Stock indexes are experiencing a bit of a reshuffling with the rally that has been carried by big tech now broadening to smaller-cap stocks in lagging sectors. Most Wall Street insiders view this as is a welcome rotation as it should ultimately provide broader base of support for market gains.

How much higher stocks can climb from here is still largely dependent on future Federal Reserve policy and the strength of the US consumer. There is starting to be a lot more debate about how well consumer spending might hold up. One issue at the forefront is the resumption of student loan payments, which are set resume no later than September 1, per the recently negotiated debt ceiling bill. Close to 43 million Americans will be impacted and could lead to an estimated -$40 billion decrease in household disposable income.

On the plus side, it could have a minor impact on inflation. According to a Goldman Sachs analysis, a resumption of student-loan payments would be the equivalent of a -0.2% drop in the Fed’s preferred inflation gauge. Consumer spending has so far held up pretty well, although it has mostly stopped growing in the goods sector.

Services spending on the surface still looks robust but when you strip out health care and housing, spending in the sector has been mostly flat since last year. There are also other cracks starting to form, including rising credit card delinquencies and steadily sliding consumer sentiment. According to the latest Consumer Credit data from the Federal Reserve, revolving credit, which includes credit card debt, rose at a seasonally adjusted annual rate of +13.1% to $1.24T. many economist worry how long this increasing debt load will be sustainable, particularly if the economy takes a hard turn. And consumers do seem to be feeling the strain.

According to the closely-followed University or Michigan Consumer Sentiment Survey, sentiment slid -7% in May amid worries about the path of the economy, erasing nearly half of the gains achieved after the all-time historic low hit last June. Additionally, year-ahead expectations plummeted -17% in May.

As for what companies are projecting, most were pretty upbeat in their recent earnings releases. A lot of that stemmed from still-favorable margins resulting from strategic price increases. Colgate-Palmolive, for instance, saw its Q1 2023 profits climb +6% from last year thanks to a +12% increase in prices. That was in spite of a -2% decline in sales volume.

However, with more money expected to be diverted away from discretionary spending, tightening credit conditions, and consumer budgets in general continuing to get squeezed, companies may find it more difficult to eek out the same level of profits in the quarters ahead.

There remain some concerns about the threat of disinflation hitting earnings but companies so far have not found it necessary to dramatically lower prices. The only economic data today is Weekly Jobless Claims and Wholesale Inventories. DocuSign, Toro, and Vail Resorts are the key US earnings on the calendar.

Billions in Backed-Up Bond Sales Could Create Craziness: Investors are bracing for a flood of more than +$1 trillion of Treasury bills in the wake of the debt-ceiling fight, potentially sparking a new bout of volatility in financial markets. Some on Wall Street fear that roughly $850 billion in bond issuance that was shelved until a debt-ceiling deal was passed—sales expected between now and the end of September, according to JPMorgan analysts—will overwhelm buyers, jolting markets and raising short-term borrowing costs. Source WSJ

"Cardboard Boxes"... Perhaps an Overlooked Recession Indicator: The US is in a "cardboard box recession," and it could mean the economy will see a sharp drop in inflation by the end of the year, according to Charles Schwab chief global investment strategist Jeffrey Kleintop. According to the Fibre Box Association, we are currently seeing a drop in cardboard box demand – perhaps an overlooked recession indicator that has preceded previous downturns for the US economy. But the downturn could also have the silver lining of softening inflation, as manufacturing prices in the Purchasing Manager's Index which includes the prices of a cardboard box, typically leads inflation in the US by about six months. Falling inflation would likely provide a boost for US markets, as corporations have been battered by high costs and rising interest rates for the past year. Source Business Insider

Used Car Prices Are Starting to Fall: Wholesale used vehicle prices reached their lowest level of the year in May, as sales fell amid high-interest rates and inflated retail prices. Cox Automotive reported Wednesday a -2.7% decline from April to May in its Manheim Used Vehicle Value Index, which tracks vehicles sold at its U.S. wholesale dealership auctions. The index, which tracks vehicles sold at its U.S. wholesale dealership auctions, remains elevated from historical levels but is expected to continue to decline this year amid improving new vehicle inventory levels and high-interest rates that appear to be scaring off consumers. Used retail sales are estimated to have been down -11% year over year in May, Cox reports. The notable decline comes as many Americans, especially those with lower credit ratings, are being priced out of the market and repairing their vehicles instead of replacing them. Source CNBC

Crazy Air Quality Hitting New York City: New York City’s air is officially hazardous to breathe as of late Wednesday afternoon — due to Canadian wildfires that have brought dangerous smoke to the New York metro area. Pollution concentrations at this level constitute a “health emergency,” according to the Environmental Protection Agency. Officials in New York and New Jersey have issued air quality warnings and asked residents to refrain from unnecessary outdoor activities. Mayor Eric Adams and top city officials held a press conference on Wednesday evening, addressing the public on the air quality crisis. Adams said that all outdoor events in New York City are to be canceled Thursday, and all city beaches will be closed. New York City air quality levels skyrocketed to 377 yesterday, which is now the worst level in New York City history. As you can see in the graphic below anything over 350 is considered "hazardous". Crazy times...

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Mystery Bet Before SEC Crypto Crackdown May Mint Trader Millions: Less than a half hour before US regulators cracked down on a key crypto exchange, an options trader made a short-term bet against Coinbase Global Inc. that may have netted them millions of dollars. At 10:36 a.m. on Monday, a block of 4,806 contracts of Coinbase $50 puts expiring Friday hit the tape, when the stock was at $61.77. Roughly 24 minutes later, the Securities and Exchange Commission announced that it was suing Binance Holdings Ltd, sparking a selloff across the crypto universe. By noon in New York, Coinbase shares had fallen nearly -12% and the options, which had been bought for 18 cents each, traded for as much as $1 — a gain of almost +460% if sold at the peak. The already profitable bet became even more lucrative on Tuesday after the SEC announced a separate suit again Coinbase itself. Shares of the cryptocurrency exchange tumbled as much as -21% at the open of trading, driving the value of the put options to $5.65 each. The move means a trader could have potentially turned a $86,500 investment — the sum spent on buying the puts — into a windfall of as much as $2.6 million in less than day Source Bloomberg

Wholesale Used Car Prices Falling as Sales Soften: Wholesale used vehicle prices reached their lowest level of the year in May, as sales fell amid high interest rates and inflated retail prices.Cox Automotive reported Wednesday a 2.7% decline from April to May in its Manheim Used Vehicle Value Index to 224.5. It marks the second consecutive monthly decline and the index’s lowest level since 219.3 in December. The index, which tracks vehicles sold at its U.S. wholesale dealership auctions, remains elevated from historical levels but is expected to continue to decline this year amid improving new vehicle inventory levels and high interest rates that appear to be scaring off consumers. Used retail sales are estimated to have been down 11% year over year in May, Cox reports. Continued declines could help bring used vehicle pricing down for consumers, since retail prices traditionally follow changes in wholesale prices. However, that has not been the case thus far, as the average retail listing price for a used vehicle moved +0.8% higher over the last four weeks, Cox reports. Source CNBC

How Much is Russia Spending on its War in Ukraine? Since Russia invaded Ukraine in February 2022 it has caused enormous damage. Thousands of people have died and billions of dollars’ worth of infrastructure has been destroyed in Ukraine. Yet all this damage has come at a relatively mild cost to Russia. Its economy is holding up much better than almost anyone expected. And the direct fiscal cost of the war—what it is spending on men and machines—is surprisingly low. The folks at The Economist peg the cost of the invasion at 5 trillion roubles ($67bn) a year, or 3% of GDP. That is, by historical standards, a puny amount. One reason for this is that Russia would struggle to expand the war effort without costing its citizens dearly: printing money would spur inflation and loading up banks with public debt might have a similar effect. Another reason is politically motivated - Many within the Russian government would like to continue to portray the war on Ukraine as a “special military operation”. It would hardly make sense for such an operation to cost a double-digit percentage of GDP. Source Economist

Mastercard and Visa Tumble on New Bill Threat: A bill to improve competition among credit-card networks is set to be reintroduced in Congress, causing shares of Visa and Mastercard to tumble even though Wall Street is doubtful about the legislation’s prospects. Under the current standard, merchants generally have to process payments through the same network as the card issuer. Payments made using a Visa card must be handled through the Visa network, for example. That gives the company tighter control over the fees it can collect. But a new bill, the Credit Card Competition Act, which is very similar to a bill introduced by Sen. Dick Durbin (D-IL) last year, is expected to be introduced in the Senate as soon as this week. Under the proposed bill, merchants could route payments through other networks, thereby increasing competition in the space and potentially reducing the fees they pay. But few on Wall Street expect that the legislation will pass, citing reluctance in Congress to move forward and the potential for unintended consequences. Source Barrons

Nikola's Share Increase Stalls After Failing to Get Enough Shareholders to Vote: Nikola failed to get enough investors to vote on a proposal that would allow the beleaguered electric truck company to issue more shares — and, in turn, raise more capital. Nikola adjourned its annual meeting of shareholders Wednesday until July 6 in an attempt to secure the requisite number of votes needed to add shares to the marketplace. Nikola needs to secure more than 50% of all outstanding shares to vote in favor of the proposal, which is a higher bar than other proposals would need to reach. Nikola said it’s only weeks away from the initial commercial production of its hydrogen fuel cell electric truck. Without the approval of this proposal, production could be delayed or scrapped, the company said in a statement. Source TechCrunch

Hundreds of Northeast Flights Delayed Due to Canadian Wildfire Smoke: Smoke from wildfires in Canada delayed hundreds flights at New York-area airports and in Philadelphia on Wednesday as haze blanketed the region and cut visibility. Earlier, the FAA briefly halted flights bound for New York’s LaGuardia Airport. “The agency will adjust the volume of traffic to account for the rapidly changing conditions,” the FAA said. Smoke drifting south from wildfires in Canada covered the New York City area on Tuesday into Wednesday, tainting air quality and sending residents indoors. As of noon Wednesday, the city ranked fourth in the world for worst air quality, with an IQAir World Air Quality Index of 158, a level considered unhealthy for all residents. As of about 5:20 p.m. ET, more than 3,000 U.S. flights were delayed, according to flight-tracking site FlightAware. Source CNBC

Getting Hitched Isn't Getting Any Cheaper: Getting married is expensive, but just how much the event costs depends a lot on location. While couples are known to spend six-figures (or more) on lavish nuptials, the average wedding in the US costs as much as $28,000, according to a study by financial-information provider SmartAsset. Hawaii, California and New York are home to some of the costliest weddings in the country, the report found. Weddings are generally cheapest in the South, led by Tuscaloosa, Alabama. Even in places where median wedding costs are lower, the expense of the event can still feel out of reach. It can take close to a decade to save for the average American wedding, the study found. In places like Binghamton, New York, and Cleveland, Ohio, folks can expect to spend close to nine years saving for the big day. In more-affordable parts of the US, saving for a wedding could take about half as much time. In Waco, Texas, and Tuscaloosa it takes less than five years for locals to save up. Source Bloomberg

"Extreme" Unemployment in Some States a Major Contributor to Inflation: The phrase “historically low unemployment” has become almost a cliché but with joblessness only rising to 3.7% as of May, it’s worth recognizing how unusually low the numbers have been. This spring, 15 states were at their lowest unemployment levels since 1976, and all but Nevada were at or below the 5% rate that economists say represents “full employment.” These lows have fueled the strong consumer spending and pay increases driving inflation. Barely three years ago, a full 45 states hit record highs in unemployment, the result of pandemic-induced shutdowns. Source Fortune

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