Stocks slumped yesterday as House Speaker Nancy Pelosi flashed a saber in the face of China sending a chill down spines of stocks traders. Americans are taking on more debt as result of higher prices on already pricy goods.
There’s something about Mary. No, I am not going to write about the 1998 Adult Romcom, although it was a rather funny movie… ah… the 90s. Snap out of it! The US is in a technical recession, the Fed is raising interest rates like its 1981… ah, the 80s. Snap out of it! Inflation is at 1970’s levels… ah, the 70s. Snap out of it! Snap out of it! Ok, we are back to the 2020s and all these conditions persist at present, which is why there is a bit of tension amongst stock AND bond investors. Surely, we would all like to know what will happen next on any or all the aforementioned. Markets are factoring in the reality of a 3.38% Fed Funds rate by the end of the year. That is a whole percentage point from where rates are today. That is 4 times +25 basis-point hikes, 2 times +50 basis-point hikes, a +75 and a +25 basis-point hikes… you get the picture, it could be any permutation, but the point is that the Fed still has some hiking to do according to Fed Fund futures. There is an optimist in most of us who hopes that the Fed may have second thoughts on those hikes and perhaps pull 1 or 2 of them off the table. How does that optimist exist with the average price of a dozen grade A eggs costing $2.70… up from $1.64% at this time last year? Never mind the price of those fancier eggs laid by emancipated, high-bred chickens living in luxury – those will cost you $11.49 / dozen at my local Whole Foods market. For that matter, the cheapest dozen eggs I can find there will cost you $3.39. You get the message. In any case, the Fed MUST tackle this rampant inflation without sending the US economy into a recession… wait, aren’t we already in a technical recession? Yes, but it’s not that bad yet because unemployment is still low. The fact that the US is in a technical recession and consumer sentiment is at record lows, one would expect the Fed to tread more carefully on rate-hikes going forward, now that the Fed Funds rate is at what many consider (including Chairman Powell) the neutral rate. That is the theoretical rate at which the economy is neither being stimulated or hindered, where any hikes from here will have a meaningful negative impact. So, yes that is a reasonable assumption, and the markets are attempting to factor that assumption in, and that has had a very positive impact on last month’s rally in interest rate sensitive growth stocks.
Are there any numbers to support that potentiality? Unfortunately, not really. Looking to those same Fed Funds futures implied rates for December we see that predictions at the end of July were roughly the same as they were at the start of the month (see the chart below). Despite this, the interest rate sensitive Nasdaq Composite gained +12.35% for the month! Now it can take a while for everything to synch up with markets, so at some point all of these indicators will align and support an extension of last month’s rally in stocks. For many analysts, however last month’s rally was driven by a large dose of hopium. Because of this, it doesn’t take much to deflate optimism in the current rally. Yesterday, Speaker Pelosi’s visit to Taiwan put markets on their back foot, fearing a Chinese retaliation – economic more than military. It was then San Francisco Fed President Mary Daly who in a LinkedIn interview stated that the Fed was far from done with its rate hiking that pushed markets farther into the red. Markets are attempting to look beyond this current situation, like sometime next year… when Fed Funds futures are predicting rate cuts as early as next March, after hikes in all FOMC meetings until then. Yesterday’s JOLTS Job Openings number came in lower than expected which supports the thesis that the labor market may be softening up as employers slow hiring. Friday’s monthly employment number will give us an even more granular view of the labor market and next week’s CPI release will give us a clue, albeit a lagging one, if the Fed’s activities are beginning to work. Until then, hope will have to suffice.
Match Group Inc (MTCH) shares are lower by -21.0% in the premarket after it announced a surprise EPS loss and a -1.19% Revenue estimate miss. The company lowered its current quarter guidance blaming the weakness on currency headwinds and challenges with its Tinder service offering. Potential average analyst target upside: 40.5%.
PayPal Holdings Inc (PYPL) shares are sharply higher by +12.69% in the premarket after it announced that it beat EPS and Revenue Estimates by +6.07% and +0.39% respectively. While the company raised its full year EPS guidance, it came up short of analyst expectations. Finally, the acknowledged that Elliot Management has made a sizable investment the company and hopes to bring a turnaround. Potential average analyst target upside: 27.7%.
Stocks struggled yesterday in response to Pelosi’s unannounced visit to Taiwan and to sharp words from San Fracisco Fed’s Mary Daly. The S&P500 declined by -0.67%, the Dow Jones Industrial Average dropped by -1.23%, the Nasdaq Composite Index slipped by -0.16%, and the Russell 2000 gave up -0.05%. Bonds dropped and 10-year Treasury Note yields gained +17 basis points to 2.78%. Cryptos climbed by +0.20% and Bitcoin advanced by +1.57%.
- Factory Orders (June) are expected to have climbed by +1.2% after climbing by +1.6% in the prior month.
- Durable Goods Orders (June) are expected to come in at +1.9%, in line with prior estimates.
- ISM Services Index (July) may have fallen to 53.5 from 55.3.
- After the closing bell earnings: Marathon Oil, McKesson, Fisker, Revolve Group, Allstate, Albemarle, Fastly, Realty Income, Energy Transfer LP, Ingersoll Rand, eBay, Lucid, BioMarin, MetLife, Sunrun, Lumen, MGM Resorts, Innovative Industrial Properties, and Fortinet.
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