Stock bulls seem to remain comfortably in control as earnings surprise to the upside and economic data supports a less aggressive Federal Reserve. Bank of America and Morgan Stanley yesterday were the latest big Wall Street banks to top expectations. Maybe more importantly, several smaller banks also defied the steep losses many were projecting, and most insiders believe balance sheets are strong enough to avoid a regional banking crisis that some feared could still be around the corner.

Bulls are also cheering early evidence that artificial intelligence (AI) might deliver on its money-making promises after Microsoft introduced a new AI subscription service. The company's new "Microsoft Copilot" will charge $30 a month for users to add AI capabilities to its widely used "Office" products, which could effectively raise subscription prices for enterprise customers by a whopping +83%.

Today, investors are anxious to hear from Netflix and Tesla, which are considered previews for what big tech companies might deliver in the weeks ahead. More bank results are also due today, including US Bancorp, Citizens, Zions, First Horizon, and M&T. Alcoa, Baker Hughes, Halliburton, Kinder Morgan, Las Vegas Sands, and United Airlines also report today.

On the economic data front, Retail Sales for June rose +0.2% over May, which was below expectations but still the third consecutive month of growth. Coupled with data last week showing a meaningful slowdown in inflation, bulls view the latest retail sales results as further confirmation that the US is experiencing a "goldilocks economy," in which the labor market and consumer spending is strong enough to prevent recession but not so strong that it reignites inflation. However, bears warn that consumer health is deteriorating amid still-high prices and increasing credit card debt. Bears also believe budgets are likely to be even more strained in the months ahead as student loan payments resume.

The only US economic data due today is Housing Starts and Building Permits for June. It's worth noting that there is also growing concern about a slowdown across the wider global economy, particularly China.

Bears believe China's economic slump alone could pull the whole world into recession, although many economists, including Treasury Secretary Janet Yellen, say the impacts of China's downturn on the US are fairly limited. The bigger threat to the US economy right now could actually be the looming UPS worker strike, which experts say could cost the economy billions due to supply chain disruptions and increased shipping costs. It could also reignite inflation in some parts of the economy, in turn extending the time-frame for when the Fed might begin trimming interest rates.

The problems could also be compounded by a worker strike at regional trucking firm Yellow, where the union set a July 24 walkout date. The UPS strike is set to begin August 1. There seems to be a lot more worker walk-outs and strikes starting to happen as employees want more money to help battle higher inflation, but instead are running into corporate cost cutting. It seems like some of the power that shifted to the employees during covid is now trying to be reeled in by the corporate executives as they face much higher interest rates and heavier headwinds. It is going to be interesting to see how this battle plays out... how many work from home jobs are going to be cut, how many company perks will be slashed as margins are being squeezed and paying back covid loans start to come home to roost...

Housing Transactions Remain Slow: Out of every 1,000 homes in the U.S., only 14 changed hands over the first six months of this year, or 1.4%, according to data recently released from real-estate brokerage Redfin. Before the pandemic in 2019, roughly 19 out of every 1,000 homes, or 1.9%, changed hands. Areas of the country with less expensive homes are reporting a higher turnover rate. On the flip side, areas with higher-priced homes are reporting a lower turnover. For example, homes in San Jose, CA are among the highest in the nation with a median price of around $1.3 million and the data shows the turnover rate at roughly 6 out of every 1,000 homes. Data also shows that in recent years, more households were formed than single-family homes constructed to house them. The shortfall increased to 6.5 million in 2022 from 5.24 million in 2021. Source Zillow, Marketwatch,Redfin

Loans Are Getting Much Tougher to Get: Just as Americans may be looking for a loan to stay afloat, it may be harder to get one.The rejection rate for people applying for credit jumped to 21.8% in June, up from 17.3% in February and the highest level in five years, according to a Federal Reserve survey. The four biggest U.S. lenders wrote off a combined $3.4 billion in bad consumer loans in the first three months of 2023, a 73% increase from a year earlier, according to Bloomberg. The rejection rate for auto loans rose to 14.2% the highest level since this data was first collected in 2013 and for the first time, exceeded the application rate. Rejection rates for mortgages, and mortgage refinance applications rose to 13.2%, and 20.8%, respectively, the Fed said Source USA Today and Marketwatch

US Factory Boom is Finally Happening: Since the beginning of 2022, construction spending on new factories has more than doubled, from an annualized rate of $91 billion in January 2022 to $189 billion in April 2023, the latest data available. That’s the biggest jump, by far, in data going back to 2002. In April, factory construction accounted for 9.9% of all construction, the highest portion in Census Bureau records going back to 1993. Private-sector firms are building more US factories to cash in on an unprecedented spate of legislation Biden has signed providing federal funding and incentives for infrastructure development, a massive green-energy buildout, and a revitalized semiconductor industry. US manufacturing employment peaked in 1979, then began a long decline that intensified starting around 2000. That seemed okay for a while since the United States was increasingly becoming a service economy with an exploding technology sector. The Reshoring Initiative, which tracks the relocation of manufacturing from overseas sites to domestic ones, says companies have announced 406,000 new manufacturing jobs at domestic sites for 2023, the most, by far, since the group started tracking the issue in 2010. That’s more than four times the number of reshoring jobs announced in 2019, the last year before COVID. Source YahooFinance

UPS Strike Could Cost U.S. Economy Billions: A potential strike against the UPS delivery service by 340,000 workers could lead to slower delivery times, supply chain disruptions and higher shipping costs if the company and the Teamsters union don't come to an agreement over pay for part-time workers and cost of living adjustments by August 1—possibly causing billions of dollars of economic damage. A 10-day UPS strike would be the most expensive strike in at least a century, costing the U.S. economy upwards of $7 billion, a study by the consulting firm Anderson Economic Group found, including $4.6 billion in losses for customers, $1 billion in lost wages and more than $800 million in direct losses at UPS. Packages going to rural areas with fewer alternative delivery options or coming from small businesses that can’t afford to switch providers will be among the hardest hit with slower delivery times, Ohio State University logistics professor Terry Esper told Forbes, and big retailers will likely fare better because they already use a variety of delivery services. Supply chains for things like medical gear and car parts could also be hit hard because those sectors locally rely on business-to-business shipments from wholesalers to operate. Source Forbes

College Athletes Get Scammed on NIL Deals: Since college athletes gained the freedom to profit off their name, image, and likeness two years ago, they have been targeted by a wave of questionable business deals, disreputable agents, and outright scams. News coverage of NIL has focused primarily on six-figure deals for athletes with massive social media followings and how the new policies have changed the face of recruitment. Yet the majority of college athletes benefiting from the new rules are making small, one-off agreements without help from expensive lawyers or agents. That has opened the door to new forms of exploitation, including companies asking students to sign away their intellectual-property rights. When NIL went into effect, businesses formed en masse to approach a potential client base of 500,000 student-athletes in the NCAA, said Luke Fedlam, a non-agent sports attorney who visits high schools and colleges to warn students of the potential pitfalls of the contracts coming their way. In many cases, Bloomberg Law found, universities can do little to help student-athletes avoid such contract pitfalls. The reason: NCAA red tape that bars universities from providing services to college athletes, including legal advice. Source Bloomberg

Fund Managers Remain Mostly Bearish Despite Rising Outlook for Economy: Investor sentiment globally remained generally bearish in early July despite increasing bets that the world economy may achieve a “soft” economic landing and avoid a recession, according to the Bank of America (BofA) Global Fund Manager Survey. A broad measure of BofA’s fund manager sentiment, which is based on cash positions, equity allocation, and economic growth expectations, shows the sentiment is still “stubbornly low” and not improving into the second half of 2023, said a team of investment strategists led by Michael Hartnett. The majority of surveyed fund managers expect a weaker global economic growth, while 48% predict the start of a global recession by the end of the first quarter of 2024. However, bets on a soft landing surge to 68% in early July, which is higher than the 21% expecting a “hard landing” scenario and the 4% forecasting a “no landing” scenario (see chart below). In the global central banks’ fight against post-pandemic inflation, policymakers aim to achieve a soft landing, to use the metaphor of a pilot landing an aircraft, where the economy slows down just enough to control inflation, but avoids a recession. Being “long Big Tech” is now the most crowded trade, with 42% of polled investors saying the widespread adoption of artificial intelligence (AI) will increase corporate profits over the next two years. Source Marketwatch

Chipotle Is Bringing Its Burritos to Small Town U.S.A.: Small-town America is the next frontier for Chipotle Mexican Grill. Inverness, Fla., and Fairborn, Ohio——with populations ranging from 7,600 to 35,000——are among the towns and small cities where the burrito chain hopes to open 700 to 800 new locations in the coming years. Such smaller-market stores would represent around one-fifth of the nearly 3,800 restaurants the company has committed to opening across North America, Chief Financial Officer Jack Hartung said in an interview. Around 18 months ago, Chipotle executives started crunching numbers on the several dozen restaurants Chipotle had built in smaller U.S. markets, including Camden, Del.; Staunton, Va.; and Battle Ground, Wash. Executives were impressed by the stores’ performance, and last year decided to go further. Four of the five best openings for Chipotle restaurants in the past year occurred in smaller markets, including San Angelo, Texas, and El Centro, Calif., Chipotle said. Some of the new restaurants in these smaller markets are opening with two to three times the sales of an average Chipotle, Hartung said. Most of the planned locations will have drive-through lanes for online orders. Source WSJ

Goldman Sachs Predicts Housing Market Gridlock Through 2026: From March 2020 to June 2022, the Case-Shiller National Home Price Index recorded a staggering increase of +43.3% in U.S. home prices. Fast forward to 2023, and the mortgage rate shock has clearly stopped the overheating—national house prices in April as tracked by Case-Shiller were -2.4% below the June 2022 peak. However, the vast majority of pandemic house price gains remain. Looking ahead, Goldman Sachs’ forecast model predicts a very faint increase in U.S. home prices as measured by Case-Shiller: +1.3% in 2023, followed by +1.7% in 2024, +2.4% in 2025, and +3.8% in 2025. To put this into perspective, the average annual growth rate of U.S. home prices since 1976 has been +5.5%, including an unprecedented surge of +19% in 2021. While Goldman Sachs’ forecast is technically predicting a slow grind upwards, one could argue it’s also a “sideways” housing market—at least “sideways” relative to the growth rates we’ve seen over the past decade. Source Fortune

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