Digital Finance Analytics (DFA) Blog
"Intelligent Insight"
An in-depth look at New Zealand, as the Reserve Bank holds rates at 5.5% and underscores the need to hold rates higher for longer. Plus, the inquiry into Banking Competition fires up, and the Chief statistician says people do not want to talk to them! Wonder why?
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Wall Street’s main stock indexes closed sharply lower on Tuesday after stronger-than-expected retail sales data stoked worries interest rates could stay higher for longer, while U.S. big banks dropped on a report that Fitch could downgrade some lenders.
The U.S. retail sales data comes on the heels of strong inflation readings for July, and could potentially give the Fed more impetus to remain hawkish in the coming months. Such a scenario bodes poorly for risk-driven assets, particularly tech stocks.
The Commerce Department report showed retail sales grew 0.7% last month against expectations of a 0.4% rise, suggesting the U.S. economy remains strong.
After the data, traders’ bets of a pause on hikes by the Federal Reserve next month stayed intact at 89%, yet analysts said investors were worried rates could stay at current levels longer than anticipated.
Banks saw the brunt of the selling as investors grew more anxious about interest rates. The U.S. Treasury yield curve has been inverted for over a year, with longer-term bonds yielding less than short-term debt instruments. This persistent situation pressures profits that banks can earn on loans.
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Our normal weekend market update, as incoming data is all over the show. No wonder things are volatile!
The S&P 500 and the Nasdaq Composite fell on Friday and posted their second straight weekly losses, as hotter-than-expected U.S. producer prices data pushed Treasury yields higher and sank rate-sensitive megacap growth stocks. Being data dependent, means markets will be highly volatile over the northern summer.
Data on Thursday showed U.S. consumer prices increased moderately in July, with the smallest annual increase in core inflation in nearly two years, lifting hopes that the Federal Reserve is at the end of its rate hike cycle.
However, San Francisco Fed Bank President and CEO Mary Daly said that more progress is needed before she would feel comfortable the Fed has done enough to rein in inflation.
US producer prices picked up in July, primarily due to increases in certain service categories, highlighting the choppy nature of getting inflation back down to target.
According to the Bureau of Labor Statistics the producer price index for final demand, as well as the core index which excludes food and energy, both rose by 0.3% in July, While those came in slightly more than forecast, downward revisions to the prior month tempered some of the strength.
Normalizing global supply chains, tepid demand abroad, and a broader shift in consumer spending toward services and away from goods have generally helped alleviate inflationary pressures at the producer level over the last year. But headwinds are building again as oil prices climb.
Service costs rose by the most in nearly a year, reflecting increases in categories including portfolio management, outpatient care and passenger transportation. Several categories from the PPI report, notably in health care, are used to calculate the personal consumption expenditures price gauge — the Federal Reserve’s preferred inflation measure — that will be released later this month.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
In a choppy trading session indexes rose in the morning, then wavered before turning negative so Wall Street closed lower on Friday after a report of slowing U.S. labor market growth, and all three major indexes posted weekly losses as investors braced for more possible downside surprises a day after disappointing earnings from Apple.
A mixed July jobs report showing fewer than expected job gains in July, but an uptick in wages that threatens a re-acceleration in inflation and so more FED action. Still the markets are holding the faith on a soft landing for the economy as the FED tightens. It still though might feel like a hard bump.
The weekly percentage declines for the S&P and Nasdaq were the biggest since March, with some investors taking profits after five months of gains due to economic data, disappointing earnings and rising Treasury yields.
The Labor Department reported that U.S. employers added 187,000 jobs in July. Data for June additions was revised lower to 185,000 jobs, from 209,000 reported previously. Average hourly earnings rose 0.4% in July, unchanged from the previous month, exceeding expectations, taking the year-on-year increase in wages to 4.4%.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
My latest Friday chat with Journalist Tarric Brooker, as we deep dive into the latest charts and trends.
You can see the charts here: https://avidcom.substack.com/p/dfa-chart-pack-4th-august-2023?sd=pf
Japan article here: https://avidcom.substack.com/p/kamikaze-bank-of-japan-policy-and
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
This is an edited version of a discussion with Head of Investments at Walk The World Funds and Nucleus Wealth, Damien Klassen. Has FOMO taken over as inflation eases down, or is this a head fake?
Go to the Walk The World Universe at https://walktheworld.com.au/
Well, dangerous investor euphoria is now spreading like a rash on the belief, at least in the US, of a perfect soft landing as inflation is vanquished, without a recession. Cash and hedges are out, replaced by demand for everything from small caps to meme stocks. Industrial shares are on a tear, junk-bond spreads are narrowing, quants are ramping up Treasury shorts and everyone is piling into stocks.
How different from the recent talk about recession, as data on the surface at least suggests the US economy is thriving amid mounting evidence the Federal Reserve is beating inflation.
On Wednesday, Federal Reserve Chair Jerome Powell said the Fed was not forecasting a recession and did not rule out another rate hike, saying it would follow future economic data. But they would not hit their inflation target until 2025.
More than half of the firms listed on the S&P 500 have reported second quarter earnings as of Friday, out of which 78.7% have surpassed analyst expectations.
All the optimism has sent the S&P 500 to the brink of its sixth advance in seven months and pushed prices in the Nasdaq 100 to almost 35 times profit. It’s manna for bulls — even as it leaves them with precious little wiggle room should anything in the economy or monetary policy not unfold as hoped.
Economic data keeps defying bearish predictions — everything from gross domestic product to consumer confidence and hiring has beaten forecasts. Reports on Friday showed the employment cost index had its slowest advance since 2021 in the second quarter, while the Fed’s preferred inflation gauge posted the smallest increase in more than two years.
The personal consumption expenditures (PCE) price index increased 0.2 per cent last month after edging up 0.1 per cent in May, the Commerce Department said. Food prices dipped 0.1 per cent while the cost of energy products increased 0.6 per cent.
In the 12 months through June, the PCE price index advanced 3.0 per cent. That was the smallest annual gain since March 2021 and followed a 3.8 per cent rise in May.
http://www.martinnorth.com/
The Fed lifted rates again on Wednesday to a 22-year high, and pretty much repeated the statement from last month. But there is an expectation of higher rates for longer, and that inflation would be above target for the next couple of years.
The market reacted as expected, given the hike was well signaled, but lifted the probability of another hike this year a little, but that will be determined by incoming data. The Fed meets again late September.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
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Wall Street closed out another week with a quiet Friday on US markers as stocks found some stability after sliding the day before.
The S&P 500 edged up by less than 0.1 per cent, to 4,536.34 to cap its eighth winning week in the last 10. The Dow Jones Industrial Average added less than 0.1 per cent, to 35,227.69.
The blue-chip index was lifted by gains of more than 1% each in Procter & Gamble (NYSE:PG) and Chevron (NYSE:CVX) . It is now up over 6% in 2023, compared to the S&P 500’s 18% rise.
To be sure, the 18.1 per cent jump for the S&P 500 this year also has critics saying the rally has come too far, too fast. The risk of recession remains because inflation and interest rates remain high.
In Australia, The RBA does not expect inflation to return to the upper end of its 2 per cent to 3 per cent target band until mid-2025.
ASX company profits are on track to contract in the 2024 financial year for the first time since the pandemic, casting a dim light on the forthcoming earnings season which investors and strategists warn will translate to weaker returns for shares. Soaring wage bills, the rising cost of borrowing, and high energy costs are eroding profit margins and offsetting the bullish performance of Australia’s jobs market and robust house price growth.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
In another volatile week, the markets latest winning week closed with a mixed finish on Friday following stronger profit reports than expected from several big US companies and more benign inflation news from the US this week.
Hopes for an easier Fed also helped stocks worldwide to strengthen, though markets abroad were also mixed on Friday. The MSCI World Equity index was little changed, staying at its peak for the year and its highest level since early 2022.
For the week, the Dow was up 2.3%, the S&P 500 rose 2.4% and the Nasdaq advanced 3.3%. The S&P 500 remains up 17% for the year to date.
Data showed on Wednesday U.S. consumer prices growing at their slowest pace in more than two years, and on Thursday the smallest increase in U.S. producer inflation in nearly three years. On Friday, the government reported that U.S. import prices dropped 0.2% last month, and U.S. consumer sentiment jumped to the highest level in nearly two years.
The US earnings reporting season is just getting underway, and Wall Street’s expectations are low. Analysts are forecasting the worst drop in earnings per share for S&P 500 companies since the spring of 2020. If they’re right, it would also mark a third straight quarter where profits sank.
Such expectations are key for financial markets, because one of the biggest factors that set a stock’s price is how much profit a company produces.
And a preliminary reading on a University of Michigan survey showed consumer sentiment at its highest level since September 2021, though lower-income consumers weren’t feeling as positive.
The big recent gains for stocks on Wall Street have some critics cautioning investors not to get carried away by hopes for what’s called a “soft landing,” where high inflation can be vanquished without a painful recession.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/