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.
Don't forget, this week ends both the month and the quarter, so there could be a lot of window-dressing and moving of money. This is in fact the last week of the first half of 2023 and indexes so far are sitting on decent year-to-date gains with the Nasdaq up nearly +29%, the S&P 500 up more than +13%, and the Dow just shy of a +2% gain.
Bulls believe last week's weakness was mostly the result of profit taking after the S&P 500 finally regained all the losses it had incurred since the US Federal Reserve began lifting interest rates last March.
Mega-cap technology stocks still seem to be the crowd favorites with many investors viewing these behemoths as "safer" against the current backdrop of high economic uncertainty.
Recent data does point to some further softening of the US economy, including preliminary June manufacturing PMI released Friday that sank further into contraction territory. However, services PMI for June ticked down only slightly and remains in expansion territory.
The top highlight this week will be the PCE Prices Index on Friday. Economists expect the "core" rate that strips out food and energy will remain unchanged at an annual rate of +4.7%, while the headline rate is seen dipping to +3.8% from +4.4% previously.
The core rate, which the Fed prefers, has held at 4.6%-4.7% since November of last year, illustrating just how entrenched high prices have become across most consumer goods. The only economic data today is the Dallas Fed Manufacturing Survey.
Investors this week will also hear from Fed Chair Jerome Powel, who will participate in a panel discussion at a European Central Bank event on Wednesday. Powell's forum topic is central bank policy so the discussion could yield some further insights into the US Fed's current thinking.
Early Q2 2023 earnings results are starting to roll out this week as well, with highlights including results from Carnival today; Walgreens on Tuesday; General Mills and Micron Technology on Wednesday; and Nike on Thursday. Overall, Wall Street analysts are anticipating another disappointing earnings season with a loss of between -5% to over -8% forecast for S&P 500 companies. That would follow a decline of around -2.8% in Q1. Wall Street still expects those losses to be offset in the second half of the year, though, with full-year 2023 growth pegged at just over +1% for S&P 500 companies.
Investors this week will also be tuning in to updates out of Russia following a brief threat of rebellion by the mercenary "Wagner Group". The entire event lasted less than 24-hours but several geopolitical insiders believe it could lead to a new direction for the war in Ukraine, depending on how everything shakes out. I've included more information below.
What We Know About the "Wagner Group" and the Failed Russian Rebellion: Russia briefly faced a violent rebellion from its mercenary Wagner Group—designated as a “transnational criminal organization” by the US—over the weekend, all of which played out lightning fast. Russia’s Federal Security Service said Friday that Yevgeny Prigozhin, head of the Wagner Group, which had been fighting with Russian troops against Ukraine, had incited an “armed rebellion” after Prigozhin accused the Russian military of attacking one of the group’s camps. The Wagner Group subsequently claimed control over Russian military facilities in Voronezh and Rostov, Russia’s logistical hub for its invasion of Ukraine, on Saturday before marching toward Moscow, which prompted Putin to warn his country of a possible civil war. But less than 24-hours after the threat began, Prigozhin abruptly announced the armed rebellion was over. In exchange for turning back, a criminal case against Prigozhin was dropped and he agreed to go to Belarus, which appears to be a sort of official exile. It's not clear what the fallout might be but Western officials say the incident could weaken Russia's military significantly. Many think it's possible that internal power struggles amid the military elite may be at play that the rest of the world is not privy to, which could fray lines of command and further sap troop morale. Russian infighting could provide an advantage for Ukraine if the chaos continues but Ukrainian soldiers on the front lines said this weekend that they haven't witnessed any signs of disruption.
Wagner's exit from the war could also reduce Russia's troop numbers but it's not clear how many, if any, of the group's soldiers might abandon the cause. Some experts worry that in the event that Russian President Vladimir Putin does face more internal threats, it could lead to him taking more extreme measures in order to demonstrate his control. At the same time, Putin may conclude that prolonging the war carries too big a domestic political risk, prompting Russia to seek a peace deal.
Yevgeny Prigozhin, 62, was seen leaving the district military headquarters in Rostov, hundreds of miles south of Moscow, late on Saturday in a sport utility vehicle. His whereabouts on Sunday were not known. Prigozhin, is a former Putin ally and ex-convict whose forces have fought the bloodiest battles of the 16-month war in Ukraine, Prigozhin said his decision to advance on Moscow was intended to remove corrupt and incompetent Russian commanders he blames for botching the war.
The "Wagner Group" is seen as a private military company (PMC), formed by a network of mercenaries and a de facto private army of Yevgeny Prigozhin, a businessman formerly with close ties to Russian President Vladimir Putin. It operates in support of Russian interests, receives equipment from the Russian Ministry of Defense (MoD) and has used MoD installations for training. Prior to this weekend, it was widely speculated that the Wagner Group was used by the Russian government to allow for plausible deniability and to obscure the true casualties and financial costs of Russia's foreign interventions. The group came to prominence during the Donbas war in Ukraine, where it helped pro-Russian separatist forces of the self-declared Donetsk and Luhansk People's Republics from 2014 to 2015. Its contractors have reportedly taken part in conflicts around the world, including the civil wars in Syria, Libya, the Central African Republic, and Mali, often fighting on the side of forces aligned with the Russian government.
The Wagner Group has played a significant role in the Russian invasion of Ukraine, where it has been reportedly deployed to assassinate Ukrainian leaders, among other activities, and for which it has recruited prison inmates from Russia for frontline combat. In December 2022, United States National Security Council Coordinator for Strategic Communications John Kirby claimed the Wagner Group had +50,000 fighters in Ukraine, including 10,000 contractors and 40,000 convicts. Source WSJ
World Bank Sees Major Economies Growing Much Slower: Higher rates and overhangs from this year’s banking crisis will drastically slow economic growth for the biggest global economies, according to the World Bank. The bank estimates overall global growth will decelerate to 2.1% in 2023, down from 3.1% in 2022. Emerging and developing economies are forecasted to see a slight uptick in GDP to 4%, up 0.6% from the bank’s projections made in January 2023. However, World Bank chief economist Indermit Gill said excluding China, growth in developing economies would be less than 3%, marking one of the weakest growth rates in the last five decades. The U.S. is projected to grow 1.1%, while the Euro area and Japan are projected to see GDP growth of less than 1% in 2023. Source CNBC
Rent Relief on the Horizon: The once red-hot US apartment market has suddenly softened. Although many experts suggest this is due to a mix of factors that are largely temporary, there are reasons to believe that after a decade in which the market seemed to only get tighter, with apartment construction struggling to keep pace with demand, we're in for a prolonged period with more balance than any time since the mid-2000s. The weakness is happening for two reasons. The first is that the market is going through the same pandemic-fueled boom/bust dynamic that many industries have experienced, but with a lag because renters typically only sign leases once a year. The second is there's a ton of new supply hitting the market, with more apartments currently under construction than ever. This is coming just as the boom in household formations in 2020 and 2021 – which were much more than would have been expected from population growth alone as people took advantage of cheap rents and more space – is beginning to unwind to some extent. As John Burns Research & Consulting noted in a recent report, population growth between 2020 and 2030 will be concentrated among two age buckets. The first is people between the ages of 35 and 49, and the second is people over 65. The first bucket is people who tend to buy homes, and the latter is retirees who are largely staying put. Importantly, the population of adults between the ages of 20 to 34 -- a group that tends to rent -- is expected to decline Source Bloomberg
Trade Woes in Asia Bring Inflation Relief to US Consumers: Sinking global trade is pummeling Asian exports, bringing some relief on inflation to US and other Western consumers. But easing prices for home furnishings, electronics and other manufactured goods don’t signal high inflation will soon be defeated. Wage growth and services price gains are still elevated. Cheap Asian goods helped keep a lid on price growth for decades before the pandemic. Economists say that phenomenon is unlikely to return with the same intensity now that the high-water mark of globalization has passed. Asia’s powerhouse exporters enjoyed a boom in overseas sales during the pandemic. On a rolling 12-month basis, the U.S. dollar value of exports from China, Japan, South Korea, Taiwan and Singapore peaked last year in September at $6.1 trillion. That was +40% higher than recorded over the 12 months through March 2020, when the pandemic began. Asian exports started sliding late last year as rising interest rates took some heat out of economic growth. The weakness in trade is showing up in the prices charged for goods when they leave Asia’s factories. Chinese producer prices fell 4.6% in May compared with a year earlier, the eighth straight month of declining supplier prices in the world’s largest factory floor. Similar gauges of inflation in other Asian exporter economies are weakening, too, as lower commodity prices reduce costs and collapsing demand for goods saps companies’ pricing power Source WSJ
Transportation Head Warns of Flight Delays as 5G Rolls Out: Summer airline operations will face their “biggest foreseeable problem" starting next week as a deadline to retrofit equipment to avoid potential interference from 5G wireless signals approaches, with Transportation Secretary Pete Buttigieg sounding alarm bells about possible delays. Planes that fail to meet the deadline for upgrading won't be able to land in certain weather conditions when visibility is low starting July 1, as 5G wireless service could interfere with the devices that use radio waves to measure an aircraft’s distance from the ground, Buttigieg explained. Buttigieg didn't know exactly how widespread the impact could be, but said it could rise to a "noticeable level." Some airlines said they don’t expect problems—like United and Southwest, according to the Wall Street Journal—but others say it could be months before their fleets are fully updated Source Forbes
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