Taking Stock Of A Load Of Macro Inputs

There are a lot of macro inputs for the market to digest today, including the output heard yesterday from the FOMC and Fed Chair Powell.

There was a unanimous vote (a surprise to us) to hold the target range for the fed funds rate steady at 5.00-5.25% and new projections that included an upward revision to the median estimates for the change in 2023 real GDP (to 1.0% from 0.4%), a downward revision to the expected 2023 unemployment rate (to 4.1% from 4.5%), and an upward revision to the expected 2023 core PCE inflation level (to 3.9% from 3.6%). In turn, the dot-plot contained a median estimate for two more rate hikes before the end of the year (versus one more rate hike that the market had been expecting).

In sum, there were a few surprises from the Fed yesterday, yet the stock market didn’t act as if it was really surprised. The S&P 500, which experienced some normal volatility following the decision, ended the day at roughly the same level it was trading just before the FOMC decision at 2:00 p.m. ET.

The tolerance for the Fed’s surprises was underpinned by an assumption that the Fed won’t ultimately realize the projection of raising rates at least two more times before the end of the year. That assumption was borne out of an abiding belief that inflation trends will improve more than the Fed expects, thereby allowing the Fed to hold off on additional rate hikes.

This will be the great divide in coming months that one side is going to have to cross: either the market is right or the Fed is right. If the Fed is right, then the market will find its climb more challenging. If the market is right, then one might reasonably expect to see some shock absorbers kick in on any pullbacks, as participants ride the notion that the rate hikes at least are basically over.

That doesn’t mean, however, that the Fed is going to pivot quickly to a rate-cut cycle. It is apt to keep rates higher for longer until it is confident inflation will get back to its 2.0% target and stay there on a sustained basis. How the economy handles the higher rates for longer will be key in dictating the market’s path since that will ultimately factor into thoughts about earnings prospects.

In other central bank news, the People’s Bank of China cut its one-year medium term lending facility rate by 10 basis points to 2.65% amid a slate of May retail sales, industrial production, and fixed asset investment data that was all weaker than expected. The European Central Bank for its part raised its three key policy rates by 25 basis points, as expected.

Those developments preceded a large batch of economic data out of the U.S. this morning that was mixed:

• Total retail sales increased 0.3% month-over-month in May (Briefing.com consensus 0.0%). Excluding autos, retail sales increased 0.1% month-over-month (Briefing.com consensus +0.1%).
  • The key takeaway from the report is that spending was flat or up in May across nearly every retail category with the exception of gasoline stations (-2.6%) and miscellaneous store retailers (-1.0%), which speaks to the enduring spending capacity of U.S. consumers who continue to be bolstered by a strong labor market.
• Initial jobless claims for the week ending June 10 were unchanged at 262,000 (Brieifng.com consensus 251,000). Continuing jobless claims for the week ending June 3 increased by 20,000 to 1.775 million.
  • The key takeaway from the report is that initial jobless claims have elevated in recent weeks, yet they remain well below levels north of 375,000 that have been seen in all recession since 1980.
• The June Philadelphia Fed Index slumped to -13.7 (Briefing.com consensus -13.0) from -10.4 in May.
  • The key takeaway from the report is that June was the tenth consecutive negative reading, pressured by another negative reading for the new orders index (to -11.0 from -8.9).
• The June Empire State Manufacturing Survey surged to 6.6 (Briefing.com consensus -16.0) from -31.8 in May.
  • The key takeaway from the report is that the index for future business conditions jumped to 18.9 from 9.8, which is the second consecutive increase and suggests firms have become more optimistic about conditions improving over the next six months.
• May import prices declined 0.6% month-over-month following a downwardly revised 0.3% increase (from 0.4%) in April. Excluding fuel, import prices were down 0.1% following an unchanged reading for April. Export prices declined 1.9% month-over-month following a downwardly revised 0.1% decline (from 0.2%) in April. Excluding agricultural products, export prices declined 1.8% following a downwardly revised 0.1% decline (from 0.2%) in April.
  • The key takeaway from the report is the deflation seen in import prices year-over-year (-5.9%), nonfuel import prices year-over-year (-1.9%), export prices year-over-year (-10.1%), and non-agricultural export prices year-over-year (-10.5%).

The equity futures market improved somewhat after the release of the data, which coincided with an improvement in the Treasury market after the release of the data. The 2-yr note yield is down three basis points to 4.67% (having been as high as 4.78%) and the 10-yr note yield is down four basis points to 3.76% (having been as high as 3.84%).

Currently, the S&P 500 futures are down 11 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 61 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 25 points and are trading 0.1% below fair value.

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Originally Posted June 15, 2023 – Taking stock of a load of macro inputs