Investors are parsing several new data points released this morning, prior to the commencement of today’s trading session; stock futures suggest a negative open.
The Commerce Department reported that personal consumption expenditures (PCE) declined 0.1% and core PCE, that is, before food and energy prices, increased 0.1% in July, on a month-to-month basis. Year over year, PCE inflation was up 6.3%, while the core PCE, which is closely monitored by the Federal Reserve, advanced 4.6%. These readings marked a further easing of inflation. Separately, last month, nominal personal income increased 0.2%, less than the 0.7% growth rate for June, and nominal consumer spending picked up 0.1%, slower than the previous-month rate of 1.0%.
Shortly, investors will review the latest University of Michigan’s August consumer sentiment index figure for any improvement from record lows. That institution will also provide the results of its recent survey of five-year inflation expectations.
At the same time, Federal Reserve Chairman Jerome Powell will speak at the Kansas City Fed’s economic symposium in Jackson Hole, Wyoming. Wall Street is hoping for a clearer view on the central bank’s strategy for the current interest-rate cycle. The consensus on the street is that an aggressive one-half or a three-quarters of a percentage point increase in short-term interest rates will be set at the Fed’s upcoming September meeting. Importantly, Fed officials are suggesting that once rates reach an effective range, possibly 3.75%-4.00%, they will stay at such a level through all or most of 2023 in order to contain inflation. Concomitantly, the Fed plans to reduce bond holdings on its balance sheet, also known as quantitative tightening, to rein in market liquidity.
Leading up to today, stocks traded flat-to-down for the week, reflecting investors’ hesitancy to commit in a big way to buying or selling before the new data is released. The tech-heavy NASDAQ proved the most resilient to losses through Thursday, while the Standard & Poor’s 500 and the Dow Jones Industrial Average fell behind. In yesterday’s trading, stocks gathered some strength during the final half hour, underpinned by a report that second-quarter Gross Domestic Product contracted at lower rate than previously estimated. Advancers led decliners by a ratio of five-to-one. All eleven market sectors posted improvement. Equities rising in valuation included Marvell Technology (MRVL), Royal Caribbean (RCL), and Micron Technology (MU); all of these advanced in the 5% range. Among the notable laggards were Dollar Tree (DLTR), down 10%, Paychex (PAYX), off by 0.8%, and Tesla (TSLA), losing 0.35%. Overall volatility was subdued and trading volume was light.
To the end of this year, we would not be surprised to see stock market volatility increase. There are a number of potential negatives. A severe drought is disrupting energy supplies and manufacturing in hydroelectric-dependent areas of China. Even before these disruptions, that economy was slowing as consumers cut back on spending and investment in an inflated real estate market. Elsewhere, Western Europe faces the possibility of more-severe energy shortages and aggravated supply-chain issues, resulting from the prolonged Russia-Ukraine military conflict. Here in the United States, lingering energy and food inflation could further erode consumer budgets and hurt corporate earnings. Fortunately, current household and company finances are still in decent shape. A strong labor market augurs well for continued, reasonably healthy consumer spending. Those saying we remain in a bear market, despite the rally since mid-June, could prove to be correct. At this time, it’s best to be conservative and focus on the high-quality stocks of firmly established organizations.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
