Futures markets have displayed a negative bent this morning. Prior to today’s stock trading, government statisticians reported that the July Producer Price Index (PPI) rose 0.3%, month over month, versus no advance in June. Year to year, the PPI was up 0.8%, compared to the previous reading of 0.1%. The core PPI, which strips out volatile food and energy data, also showed a monthly advance of 0.3%; it gained 0.1% in June. Measured against the year-earlier level, core PPI increased 2.4%; that’s even with the pace in the month before. Not surprisingly, investors appear to be viewing the latest higher-than-anticipated inflation news in an unfavorable light. Shortly, experts at the University of Michigan will reveal their consumer sentiment survey results for August. The consensus among economists is that sentiment will be at the 72.0 level, a modest improvement over the 71.6 mark posted for July. This relatively volatile indicator has tracked upward since last May, more evidence that consumers are feeling a bit more confident about their situation – and indicating higher demand tending to push prices up.
The domestic market indexes look to turn in a soft performance for all of this week. Blue-chip Dow Jones Industrial Average stocks might have trouble holding onto a modest overall gain. The broader Standard & Poor’s 500 index looks to finish flat to down for the five trading days. NASDAQ composite stocks, heavily comprised of technology companies, which until recently have been equities market leaders, could well record a consolidated loss of more than 1%. One other highly visible event has pressured equities, lately. Moody’s undertook a keen review of the banking sector, deciding to downgrade the credit of many banks, or place them on negative watch. The smaller regional banks took the biggest hit. The credit rater has become concerned about the banks’ ability to not only hold onto deposits, as interest rates rise, but to accurately record the amount of uninsured cash obligations on their books. Too, the higher cost of deposits is stressing bank profitability.
Next week, investors will receive more data on U.S. retail sales, import prices, housing, manufacturing, industrial production, capacity utilization, and jobless claims, as well as a measure on leading economic indicators. We think this new data will support the view that a harsh recession can be avoided. Up to now, gross domestic product has proven healthy, recent corporate earnings have come in better than expected, unemployment has stayed low, wage growth has moderated, consumer spending, especially with regard to services, has held up well, and consumer price inflation has been slowly moderating. This augurs well for stocks in the second half of 2023.
Still, we caution that a fair amount of uncertainty persists. The Federal Reserve appears on course to execute a “soft landing” (i.e., no recession) for the domestic economy. Central bank officials, however, seem open to raising the federal funds rate another one-quarter point, to 5.50%-5.75%, before yearend. Anything more than that could further stress the financial sector and spark a broader downturn. Elsewhere, the Bank of Japan has created some concern by easing bond yield limits, China’s economy appears to be stumbling in its rebound from the dark days of the coronavirus pandemic, Taiwan remains under threat from China, North Korea and Iran continue to test the resolve of the U.S. government, and the Ukraine-Russia conflict has yet to reach a conclusion. Furthermore, energy and food price inflation soon could reignite.
The consensus on Wall Street is that the stock market will suffer a modest pullback in the short run, and then strengthen to the close of 2023, assuming no recession. This is a credible, though not assured, scenario. We advise holding some cash and bonds, while focusing portfolios on leading industrial, energy, financial, and healthcare issues, as opposed to pricier technology stocks. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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