal Reserve to hike interest rates by another 25 basis-points at its upcoming July 25-26 meeting, but investors are now more optimistic that it might also be the last rate hike in this cycle. Just look at the two-year yields which tumbled right after the release of the CPI data, going from 4.85% down to 4.75%.
Many Wall Street insiders argue that if the two-year yields stay steady or start to deteriorate the stock market bulls will have even more room to run higher, perhaps even retesting the all-time highs by yearend.
On the flip side, if the two-year yields again start to climb higher, stock market bulls could face more sizable headwinds.
There's also still a great deal of debate over whether the Fed's historically fast pace of rate hikes could pull the economy into recession. Bulls believe that the affects of the Fed's hiking campaign have mostly already worked their way through the system and that the job market and household finances are strong enough to handle "higher rates for longer."
Bears, however, argue that delayed impacts have yet to be fully realized, particularly in the financial and commercial real estate sectors, which could of course have consequences for the broader US and global financial systems.
Bulls are pointing to the Fed's latest "Beige Book" report that showed an overall increase in US economic activity in June with inflation continuing to ease. That combination of steady growth and falling prices is what some call a "goldilocks" economy, aka an ideal environment of full employment, economic stability, and stable growth.
Bears continue to argue that falling prices are going to big problem for corporate earnings in the quarters ahead, regardless of whether the US avoids recession.
Bears are also quick to remind that some areas of "disinflation" in June may not continue or could possibly reverse course, in turn keeping overall inflation above the Fed's +2% target rate. In other words, it is only one report and too soon to declare the inflation battle has been won.
The real test for stocks in the weeks ahead will be Q2 2023 earnings season, which "unofficially" kicks off on Friday with results from big Wall Street banks.
Many Wall Street insiders are concerned that even if earnings and forward guidance surprise to the upside, stock price gains could be limited due to already high valuations.
The S&P 500 is currently trading at a 12-month forward price-to-earnings ratio of 19.2 times compared to its long-term average of 15.6, according to Refinitiv. At the same time, there is evidence that companies are rapidly losing their pricing power while simultaneously facing high labor and financing costs. Meaning profits going forward may be much tougher to achieve.
Today, earnings results are due from Conagra, Delta, Fastenal, and PepsiCo. The key economic data is the Producer Price Index (PPI) for June with economists expecting the headline rate to slow to +0.5% year-over-year from +1.0% in May, with the "core" rate holding steady at an annual rate of +2.8%. If PPI unexpectedly moves up, it will likely spark worries that inflation is poised to make a comeback. Stay tuned..
Mexico Becomes U.S. #1 Trading Partner: Mexico has become the top U.S. trading partner, with total bilateral trade between the two countries totaling $263 billion during the first four months of this year. Mexico's emergence followed fractious U.S. relations with China, which had moved past Canada to claim the top trading spot in 2014. The dynamic changed in 2018 when the U.S. imposed tariffs on China’s goods and with subsequent pandemic-era supply-chain disruptions that altered international trade and investment flows worldwide. Mexico’s gains mirror its rise in manufacturing, a key component of goods moving between it and the U.S. During the first four months of 2023, total trade of manufactured goods between Mexico and the U.S. reached $234.2 billion. Overall, Mexican imports to the U.S. totaled $157 billion; U.S. exports to Mexico reached $107 billion. Source Federal Reserve Bank of Dallas
Consumers Are Cutting "Back-to-School" Spending: Deloitte's 2023 back-to-school survey projects total spending per child will fall 10% to $597, down from $661 in 2022. More than half of the parents who plan to spend less attributed the decline to "reduced disposable income." Inflation is expected to be the main driver behind the first yearly decline in back-to-school spending in nine years. Keep in. mind, the p[rice of school supplies has increased +23% in the past two years. Source Deloitte
Inflation is Still Sticky In Some Sectors: Inflation is still holding on for certain categories and items, especially processed foods, which are impacted not only by the cost of raw materials but also by labor inflation, transportation costs, and more, which impact the price tag consumers see in store. Check out the graphic below to see the year-on-year change of prices. Source Yahoofinance
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Private Equity Is Chasing Plumbers and Lumber Yards: Wall Street has been buying into fragmented Main Street industries for years, with dental and veterinary practices among the favorite targets. It’s known as the roll-up strategy – and it’s catching a tailwind right now, and expanding rapidly in household services and building materials. Small firms account for the biggest share of acquisitions by private equity (PE) funds and their portfolio companies since the late 2000s, according to data from industry analyst PitchBook. They made up more than 61% of all private equity deals in the first quarter of 2023, compared with an average in the mid-50s over the past decade or so. “If you acquire enough, you get economies of scale,” says Tim Clarke, PitchBook’s lead private equity analyst. “You just keep rolling rolling, rolling and before you know it you’ve got 10-20% of the market.” Private equity’s enthusiasm for small firms is spreading into industries like plumbing and other trades — which have shown they’re recession-proof, even in the Covid slump, and have room for consolidation because markets are typically divided up among many businesses. In terms of dollar value, PE acquisitions of publicly traded companies or those bought from other private equity firms still make up the biggest chunk of deals. Even by that measure, though, purchases of founder-owned businesses — which in most cases are valued at under $100 million apiece — are on the rise. They accounted for more than 43% of deal value in the first quarter of 2023, well above the typical levels in recent years, according to PitchBook. Source Bloomberg
Investors Need to Understand the ‘Geopolitical Risk Supercycle': When will the world go back to normal? That’s the most common question geopolitical strategist Tina Fordham hears from business leaders. The answer, unfortunately, is that it won’t. The world is experiencing a “geopolitical supercycle,” Fordham said in an interview on Barron’s Live. Geopolitical disruptions aren’t new, Fordham said, but they are now having more of an impact on markets than they used to. That is because some of the buffers that kept politics out of the boardroom have been weakened, particularly because of the end of easy money from central banks. But to know how such events matter for investors, you have to understand the transmission mechanism from politics to markets. “Most multinational corporations have wound down their operations in Russia, and the world—at least the Western world—has largely learned to live without Russian gas supplies,” Fordham said. “So it’s not surprising that markets shrugged it off.” But zooming out, the emergence of the geopolitical supercycle is disrupting the period of stability that allowed multinational corporations to expand globally as financial markets grew more tightly integrated Source Barrons
Record-High Share of 40-Year-Olds in US Have Never Been Married: As of 2021, 25% of 40-year-olds in the United States had never been married. This was a significant increase from 20% in 2010, according to a new Pew Research Center analysis of Census Bureau data. Marriage has long been a central institution in the lives of Americans. In 1980, just 6% of 40-year-olds had never been married. But people born from the 1960s onward have been increasingly delaying marriage, and a growing share are forgoing it altogether. While many unmarried 40-year-olds are living with a romantic partner, most are not. In 2022, 22% of never-married adults ages 40 to 44 were cohabiting. The share of 40-year-olds in 2021 who had never married varied by the following demographic characteristics: A higher share of men than women had never married; Black 40-year-olds were much more likely to have never married than Hispanic, White, and Asian 40-year-olds; and 40-year-olds without a four-year college degree were more likely to have never married. To be sure, we can’t assume that if someone has not married by age 40, they never will. In fact, about one-in-four 40-year-olds who had not married in 2001 had done so by age 60. If that pattern holds, a similar share of today’s never-married 40-year-olds will marry in the coming decades. Source Pew Research
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Nvidia Invests in Biotech Company Using AI for Drug Discovery: Chipmaker Nvidia will invest $50 million in Recursion Pharmaceuticals to speed up the development of the biotech firm’s artificial intelligence models for drug discovery, the companies said Wednesday. Recursion uses AI-powered models to identify and design new therapies, and offers those models to other drugmakers, including Roche and Bayer. Salt Lake City, Utah-based Recursion will use its biological and chemical datasets exceeding 23,000 terabytes to train its AI models on Nvidia’s cloud platform. Nvidia can then potentially license those AI models on BioNeMo, the company’s cloud service for generative AI in drug discovery that it rolled out earlier this year. Nvidia’s investment is the latest example of the AI frenzy making its way into the pharmaceutical industry. Drugmakers are increasingly recognizing AI’s potential to get life-saving treatments to people faster. Source CNBC
Elon Musk Launches xAI: Elon Musk, the CEO of Tesla and SpaceX, and owner of Twitter, on Wednesday announced the debut of a new AI company, xAI, with the goal to “understand the true nature of the universe.” According to the company’s website, Musk and his team will share more information in a live Twitter Spaces chat on Friday. Team members behind xAI are alumni of DeepMind, OpenAI, Google Research, Microsoft Research, Twitter and Tesla, and have worked on projects including DeepMind’s AlphaCode and OpenAI’s GPT-3.5 and GPT-4 chatbots. Musk seems to be positioning xAI to compete with companies like OpenAI, Google and Anthropic. News of the startup was previously reported by The Financial Times in April, along with reports that Musk had secured thousands of GPU processors from Nvidia in order to power a potential large language model. That same month, Musk shared details of his plans for a new AI tool called “TruthGPT” during a taped interview on Fox News Channel, adding that he feared existing AI companies are prioritizing systems that are “politically correct.” Source CNBC
Home Values Hit New Record High As Homeowners Sit Tight: According to Zillow data, the typical U.S. home value climbed +1.4% from May to June, continuing a four-month streak of hot home value growth driven by several months of scarce new listings. The nation’s typical home value now sits at an all-time high of $350,21), just above the previous peak of $348,225 reached in July 2022. All major U.S. markets saw home values rise in June, but more than half remain below year-ago levels. Affordable metro areas had some of the biggest monthly home value gains in June, led by Chicago (2.1% increase from May), followed by Buffalo (2.1%), New Orleans (2.1%), Hartford (2.1%), and Detroit (2.0%). The slowest monthly growth was in Austin (0.4%), Jacksonville (0.8%), Memphis (0.8%), San Antonio (0.8%), and Birmingham (0.8%). Home values are down from year-ago levels in just over half (27) of the 50 largest metro areas, most significantly in Austin (-11.2%), San Francisco (-7.7%), Phoenix (-7.2%), Las Vegas (-7.0%), and Sacramento (-5.8%). Annual price gains are highest in Richmond (5.3%), Miami (5.3%), Milwaukee (4.3%), Oklahoma City (4.2%), and Cincinnati (4.2%). What comes next is less certain, as buyer demand typically begins to wane in the summer. But this year that trend will be set against incredibly scarce new listings. There were -28% fewer new listings than last June, with only 376,500 new listings coming to market. This is more comparable to the winter market doldrums, like February (about 341,500 average new listings) than to the average new listings in June (505,100) in Zillow’s listings data. The dearth of new listings has dogged the housing market for almost a year now, and the chief suspect remains unchanged: today’s higher mortgage rates. Source Zillow
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