Today also marks the end of the month, end-of-quarter, and end of first half of the year, so there may still be some big money shifting around. Adding to that is the critical PCE Prices Index due out this morning. The headline rate is expected to slow to 3.8% for May versus +4.4% in April. The "core" rate - one of the Fed's preferred gauges that strips out food and energy - is expected to remain flat at +4.7%.
The main areas of stubborn elevation have been shelter prices, food, and services. Interestingly, stripping out shelter brings the May "core" rate all the way down to +3.4%.
Economists still expect the ongoing rent deflation will start showing up sometime in the second half of the year, as well as a moderate softening of home prices. Those declines won't be enough however to slow inflation down to the Fed's +2% target rate, at least not in 2023.
A bigger worry for investors as far as economic data is next week's June Employment Report, due out on Friday, July 7. The Federal Reserve has made it pretty clear that it doubts inflation can be beat with the strong labor market. After the surprising strength of hiring in May, investors are very nervous about a repeat for June. It is worth noting that the unemployment rate ticked up by +3 points in May despite the addition of +339,000 jobs.
A big portion of that seems to stem from "self-employed" workers, particularly gig workers (Uber drivers, etc.), moving back into the regular job market. Many Wall Street insiders think the Fed wants to see the unemployment rate push above +4% before it feels comfortable ending this rate hiking cycle.
A recession would certainly accomplish that and then some, although Wall Street economists are divided as to whether the long-predicted downturn will happen at all.
There are also deep divisions as to when it might happen with a lot of economists now pushing recession out into the first part of 2024, as opposed to the second half of this year.
Those that think the US will escape recession point to not only the strong job market but also the housing market.
Keep in mind, home prices don't always fall during recessions and the labor market doesn't typically start to slide until the economy has already turned.
Next week's other economic data includes ISM Manufacturing and Construction Spending on Monday; ADP's Employment Change and Factory Orders on Wednesday; and the ISM Non-Manufacturing Index and the Job Openings and Labor Turnover Survey on Thursday.
Earnings are extremely light next week with Levi Strauss on Thursday really the only notable US release.
Overall, not a lot has changed this week. Wall Street bears are pointing toward a still hawkish Fed and an inverted yield curve, which historically signals a recession is around the corner.
Bulls are saying US employment is strong enough to pull us through it without much turbulence and that corporate earnings expectations are low enough to keep the stock market from melting down. Perhaps the market chops around until it finds the next major catalyst.
US Economy Stronger Than Many on Wall Street Thought: The US economy grew more than initially anticipated in the first quarter, according to the Bureau of Economic Analysis. The BEA's third reading of gross domestic product showed the US economy grew by 2% in the first quarter, marking a sharp increase from the previous reading of 1.3%. The revision still indicates a slowdown from the 3.2% and 2.9% growth in the third and fourth quarters of 2022, respectively. New data also out Thursday showed the early stages of an upward trend in weekly jobless claims, which could indicate softening in the labor market, hasn't materialized. With 239,000 claims in the week ending June 24, jobless claims hit their lowest levels since May. On Tuesday, June consumer confidence data hit its highest level in 18 months as other data revealed durable goods orders grew in May, even as economists had been expecting a decline, and May new home sales surprised to the upside. The strong data has forced economists to reconsider their projections for a recession and investors to adjust their expectations for the Federal Reserve. As of Thursday morning, futures tied to the Fed's benchmark interest rate are projecting an 86.8% chance the Fed hikes interest rates at its July meeting, per the CME FedWatch Tool. That's up more than 10% in the last week and 30% in the last month. Source YahooFinance
Why Air Travel Is a Mess Ahead of July Fourth: Airlines are bracing for a busy July Fourth holiday weekend after being tested by the first major disruption of the summer. Airlines canceled thousands of flights this week as a series of pop-up storms bore down on the East Coast, choking off routes to and from major New York airports for long stretches. Since Saturday, carriers including United Airlines, JetBlue Airways and Delta Air Lines have scrapped more than 7,500 flights. By Thursday, most airlines had returned to near normal operations, but United Airlines remained off kilter. Its 400 mainline flight cancellations accounted for the bulk of the day’s disruption, according to FlightAware, a flight-tracking site. United said it had seen “meaningful improvement” after an overnight push to fix its schedules and match crews with planes, and that it expects delays and cancellations to continue declining. Friday is expected to be the busiest day at U.S. airports since before the Covid-19 pandemic, with an estimated 2.82 million travelers, according to the Transportation Security Administration. The administration expects to screen 17.7 million people over the course of the next week. Smoke from Canadian wildfires arriving in New York City and thunderstorms in the Midwest in the mid-Atlantic could pose challenges in the days ahead, according to the National Weather Service. But it isn’t yet clear whether these conditions will have a major impact on travel. Source WSJ
Home Inventories Could Get Even Tighter: Anyone out shopping for a home on the resale market knows the pickings are slim. They’re about to get slimmer. The number of homes for sale this month was actually +7% higher than June of last year, according to Realtor.com. But, in just the last week, that comparison went negative, with the number of homes for sale falling below year-ago levels for the first time in 59 weeks. New listings in the last week of June were down -29% from the same week a year ago. That’s a wider drop than previous weeks. With mortgage rates surging ever higher, crossing over 7% again on the 30-year fixed Thursday, according to Mortgage News Daily, homeowners have very little incentive to sell their homes. The vast majority of homeowners with mortgages have rates below 4%, with some even below 3%. Prices peaked last June, after rising over 45% from pre-pandemic levels. But prices bottomed in January, according to the latest S&P Case-Shiller home price index, despite still higher interest rates and slower sales. Source CNBC
Silicon Valley Startups Face "Extinction Event": After an unexpected COVID-19 era boom, in which startups nearly doubled what they raised from venture capitalists — and the subsequent bust due to rising inflation and lingering supply chain issues — the economic landscape is dire for many venture capital-backed tech businesses. While these pandemic-era funding rounds helped buoy many startups, investors, entrepreneurs and industry watchers believe that the party is now officially over for Silicon Valley — and they're worried about how the hangover is likely to get much worse. The data, they argue, shows a perfect storm of factors that will prompt an abnormally high wave of startup failures: A drought in venture capital is spreading through the valley as VC investments into startups drop for the sixth consecutive quarter. Similarly, venture debt, another funding source, has cooled since the start of the year. All this means that founders in need of cash are now facing a precipitous drop in the amount of investment available to them. For hundreds of startups, the countdown to extinction has begun. A survey conducted by January Ventures, a Boston-headquartered early-stage investment firm, found that more than four-fifths of early-stage startups have less than 12 months available to them on their existing funding at the time. The data points to one thing, nervous tech insiders say: A startup bloodbath is coming. Source Insider
Google Removing All Canadian News Sites from Searches: Google announced it will remove links to Canadian news sites from its search results and other products for users in Canada, following a similar decision by Facebook’s parent company Meta last week, after the country passed a new law requiring internet companies to pay news publishers for their content. Kent Walker, Google’s president of global affairs, noted that links to Canadian news sites will be removed when the law comes into effect, which is expected to happen in December. Google linked to Canadian news publications 3.6 billion times last year, according to the company. A similar bill was introduced in California—the California Journalism Preservation Act—and was approved by the state assembly earlier this month. Meta has indicated it would also block news articles on Facebook in California, should the bill become law. Source Forbes
Study Shows 130 Countries Exploring Central Bank Digital Currencies: A total of 130 countries representing 98% of the global economy are now exploring digital versions of their currencies, with almost half in advanced development, pilot or launch stages, a closely-followed study shows. The research by the U.S.-based Atlantic Council think tank said significant progress over the past six months meant that all G20 countries with the exception of Argentina were now in one of those advanced phases. Eleven countries, including a number in the Caribbean, and Nigeria, have already launched central bank digital currencies (CBDCs) as they are known, while pilot testing in China now reaches 260 million people and covers 200 scenarios from e-commerce to government stimulus payments. India and Brazil plan to launch digital currencies next year while the EU aims to launch its digital euro in 2028. In the United States, progress on a digital dollar is only "moving forward" for a wholesale (bank-to-bank) version, the Atlantic Council's research said, whereas work on a retail version for use by the wider population has "stalled." Source Reuters
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