Soft Landing

By Hightower Omaha on July 24, 2023

Week of July 24, 2023

1. Economy Holding Up in Face of Adversity. The resilient consumer is tied to continued job availability and higher real wages. Consumer confidence is rising – improving in June to its highest level since January 2022. Rising confidence and a strong jobs market lead to buying more homes – mortgage rates have retreated from peak, and while existing home supply on the market remains limited, new home sales and building activity are growing. Activity in the housing sector also generates good momentum for correlated autos and goods sectors. Positive service themes have been ongoing since 2021 and continue to drive the economy. Positive jobs indicators and strong consumer spending flow into corporate profits. We do not anticipate an earnings collapse. Q2 earnings season is in full swing this week, after most banks reported good earnings last week.
2. Banks Confirm Consumer Strength. Banks are raising provisions for loan losses, while benefiting from the higher interest rates in the form of net interest income. Loan loss provisions are rainy-day funds for banks. Banks are increasing these provisions to manage customer default risk, adhering to regulatory requirements, as loans build at higher interest rates. Overall, loan defaults remain historically low, and provisions have been rising for much of the past year. Synchrony Financial (SYF), a consumer-focused credit card servicer, did not cite any cracks in the consumer. Higher net interest income fueled earnings beats for Wells Fargo (WFC) and JP Morgan (JPM). Wells Fargo said that excluding office, “the rest of the commercial real estate portfolio is performing quite well.” Credit card spending increased, along with mortgage originations. We hear from more of the small/mid-sized banks this week. Listen to Walt Bettinger, CEO of Charles Schwab (SCHW), talk about consumer optimism on CNBC.
3. Oil Price Rising. The price of oil is rebounding off of its June lows. Negative sentiment drove the commodity lower, but sentiment is now improving, and economic activity is resilient. Brent oil is finding support around $71 per barrel.

SLB (SLB), an oilfield services and technology company, reported an expectation for stronger second-half cash flows that will lead to higher annual free cash flow y/y. Industry cash flows continue to come in at record levels as offshore drilling and non-U.S. activity drive upstream oil production. Interestingly, U.S. oil rigs are down -12% y/y, while global rigs are +7% y/y.

Another commodity, copper, is experiencing a price resurgence. Copper is often a leading indicator for economic strength as a key input in infrastructure and electrical components demand. We are continuing to watch this commodity.

Labor Actions. A looming workers’ strike at UPS (UPS) is expected to create a bit of chaos for business and consumer shipping. UPS handles roughly 28% of America’s freight. A potential beneficiary, FedEx (FDX) has not seen an influx of UPS customers switching in anticipation of a strike. The potential UPS strike and ongoing writer’s strike in Hollywood emphasize the power that labor unions currently maintain in a tight job market.

4. Fixed Income Strength. For the past month, market commentary has been “lower yields.” However, since June 21, the short end has continued rising faster than the long end. The 2-yr is up 13 bps and the 10-yr is up 11 bps, furthering the yield curve inversion, which currently stands at -103 bps. After this week’s Initial Jobless Claims came in below estimates (228,000 vs. est. 240,000), the likelihood of a second additional 25 bps hike in September increased. Investors will be listening to Powell’s commentary on the labor market and outlook at Jackson Hole in late August. Consensus is for a 25 bps hike at this week’s FOMC meeting on Wednesday.

6. The Week Ahead.

Earnings – Monday: DPZ. Tuesday: GE, DOW, GEHC, CLF, RTX, ADM, MMM, MSFT, DHR, GM, GOOGL, PCAR. Wednesday: KO, UNP, BA, META, LRCX, T, HLT, OTIS, CMG. Thursday: BMY, VICI, VLO, CARR, KDP, LHX, MCD, HON, MA, LUV, F, MDLZ. Friday: XOM, CVX, PG.

Economics – Monday: Preliminary PMIs (July). Tuesday: Consumer Confidence (July). Wednesday: FOMC Meeting. Thursday: GDP (Q2), U.S. Federal Reserve Basel III Meeting. Friday: Core PCE (June), Employee Cost Index (Q2).

Stephanie Link: CNBC TV Schedule

Return for Selected Indices^[1]

[1] Source: Bloomberg. As of July 23, 2023.