In a week that will bring a number of important data points that the Federal Reserve will use to determine near-term monetary policy, we had yet to receive either of the two most important reports. That changed this morning when the Bureau of Economic Analysis reported July personal consumption and spending data. The report included the latest Personal Consumption Expenditures (PCE) Price Index reading, which is the tracker of inflation most closely watched by the central bank.
The release, issued at 8:30 A.M. (EDT), showed that the PCE Price Index and the core-PCE, which excludes the volatile food and energy components, both rose 0.2% for the month and were up 3.3% and 4.2%, respectively, on a 12-month basis. These figures were relatively in line with expectations and did not change the narrative that the Federal Reserve will likely keep interest rates at elevated levels for an extended stretch. Overall, personal income increased 0.2% last month, while personal expenditures jumped 0.8%. Following the release, Treasury market yields inched slightly higher and the equity futures, which were comfortably in positive territory heading into the report, weakened, and the NASDAQ is now looking at lower opening when trading kicks off stateside. The Dow Jones futures are getting a boost from a sharp move higher from shares of Salesforce, Inc. (CRM) following the release of the company’s latest quarterly results (more below).
The four bullish trading sessions leading up to today, the final day of August, have helped the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 retrace some of the month’s earlier losses, and the 31-day stretch is not looking anywhere near as bad as pundits thought was possible just one week ago when the Fed commenced its annual three-day Jackson Hole, Wyoming conference. The broader S&P 500 Index and the tech-heavy NASDAQ Composite enter the final day of August holding respective month-to-date losses of just 1.6% and 2.3%. Prompting the rally this week was a series of economic reports that Wall Street deemed to be of the “Goldilocks” variety. Specifically, the data revealed that the Fed’s goal of reducing inflation is working, but not at the expense of rapidly slowing the U.S. economy.
Among the “Goldilocks” reports was the first revision to the second-quarter Gross Domestic Product (GDP) estimate from 2.4% to 2.1%. This revealed some moderation in output, but the overall growth was still above the expectations that Wall Street held heading into the June quarter. The GDP revision also showed a drop in the second-quarter PCE Price Index and the core-PCE Price Index, which was an encouraging sign for the Fed in its battle to tame inflation. This followed an Automatic Data Processing (ADP) report revealing a slowdown in the pace of private sector jobs creation in July, and the Labor Department’s Job Openings and Labor Turnover (JOLTs) release that indicated a decline in the number of job openings. This should put some downward pressure on salaries and ultimately the average hourly wage figure, which the Fed believes is needed to combat inflation in the labor market.
Tomorrow, the Labor Department’s report on August employment and unemployment will be highly scrutinized, as it will provide another indication of whether the Fed’s goal of slowing job growth is working, with the end game of reducing inflation. This morning, initial jobless claims for the week ending August 26th totaled 228,000, below the consensus expectation of 235,000, and the lowest level recorded in August.
We also received some corporate earnings news since the close of trading yesterday afternoon. The headline reports came from the technology sector. Dow-30 component Salesforce beat expectations for both revenues and earnings per share. The company also raised its full-year guidance, and shares of the technology company are trading higher in pre-market action. Cybersecurity company Okta (OKTA) also reported strong results, citing better IT spending as the main catalyst, and its stock is higher in extended hours trading. Likewise, fellow cybersecurity company CrowdStrike Holdings (CRWD) beat on the top and bottom lines and raised its guidance. The stock initially traded lower, as Wall Street did not like that annual recurring revenue, a key metric for the company, fell in the latest period, but it since reversed course and is also looking at a higher start today.
On the retailing front, the market’s reaction to the quarterly results was not as good. Online pet food retailer Chewy (CHWY) reported earnings per share of $0.04, on better-than-expected revenue growth. The consensus was looking for a $0.05-a-share loss last quarter. Meantime, discount retailer Five Below (FIVE) beat expectations on both the top and bottom lines. However, shares of both companies are looking at lower openings, as it may be a case of “buy on the rumors, sell on the news.”
For the most part, these reports are continuing the recent trend that those companies beating expectations and issuing positive near-term guidance are seeing their stock prices get a nice boost. Our sense is that with Treasury market yields higher and the Fed looking to keep interest rates higher for longer, earnings for the S&P 500 companies will need to continue to trend positively in the coming quarters to support the current frothy market valuations. If consensus earnings expectations were to be revised lower over the next few quarters, the market’s current price-to-earnings multiple of above 19 times 12-month forward-looking earnings would likely not be sustainable. Thus, we continue to recommend that investors maintain a portfolio of high-quality companies that have demonstrated an ability to generate steady earnings and cash flows even during less-than-ideal economic times. - William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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