Stock bulls are ready to move beyond the heavy focus on Federal Reserve policy that has dominated this week's headlines. Most bulls believe the lull in stock gains this week is mostly a result of consolidation following the recent rally, as well as some jitters felt ahead of Fed Chair Jerome Powell's testimony to Congress on Wednesday and Thursday.

With that out of the way, bulls see more upside potential thanks in part to the large chunk of cash that big money managers still haven't put to work, as well as the pressure funds might be feeling to participate if stocks do continue to rally.

Bulls overall are also not convinced that the Fed will need to follow through on the two remaining rate hikes forecast for this year. Most think a 25 basis-point hike in July will see the end of the tightening cycle, in turn providing a big boost to stocks in the last part of the year. Bears, however, believe that stocks are headed for a rough second half with further rate hikes by the Fed, tighter credit conditions, and slowing consumer demand creating an even more challenging environment for companies.

That in turn could mean upcoming earnings results and forward guidance fail to support some of the lofty valuations that companies have racked up so far in 2023.

Outlooks for both US and global growth have been sinking lately as economists react to the ongoing central bank tightening across much of the West, which is continuing longer than most had anticipated due to the fact that inflation is so stubbornly entrenched.

Most bears doubt the US economy will be able to avoid a long-anticipated recession if rates are pushed much higher. They are also quick to point out that an economic downturn could be particularly painful if inflation remains high because that means the Fed will be less likely to step in and help soften the blow.

The only economic data on the calendar today is the preliminary June read for IHS Markit Manufacturing and Services PMIs.

The data calendar gets a lot busier next week with the key highlight being the PCE Prices Index on Friday. Both headline and "core" inflation rates ticked up last month, though they are basically in the same range they've been stuck in all year.

Durable Goods, Consumer Confidence, the S&P Case-Shiller Home Price Index, and New Home Sales are due out on Tuesday; advance reads on International Trade, Retail Inventories, and Wholesale Inventories on Wednesday; the final estimate of Q1 GDP and Pending Home Sales on Thursday; and Consumer Sentiment on Friday.

On the earnings front, CarMax reports today.

Next week brings results from Carnival on Monday; Walgreens and Jefferies Financial on Tuesday; General Mills and Micron Technology on Wednesday; and McCormick & Co., Nike, and Paychex on Thursday. Have a great weekend!

Will Continued Strong Inflation in Europe Spill Over and Hurt the US Economy? A flurry of interest-rate hikes from European central banks on Thursday is darkening the outlook for the global economy, reigniting fears about a U.S. recession and damping the appeal of risk assets. Central banks in England, Norway, Switzerland and Turkey all lifted interest rates to combat inflation, even as the U.S. experiences some relief from the pace of rising prices. What remains to be seen is whether the U.S. can continue to skirt a much-anticipated economic downturn, which has been talked about for more than a year. The world’s largest economy has surprised many in financial markets by staying afloat despite the Federal Reserve’s most aggressive rate-hike cycle in four decades and policymakers’ latest projections for another half-of-a-percentage-point of rate hikes by year-end. It’s pretty clear Europe has an inflation problem that is not getting any better and their central banks are turning up their tightening a notch, said Edward Moya, senior market analyst for the Americas at OANDA Corp. in New York. Moya also said that we’re going to see the economic situation deteriorate fairly quickly in Europe, and eventually, that weakness will be passed on to the U.S. Source MarketWatch

How Zombie Firms Are Eating Up Economic Growth: Zombies aren’t just out for brains—they’re devouring financial gains as well. That’s the conclusion of a recent report from the International Monetary Fund, which found that zombie firms—so called because their long-term unprofitability, high debt loads, and negative real sales growth make them “unproductive and unviable”—are not only proliferating around the world, but can hamper the performance of non-zombie peers. The problem was exacerbated by Covid-19, writes the report’s lead author Bruno Albuquerque, because of “unprecedented” support governments offered both public and private businesses. Yet it’s not simply a product of the pandemic, as zombies have been steadily increasing over the past two decades. Moreover, zombies have been staggering on longer than before, now existing an average of four years after a firm is first classified as a zombie. This might all sound like nothing more than a reminder that caveat emptor applies to all potential investors in any new business they come across. However it’s a much broader problem than that, Albuquerque writes, as “the presence of zombie firms dampens investment, productivity, and employment of nonzombies,” all while the latter are also competing with zombie firms for limited credit supply. Source Barrons

Fed Officials "Very Aware" of Commercial Real Estate Problems: Federal Reserve Chairman Jerome Powell said Thursday that the central bank is monitoring the growing pressure the commercial real estate sector has come under. "It's really which banks have concentrations, high concentrations of real estate, and that is not seen in the large banks. It's seen in some of the smaller banks," Powell said in a response to a lawmaker's question. Powell added that the Fed was working with banks it had identified as being potentially at risk because of their exposure to commercial real estate. With white-collar workers spending more time in their home offices, a phenomenon that shows few signs of ending, investments linked to downtowns are trading at falling prices in volatile markets. Office buildings are only about 50% as full as before Covid-19 across 10 major metro areas, according to keycard tracking by Kastle Systems, a building-security company. The amount of troubled assets climbed to nearly $64 billion in the first quarter of this year, a +10% increase, according to a new report from MSCI Real Assets. Risks loom on the horizon too, with nearly $155 billion of commercial property assets that are potentially troubled, according to the report. “Should this potential distress be upgraded to full-blown trouble, an increase in distressed asset sales and declining prices would be inevitable,” MSCI Real Assets researchers including Jim Costello and Alexis Maltin wrote in the report. That's bad news for the banks, pension funds, and asset managers that are among the biggest lenders to and owners of commercial buildings, which could face losses for years to come. Commercial mortgages account for around 38% of the median U.S. bank’s loan holdings, according to KBW Research. North American public pension funds on average hold around 9% of their assets in real estate. Source WSJ and Fortune

California No Longer Most Expensive State for Gas: Drivers in the state of Washington are celebrating the official start of summer with an unwelcome sight: America’s most expensive gas prices. The average cost of regular gasoline in Washington state has jumped by 32 cents over the past month to $4.93 a gallon, according to AAA. That’s 7 cents ahead of California, which had held the unwanted title of America’s most expensive state for gas for roughly 95% of the time over the last few years, according to Patrick De Haan, head of petroleum analysis at GasBuddy. Prior to the past few days, Washington has never been the most expensive state for gas in data going back to 2005, GasBuddy told CNN. The good news is that Americans are paying a lot less for gas than the first day of summer last year — even in Washington. Nationally, the average price for regular gas is $3.58 a gallon, down $1.39 from this point last year. No state has enjoyed a bigger plunge in gas prices than Delaware, where the state average is down by $1.61 a gallon over the past year, according to AAA. Michigan ($1.59), Indiana ($1.59), California ($1.53), Alaska ($1.53) and Texas ($1.51) have also experienced large price drops over the past year. Source CNN

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