Watching the Summer Data

By Hightower Omaha on July 1, 2024

Week of July 1, 2024

1. Inflation Cools Further. May’s personal consumption expenditure (PCE) reading, the Fed’s preferred inflation gauge, was in-line with expectations at 2.6% y/y, the lowest reading since March 2021. Investors had been expecting a cooler PCE print following lower inflation readings in May for the consumer price index (CPI) and producer price index (PPI). The data did little in moving rate cut expectations; we still believe it is unlikely that the Fed needs to cut in 2024, with the market believing there is over a 50% chance for a 25 bp cut in September.[1]

Outside of inflation data, economic data continues to come in waves. Housing data was worse than expected last week, but mortgage rates continue to decline, and we think the housing market is troughing. PMIs across manufacturing and services are expanding, initial claims are at historical lows and personal incomes are higher than expected. We continue to watch the data to provide insight into the U.S. economy.

Chart 1: All Major Inflation Gauges Are Trending Lower[2]

2. Wrapping Up the Second Quarter. Last week ended the second quarter, with equity market performance proving to be resilient once again. The S&P 500 closed up 3.92%, outperforming the equal weight S&P 500 by nearly 700 bps. The technology sector remains the main story, gaining 8.6% in the quarter and 17.5% year-to-date. Within tech, semiconductors are leading, up 15.8% for the quarter and 49% on the year.

We believe the second half will bring broader market participation and earnings performance. The tech sector is still expecting strong growth in Q2 (16.1% earnings growth y/y), but other sectors like health care and energy are expected to turn around, with analysts estimating 16.9% and 14.7% y/y earnings growth, respectively. Nvidia (NVDA) is still an extreme contribution to earnings growth – if excluded from Q2 estimates, y/y earnings growth for the technology sector declines to 6.6%.[3]

Chart 2: S&P 500’s Market Cap Weighted Index Diverges From Equal Weight Index in Q2[4]

3. Bank Clear Stress-Tests. Last week the Federal Reserve noted that all 31 banks reviewed passed the Fed’s annual stress test. Vice Chair Michael Barr stated, “Large banks have sufficient capital to withstand a highly stressful scenario and meet their minimum capital ratios.”[5] Yearly stress tests are enacted to review major financial institutions’ capital requirements and ensure they can continue operating in economic downturns.

The major banks quickly went to work with their excess capital after passing the Fed’s review. Bank of America (BAC), Morgan Stanley (MS), Goldman Sachs (GS) and JP Morgan (JPM) all increased their quarterly dividends between 8-9%. Also, banks no longer need to go to regulators before announcing a stock buyback, providing a smoother avenue for banks to pay back shareholders. This will likely be beneficial for the top banks, the ones with the most capital, as they have more freedom regarding capital allocation decision-making. Financials kick-off Q2 earnings season on July 12.

4. Fixed Income. U.S. Treasury yields rose across the curve last week in a strong bear steepener that eased the 2-year/10-year curve inversion by 12 bps (-36 bps inverted, inversion has been in place since July 5, 2022). U.S. 2-, 10- and 30-year Treasury yields rose 2, 14 and 18 bps, respectively. High yield spreads tightened by 4 bps to +357. Muni yields rose 3-4 bps across the curve.

5. The Week Ahead.

Earnings – Wednesday: STZ.

Economics – Monday: ISM Manufacturing, Markit PMI Manufacturing; Tuesday: JOLTS Job Openings; Wednesday: ADP Employment Survey, Markit PMI Services, Durable Orders, Factory Orders, ISM Services, FOMC Minutes; Thursday: Independence Day; Friday: Nonfarm Payrolls, Hourly Earnings, Unemployment Rate.

[1] Source: CME. As of June 28, 2024.

[2] Source: FactSet. As of June 28, 2024.

[3] Source: FactSet. As of June 21, 2024.

[4] Source: FactSet. As of June 28, 2024.

[5] Source: Federal Reserve. As of June 26, 2024.