At last the markets and the Federal Reserve appear to be agreeing on something—a soft landing for the U.S. economy.
Minneapolis Fed President Neel Kashkari said Sunday the central bank now thinks it can steer the economy to a so-called soft landing. That would entail bringing down inflation to the 2% target without causing a recession.
The Fed’s preferred inflation metric Friday gave the stock market more reason to be upbeat, as the core personal consumption expenditure index fell to an annual 4.1% in June.
It’s been a jubilant July for the S&P 500, the index is up 3% for the month and 19% for the year so far.
But—and it’s a fairly big but—core PCE inflation is still more than double the target and more rate hikes could well be ahead, which could puncture the buoyant mood.
The bond market appears to think so. Bond yields rose last week as strong economic data, including GDP, pointed toward more rate hikes. Yields and stock don’t typically rise in tandem but they seem to be focusing on two different things.
The Fed’s data-dependent approach means future rate hikes are up for interpretation. Friday’s payrolls report for June will be the next data set to help shape the central bank’s September decision.
The stock market, for now, isn’t concerned by more rate hikes. A robust earnings season so far is helping to broaden the market rally, and investors are choosing to focus on the diminishing recession chances. At the midpoint, 80% of companies have beaten earnings estimates, according to FactSet.
However, with economic data galore and a third of the S&P 500 reporting this week, there’s plenty in the coming days that could test the optimism.
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Apple, Amazon.com Reports to Show Latest Consumer Spending Trends
When Apple and Amazon.com report quarterly results on Thursday, investors hope to hear more about the fallout from a slowdown in consumer spending, waning demand for electronics ahead of the release of Apple’s iPhone 15 and virtual-reality headsets, and details about Amazon’s Prime Day sales.
- Apple, which has avoided layoffs, is expected to share details about China’s recovery and growth in India, after opening stores in Mumbai and New Delhi.
- D.A. Davidson analyst Tom Forte also sees some challenges for Apple to achieve mass adoption of its Vision Pro VR headset, which will soon be available for $3,499.
- Forte is watching for the impact from Amazon’s cost-cutting moves, including thousands of layoffs and a pullback in expanding Amazon Fresh grocery delivery, amid slower growth in its cloud business, MarketWatch reported.
- Wedbush analyst Dan Ives said so far, tech earnings have been a flex-the-muscles moment for stock bulls. Fundamental growth stories are setting up for the second half of this year and into 2024, he said in a recent note, with the revolution in artificial intelligence just starting to kick in.
What’s Next: More than 51% of S&P 500 companies have reported their quarterly financial results, and earnings are on pace to fall by 7.3% compared with last year. That would be the largest drop since second-quarter 2020, according to FactSet.
Freight Hauler Yellow to Seek Bankruptcy, Shut Down
Yellow, a nearly 100-year-old trucking business that moves freight around the country for big retailers such as Walmart and Home Depot and other companies, is shutting down. A string of mergers left it burdened with debt. It has also been in a dispute with the International Brotherhood of Teamsters.
- Notices to customers and employees said it was ceasing all operations at midday Sunday, The Wall Street Journal reported. Yellow is preparing a bankruptcy filing, the report added, and is in talks to sell off all or parts of the business. A spokesman didn’t return a phone call.
- Yellow has nearly 30,000 workers, including about 22,000 Teamsters union members. It would be the trucking industry’s biggest collapse in revenue and jobs. Many customers made new freight arrangements in recent weeks, the Journal reported.
- The collapse also comes days after about 340,000 union workers at United Parcel Service struck a tentative five-year contract with the company, averting a potentially devastating strike that could have disrupted global shipping.
What’s Next: Just three years ago, Yellow, then called YRC Worldwide, got a $700 million Covid-19 rescue loan from the Trump administration. That deal left the U.S. Treasury with 30% of the stock, which it still has today, according to FactSet. Yellow shares are down nearly 72% this year.
July Jobs Report Hits Friday as Fed Navigates Soft Landing
The U.S. jobs report on Friday is expected to show that employers are still hiring at a healthy but slower rate, amid signs the economy is cooling, consumers are spending more judiciously, and the recession that economists had projected hasn’t materialized.
- Economists are expecting to see a gain of 200,000 nonfarm payrolls in July, following the 209,000 increase in June. The unemployment rate is expected to remain at a historically low 3.6%.
- In contrast to what happened in 2007-08 and 2020, companies are cross-training workers and using technology to trim expenses. Freight railroads retained workers despite declines in shipping volumes, a reversal of the deep cuts they made during the Covid-19 pandemic, The Wall Street Journal reported.
- While economic output has accelerated in recent months, inflation cooled to 3% in June, and wage growth has slowed. Fed Chairman Jerome Powell called it the beginnings of disinflation without any real costs in the labor market.
- Federal Reserve Bank of Minneapolis President Neel Kashkari told CBS’ Face the Nation on Sunday that the economy has been surprisingly resilient, calling the economic outlook “quite positive.”
What’s Next: Kashkari said the current 3.6% unemployment rate could climb to as high as 4% in coming months, but that could still be considered a soft landing. He added that if further rate increases are needed to get to the Fed’s 2% inflation target, “we will do so.”
Ukraine President Volodymyr Zelensky said his country was getting stronger following a drone attack on Moscow on Sunday, according to multiple reports.
- Three drones targeted Moscow, according to Russian authorities as reported by The Wall Street Journal. It also cited a Russian state media report that said one person was injured and the capital city’s main airport was temporarily closed.
- “Gradually, the war is returning to the territory of Russia—to its symbolic centers and military bases, and this is an inevitable, natural and absolutely fair process,” Zelensky was reported as saying by AFP News on a visit to Ivano-Frankivsk, a city in western Ukraine.
- It also reported him saying that “Ukraine is getting stronger,” warning, however, that his country should get ready for a fresh attack on energy infrastructure in winter.
What’s Next: The invasion of Ukraine by Russia has had a major impact on energy security around the world and these comments point to continued uncertainty. One bright spot is Saudi Arabia will hold talks next month aimed at getting Western allies and developing countries aligned on the shape of what’s needed for peace in Ukraine, according to The Journal. Russia is not included.
Housing Market Conditions Are Worsening for Aspiring Buyers
Just as the U.S. housing market appeared more promising for prospective buyers, market conditions are melting down again, with mortgage rates and home prices rising, while the inventory of available homes is still declining.
- Mortgage rates jumped to an average of 6.81% for a 30-year fixed-rate loan for the week ending July 27, up from the prior week’s 6.78%. The Federal Reserve raising interest rates again suggests that mortgage rates will remain high this year.
- The median home price had been on the decline for six straight weeks but flatlined for the week ending July 22, with prices tying last year’s levels. The median asking price was $445,000 in June, as sellers sensed their advantage, Realtor.com Chief Economist Danielle Hale said.
- New listings entering the market fell 18% for the week ending July 27 from one year ago, continuing a 55-week streak. And active inventory (a combination of new and old listings) fell 8% from the same time last year.
- Extreme weather is adding to the pain. Since the start of 2022, double-digit home insurance rate increases have been approved in 31 states, according to S&P Global Market Intelligence for The Wall Street Journal. Insurers are pulling out of or halting new policies in catastrophe-prone California and Florida.
What’s Next: Insured damage in the U.S. from severe storms, wildfires, floods and other natural disasters has topped $90 billion in each of the past three years, much higher than inflation-adjusted averages for the previous four decades. insurance broker Aon said.
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