The AM Call: Roller Coasters and Feedback Loops

• Recent market action has a little too much in common with a theme park ride. Starting with the Bank of Japan’s move in late July to raise rates, followed by a weak payroll report in the first week of August, market volatility has risen dramatically from a low base. The chart below shows the VIX, a volatility measure, jumping to around 38 before quickly falling back to 20. Equity indexes followed a similar path, plummeting in early August and then regaining most, but not all, of the lost ground. Treasuries rose (yields down), while credit spreads widened.

• The culprit has been the unwind of a “carry trade” in which leveraged investors borrow in a low-yielding currency (Japanese yen) to invest in higher yielding assets (US, EM bonds). With the recent policy moves by BoJ tighten, while the Fed is on track to loosen policy as soon as September, the narrowing interest rate differential makes the trade less profitable, leading investors to reduce their exposure. Meanwhile, macro data has indicated a slowing in the U.S. economy is upon us. Still, we emphasize that the most recent GDPNow forecast for 3Q24 is 2.9%, hardly in recession territory. Remember, August and September can be seasonally challenging months for equities, and we note that the S&P 500 total return for the YTD is still a relatively healthy 13%.
• Now markets will turn their attention to the PPI and CPI reports for July. Despite expectations for a MoM increase in CPI (discussed in detail below), we expect a slight uptrend will not change the Fed’s path toward lowering rates this fall. Even so, we expect market volatility will remain elevated in the short-term so buckle up for the ride.

Equities and Earnings Update

• Stocks closed a wild week mostly lower, but recovering somewhat from the lows on the week. A meltdown driven by a historic Japanese market sell-off eventually attracted opportunistic dip buyers, keeping the week-over-week moves in check.
• By sector, consumer discretionary was hit hardest while consumer staples rose, which would be a very typical rotation trade for a recession-led trading thesis.

• Most other sectors were lower by -1% to 2% for the week, but remain higher for the year-to-date.

• In earnings, 2Q24 reporting season continued with large number of companies reporting, among top releases with strong positive price reactions were Palantir (PLTR), Uber (UBER), Kenvue (KVUE), Fortinet (FTNT), Eli Lilly & Co (LLY), TradeDesk (TTD) and Shopify (SHOP). The big misses and disappointments for the week included AirBnB (ABNB), SuperMicro Computers (SMCI), Monster Beverages (MNST), Warner Bros Discovery (WBD) and McKesson (MCK).
• In corporate news, a judge ruled Alphabet (GOOGL) illegally monopolized online search via exclusive deals such as Apple’s (AAPL) $20 bn per year agreement, Disney (DIS) announced price hikes for its Disney+ streaming service, Lucid (LCID) received an additional $1.5 bn investment from its largest investor who earlier this year had already provided $1 bn in new capital, and Cisco (CSCO) announced a new round of layoffs expected to be around 2,000 employees. Also, Sunpower (SPWR) filed for bankruptcy and will sell off all remaining assets.

The Week Ahead

• This week, Home Depot (HD), Cisco (CSCO), Wal-Mart (WMT), Deere (DE) and Applied Materials (AMAT) are among companies set to report 2Q earnings.  
• We have a very busy week ahead for macro data, including PPI, CPI, and July advance retail sales, as well as an update to the weekly initial and continuing jobless claims. July PPI is expected to show some easing from June. On a MoM basis, PPI Final demand and ex Food and Energy are both expected to be up 0.2%, compared to up 0.2% and 0.4%, respectively, in June. On a YoY basis, PPI Final Demand is estimated to be up 2.3% (2.6% prior) and PPI Final Demand ex Food and Energy is estimated to be up 2.7% (3.0% prior).

• July CPI is forecast to creep higher on a MoM basis, after a softer reading in June. Headline and core CPI are both forecast to rise by 0.2% MoM, compared to down -0.1% headline figure in June. On a YoY basis, headline CPI is forecast to be unchanged at 3.0% while core drops slightly to 3.2% (from 3.3% in June).

• Advance Retail Sales are expected to cool from June. Retail sales excluding the volatile auto and gas categories are expected to rise by 0.2% MoM, compared to 0.8% in June.

Market Summary – Returns and Yields

• Bonds rallied and equities fell. The VIX remains elevated.

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.

Not FDIC Insured | Not Bank Guaranteed | May Lose Value | Not Insured By Governmental Agencies | Member FINRA/SIPC, Registered Investment Advisor