July 4th weekend marks the halfway point of what is shaping up to be a tough year. The 60/40 portfolio is currently down double digits for the 1st time since 2008.
The S&P 500 total return closed Thursday (EOQ) down 19.96% YTD, logging its worst first-half return since 1970. For the quarter, the Index was down 16.4%, its worst since Q1 ’20 and the rise of the COVID pandemic (when it dropped 20%). The S&P only saw three weeks of gains during Q2, with bounce attempts often generating more headlines (often referencing oversold conditions) than traction. As investors look ahead, it’s not surprising there is a lot of focus on about a Fed policy mistake and prospects for a recession. Also concerns about downside risk to earnings estimates given challenging inflationary backdrop and questions about consumer-spending resiliency. But multiple bullish talking points remain relevant. A lot of talk about depressed sentiment and positioning indicators as contrarian buy signals (though some recent surveys showing slight rise in optimism). Peak-inflation narrative has also gotten some limited support from recent data.
Inflation remained the big drag on risk sentiment in Q2. May headline CPI came in hotter than expected, increasing 1% m/m and 8.6% y/y, the biggest annual increase since late 1981. Surging energy and food prices, where pressure has been exacerbated by geopolitical developments, were key upside drivers Stickier sources, including those surrounding housing, were also elevated. When it came to energy, there was a lot of attention in Q2 on the temporary push in the national average gas price about $5 a gallon. The Fed’s outsized focus on inflation led to a more aggressive pace of rate hikes following the 25 bp liftoff in March. The central bank raised rates by 50 bp in May and 75 bp in June. It also guided for a 50 to 75 bp rate increase in July.
Q2 also saw the Fed provide details on quantitative tightening, with runoff caps starting at $30B a month for Treasuries and $17.5B for MBS in June, before rising to $60B and $35B, respectively, after three months. Financial conditions, as measured by the Goldman Sachs US Financial Conditions Index, tightened by more than 15 bp over the course of the quarter. Tightening financial conditions drove concerns about a growth slowdown with the Atlanta Fed GDP Now Model now estimating -1% growth for Q2 following the -1.6% print in Q1. Growth concerns were exacerbated by a number of other factors, particularly the widespread lockdowns in Shanghai related to China’s continued strict adherence to a zero COVID policy. The market selloff itself was mentioned as a growth overhand as Wells Fargo pointed out that the economy has the highest equity beta in decades. It estimated that US household assets could decline some $6T (4%) in Q2 due to the selloff. While the 1H drawdown was entirely driven by multiple compression, a combination of slowing growth, tightening financial conditions, lingering input price and supply chain pressures, waning corporate sentiment and FX headwinds drove a meaningful pickup in concerns about the downside risk to consensus earnings estimates.
Europe travel looks really good these days as the USD/ Eur is almost level.
Energy Complex
The Baker Hughes rig count decreased by 3 this week. There are 750 oil and gas rigs operating in the US – Up 275 over last year.
Metals Complex
Employment Picture
Weekly Unemployment Claims– Released Thursday 6/30/2022 – The week ending June 25th observed a decrease of 2k in initial claims decreasing to 231k. The four-week moving average of initial jobless claims increased 7.25k to 231.75k.
May Jobs Report – BLS Summary – Released 6/3/2022 –The US Economy added 390k nonfarm jobs in May and the Unemployment rate stayed unchanged at 3.6%. Average hourly earnings increased 10 to $31.95. Hiring highlights include +84k Leisure and Hospitality, +74k Education and Health Services, and +75 Professional and Business Services.
Average hourly earnings increased 10 cents to $31.95.
U3 unemployment rate remained unchanged at 3.6%. U6 unemployment rate slightly increased from 7% to 7.1%.
The labor force participation rate was little changed at 62.3%.
Average work week was unchanged at 34.6 hours.
Job Openings & Labor Turnover Survey– JOLTS – Released 6/1/2022 – The US Bureau of Labor Statistics reported the number and rate of job openings decreased to 11.4 million on the last business day of April. Over the month, hires were little changed at 6.6 million and separations were little changed at 6 million. Within separations, quits were little changed at 4.4 million. The layoffs and discharges rates declined to 1.2 million.
Employment Cost Index– Released 4/29/2022 – Compensation costs for civilian workers increased 1.4% for the 3-month period ending in March 2022. The 12-month period ending in March 2022 saw compensation costs increase by 4.5%. The 12-month period ending March 2021 increased 2.6%. Wages and salaries increased 4.7% over the year and increased 2.7% for the 12-month period ending in March 2021. Benefit costs increased 4.1% over the year and increased 2.5% for the 12-month period ending in March 2021. This report is published quarterly.
This Week’s Economic Data
Links take you to the data source
PMI Manufacturing Index – Released 7/1/2022 – June PMI decreased 3.1% to 53% down from May’s reading of 56.1%. The New Orders Index was 49.2% down 5.9% from May’s reading of 55.1%. The Production Index registered 54.9%, up 0.7%.
U.S. Construction Spending – Released 7/1/2022 –Construction spending increased 0.1% in May, measuring at a Seasonally Adjusted Annual Rate of $1,779.8 billion. The May figure is 9.7% above the May 2021 estimate. Private construction spending was unchanged from the revised April estimate at $1,436 billion. Public construction spending was 0.8% below the revised April estimate at $343.8 billion.
Chicago PMI– Released 6/30/2022 – Chicago PMI decreased by 4.3 points in June to 56. All five of the main five indicators increased except for supplier deliveries, which hit its lowest level since November 2020.
Personal Income – Released 6/30/2022 – Personal income increased $113.4 billion or 0.5% and Personal Consumption Expenditures (PCE) increased $32.7 billion or 0.2%.
Third Estimate of 1st Quarter 2022 GDP– Released 6/29/2022 – Real Gross Domestic Product (GDP) decreased at an annual rate of 1.6% in the first quarter of 2022, according to the third estimate released by the Bureau of Economic Analysis. GDP increased 6.9% in the fourth quarter of 2021. The GDP third estimate is based on data that are more complete than the advance estimate which estimated that GDP declined q.4% in the first quarter and then the second estimate which estimated that GDP declined 1.5% in the first quarter. The third estimate primarily reflects a downward revision to Personal Consumption Expenditures (PCE) that was partly offset by an upward revision to private inventory investment. The decrease in real GDP reflected decreased in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased. Personal COnsumption Expenditures (PCE), nonresidential fixed investment, and residential fixed investment increased.
Consumer Confidence– Released 6/28/2022 – The Consumer Confidence Index decreased in June following a decline in May. The Index now stands at 98.7, down from 103.2 in May.
Durable Goods – Released 6/27/2022 – New orders for manufactured durable goods in May increased $1.9 billion or 0.7% to $267.2 billion. Transportation equipment led the increase up $0.7 billion or 0.8% to $87.6 billion.
Recent Economic Data
Links take you to the data source
New Residential Sales– Released 6/24/2022 –Sales of new single-family homes increased 10.7% to 696k, seasonally adjusted, in May. The median sales price of new homes sold in May was $449,000 with an average sales price of $511,400. At the end of May, the seasonally adjusted estimate of new homes for sale was 444k. This represents a supply of 7.7 months at the current sales rate.
Existing Home Sales– Released 6/21/2022 – Existing home sales decreased in May marking four consecutive months of declines. Sales declined 3.4% to a seasonally adjusted rate of 5.61 million in Mat. Sales decreased 8.6% year-over-year. Housing inventory sits at 1.16 million units. Up 12.6% from April’s inventory. Down 4.1% over last year. Unsold inventory sits at a 2.6- month supply. The median existing home price for all housing types was $407,600 which is up 14.8% from May 2021. This marks 123 consecutive months of year-over-year increases, the longest-running streak on record.
Industrial Production and Capacity Utilization– Released 6/17/2022 – In May, Industrial Production increased 0.2%. Manufacturing decreased 0.1%. Utilities output increased 1%. Mining output increased 1.3%. Total industrial production was 5.8% higher in May than a year ago. Total capacity utilization increased to 79% in May, which is 0.5% below its long run average.
Housing Starts – Released 6/16/2022 –New home starts in May were at a Seasonally Adjusted Annual Rate of 1.549 million; down 14.4% below April, and 3.5% below last May’s rate. Building Permits were at a Seasonally Adjusted Annual Rate of 1.695 million, down 7% compared to April, but up 0.2% over last year.
Retail Sales – Released 6/15/2022 –US retail sales for May decreased 0.3% to $672.9 billion but retail sales are 8.1% above May 2021. US retail sales for the March 2022 through May 2022 period were up 7.7% form the same period a year ago.
Producer Price Index– Released 6/14/2022 – The Producer Price Index for final demand increased 0.8% in May. PPI less food and energy increased 0.7%. The change in PPI for final demand has increased 10.8% y/y.
Consumer Price Index– Released 6/10/2022 – Consumer prices rose 1% m/m in May following a 0.3% increase in April. Consumer prices are up 8.6% for the 12-month period ending in May. Core consumer prices increased 0.6% m/m in May, the same as in April.
Consumer Credit– Released 6/7/2022 – Consumer credit increased at a Seasonally Adjusted Annual Rate of 10.1% in April. Revolving credit increased at an annual rate of 19.6%, while nonrevolving credit increased at an annual rate of 7.1%.
U.S. Trade Balance– Released 6/7/2022 – According to the US Census Bureau of Economic Analysis, the goods and services deficit decreased in April by $20.6 billion to $87.1 billion. April exports were $252.6 billion, $8.5 billion more than March exports. April imports were $339.7 billion, $12.1 billion less than March imports. Year to date, the goods and services deficit increased $107.9 billion, or 41.1%, from the same period in 2021. Exports increased $151.3 billion or 18.8%. Imports increased $259.2 billion or 24.3%.
US Light Vehicle Sales– Released 6/3/2022 – US light vehicle sales were at a Seasonally Adjusted Annual Rate (SAAR) of 12.677 million units in May.
PMI Non-Manufacturing Index– Released 6/3/2022 – Economic activity in the non-manufacturing sector grew in May for the 24th consecutive month. ISM Non-Manufacturing registered 55.9%, which is 1.2 percentage points below the April reading of 57.1%.
Next week we get data on Services PMI, US Trade Balance, Consumer Credits, JOLTS, and the June Jobs Report.
Good Life Advisors – Talking Points – Week 25
Halfway Through the Year
July 4th weekend marks the halfway point of what is shaping up to be a tough year. The 60/40 portfolio is currently down double digits for the 1st time since 2008.
The S&P 500 total return closed Thursday (EOQ) down 19.96% YTD, logging its worst first-half return since 1970. For the quarter, the Index was down 16.4%, its worst since Q1 ’20 and the rise of the COVID pandemic (when it dropped 20%). The S&P only saw three weeks of gains during Q2, with bounce attempts often generating more headlines (often referencing oversold conditions) than traction. As investors look ahead, it’s not surprising there is a lot of focus on about a Fed policy mistake and prospects for a recession. Also concerns about downside risk to earnings estimates given challenging inflationary backdrop and questions about consumer-spending resiliency. But multiple bullish talking points remain relevant. A lot of talk about depressed sentiment and positioning indicators as contrarian buy signals (though some recent surveys showing slight rise in optimism). Peak-inflation narrative has also gotten some limited support from recent data.
Inflation remained the big drag on risk sentiment in Q2. May headline CPI came in hotter than expected, increasing 1% m/m and 8.6% y/y, the biggest annual increase since late 1981. Surging energy and food prices, where pressure has been exacerbated by geopolitical developments, were key upside drivers Stickier sources, including those surrounding housing, were also elevated. When it came to energy, there was a lot of attention in Q2 on the temporary push in the national average gas price about $5 a gallon. The Fed’s outsized focus on inflation led to a more aggressive pace of rate hikes following the 25 bp liftoff in March. The central bank raised rates by 50 bp in May and 75 bp in June. It also guided for a 50 to 75 bp rate increase in July.
Q2 also saw the Fed provide details on quantitative tightening, with runoff caps starting at $30B a month for Treasuries and $17.5B for MBS in June, before rising to $60B and $35B, respectively, after three months. Financial conditions, as measured by the Goldman Sachs US Financial Conditions Index, tightened by more than 15 bp over the course of the quarter. Tightening financial conditions drove concerns about a growth slowdown with the Atlanta Fed GDP Now Model now estimating -1% growth for Q2 following the -1.6% print in Q1. Growth concerns were exacerbated by a number of other factors, particularly the widespread lockdowns in Shanghai related to China’s continued strict adherence to a zero COVID policy. The market selloff itself was mentioned as a growth overhand as Wells Fargo pointed out that the economy has the highest equity beta in decades. It estimated that US household assets could decline some $6T (4%) in Q2 due to the selloff. While the 1H drawdown was entirely driven by multiple compression, a combination of slowing growth, tightening financial conditions, lingering input price and supply chain pressures, waning corporate sentiment and FX headwinds drove a meaningful pickup in concerns about the downside risk to consensus earnings estimates.
Table of Contents
Fixed Income
June FOMC Statement Balance Sheet Reduction Plan Credit, Liquidity and Balance Sheet Federal Reserve Dot Plots
US Corporate Debt Tops 7 Trillion. Treasury.gov yields FOMC Policy Normalization Statement Longer Run Goals August 2020
Foreign Exchange Market
Europe travel looks really good these days as the USD/ Eur is almost level.
Energy Complex
The Baker Hughes rig count decreased by 3 this week. There are 750 oil and gas rigs operating in the US – Up 275 over last year.
Metals Complex
Employment Picture
Weekly Unemployment Claims – Released Thursday 6/30/2022 – The week ending June 25th observed a decrease of 2k in initial claims decreasing to 231k. The four-week moving average of initial jobless claims increased 7.25k to 231.75k.
May Jobs Report – BLS Summary – Released 6/3/2022 – The US Economy added 390k nonfarm jobs in May and the Unemployment rate stayed unchanged at 3.6%. Average hourly earnings increased 10 to $31.95. Hiring highlights include +84k Leisure and Hospitality, +74k Education and Health Services, and +75 Professional and Business Services.
Job Openings & Labor Turnover Survey – JOLTS – Released 6/1/2022 – The US Bureau of Labor Statistics reported the number and rate of job openings decreased to 11.4 million on the last business day of April. Over the month, hires were little changed at 6.6 million and separations were little changed at 6 million. Within separations, quits were little changed at 4.4 million. The layoffs and discharges rates declined to 1.2 million.
Employment Cost Index – Released 4/29/2022 – Compensation costs for civilian workers increased 1.4% for the 3-month period ending in March 2022. The 12-month period ending in March 2022 saw compensation costs increase by 4.5%. The 12-month period ending March 2021 increased 2.6%. Wages and salaries increased 4.7% over the year and increased 2.7% for the 12-month period ending in March 2021. Benefit costs increased 4.1% over the year and increased 2.5% for the 12-month period ending in March 2021. This report is published quarterly.
This Week’s Economic Data
Links take you to the data source
PMI Manufacturing Index – Released 7/1/2022 – June PMI decreased 3.1% to 53% down from May’s reading of 56.1%. The New Orders Index was 49.2% down 5.9% from May’s reading of 55.1%. The Production Index registered 54.9%, up 0.7%.
U.S. Construction Spending – Released 7/1/2022 – Construction spending increased 0.1% in May, measuring at a Seasonally Adjusted Annual Rate of $1,779.8 billion. The May figure is 9.7% above the May 2021 estimate. Private construction spending was unchanged from the revised April estimate at $1,436 billion. Public construction spending was 0.8% below the revised April estimate at $343.8 billion.
Chicago PMI – Released 6/30/2022 – Chicago PMI decreased by 4.3 points in June to 56. All five of the main five indicators increased except for supplier deliveries, which hit its lowest level since November 2020.
Personal Income – Released 6/30/2022 – Personal income increased $113.4 billion or 0.5% and Personal Consumption Expenditures (PCE) increased $32.7 billion or 0.2%.
Third Estimate of 1st Quarter 2022 GDP – Released 6/29/2022 – Real Gross Domestic Product (GDP) decreased at an annual rate of 1.6% in the first quarter of 2022, according to the third estimate released by the Bureau of Economic Analysis. GDP increased 6.9% in the fourth quarter of 2021. The GDP third estimate is based on data that are more complete than the advance estimate which estimated that GDP declined q.4% in the first quarter and then the second estimate which estimated that GDP declined 1.5% in the first quarter. The third estimate primarily reflects a downward revision to Personal Consumption Expenditures (PCE) that was partly offset by an upward revision to private inventory investment. The decrease in real GDP reflected decreased in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased. Personal COnsumption Expenditures (PCE), nonresidential fixed investment, and residential fixed investment increased.
Consumer Confidence – Released 6/28/2022 – The Consumer Confidence Index decreased in June following a decline in May. The Index now stands at 98.7, down from 103.2 in May.
Durable Goods – Released 6/27/2022 – New orders for manufactured durable goods in May increased $1.9 billion or 0.7% to $267.2 billion. Transportation equipment led the increase up $0.7 billion or 0.8% to $87.6 billion.
Recent Economic Data
Links take you to the data source
New Residential Sales – Released 6/24/2022 – Sales of new single-family homes increased 10.7% to 696k, seasonally adjusted, in May. The median sales price of new homes sold in May was $449,000 with an average sales price of $511,400. At the end of May, the seasonally adjusted estimate of new homes for sale was 444k. This represents a supply of 7.7 months at the current sales rate.
Existing Home Sales – Released 6/21/2022 – Existing home sales decreased in May marking four consecutive months of declines. Sales declined 3.4% to a seasonally adjusted rate of 5.61 million in Mat. Sales decreased 8.6% year-over-year. Housing inventory sits at 1.16 million units. Up 12.6% from April’s inventory. Down 4.1% over last year. Unsold inventory sits at a 2.6- month supply. The median existing home price for all housing types was $407,600 which is up 14.8% from May 2021. This marks 123 consecutive months of year-over-year increases, the longest-running streak on record.
Industrial Production and Capacity Utilization – Released 6/17/2022 – In May, Industrial Production increased 0.2%. Manufacturing decreased 0.1%. Utilities output increased 1%. Mining output increased 1.3%. Total industrial production was 5.8% higher in May than a year ago. Total capacity utilization increased to 79% in May, which is 0.5% below its long run average.
Housing Starts – Released 6/16/2022 – New home starts in May were at a Seasonally Adjusted Annual Rate of 1.549 million; down 14.4% below April, and 3.5% below last May’s rate. Building Permits were at a Seasonally Adjusted Annual Rate of 1.695 million, down 7% compared to April, but up 0.2% over last year.
Retail Sales – Released 6/15/2022 – US retail sales for May decreased 0.3% to $672.9 billion but retail sales are 8.1% above May 2021. US retail sales for the March 2022 through May 2022 period were up 7.7% form the same period a year ago.
Producer Price Index – Released 6/14/2022 – The Producer Price Index for final demand increased 0.8% in May. PPI less food and energy increased 0.7%. The change in PPI for final demand has increased 10.8% y/y.
Consumer Price Index – Released 6/10/2022 – Consumer prices rose 1% m/m in May following a 0.3% increase in April. Consumer prices are up 8.6% for the 12-month period ending in May. Core consumer prices increased 0.6% m/m in May, the same as in April.
Consumer Credit – Released 6/7/2022 – Consumer credit increased at a Seasonally Adjusted Annual Rate of 10.1% in April. Revolving credit increased at an annual rate of 19.6%, while nonrevolving credit increased at an annual rate of 7.1%.
U.S. Trade Balance – Released 6/7/2022 – According to the US Census Bureau of Economic Analysis, the goods and services deficit decreased in April by $20.6 billion to $87.1 billion. April exports were $252.6 billion, $8.5 billion more than March exports. April imports were $339.7 billion, $12.1 billion less than March imports. Year to date, the goods and services deficit increased $107.9 billion, or 41.1%, from the same period in 2021. Exports increased $151.3 billion or 18.8%. Imports increased $259.2 billion or 24.3%.
US Light Vehicle Sales – Released 6/3/2022 – US light vehicle sales were at a Seasonally Adjusted Annual Rate (SAAR) of 12.677 million units in May.
PMI Non-Manufacturing Index – Released 6/3/2022 – Economic activity in the non-manufacturing sector grew in May for the 24th consecutive month. ISM Non-Manufacturing registered 55.9%, which is 1.2 percentage points below the April reading of 57.1%.
Next week we get data on Services PMI, US Trade Balance, Consumer Credits, JOLTS, and the June Jobs Report.
Data Sources:
Bureau of Economic Analysis (BEA)
Congressional Budget Office (CBO)
U.S. Bureau of Labor Statistics (BLS)
Federal Reserve Economic Data (FRED Charts)
CME Fed Watch
U.S. Treasury – Yields
U.S. Census Bureau
Institute for Supply Management (ISM)
Weekly DOL Employment Data
BLS Monthly Jobs Report
JOLTS
US Energy Admin (EIA)
BLS Consumer Price Index CPI
BLS Producer Price Index PPI
Atlanta Fed GDPNOW
NY Fed Nowcast GDP
US Census Bureau Housing Starts
Consumer Credit
USCB Retail Sales
Construction Spending
Federal Reserve Dot Plots
NY Empire Index
Philadelphia Federal Reserve
P/E Ratio Data -Yardeni Research
Technical Analysis Info:
StockCharts.com – Financial Charts
Exponential vs Simple moving average
Other Links:
1973 Arab Oil Embargo
Hunt Brothers Silver
Long-Term Capital bailout
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