Closing Bell Market Update - 03/07/2023

Good evening. I will analyze and explain the released economic data in today's post. We will also discuss real estate, greedflation, the cycle mismatch, and the most interesting corporate stories released during Monday's trading day.

Economic Data

Economic data released on Monday showed that the US ISM Manufacturing Index declined to 46 vs. an expected?value of 47.1. This is the eighth consecutive month that the ISM Manufacturing Index is below 50, which is the crucial mark that separates contraction and expansion. All values of the Manufacturing PMI below 50 indicate that the sector is in contraction territory. This truly highlights the weakness of the manufacturing sector, which is a phenomenon that we can see in most developed countries at the moment. In contrast, the service sector remains strong due to its insensitivity to interest rate hikes. Prices Paid dropped to?41.8, a good sign for the federal reserve.

We continue to see buoyancy in the interest-rate-sensitive housing sector. Headline Construction spending rose by 0.9% vs. an expected increase of 0.6%. However, this specific data point is prone to revisions. For example, construction spending in April was revised from?+1.2% to +0.4%. Despite this, we can clearly see that there is resilience in the housing sector, which was unexpected. The main reason for the strength in construction is the limited supply. Due to rising mortgages, people are less willing to sell their homes, which puts a constraint on supply, resulting in more construction. This explains the rise in home builder sentiment we saw in June. Residential Construction?rose by 2.1% compared to the previous month in?May. As the year progresses, I expect the housing sector to show more evident signs of weakness again, as mortgages might rise further from here, and?the consumer loses more resilience.

This creates a vital issue. As we start to see more weakness in the interest rate-sensitive sectors, the service sector, which is very insensitive to changes in monetary policy, will likely remain resilient. However, at some point, it will not generate enough growth to compensate for weakness in other sectors and keep employment at the current levels, which will cause the unemployment rate to rise and the consumer to lose resilience. This point could likely be the start of an unemployment rate that rises above 4%.

Greedflation

The IMF recently published a paper stating that 45% of the increase in CPI price levels from January 2022 to March 2023 can be attributed to the high profit of companies. This phenomenon is called "greedflation". As inputs costs rise and most sectors are affected, companies tend to increase their prices by more than the amount their input costs rose. In addition to supply constraints, this explains that companies such as Mercedes-Benz have acquired record profits during the pandemic despite significantly lower sales volume. In the previous earnings season, you could see that companies could still raise their prices without seeing a significant effect on sales volume, which genuinely highlighted the resilience of the US consumer. Regarding this topic, the finance minister of France, Bruno Le Maire, said, “We will not allow big?industrial companies to make undue?margins." The Exchequer?of the UK Jeremy Hunt: "We are working hard to halve?inflation this year.?Businesses must play their part, too, and I will keep a?watchful eye on the progress they make."?

Cycle Mismatch

During the pandemic, consumer shifted their spending from the service sector to the goods sector. However, as more countries started to transition out of lockdowns, spending in the service sector quickly rebounded, while companies faced a smaller labor force than before the pandemic. This has caused wages to rise strongly, and the service sector is still recovering from the pandemic. A strong service sector, high wage growth, and excess savings accumulated following the onset of the Covid pandemic have allowed consumers to continue to spend, causing core inflation to fall much slower than headline inflation. The fact that the service sector might still be recovering from the pandemic while the manufacturing sector is already in a recession and the federal reserve increased interest rates by 500 basis points within 13 months can be called a "cycle mismatch," and it remains unclear to me how much this affects the transmission of monetary policy. One thing is clear, high excess savings and a strong service sector certainly cause the real economy to be less responsive to interest rate hikes. However, we certainly have felt the effect of interest rate hikes to some extent. Wage growth has declined, people are working fewer hours on their jobs, and we are seeing a more substantial divergence of hiring in different sectors.

Top 5 Stocks to Watch

1. Tesla

Tesla shares were up 6.90% on Monday. The company published a strong sales report. Tesla reached record sales of 466,000 in Q2, compared to 255,000 a year earlier. However, the company achieved this by cutting prices. This caused gross margin profit to fall to 19.3%, the lowest level since the end of 2020.

2. Apple

The Financial Times reported on Monday that Apple would trim its production target for the vision pro. Luxshare, the only assembler of the vision pro, will deliver less than 400,000 units in 2023. Apple shares were down 0.78% on Monday.

3. Fidelity National Information Services

Reports released on Monday state that two private equity groups are potential buyers for Fidelity National Information Services' payments provider business Worldpay Group, according to Barrons. Shares of FIS were up 6.03% on Monday.

JP Morgan and Bank of America

There is a significant amount of positive sentiment in the financial sector at the moment after the stress test of the federal reserve showed that all US banks have enough capital to weather a hypothetical severe US recession. JP Morgan shares were up 0.80% on Monday. However, an exciting story is coming from Bank of America. According to Reuters, BofA announced that it started a dialogue with the FED because the company's own stress test under the Dodd-Frank Act shows different results than the Fed's stress test. It will be exciting to see how this story further develops.

Market performance

The S&P 500 Index was up 0.1% and increased to 4,455.59, the?Dow Jones Industrial Average was up 10.87 points at 34,418.47, and the Nasdaq Composite was up 0.2% at 13,816.78. The 10-year?Treasury yield?was up about four basis points at 3.862%, and the Cboe VIX Volatility Index was little changed at 13.58.