Markets Flourish as They Await Tech Earnings, Powell: July 24, 2023

Investors appear optimistic about more market moving earnings reports later this week, with capital markets moving in their favor. This positivity persists even as today’s S&P Global Flash Purchasing Managers’ Index points to slowing economic growth amidst persistent inflation. Market players are also bracing for Federal Reserve Chairman Jerome Powell’s comments this Wednesday with hopes that economic activity is slowing just enough to subdue inflationary pressures while maintaining corporate earnings strength.

Flash PMI data released this morning provided little surprises. In fact, the PMI has looked similar all year, as growth in the services sectors continues while manufacturing remains in persistent decline. Overall, this morning’s data points to businesses managing slower ordering and tenacious inflation by hiring at a subdued pace.

July’s services PMI of 52.4 trailed projections of 54 and weakened from June’s 54.4 level. July’s reading is a five-month low as consumer exhaustion weighs against the backdrop of fading savings and high prices. Confidence among service providers declined as a result, with chief executives reporting blurred visibility into the coming months, which is challenging inventory levels, staffing and expansion plans.

Manufacturers continue to depend on older orders, as lofty borrowing costs and higher prices continue to weigh on new orders. The long-awaited Chinese recovery has also failed to manifest, weighing on global manufacturing conditions. The manufacturing PMI came in at 49 for the month, a three-month high and much better than expectations of 46.2 and June’s 46.3 level. Still, a level below 50 indicates that the sector contracted during the month albeit at a slower rate of change. The slower contraction is generating confidence among manufacturing administrators, with easing labor shortages, onshoring trends and hopes of a soft landing boosting sentiment in the sector to its highest level since April 2022. 

Consumers Send Mixed Signals

As consumers face higher costs of living, they are pushing back on price increases, at least in the case of Dominos Pizza. During its earnings call this morning, Dominos said its second-quarter revenues weakened in response to the company raising its prices to improve profit margins. The company’s same-store sales increased only 0.1% year-over-year (y/y) during the quarter, missing the analyst consensus expectation of a 0.2% increase. Additionally, the company’s total revenue of $1.02 billion dropped 3% and missed the consensus expectation of $1.07 billion. Dominos’ earnings of $3.08 per share, however, beat the consensus expectation of $3.05. Meanwhile, Adidas just held a $565 million blockbuster sale of Yeezy shoes, or shoes branded with rapper Ye, formerly known as Kanye West. Orders for the sneakers exceeded the company’s expectations.  Adidas severed its branding deal with Ye and the strong results of the shoe sales may have been driven by Ye fans realizing supply of the products is ending, but it could also point to consumers continuing to have strong spending power.

Markets Continue Winning Streak

The Dow Jones Industrial Average is on track for its eleventh-consecutive trading day of gains while bond yields are unchanged. All major U.S. indices are in the green, with the S&P 500 Index up 0.5% to 4559. Participation is positive as well, with almost all sectors gaining except for utilities and materials. Crude oil is up strongly, as comments from the Chinese Politburo supported positive sentiment regarding the nation’s prospects for stimulative fiscal and monetary policies. Lighter production from OPEC + on the back of bulls out of Riyadh and Moscow alongside cash dividend focus in the United States is also boosting prices as the commodity aims for a fifth-consecutive week of gains, with WTI crude oil up 2% to $78.60 per barrel. The inflationary impact of rising oil prices and dismal PMI readings out of the EU and Great Britain are propping up the dollar and weighing on the euro, with the Dollar Index rising 19 basis points to 101.27.

The Monetary Balance Beam

With the Fed striving for a delicate balance between curtailing inflation and maintaining low unemployment, one central question for investors is what the impact of higher interest rates and a slowing economy will be on corporations. As more firms report earnings, the outlook for the aggregate result of S&P 500 companies is weakening and at the current pace may be the worst since the second quarter of 2020, according to FactSet Research.

In the coming days, earnings reports will provide additional insight into how much the Fed’s hawkish policies have dented corporate results, the overall economy and if the central bank is likely to stick by its expectations of raising rates twice by year end.  Based on unemployment claims from last week, labor market strength is continuing, while other data, such as existing home sales, retail sales, today’s PMIs and the Conference Board’s Leading Economic Index point to a slowing economy. With those points in mind, I look forward to upcoming earnings calls and comments from Jerome Powell after the Fed meeting on Wednesday.

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