Executive summary:
- Headline inflation decelerated
- The labor market cooled
- Fed has confidence that inflation is moving sustainably toward 2%
- Powell states a September rate cut could be on the table
- Value outperformed growth
Index performance for July:
Equity price action in July can be summed up as a rotational shift from the crowded mega-tech / AI trade that had moved the Nasdaq-100 and S&P 500 indices to record highs earlier in the month to investor enthusiasm for small-cap stocks, particularly the Russell 2000 and Russell Microcap indices. Cooling inflation, a weakening labor market, steady economic growth, higher odds for multiple Fed rate cuts this year and an increasing likelihood of an economic “soft landing” (more below) contributed to the shift.
The “great rotation” (as some are calling it) is being fueled by an optimistic investor sentiment that anticipates interest rate cuts will stimulate wider economic growth, benefiting smaller companies. Funds flowed out of mega-cap names as investors assessed significant earnings growth rates alongside stretched valuations.
Accordingly, Value outperformed Growth in July. The Russell 1000 Value Index had a total return of 5.8% this month while the Russell 1000 Growth Index lost 1.5%. The Nasdaq-100 Index, which is heavily weighted in the tech space, lost 1.5% in July, while the Russell 2000 and Russell Microcap indices gained 11.8% and 13.5%, respectively.
The Federal Open Markets Committee left the Fed Funds rate unchanged at 5.25%-5.5% as expected. However, in the ensuing press conference, Chair Jerome Powell indicated that a rate cut at the September meeting could be on the table, saying, “The question will be, where the totality of the data, the evolving outlook, and balance of risks are consistent with rising confidence and maintaining a solid labor market. If that test is met, the reduction of the policy rate could be on the meeting as soon as September.”
Sector performance total return for July:
Rate cut odds suggest a 100% chance of a cut at the September FOMC meetings with two more possible cuts by year end:
Earnings commentary:
S&P 500 corporate earnings for Q2’24 are off to a good start with nearly 60% of the membership reporting. According to FactSet data, nearly 80% of those who reported have announced a positive surprise, averaging about 4% above consensus, with a blended Y/Y earnings growth rate of 10.2% (above the +8.9% consensus expected at the end of the quarter).
Economic commentary:
The U.S. Department of Labor’s July 5th Employment Situation Report for June beat on the headline number; however, when you look under the hood it showed a cooling labor market as the previously reported April and May payrolls were revised down by a combined 110,000 jobs. The report for June posted better-than-expected numbers on job creation (+206,000 new vs +190,000 consensus), a higher unemployment rate (+4.1% vs 4.0% consensus) on an increased participation rate (62.6%), and in-line hourly wage growth (+0.3%). On a Y/Y basis; however, average hourly earnings rose only 3.9% (was 4.1% in May), which is the lowest Y/Y increase since May 2021. All-in-all, the report was not weak but did show signs of a slowing labor market.
Headline inflation decelerated in June as CPI fell -0.1% M/M (consensus +0.1%) and on a Y/Y rose only +3.0% compared to the +3.3% print in May. Core-CPI, which excludes food and energy, increased 0.1% M/M (below consensus of +0.2%) and increased only +3.3% Y/Y vs +3.4% in May. The +0.2% M/M increase shelter was more than offset by the -3.8% decline in gasoline index.
June PPI came in hotter than expected at +0.2% vs consensus of +0.1%. The prior month was revised higher as well from -0.2% to flat. Core PPI increased +0.4% (also above consensus of +0.2%). On an annualized basis, total PPI increased 2.6% vs a revised +2.4% in May. Ex-food and energy, PPI was up 3.0% versus +2.6% in May. June’s hotter print was due to an increase in margins for trade services.
Retail sales showed solid levels of discretionary spending on goods in June. The report (which does not adjust for inflation) was flat M/M in June (consensus ‐0.3%), following an upwardly revised May (+0.3% from +0.1%). Ex-autos, retail sales increased 0.4% (consensus +0.1%) and ex-autos and gas, retail sales rose 0.8% M/M (consensus +0.2%).
U.S. Initial Jobless Claims (a leading indicator) have risen slightly over the past few months, which is consistent with a normal, though slowing, labor market. For the week ending July 13, new claims were 235,000 (consensus 238,000), in-line with the four-week average. Continuing jobless claims decreased W/W to 1.851 million from 1.860 million.
The advance reading for Q2’24 GDP released by the U.S. Department of Commerce showed better than expected economic growth in the U.S. The report showed the economy grew by 2.8% annually (consensus at +2.0%) on the back of strong consumer spending and above the +1.4% increase seen in the first quarter. The GDP Chain Deflator (price index) was up to 2.3% from 3.1% in Q1’24.
June Personal income came in lower than consensus (+0.2% vs 0.4% expected) and below the 0.4% we saw in May. Personal spending increased 0.3% (in-line with consensus), below May’s upwardly revised +0.4% level.
The Fed’s favorite inflation index, the PCE Price Index, rose 0.1% M/M (vs flat in May) and 2.5% Y/Y (vs +2.6% in May). Core increased 0.2% M/M slightly hotter than May (+0.1%) and increased 2.6% in-line with May and slightly above consensus.
The Conference Board’s Consumer Confidence Index improved in July to 100.3 (consensus was 99.7) from a downwardly revised 97.8 in June. The Expectations Index (based on consumers’ short-term outlook for income, business and labor market conditions) increased to 78.2 from a downwardly revised 72.8 in June.
CPI Inflation – YoY:
Treasuries:
Treasury yields have been in a downward trend since April on the back of softening economic data, with market expectations that the Fed will start cutting rates this September. Specifically, the July 5th Jobs Report saw the monthly unemployment rate tick up to 4.1% and the July 11th CPI report when both headline and core CPI (i.e., inflation) came in below consensus. The 2Y yield ended July near its lowest level since February, while the 2/10 spread hit its least inverted point in two years (chart below).
Yield on the 2-year Treasuries:
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity:
Oil:
Oil futures declined 4.5% in July despite the month end rally related to rising tensions in the Middle East.
According to AAA data, the average cost of a gallon of regular gas in the U.S. is $3.49 down about 26 cents from this time last year.
Crude Oil front month contract for July:
Dollar:
The DXY declined 1.7% in July and was weaker on most major crosses. The Japanese yen was a focal point for FX following numerous intervention headlines and another BoJ rate hike.
Looking ahead:
Fed speak, economic data and the continuation of Q2’24 earnings will be the focus for investors in August. On the economic calendar, the July Jobs report will be released Friday morning (8/2). Economists are expecting the unemployment rate to remain unchanged at 4.1%. PPI will be released on Aug. 13, followed by CPI on Aug. 14 and Retail Sales on Aug. 15. At the end of the month, we have the Jackson Hole Economic Symposium which this year is titled “Reassessing the Effectiveness and Transmission of Monetary Policy.”
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