Daily Research Updates
Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
The Bond Vigilantes Are On The March
Check out the accompanying pdf and chart collection. Executive Summary: What moves the bond market has changed recently and disconcertingly. The 10-year Treasury bond yield’s recent action—and nonreaction to economic news that typically moves it—suggest a shift in bond investors’ focus from what monetary policymakers may do to rising alarm about what fiscal policymakers are doing. The worry is that the escalating federal budget deficit will create more supply of bonds than demand can meet, requiring higher yields to clear the market; that worry has been the Bond Vigilantes’ entrance cue. Now the Wild Bunch seems to have taken full control of the Treasury market; we’re watching to see if the high-yield market is next. We are still counting on moderating inflation to stop the beatings in the bond market.
Some Good News & Not So
Check out the accompanying pdf and chart collection. Executive Summary: Last week’s plentiful economic news netted out to support our optimistic economic outlook through next year, bringing more signs of improving productivity, surging investment in manufacturing, and manageable inventories. Last week also brought some mixed news and some outright bad news, but we still see a 75% chance of a soft-landing scenario with disinflation and a 25% chance of a hard landing. Longer term, we’re still convinced that improving productivity will set the stage for a “Roaring 2020s” decade. Nevertheless, for the here and now, we are worrying quite a bit about the Bond Vigilantes’ hostile response to profligate fiscal policy. ... And: Dr. Ed reviews “A Good Person” (+ +).
Semis, Earnings & Musk’s Robot
Check out the accompanying pdf and chart collection. Executive Summary: A new trend among big tech companies: DIY AI. Amazon, Google, Tesla, Meta, and Microsoft are developing AI chips in house rather than paying up for Nvidia’s products. … Also: Analysts expect much improved earnings growth for S&P 500 companies on the whole next year, but some industries with the strongest projected growth also have stock price indexes in the doghouse this year to date. Jackie points out which. … And: Inside the neural networks of Elon Musk.
Consumers, Earnings & MegaCap-8
Check out the accompanying pdf and chart collection. Executive Summary: The US economy has been doing well thanks to consumers, defying the gravitational pull of aggressive Fed tightening. Driving the consumers’ record-high real spending is rising real disposable income. Rising real incomes are a function of strong employment. … Supporting the hot labor market are robust construction activity, consumer spending trends, and Baby Boomers’ lifestyles in retirement. … Also: Joe examines the rates of Q3 earnings and revenues growth that analysts expect for the S&P 500 with and without two sets of stocks that sway results significantly: the MegaCap-8 and the S&P 500 Energy sector.
Is Powell’s Path Forward Widening Or Narrowing?
Check out the accompanying pdf and chart collection. Executive Summary: The Fed has paused its rate hiking for now but not without warning that resumed tightening is possible. Either way, monetary policy will be kept restrictive for longer than investors previously expected, Fed Chair Powell has said. What does that scenario imply for the economic outlook? Peaks in the federal funds rate are coincident indicators of financial crises caused by restrictive policy, which often trigger credit crunches and recessions. That’s the big risk of the Fed’s higher-for-longer rate path. ... We don’t expect that scenario—we’re in the soft-landing camp—but were it to occur, the highly leveraged commercial real estate market might be the epicenter of the financial crisis.
Money & Credit: Debatable Points
Check out the accompanying pdf and chart collection. Executive Summary: Some economic prognosticators still believe that a credit crunch and recession are just around the bend. Today, we question two of their main arguments: We don’t believe that falling M2 presages anemic GDP growth; contrary to conventional wisdom, there is no reliable correlation between the two. And we can’t see consumers slamming the brakes on their spending and hobbling the economy; they don’t need to with their net worth at a record high and real disposable income growing. … Also: The inverted yield curve correctly predicted the banking crisis earlier this year, but there has been no credit crunch so far; we are monitoring commercial bank lending stats closely. ... And: Dr. Ed reviews “Golda (+ + +).
The Fed, The Deficit & Earnings
Check out the accompanying pdf and chart collection. Executive Summary: The Fed once again alerted the financial markets that the federal funds rate will remain restrictively aloft for longer than generally expected. Managing the market’s expectations in this way rather than raising rates further might lower the risk of a credit crunch and recession. We agree with the FOMC members who collectively anticipate a soft landing. … Also: Inflation has boosted federal entitlements and interest outlays, ballooning the federal budget deficit to worrisome heights, and soon the Biden administration’s spending spree will take it further north. … And: Get ready for a better Q3 earnings season; that’s the message from the earnings estimate data that Joe tracks for S&P 500 companies.
What’s Up With Earnings?
Check out the accompanying pdf and chart collection. Executive Summary: Today, we examine the flight paths of S&P 500 companies’ revenues, earnings, and profit margins through Q2’s earnings season. … Forward revenues per share rose to a record high the week before last, and analysts project revenues growth more than doubling next year to nearly 5%. … Forward earnings rose to a record high last week; it does a good job of predicting the earnings outlook during economic expansions. … The forward profit margin has edged up since bottoming in March, after dropping from last year’s record high. … All things considered, we’re sticking with our upbeat earnings forecasts and S&P 500 price targets for now.
China: Party Tricks
Check out the accompanying pdf and chart collection. Executive Summary: China’s recent efforts to stimulate its economy are likely too little too late after a decade of capitalism-eroding policies under President Xi Jinping, a huge property bubble, and a rapidly aging population. August’s economic data do show green shoots of revived growth from the stimulative policy initiatives recently enacted, but not convincingly enough to reinvigorate China’s stock market or global commodity markets. The copper price in particular is highly sensitive to China’s economic situation, but its range-bound price action suggests Dr. Copper is not impressed. … Moreover, China’s forward revenues and earnings metrics have been trending downward since 2014, suggesting that China peaked back then.
Inflation: Twin Peaks Again?
Check out the accompanying pdf and chart collection. Executive Summary: With oil prices spiking again, we can’t help but think of the 1970s when two peaks in oil prices fueled the Great Inflation and caused two recessions. We don’t see history repeating in this case, however. The big difference this time is the disinflationary tech-driven productivity boom we expect this decade. … But we are concerned enough about the oil price spike, the ballooning federal deficit, and other recent developments to return our subjective odds of a recession before year-end 2024 to 25% from 15%. Notably, we don’t view that as the most likely scenario but as a risk to our happier rolling recovery outlook.
Transports Flying Into Headwinds
Check out the accompanying pdf and chart collection. Executive Summary: It’s a been train wreck: Investors have been bailing on the S&P 500 Transportation index in recent weeks, after sending it northward for most of the year. Jackie examines the business pressures they’ve been reacting to, including lighter loads to haul in the wake of the inventory correction at a time of increased fuel and labor costs. … Also: May the best battery developer win EV market dominance. Our Disruptive Technologies segment takes a look at where the top contenders are in this high-stakes race.
AI For All
Check out the accompanying pdf and chart collection. Executive Summary: The day will come when all companies use AI just as all use the Internet today. The efficiency gains will be profound. Jackie discusses the three main skill sets that AI brings to the table and looks at ways that companies in diverse industries have found to leverage AI to their advantage. … Also: Washington lawmakers have been holding forums and hearings to explore how best to regulate AI usage, with industry execs and the Biden administration participating. … And: Technology industries that are heavily exposed to AI have helped the S&P 500 Tech sector outperform all but one other sector so far this year.
Europe Agonistes
Check out the accompanying pdf and chart collection. Executive Summary: Will 2024 bring improved prospects for Europe’s economy and stock market? While analysts still project a resumption of earnings growth for Europe MSCI companies collectively next year, their 2023 earnings estimates have been falling and the Net Earnings Revisions Index turned negative in August. The outlooks for Europe’s economy and stock market hang in the balance of several uncertainties: whether the ECB can corral inflation without precipitating a recession, whether Europe’s shored up energy reserves will suffice this winter, whether Germany’s economic performance improves, and how well relying on China to meet green energy goals works out.
‘Talk To An Economist’
Check out the accompanying pdf and chart collection. Executive Summary: It’s worrying investors big time, but the escalating federal budget deficit doesn’t even merit an explanation from the administration driving it out of historically normal proportions. A federal deficit that’s rising as a percentage of nominal GDP at a time when GDP is rising is highly unusual. At risk is the bond market’s ability to finance the deficit at current interest rates. ... This concern could make bond yields less sensitive to inflation (and the Fed’s reaction to it) and more sensitive to bond supply and demand. For now, we’re sticking with our back-to-the-old-normal bond yield forecast, based on our moderating inflation forecast, but we are increasingly concerned about the flood of Treasuries.
Oil, China & The Ocean
Check out the accompanying pdf and chart collection. Executive Summary: Oil prices have spurted skyward in recent months and recent days, as intended by the production cuts instituted by Saudi Arabia and Russia. The S&P 500 Energy sector’s share price index has spurted in sympathy, outperforming its counterparts this summer. Jackie looks at the countervailing forces affecting the global oil supply, including Saudi Arabia’s budget pressures and rising US oil production. ... Also: China’s economy is not doing well despite the stimulative efforts of its government and default-avoidance efforts of its largest property developer. … And: An update on The Ocean Cleanup’s daunting mission.
From Strong To Soft Patch?
Check out the accompanying pdf and chart collection. Executive Summary: Is the surprising Q3 strength in the economy sustainable? Clues in the latest data releases suggest not, and our forecast calls for a renewed soft landing. A stronger-for-longer economy wouldn’t jibe with the Fed’s higher-for-longer interest-rate stance. ... But the economic outlook hinges much on what consumers do next. We don’t see them slamming on the spending brakes, as the hard-landers predict will happen when excess savings are depleted. But they might start tapping on the brakes, especially given the imminent resumption of student loan payments and tightening credit conditions.
Powell’s Ideal Economy
Executive Summary: What would it take for the Fed to abandon its hawkish stance? Three things, suggested Fed Chair Powell’s recent Jackson Hole speech: core PCED inflation dropping closer to 2% y/y, demand for labor dropping closer to the supply of it, and consumer spending cooling off a bit. All that can happen without a recession, as it has twice before in recent history, and the latest data on all three parameters suggest progress in the right direction. … Today, we review the data showing rebalancing of the labor market, slowing consumer spending, and moderating inflation. … Dr. Ed also reviews “The Crowded Room” (+).
Hooray! The Job Market Is Rebalancing
Executive Summary: The stock market has proven resilient so far this week, rallying despite the Fed chair’s hawkish speech Friday. Several tailwinds have helped: The JOLTs report on Tuesday suggested the labor market is rebalancing, upping the odds that the Fed is done tightening. Joe’s data show that analysts have been raising earnings estimates in recent weeks for all future periods they forecast and that more companies’ outlooks have improved over the past three months than was true at the data’s recent low point last year. The rolling recession in goods-related industries looks poised for a rolling recovery soon. … Also: Loan growth has been falling in the US and Europe, but the US economy remains resilient.
Consumers Spending Selectively
Executive Summary: The rolling recession hit the retail industry during the first half of this year. Demand for many retailers’ merchandise plummeted during Q2, even as consumers paid up for services like travel and dining and big-ticket items like new cars and homes. Jackie examines how the shift in consumer behavior affected the earnings of particular retailers last quarter as well as the ytd performance of particular Consumer Discretionary industries’ share price indexes. … Also: US households are in good shape right now with unemployment low. But consumer debt has been on the rise, and other factors may weigh on consumer spending soon—including the resumption of student loan payments.
Wishing Upon An R-Star
Executive Summary: The Fed has no North Star. Steering monetary policy toward the ideal outcome that would keep both inflation and unemployment low requires knowing where the “neutral” federal funds rate is, i.e., the rate that wouldn’t influence either—a.k.a. “r-star.” But r-star is a theoretical construct only, neither measurable nor constant. … Also: Joe provides an update on the MegaCap-8 stocks, which haven’t been the bullish driving force behind the S&P 500’s performance that they were for most of this year. Quite the opposite.
The Chairman’s Speech
Executive Summary: Today, we examine Fed Chair Jerome Powell’s Jackson Hole speech on Friday. The tone was more hawkish than we expected, with Powell saying that the Fed wouldn’t hesitate to raise interest rates further if needed to bring inflation back down to the Fed’s 2.0% target but failing to say what it would take for the Fed to lower interest rates given that inflation has been moderating. … We also examine 12 sets of economic data that Powell monitors, sharing what he said their recent readings indicate and our observations on each. … And Dr. Ed reviews “Painkiller” (+).
Morning Briefing 2023-08-24
Executive Summary: The Federal Trade Commission has been taking aim at tech giants, with investigations targeting Amazon, Meta, and Microsoft. It’s also out to prevent big tech companies generally from using AI to gain unfair advantages and from buying their way into market dominance by acquiring smaller companies. Jackie examines where FTC Chair Lina Khan is leading the agency. … And in our Disruptive Technologies segment, a look at scientists’ nascent efforts to harness the power of fusion to generate energy in the hopes that it can someday replace the burning of fossil fuels.
Dueling Composite Indicators
Executive Summary: The Conference Board’s trio of economic indicators flashed conflicting messages in their recently reported July readings. The leading indicator says a recession is overdue. The coincident indicator keeps scaling new heights. The lagging indicator has been peaking, as it does after recessions are almost over! Today, we explore explanations in the specific components that each index measures. … Also: The CPI services inflation rate significantly lags the CPI goods inflation rate. Services’ inclusion of rent is much of the reason. … And: Q2 earnings reporting season is nearly over. Joe analyzes the near-final data on Q2 earnings growth and the encouraging estimate revisions trend.
Bond Yields Returning To Normal
Executive Summary: My bond market outlook over the past 40 years was misrepresented in a Bloomberg story on Friday. To set the record straight, I was bullish on bonds from 1983-2021, not regularly predicting a return of the Bond Vigilantes as reported. … But they are back now, driving up the 10-year Treasury bond yield on concerns about the mounting federal deficit. The Bond Vigilantes still care about inflation (which is moderating), but they also care more about supply and demand than in the past, with the federal government straining both (via fiscal spending and QT). … What’s next? We think the Treasury bond yield is returning to normal around 4.50%-4.75% as the economy returns to its Old Normal.
No Hard Feelings
Executive Summary: Is the strength of the economy a double-edged sword that means higher-for-longer inflation, further monetary tightening, and a recession? Or will the tightening that’s already occurred fell the economy still? Or is the mounting federal budget deficit the economy’s Achilles’ Heel? While we remain in the light-side camp, we do share the deficit concerns of dark-side prognosticators: Profligate government spending combined with falling revenues as a percent of GDP points to nowhere good. The bond market is concerned too. Fed Chairman Powell will have a chance to calm the bond market at Jackson Hole on Friday. Much depends on whether he does. … And: Dr. Ed reviews “Breaking” (+ +).