Core Personal Consumption Drops To 4.7% Annual Rate

(Thursday Market Open) Equity futures skidded on this final day of a tumultuous first half for U.S. markets, not moved much by May inflation numbers that were slightly better than expected. Manufacturing production numbers rounding out the Q2 picture tomorrow should set the tone for a big earnings season in July.  

Potential Market Movers

The Federal Reserve’s favorite inflation measure came in slightly lower than expected, which may be good news that U.S. price increases are finally moderating.

The flip side, of course, is that if the consumer component of gross national product (GNP) is dropping, that could potentially be bad news for equities in the consumer sectors. Whatever emerges, this week’s numbers are setting the stage for an eventful earnings season in the coming weeks and big questions about what 2022’s second half will look like.

In premarket trading, stock futures headed lower. S&P 500 futures were down 1.19% just before the market open, Dow Jones futures lost 1.09%, and Nasdaq futures skidded 1.28%. The S&P 500 is fully on course to finish its worst first half since 1970.

The Personal Consumption Expenditures (PCE) Price Index rose a headline 6.3% in May, unchanged from last month’s reading. Core PCE dropped to a 4.7% annual rate, down from April’s 4.9% reading.

U.S. personal spending also rose a slight 0.2% month-over-month in May, the weakest gain of the year, after a downwardly revised 0.6% in April.

The Cboe Market Volatility Index (VIX) had moved above 29 just before the open, indicating investors expect additional churn in today’s markets.

Also before the open, initial jobless claims, a key layoff indicator, declined to a seasonally adjusted 231,000 last week from a revised 233,000 the week before. The labor market’s still tight, but the latest numbers may show that the hiring boom could be slowing down.

Walgreens Boots Alliance WBA reported quarterly earnings and sales ahead of estimates and reiterated its forecast for adjusted earnings per share in the low-single digits. Earlier this week, the company halted its plans to sell its U.K.-based Boots drugstore chain, and its shares are down more than 25% for the year.

Reviewing the Market Minutes

 

Stocks finished mixed yesterday in advance of Thursday’s May PCE, and weekly jobless claims reports will likely provide more detail on inflation and, perhaps more importantly, on the health of the job market.

The Dow Jones Industrial Average ($DJI) was the only major index to finish higher on the day with a slight 0.27% advance, while the S&P 500 (SPX) lost 0.07% and Nasdaq Composite ($COMP) retreated 0.03% by the close. The small-cap Russell 2000 (RUT) finished down 1.12% by the end of Wednesday’s trading. Perhaps as a relief to investors tiring of recent volatility, a panel discussion between leading central bank chiefs in Portugal didn’t seem to move the market extensively in either direction. By the close, the Cboe Market Volatility Index (VIX) was at 28.

Federal Reserve Chief Jerome Powell told the European Central Bank forum audience that he remains more concerned about failing to tame recession than raising rates too high and risking recession. Said Powell, “Is there a risk we would go too far? Certainly, there’s a risk…the bigger mistake to make—let’s put it that way—would be to fail to restore price stability.”

 

Before Powell’s remarks, Cleveland Fed president Loretta Mester told CNBC that the central bank was “at the beginning” of increasing rates to fight rising prices and would advocate for another 75-basis-point hike based on whatever information that surfaces before the Fed’s next rate meeting in late July.

However, other European bankers at the event, including ECB head Christine Lagarde, indicated they may move more gradually. Early yesterday, the annual inflation rate in Germany slowed unexpectedly to 7.6% in June, below market forecasts of 8%.

The market will finish a tough first half today and more economic reports will finish out the week. After tomorrow’s PCE numbers, initial jobless claims and Chicago PMI figures, the market will look closely at ISM Manufacturing PMI figures on Friday for a sign of changes in manufacturing production levels across the country. Then comes the long Independence Day weekend.

After positive news that China is cutting quarantine periods for international visitors in half, most major indexes in Asia declined. The Shanghai Composite Index fell 1.4%, Hong Kong’s Hang Seng Index slipped 1.9%, and Japan’s Nikkei 225 retreated 0.9%.

Meanwhile, the price of bitcoin remained near $20,000 after a British Virgin Islands court ordered cryptocurrency hedge fund Three Arrows Capital to liquidate after creditors sued for debt repayment.

The Stoxx Europe 600 fell 0.7%.

Amid all the discussion, the U.S. economy is already slowing. Yesterday, the Commerce Department issued a revision for the first-quarter drop in gross domestic product (GDP) to 1.6%, a tenth of a percentage point lower than its first estimate. If upcoming GDP estimates for the second quarter show a continued contraction, that would be the official definition of a recession. On Monday, the Federal Reserve Bank of Atlanta’s GDPNow tool placed its second-quarter GDP estimate at 0.3% on Monday, up from 0.0% on June 16.

WTI crude oil settled at $109.71 on Wednesday, down a fraction, while the 10-year Treasury finished at a yield of 3.087%, unchanged from the previous day.

Among stocks making news on Wednesday:

• General Mills GIS gained 6.30% after earnings topped estimates and the company raised its dividend.
• Bed Bath & Beyond BBBY slid 24% after posting a greater-than-expected quarterly loss announcing its CEO is leaving.
• Carnival Corp CCL lost 14.13% after Morgan Stanley cut its price target for the cruise line to $7 per share.

CHART OF THE DAY: WHERE THE MONEY WENT. There’s a reason why the PCE Price Index is said to be the Federal Reserve’s favorite inflation barometer. May’s number confirmed what many already knew—for consumers, the spending is almost all about the basics. Chart source: Bureau of Economic Analysis website (bea.gov)

Three Things to Watch

What CFOs Know: The quarterly CFO survey from Duke University and the Federal Reserve Banks of Richmond and Atlanta not only found overall chief financial officer optimism at its lowest point in 10 years, but that the more than 300 senior financial executives questioned expect U.S. real GDP to grow only 1.5% over the next 12 months, down from their first-quarter expectation of 2.5%. The results coincided with the Commerce Department’s report that first-quarter GDP contracted by 1.6%, one-tenth lower than the earlier estimate. The study said finance executives believe the average probability of negative GDP growth over the next 12 months is 21% compared with 12% during Q1.  

Boosters in the Fall? The COVID-19 pandemic may be waning in severity, but investors who leave week-to-week pandemic cases out of their research may be doing so at their peril. A Food and Drug Administration (FDA) advisory committee recommended on Tuesday that the next round of booster shots should be reformulated to focus on potentially new and fast-moving omicron subvariants. The Centers for Disease Control and Prevention (CDC) have noted that two omicron variants known as BA.4 and BA.5 are now accounting for more than half of all new U.S. cases as of June 25, outrunning another subvariant that only became dominant in mid-May. Deciding on a new formulation falls to the FDA.

Gearheads: When economic times turn challenging, people tend to baby their homes, their older appliances, and other big-ticket purchases—including the one in their garage. Barron’s reported that auto parts retailers have been a standout for much of the pandemic for this reason, and today’s rising recession fears aren’t likely to hurt. AutoZone AZ has risen nearly 4% during June, though other key auto repair chains have been down, including Advance Auto Parts AAP, off nearly 7%, and O’Reilly Automotive ORLY, which was down fractionally for the month as of Wednesday. Time to look under the hood?

Notable Calendar Items 

July 1: ISM Manufacturing PMI
July 4: Markets closed for Independence Day
July 5: Factory Orders
July 6: JOLTS job openings report, ISM Services Index, and S&P U.S. Services PMI
July 7: ADP National Employment Report, Challenger job cut survey, and earnings from Seven & I Holdings SVNDY, Levi Straus LEVI, and WD-40 WDFC
July 8: June unemployment and May consumer credit

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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