- The Federal Reserve’s decision to keep interest rates unchanged in the July 2024 meeting, coupled with hints of a possible rate cut in September, indicates a flexible and responsive approach to economic conditions. The Fed is balancing the need to control inflation with the necessity of supporting ongoing economic growth. Chair Powell mentioned that “assuming that the totality of the data supports such an outcome. No question, that is the case that as I mentioned, we think that the time is approaching and if we do get the data that we hope we get, then a reduction in our policy rate could be on the table at the September meeting”. Although no decision has been made regarding a September cut, as of this writing, markets are pricing in at over an 80% chance of a –50 bps rate cut at the next meeting. The Fed remains attentive to risks on both sides of the dual mandate and will continue accessing incoming data for future decisions. It is worth noting that reducing rates too late could unduly weaken the economy.
- Job growth slowed much more than expected during July and the unemployment rate ticked higher. Nonfarm payrolls report shows a gain of 114k jobs in the past month, falling below the expectation of 175k and the revised previous month of 179k. The unemployment rate rose to 4.3%, higher than expected and previous of 4.1%. The weaker than expected job growth and rising unemployment rate data have contributed to a drop in U.S. Treasury yields and the U.S. dollar index. This data supports the likelihood of a more dovish approach from the Fed, reinforcing the expectation of a September rate cut.
- Average hourly earnings on a MoM basis came at 0.2%, lower than the expected of 0.3% and average hourly earning on a YoY basis came in at 3.6%, also lower than the expected of 3.7%.
- ISM Manufacturing declined to 46.8 in July vs. the 48.8 expected and the previous of 48.5 in June. With new orders falling further into contraction, “demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and other conditions” said Timothy R. Fiore, chair of the ISM Manufacturing Business Survey Committee. That marks the 20th time in the last 21 months in which economic activity in the manufacturing sector contracted.
- In other news, JOLT’s job openings came in at 8184k, higher than the expected of 8000k and revised previous of 8230k and ADP payrolls for July came in at 122k, much lower than the expected and previous of 150k.
Equities and Earnings Update
- In equity markets, the sell-off continued led by Technology and Small Cap stocks as the selling this time was widespread across all equity classes differently from the previous weeks rotational shift, in a week were disappointing earnings and weak key macroeconomic data weighed on investor sentiment. In “Magnificent 7” Earnings, Facebook parent Meta (META) was the highlight with a 9.3% EPS beat that grew 73% on 22% top line growth from the previous year which combined with an optimistic Q3 sales guidance that came in 4.8% higher than projected led to a strong initial share price reaction, Apple Inc (APPL) posted a modest 3% EPS beat but was welcomed a positive print as revenues grew 5% on a yearly basis breaking a trend of four consecutive quarters of top line contraction even as the Chinese market continues to disappoint, Microsoft results came in exactly as projected across major lines but the bar was set high as Revenues grew 15% from Q22023, Amazon.com (AMZN) was the big disappointment of the group as a weak Q3 forward guidance for both Revenues and Operational Income that fell short of estimates over shadowed the 21% EPS beat on 94% annual expansion reported for the quarter.
- In other earnings, MercadoLibre (MELI), DoorDash (DASH) and Carvana (CVNA) were some of the highlights while Snap Inc (SNAP), Mobileye (MBLY), Booking.com (BKNG), Arm Holdings (ARM) and Intel (INTC) were the biggest misses with the latter also suspending dividends and projecting a surprise earnings loss for the next quarter.
- In Corporate news, Crowdstrike (CRWD) shares continue to sell-off on news that Delta Air (DAL) has hired lawyers to seek monetary compensation from the major IT outage, AirBnB (ABNB) announced plans to launch luxury services such as massages and chefs to its current hospitality platform and Boeing (BA) announced Kelly Ortberg as new Chief Executive Officer.
The Week Ahead
- Uber (UBER), Caterpillar (CAT), AirBnB (ABNB), Robinhood (HOOD), Palantir (PLTR), Fiserv (FIS), InstaCart (CART), Rivian (RIVN), Reddit (RDDT), Disney (DIS), CVS (CVS), Lyft (LYFT), Datadog (DDOG) and GlobalFoundries (GFS) are among companies set to report their Q2 Earnings.
- We have a light week ahead for macro, initial jobless claims are expected to come in at 242k vs the previous of 249k and S&P Global US services PMI is expected to come in at 56, unchanged from June.
Market Summary – Returns and Yields
- All equity sectors were up last week, while info tech and energy were the only losers.
- For the year to date, all equity sectors are higher, with info tech and communication still leading the way.
For additional insights, be sure to check out last week’s blog post.
Definitions, sources, and disclaimers
Definitions:
- Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
- GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
- The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
- Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
- The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
- The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
- The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
- Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
- Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
- The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
- The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).
Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).
Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.
Important Disclosures:
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
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