Market Observations - July 28, '23
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ECON Brief:?The U.S. economy grew faster than expected in the 2nd Q as labor market strength underpinned consumer spending and business-boosting equipment buying, keeping a much-feared recession at bay. GDP rose 2.4% on an annualized basis in the preliminary Q2 report, following a 2.0% gain in the first quarter and marking the strongest quarterly pace since Q4 2022. According to the median estimate, activity in the second three months of 2023 was expected to rise by 1.8%. In the report’s details, personal consumption rose 1.6% in the first round Q2 report, following a 4.2% gain in Q1.
Also today, the European Central Bank (ECB) raised rates by 25bps, with the main refinancing rate rising from 4.00% to 4.25%, the marginal lending facility gaining from 4.25% to 4.50%, and the deposit facility rising from 3.50% to 3.75%. However, like the Fed’s latest move, the ECB’s decision to hike this week was largely priced into market metrics, making the more critical component any indication of future policy action. There was, however, little forward guidance other than a renewed pledge to raise rates to a “sufficiently restrictive” level.
US Market Wrap for Thursday:?The Trend is your Friend till it ends! What looked like a fourteenth straight positive day for the Dow was stopped short by the bears. Despite better-than-expected economic data, sellers finally took enough control to close the market red. Only one S&P sector closed green. Communication services +0.84% led, and real estate -2.11% lagged. In economic news, the U.S. economy’s second-quarter growth surprisingly accelerated to 2.4%, and the personal consumption expenditures index (PCE) continued decelerating to 2.6%. The labor market remains tight, with initial jobless claims falling to 221,000 vs. the 235,000 expected. And U.S. durable goods orders rose more than anticipated in June, driven by strength in transportation.
Pending home sales jumped 0.3% m/m in June, marking their first increase in four months but remain down 15.6% YoY. U.S. single-family homes fell 2.5% m/m in June but are up 23.8% YoY as the median new home price declined 4% YoY. Overall, tight supply and low affordability are keeping housing activity depressed.
Internationally, the European Central Bank raised rates by 25 bps to twenty-three-year highs. While it didn’t provide any forward guidance, it did hint at a potential pause in September as it gives time for its policy to impact the economy. Meanwhile, Turkey’s central bank more than doubled its previous inflation estimate to 58% as it ramps up its tightening policy. The stock market reversed sharply today, and many are pointing to treasury yields as the cause. Investors have been willing to pay more for every dollar of earnings S&P 500 companies generated.?However, that was primarily driven by the belief that interest rates and inflation had peaked and rates would come down.?Yesterday’s Federal Reserve press conference reiterated that the committee remains open to another rate hike before the end of the year. It will depend on the data, which is mixed right now. Core and headline inflation continues to trend lower (albeit slowly), and the housing market has stalled. But the labor market remains historically strong and buoys consumer confidence and spending. Today’s second-quarter GDP report came in at 2.4%, showing that the economy remains more resilient than the Fed anticipated. And if that’s the case, rates may have to adjust higher than they are.?That’s why Treasury Yields across the curve pushed higher today, with the U.S. 10- and 30-year yields topping 4% again.?Stocks across the board have rallied significantly, and earnings haven’t been there to support them. Many companies have said their pricing power diminishes as inflation comes down, but costs remain elevated due to the tight labor market. And if interest rates continue to rise from here, then it will only be more difficult for companies to generate better margins and earnings.?As a result, some market analysts believe today was the start of a short-term pullback.?Many are pointing to the “bearish engulfing candles” in major indices like the Russell 2000 and many individual stocks. This technical analysis pattern is the opposite of its bullish counterpart and essentially signals the start of a potential trend change. However, this signal requires downside follow-through in the days after to confirm that sellers have taken control.
Overall, after a strong run in the stock market, bulls are looking for the next catalyst to take the market higher. With high valuations and prices rallying sharply since October, many fear that there are more potential bearish catalysts than bullish ones. Time will tell, but at least now you know the prevailing narrative.
Investors are digesting a shift from the Bank of Japan, which has indicated it will tolerate higher interest rates as inflation picks up. And U.S. stock futures are up ahead of more big-name earnings.
Overnight Asian stocks were mixed. Shares in Japan slipped lower after the BoJ said it would take a more flexible approach to hold down long-term yields. The Nikkei lost 0.40% off earlier lows of 2%. Hong Kong and mainland China stocks finished higher.
Europe’s’ SXXP is off marginally after hitting a 17-month high on Thursday.
U.S. equity futures are trading higher: the S&P +0.40% and the Nasdaq 0.80%.
U.S. Treasury yields declined in early trade, the 2y was off around 7bps to 4.872%, and the 10y was off 5bps to 3.96%.
Gold held near 2-week lows around $1951.
WTI crude fell 50c to $79.58 a barrel, still on track for a 5.2% weekly gain.?
We await June’s personal consumption expenditures price index — the Fed’s favored inflation measure — which could inform monetary policy decisions ahead. Economists surveyed are expecting the core PCE, which excludes food and energy, to have risen by 0.2% on a monthly basis and 4.2% from a year ago. The data is particularly interesting after the central bank raised rates earlier this week in a widely expected move. The Fed targets inflation at 2% annually. Given that most people think the Fed won’t increase again if this PCE number comes in hot, that will shake that confidence. But you never know until you know.
Crypto Market Rundown:?
As of 9AM ET, Bitcoin is trading around $29,300 levels. 24h low = $29,099. 24h high = $29,501.
Ethereum is trading at $1,870. ETH has been stuck in the $1,855 - $1,878 range for the past 24h. Volatility, who?
The global crypto market cap is $1.18T, down 0.46% in the past 1D.
Top 5 Gainers on Uphold in the past 24H:?
The Top 5 Losers on Uphold in the past 24H:?
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