Bear Eats Relief Rally, Fed Rate Hikes Working? (July 1 Market Recap)

July 3, 2022

Bear Eats Relief Rally, Fed Rate Hikes Working? (July 1 Market Recap)

Indices

Dow 31,097 (403) or (1.3%)

Nasdaq 11,127 (480) or (4.1%)

S&P 3,825 (86) or (2.2%)

USD10Y 2.889% (23.6bp) or (7.6%)

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Bear Eats Relief Rally

As suspected, the markets could not sustain last week’s rare rally. The damage could have been much worse if not for a broad rally on Friday that could not be attributed to anything other than oversold conditions.

Fed Rate Hikes Working?

The week was littered with horrible earnings news, especially from the retail sector. Even when the news was good, the market punished them seemingly without regard. Nike (NKE) beat both earnings and revenue estimates and traded down. Bed Bath and Beyond appears to be on life support as they missed both earnings and revenue estimates and their CEO stepped down. Walgreens (WAG) beat expectations, reaffirmed 2022 guidance, and traded down. Micron (MU) guided Q4 revenues down by over 20% and traded down. General Motors (GM) warned that second quarter net income could be cut by as much as 36% due to manufacturing issues surrounding their supply chain but reaffirmed their 2022 guidance. Kohl’s (KSS) announced that it is no longer seeking a buyer for itself, cut second quarter guidance citing softer consumer spending and traded down 19.6%. Constellation Brands (STZ) beat top and bottom-line expectations, boosted guidance for 2022 and traded down. General Mills (GIS) was another outlier, as they beat both top and bottom-line estimates and traded up 6.35%. However, other than alcohol (STZ) and staples (GIS, WAG), there is unmistakable evidence that the Fed’s goal of demand destruction is occurring.

Key Inflation Data Is Better Than Expected.

A glimmer of hope was provided on Thursday when the Core PCE inflator number printed lower than expected at +0.3% vs +0.4% expected. This is the fourth consecutive month with a +0.3% print lending credence to the peaking inflation narrative. Further, year over Year PCE Core Inflation was lower than expected at +4.7% vs +4.8% expected and last month’s +4.9% print. The next big data point, other than the jobs report this coming Friday, will be June’s CPI, which will be released July 13, two weeks prior to the Fed’s next meeting.

Economic Data Last Week

All the economic data is still slowing on balance, with a few upbeat surprises and one notable piece of good news in the Core PCE report. This week’s tally…

June Consumer Confidence missed at 98.7 vs 100 expected.
Jobless claims printed slightly higher than last week at 231,000 claims.
Continuing claims ticked up slightly again to 1.33 million.
Final Q1 GDP was revised lower to –1.6% annualized rate.
June Chicago PMI missed at 56 vs 58 expected.
June S&P Global U.S. manufacturing PMI (final) beat but…
June ISM Manufacturing Index missed at 53% vs 54%.
The Atlanta GDPNow tracker estimates that the economy shrunk an annualized 2.1% in the second quarter which would meet the definition of a recession if true.

However,

May PCE Core Inflation, which the Fed relies on more heavily than CPI (Consumer Price Index), was lower than expected and…
Year over Year PCE Core Inflation was down as well.
May Durable Goods Orders surprised to the upside.
May Pending Home Sales Index also beat expectations.

Next Week

Oddly enough, despite multiple companies reporting earnings last week, the calendar is extremely light this week but should explode with earnings announcements the week after. That does not mean, however, that the market will be light on data. Of the information being released this week, all eyes will be focused on Wednesday’s FOMC minutes from their last meeting in mid June and Non-Farm payrolls on Friday. The latter will be especially tricky as a “too good” number will spark fears of additional inflation and rate hikes while a poor number will continue to stoke fears of recession.

Economic Calendar

Monday – Markets Closed in Observance of Independence Day.
Tuesday – N/A.
Wednesday – June S&P Global Services Index (Final), June ISM Services Index, JOLTS (Job Openings and Labor Turnover Survey), FOMC minutes.
Thursday – Initial Jobless Claims.
Friday – June Non-Farm Payrolls, Unemployment Rate, Labor Participation Rate.

July 1 Daily Trading Recap…

Monday – Dow (62) to 31,438, Nasdaq (83) to 11,524, S&P (11) to 3,900, USD10Y +6.9bp to 3.194%.

Eight of the eleven S&P sectors traded down today led lower Consumer Discretionary, Communication Services and Materials.
May Durable Goods Orders surprised to the upside: +0.7% vs +0.2% expected and April’s +0.4%.
May Pending Home Sales Index also beat expectations: +0.7 vs –4.0% expected and April’s -4.0%.
Nike (NKE) beat revenue and earnings estimates yet traded down 2.71% on poor China sales (down 20% vs last quarter).

Tuesday – Dow (491) to 30,946, Nasdaq (343) to 11,181, S&P (78) to 3,821, USD10Y +1.2bp to 3.206%.

June Consumer Confidence missed at 98.7 vs 100 expected and last month’s 103.2 number. Additionally, inflation expectations for June rose to 8%, the highest since the survey began keeping track in 1987.

Wednesday – Dow +82 to 31,029, Nasdaq (3) to 11,177, S&P (2) to 3,818, USD10Y (11.3bp) to 3.093%.

Five of eleven S&P sectors traded down today, led lower by Energy, Real Estate, and Materials.
Final Q1 GDP was revised lower to –1.6% annualized contraction vs the second revision of -1.5%.
Bed Bath and Beyond (BBBY) missed revenue and earnings estimates and plunged 23.5%. Further, CEO Mark Tritton is leaving the company effective immediately. One analyst said the company was in “the end days.”
General Mills (GIS) beat both top and bottom-line estimates and traded up 6.35%.

Thursday – Dow (253) to 30,775, Nasdaq (149) to 11,232, S&P (33) to 3,785, USD10Y (12.1bp) to 2.972%

Eight of eleven S&P sectors traded down today, led lower by Energy, Communication Services, and Consumer Discretionary.
Jobless claims printed at 231,000 claims vs 228,000 expected and last week’s slightly revised higher 233,000 print (originally 229k). Continuing claims ticked up slightly again to 1.33 million.
May PCE Core Inflation was lower than expected at +0.3% for the fourth consecutive month vs +0.4% expected.
Year over Year PCE Core Inflation was down as well at +4.7% vs +4.8% expected and last month’s +4.9% print.
June Chicago PMI missed at 56 vs 58 expected and last month’s 60.3 print.
Earnings: Constellation Brands (STZ) beat top and bottom-line expectations and boosted guidance for 2022; STZ traded down 4.34%. Walgreens (WAG) beat expectations and reaffirmed 2022 guidance; WAG traded down 7.27%. Micron (MU) guided Q4 revenues down by over 20%; MU is trading 2.84% post close.

Friday – Dow +321 to 31,097, Nasdaq +99 to 11,127, S&P +39 to 3,825, USD10Y (8.3bp) to 2.889%.

All eleven S&P sectors traded higher led by Utilities, Consumer Discretionary, and Real Estate.
June S&P Global U.S. manufacturing PMI (final) beat at 52.7 vs 52 expected and last month’s 52.4 print.
June ISM Manufacturing Index missed at 53% vs 54% expected and last month’s 56.1% print.
General Motors (GM) warned that second quarter net income could be cut by as much as 36% due to manufacturing issues surrounding their supply chain but reaffirmed their 2022 guidance.
Kohl’s (KSS) announced that it is no longer seeking a buyer for itself and cut second quarter guidance citing softer consumer spending. KSS traded down 19.6%.

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