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Navigating the Markets: July 17th-21st

Updated: Jul 16, 2023

What a week! We saw positive signs in the economic data that helped to catalyze a rather significant broad-based rally in several key markets, including US equities, bonds, and commodities. The dollar, however, did not fare so well.

All this and more in this week's Navigating the Markets!

The Big Picture

This week's CPI data brought some further relief to the inflation picture, with headline falling to 3% and core showing the lowest reading in 20 months.

Source: Edward Jones

The month-over-month readings were encouraging as well, at 0.2% on both core and headline, coming below the forecast of 0.3%.

We also see positive signs in the Atlanta Fed "sticky core CPI ex-shelter" three-month annualized rate falling rather appreciably.

Source: Deutsche Bank

One concern, however, is that the surge in inflation that we experienced last year from the Russia-Ukraine war spiking commodities prices diminished in July of 2022, as we saw commodity prices begin to cool. That lack of beneficial year-over-year base effects, along with rising housing costs, may limit the downside within inflation readings over the coming months.

Expectations regarding the Fed's July rate hike remain firmly entrenched. Discounted, however, are not only expectations for any second hike (which Fed speakers have continued to telegraph), but also the timing of the initial cuts, which are now priced in as early as January of 2024.

Source: CME Group

Current Fed Funds futures are pricing in 125 bps of hikes over 2024, which would bring the central bank's policy range down to 3.75-4%. A large departure from the central bank's Dot Plot from the June SEP, which suggests that rates will hold around 4.6% in 2024.

Source: Edward Jones

Further supporting the "higherest for longerest" plateau in rates that could last for some time are the level of positive economic surprises. Current strength suggests we could see up to an 8% EPS beat vs consensus in Q2.

Source: Bank of America

This economic strength has been supported in no small part by largess on the fiscal side. As the Fed has pulled back, the Biden administration has leaned in to aggressive spending through the CHIPS Act and the Inflation Reduction Act, stimulating a flurry of construction activity within the manufacturing space.

As we move into earnings season, companies representing 48% of the S&P 500's market capitalization report during the week of July 24th-28th, but next week is no slouch with companies representing 12% of S&P 500 market capitalization reporting.

The majority of them are within the following sectors, in order of scale:

  1. Financials

  2. Consumer Discretionary

  3. Health Care

  4. Real Estate

  5. Utilities

  6. Materials

  7. Energy

  8. Industrials

  9. Communication Services

  10. Consumer Staples

  11. Information Technology

Source: Goldman Sachs

Goldman Sachs expects the earnings recession to trough this quarter, which may prove to be an overly optimistic projection, but time will tell as we progress through earnings season.

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