Basic personal consumption falls to 4.7% at an annual rate
(Market open Thursday) Equity futures tumbled on the final day of a tumultuous first half for US markets, little moved by May inflation data which was slightly better than expected. Manufacturing production figures completing the Q2 picture tomorrow should set the tone for a big earnings season in July.
Market potential movers
The Federal Reserve’s preferred inflation measure came in slightly below expectations, which could be good news as price increases in the United States finally moderate.
The flip side, of course, is that if the consumption component of gross national product (GNP) drops, that could potentially be bad news for stocks in consumer sectors. Either way, this week’s numbers set the stage for a turbulent earnings season in the weeks ahead and big questions about what the second half of 2022 will look like.
In premarket trading, stock futures fell. S&P 500 Futures Contracts were down 1.19% just before the market opened, Dow Jones Futures lost 1.09%, and Nasdaq Futures Contracts slipped 1.28%. The S&P 500 is on track to complete its worst first half since 1970.
The Personal consumption expenditure (PCE) The price index rose 6.3% in May, unchanged from last month. Core PCE fell at an annual rate of 4.7%, down from April’s reading of 4.9%.
Personal spending in the United States also rose a slight 0.2% month over month in May, the smallest gain of the year, after a downward revision of 0.6% in April.
The Cboe Market Volatility Index (VIX) had moved above 29 just before the open, indicating that investors expect further turnover in current markets.
Also ahead of the open, initial jobless claims, a key layoff indicator, fell to a seasonally adjusted 231,000 last week from a revised 233,000 the previous week. The labor market is still tight, but the latest figures could show that the hiring boom may be slowing.
Walgreens Boot Alliance WBA announced quarterly earnings and sales ahead of estimates and reiterated its forecast for adjusted earnings per share in the low numbers. Earlier this week the company ended plans to sell its UK-based pharmacy chain Boots, and its shares are down more than 25% for the year.
Market Minutes Review
Stocks ended mixed yesterday ahead of Thursday’s May PCE, and weekly jobless claims reports will likely provide more detail on inflation and, perhaps more importantly, the health of the labor market.
The Dow Jones Industrial Average ($DJI) was the only major index to end higher that day with a slight advance of 0.27%, while the S&P500 (SPX) lost 0.07% and Nasdaq Compound ($COMP) was down 0.03% at the close. Small cap Russell 2000 (RUT) ended down 1.12% at the end of Wednesday’s session. Perhaps to relieve investors weary of recent volatility, a roundtable among Portugal’s top central bank chiefs did not appear to move the market significantly in either direction. At the close, the Cboe Market Volatility Index (VIX) was 28 years old.
Federal Reserve chief Jerome Powell told the European Central Bank forum hearing that he remains more concerned about not getting the recession under control than raising rates too high and risking the recession. Powell said: “Is there a risk that we are going too far? Certainly, there is a risk… the biggest mistake to make, let’s put it this way, would be not to restore price stability.
Ahead of Powell’s remarks, Cleveland Fed President Loretta Mester told CNBC the central bank was “at the start” of raising rates to combat rising prices and would advocate for another rate hike. 75 basis points based on all information that emerges before the next Fed rate. see you at the end of July.
However, other European bankers present at the event, including ECB chief Christine Lagarde, indicated they could move more gradually. Early yesterday, Germany’s annual inflation rate unexpectedly slowed to 7.6% in June, below market forecasts of 8%.
The market will end a difficult first half today and more economic reports will end the week. Following tomorrow’s PCE numbers, early UI claims and Chicago PMI numbers, the market will be looking closely at Friday’s ISM manufacturing PMI numbers for a sign of shifts in manufacturing production levels across the country. Next is the Independence Day long weekend.
After positive news that China is halving quarantine periods for international visitors, most major indexes in Asia have declined. The Shanghai Composite Index fell by 1.4%, Hong Kong Hang Seng Index slipped 1.9% and the Japanese Nikkei 225 fell 0.9%.
Meanwhile, bitcoin’s price remained near $20,000 after a court in the British Virgin Islands ordered cryptocurrency hedge fund Three Arrows Capital to be liquidated after creditors sued for repayment of the debt.
The Stoxx Europe 600 fell 0.7%.
Amid all the talk, the US economy is already slowing down. Yesterday, the Commerce Department issued a revised first-quarter gross domestic product (GDP) decline to 1.6%, a tenth of a percentage point lower than its first estimate. If the next GDP estimates for the second quarter show a continued contraction, that would be the official definition of a recession. On Monday, the Federal Reserve Bank of Atlanta’s GDPNow tool put its second-quarter GDP estimate at 0.3% on Monday, down from 0.0% on June 16.
WTI crude oil settled at $109.71 on Wednesday, down a fraction, while the 10-year Treasury ended at a yield of 3.087%, unchanged from the previous day.
Among the actions making the news on Wednesday:
- General Mills GIS gained 6.30% after earnings beat estimates and the company increased its dividend.
- Bed bath and beyond BBBY slipped 24% after posting a better-than-expected quarterly loss announcing the departure of its CEO.
- Carnival Corp CCA lost 14.13% after Morgan Stanley cut its price target for the cruise line to $7 per share.
GRAPH OF THE DAY: WHERE THE MONEY GOED. There’s a reason the PCE price index is considered the Federal Reserve’s favorite inflation barometer. The May figure confirmed what many already knew: for consumers, spending is almost all about essentials. Chart source: Bureau of Economic Analysis website (bea.gov)
Three things to watch out for
What CFOs know: The quarterly survey of CFOs at Duke University and the Federal Reserve Banks of Richmond and Atlanta not only found that overall optimism among CFOs was at a 10-year low, but that the more than 300 senior finance executives surveyed expect US real GDP to grow just 1.5% over the next 12 months, down from their expectation of 2.5% in the first quarter. The results coincided with the Commerce Department’s report that first-quarter GDP contracted 1.6%, a tenth less than the previous estimate. The study says finance officials estimate the average probability of negative GDP growth over the next 12 months to be 21%, up from 12% in the first quarter.
Boosters in the fall? The severity of the COVID-19 pandemic may be diminishing, but investors who omit pandemic cases week-to-week from their research may be doing so at their peril. A Food and Drug Administration (FDA) advisory committee on Tuesday recommended that the next round of recalls be reformulated to focus on potentially new and rapidly evolving subvariants of omicron. The Centers for Disease Control and Prevention (CDC) noted that two omicron variants known as BA.4 and BA.5 now account for more than half of all new US cases as of June 25, surpassing another under -variant which only became dominant in mid-May. Deciding on a new formulation is up to the FDA.
Reducers: When economic times get tough, people tend to neglect their homes, older appliances, and other major purchases, including that of their garage. Barrons reported that auto parts retailers have stood out for much of the pandemic for this reason, and today’s growing recession fears shouldn’t hurt. Auto area A-Z rose nearly 4% in June, although other key auto repair chains fell, including Advanced auto parts AAPdown nearly 7%, and O’Reilly Automotive ORLY, which was down slightly for the month from Wednesday. Time to look under the hood?
Notable Calendar Items
July, 1st: ISM Manufacturing PMI
4th July: Markets closed for Independence Day
July the 5th : Factory orders
July 6: JOLTS Job Openings Report, ISM Services Index and S&P US Services PMI
July 7: ADP National Employment Report, Seven & I Holdings Challenger Job Cuts and Earnings Survey SVNDYLevi Straus LEVIand WD-40 WDFC
July 8: June unemployment and May consumer credit
TD Ameritrade® Commentary for educational purposes only. SIPC member.
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