Market Recap August 13- Hot Town Summer in the City Edition
Market Performance Week Ending August 13
S&P 4,436 +32 or 0.72%
Dow 35,061 +307 or 0.87%
Nasdaq 14,672 (23) or 0.15%
Another Good Week in the Markets
Two of the three indices finished up on the week with the Dow and S&P setting multiple new records. The cyclical and value stocks leveraged to the reopening of the economy dominated market leadership this week although, like last week, the tide turned on Friday with the poor Michigan Consumer Sentiment number. The market’s concerns appear to have switched from inflation to the fear that growth is slowing as reflected in the 10-year Treasury yield which fell from 1.30% last Friday to 1.28% today despite fairly inflationary CPI and PPI readings.
What about the Economic Data?
It was another mixed bag of economic data this week. The JOLTS number reported the nation had 10.1 million job openings, which was more than expected. What really stood out were the three inflation numbers CPI, Core CPI, and PPI. Both CPI and PPI were hugely inflationary, showing price increases of more than 5.4% (CPI year over year) and 0.9% (PPI month over month). What the Fed doves and easy money advocates are hanging their hat on is the Core CPI number that showed “just” a 0.3% increase in prices (Core is ex-food and energy) month over month which was below the 0.4% expectations and most importantly, considerably lower than June’s 0.9% increase. Initial Jobless claims were almost an afterthought but came in right in line with expectations and last week’s number was revised only slightly higher.
A Looming Fight at the Fed
Four Fed Regional Presidents went on the record this week in favor of tapering that institution’s $120 billion/month asset purchasing program. Add that to the hawkish comments made by two different Fed members last week and one can see clear lines of demarcation forming prior to the Open Market Committee Meeting on September 21-22. On one side, the hawks, who believe inflation is running hot and want to tap the brakes in the form of reducing asset purchases. On the other side are the doves, who are concerned that the employment situation is far from healthy and want to see more progress on that front prior to reducing the money supply. More clues as to how the battle is progressing come this week when Fed President Powell and Minneapolis President Kashkari speak on Tuesday and on Wednesday when the minutes from the last FOMC meeting are released.
A Battle for the Soul of the U.S. 10-year Treasury Yield
The 10-year yield doesn’t know down from up. With hawkish comments from the Fed, the conventional wisdom would say that the yield should be rising as investors sell the security and await higher interest rates before repurchasing. On the other hand, there is a sizeable faction that is worried that economic growth is slowing and will slow further if the Fed begins to taper asset purchases. Those “flight to safety” purchases depress any increases in the yield. Finally, and this is a factor that is forgotten much of time, international demand for the security continues to be strong. Why? Just look at the rates. Which bonds are you going to buy?
- United States 1.28%
- Canada 1.18%
- United Kingdom 0.57%
- Italy 0.54%
- France –0.13%! (this is correct. You are paying France to borrow your money)
- Germany –0.47%! (even worse in Germany!)
- Japan –0.02%
Surging Covid-19 Continues
The Delta variant continues to rip through the unvaccinated southern portion of the United States. Florida alone reported more than 150,000 new cases this week as the country’s 7-day average new infections rose to 135,000. Month to date the U.S. has reported 1.5 million new infections, more than 3x the number for Iran and India which are the next two worse countries. A Mississippi hospital leader said his state’s hospital system was on the brink of collapse. The Defense Department has ordered all branches of the military to be vaccinated and San Francisco is requiring proof of vaccination for most indoor activities.
Market Data Points Next Week: FOMC minutes, June Retail Sales, Retail Earnings.
- Monday – Economic Data: Empire State Manufacturing. Earnings: Roblox (RBLX).
- Tuesday – Economic Data: July retail sales. The Fed: Fed Chair Jerome Powell and Minneapolis Fed President Neil Kashkari speak. Earnings: Walmart (WMT), Home Depot (HD).
- Wednesday – The Fed: FOMC minutes. Earnings: Target (TGT), Nvidia (NVDA), Lowe’s (LOW), TJ Companies (TJX), Cisco Systems (CSCO)
- Thursday – Economic Data: Jobless claims, Philly Fed. Earnings: Macy’s (M), Applied Materials (AMAT)
- Friday – none.
Last week’s trading…
Monday – Dow (106) to 35,101, the Nasdaq +24 to 14,860, and the S&P (4) to 4,432.
- Market leadership continues to be topsy-turvy as Covid fears punished the reopening trade today and rewarded growth.
- Breadth was very narrow with only four of the eleven S&P sectors positive, led by defensive sectors Health Care and Consumer Staples.
- JOLTS (Job Openings and Labor Turnover Survey) indicated 10.1 million job openings in June, beating expectations of 9.1 million.
- Growing momentum at the Fed to begin tapering asset purchases: both Fed President’s Bostic and Barkin at a panel today both said they believed that conditions had been met for tapering to begin during the fourth quarter at the latest.
- The ten-year U.S. Treasury yield inched up 1 bp to 1.31%.
- Earnings: AMC Entertainment (AMC) crushed their earnings and announced that they will begin to accept ApplePay, GooglePay, and bitcoin for online ticket and concession purchases. AMC traded up 5.3% post close. BioNTech (BNTX) crushed their numbers on their Covid vaccine sales (in partnership with Pfizer) and announced that a booster shot of the existing vaccine would be effective in the short term.
Tuesday – Dow +162 to 35,264 (record close), the Nasdaq (72) to 14,788, and the S&P +4 to 4,436 (record close).
- Market leadership changed hands for the third consecutive session.
- The U.S. Senate passed the Administration’s $1 billion infrastructure bill with 19 Republican votes, reinflating the reopening trade and the cyclical/value stocks attributed to it.
- Breadth was good: eight of the eleven S&P sectors rose led by Energy, Financials, and Materials. Health Care, Tech, and Real Estate traded in the red.
- The ten-year U.S. Treasury jumped 4 bp to 1.35% presumably due to the new inflationary spending that this infrastructure bill will bring if passed into law.
- All this action based on the infrastructure bill seems premature: House Speaker Pelosi has vowed not to bring this bill to a vote in the House until a second, larger, human infrastructure bill is passed via reconciliation in the Senate (reconciliation bypasses filibuster requirements of 60 votes to close debate and would not requiring any GOP votes to pass the bill assuming all 50 Democrat votes can be whipped). Pelosi has a mere four vote majority in her chamber and the progressive wing of the party is threatening to withhold their votes if the second bill is not passed first.
- Chicago Fed President Evans went against the grain of comments from his colleagues this week and when he stated today that he is not in favor of tapering in September which would leave a decision until the next Fed meeting in November.
- Earnings: Crypto currency brokerage firm Coinbase (COIN), crushed their Q2 numbers but traded down post-close.
Wednesday – Dow +220 to 35,484, the Nasdaq (23) to 14,765, and the S&P +11 to 4,447 (record close).
- Market leadership finally held steady as cyclical names took the S&P and the Dow higher.
- Breadth was good again with Materials, Industrials and Financials leading nine of the eleven S&P sectors higher. Only Healthcare traded down today.
- July’s Consumer Price Index (CPI) rose 5.4% year over year vs expectations of 5.3% and up 0.5% month over month.
- However, core CPI (ex food and energy) only rose by 0.3% vs June’s number and vs expectations of 0.4%. This is important as it demonstrates that the pace of inflation is slowing. Will it continue to do so?
- Interestingly, used car prices, which had been driving both numbers higher, rose only 0.2% after rising 10% in June.
- The slowing inflation numbers lend credence to the Fed’s theory that rising prices are “transitory,” and thus there is no need for restricting their accommodative monetary policy yet.
- On the other hand, another Fed President, Dallas Chief Robert Kaplan, told CNBC today that the Fed’s asset purchasing program should start to taper beginning in October and Kansas City President Esther George said today that she backed tapering without giving any timeline.
- The U.S. 10-year Treasury yield lost 1bp and finished at 1.34%.
- Earnings: Ebay (EBAY) missed revenues and guided both earnings and revenue lower for the third quarter. EBAY traded down as much as 2.4% post-close before rallying to end the late session down 0.85%.
Thursday – Dow +14 to 35,499 (record close), the Nasdaq +51 to 14,816, and the S&P +13 to 4,460 (record close).
- Initial Jobless claims met expectations again at 375,000 claims vs last week’s upwardly revised 387,000 print.
- Inflation Data – the Producer Price Index (PPI) rose 0.9% in July vs expectations of a 0.5% increase. PPI measures what U.S. businesses pay for labor, raw materials, and other goods.
- Cyclical leadership of the market retreated today due to the PPI number. Healthcare, Tech and Communications Services led six S&P sectors higher, Utilities traded flat, and Materials, Industrials, and Energy all traded in the red.
- The U.S. 10-year Treasury yield finished unchanged at 1.34%.
- Vaccination Required – San Francisco becomes the first major city in the U.S. to require proof of vaccination for various indoor activities including gyms, bars, restaurants, and entertainment venues that serve food or beverages (think concerts or basketball games).
- Booster Shots Approved – the FDA approved Covid vaccine booster shots for the immunocompromised today. Shots could be available as soon as this weekend.
- Earnings: Disney (DIS) beat earnings and revenue expectations and crushed Disney + subscriber numbers. DIS traded up 5.63% after hours. Airbnb (ABNB) crushed their numbers but warned that the Delta variant could affect Q3 numbers. Door Dash (DASH) missed earnings but beat revenues and raised guidance.
Friday – Dow +15 to 35,515 (record close), the Nasdaq +6 to 14,822, and the S&P +7 to 4,468 (record close).
- Markets ground higher today on a typical light trading Friday summer session.
- Seven of the eleven S&P sectors traded higher led by Consumer Staples and Real Estate while Financials and Energy were the two worst performers.
- Market leadership was much more defensive in nature and while tech/growth names traded up today (but did not lead the market), the cyclical/value plays were clearly out of favor and were among the worst performers.
- Michigan Consumer Sentiment came in at 70.2, the weakest number since December of 2011 reflecting Delta Covid and inflation fears.
- Earnings: Q2 earnings season is just about a wrap. 90% of the S&P 500 has reported and 88% of those companies have beaten earnings estimates according to Refinitiv.
- The U.S. 10-year Treasury yield sank nearly 6 bp to 1.28% on the consumer sentiment print.
- Energy, the second-best performing S&P sector YTD (+29.71%), was down again today and has traded down 7.5% over the last three months. Something to monitor.
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