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The Fed is boosting its expected core inflation outlook, Bill Ackman is making a killing by nailing Carl Icahn’s bearish bets gone wrong, and shorting Nvidia is now the leading cause of divorce in America.

Let’s dive in.

Economy Heat Check

As of 5/24/2023 market close, unless otherwise stated.

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Expectations Reset: Focus on Flash PMIs

United States

The biggest story no one talked about from Tuesday’s PMIs had nothing to do with the readings themselves, but more the main characters they help out. The US economy had its moment in May with an impressive S&P Global U.S. PMI Composite reading of 54.5. Safe to say there are a lot more Powells working at S&P than we know about. We’re not saying J Pow attends the Pelosi school of totally coincidental relationships and timing, but maybe he got a summer program certificate.

That's not to forget the real stars of the show: the service providers. They're the ones basking in the glory of stronger demand conditions, making the Services PMI soar to 55.1 last month and leaving the consensus estimate of 52.6 and previous reading of 53.6 in the dust.

The manufacturing sector didn't quite get the memo. It stumbled and fell short with a Manufacturing PMI of 48.5, failing to meet the expectations of 50.0 and the previous figure of 50.2.

Service sector companies are living the MD life, enjoying a post-pandemic demand boom. Meanwhile, manufacturers are stuck with warehouses bursting at the seams and a lack of new orders. It seems like everyone's ditching goods for services these days.

But now it looks like inflation found someone to hold its beer. During the pandemic, manufacturing prices went wild due to all that demand and supply chain mayhem. Now, it's the service sector's turn to jack up prices because they just can't handle the overwhelming demand and their limited capacity.

Eurozone 

Looks like Europeans may be able to begin their seemingly two-season summer early after all. The Eurozone's business output grew for the fifth consecutive month in May, signaling robust economic growth in the second quarter.

However, the expansion became increasingly uneven as strong growth in the service sector contrasted with a sharp decline in factory output. This divergence in demand for goods and services raised concerns about the economic outlook. Despite the overall positive growth, business confidence dropped to a five-month low, dampening optimism for the future.

While the survey data suggests that GDP growth in the Eurozone may have accelerated in the second quarter, the situation remains uncertain. The near-stalling of new orders and the weakening business expectations indicate a potential loss of momentum in output growth.

The unbalanced nature of the recovery, with manufacturing acting as a drag, raises concerns about the sustainability of the upturn. That’s not to mention the challenges posed by elevated costs and rising borrowing costs for households. The Eurozone's growth in the second half of the year will depend on factors such as household spending on services and the duration of the current manufacturing inventory adjustment.

United Kingdom

The UK economy just can't get enough of its growth spurt in May, thanks to the services sector coming back to life after pandemic restrictions were lifted, like a lad after a night out. Consumer spending and financial services joined the party, while the Coronation festivities gave the hospitality industry an extra boost.

The composite PMI reading stayed above 50, otherwise known as the lifeline between economic growth or constriction. It's predicted that GDP will show off a 0.4% increase in the second quarter, leaving behind the feeble 0.1% growth from before.

But hold on tight, because this growth comes with a price tag: inflation is back in action. Service providers are having a hard time keeping up with the demand frenzy, so they're handing out higher wages and jacking up their prices faster than Harry and Meghan’s “NYC car chase.”

Meanwhile, manufacturing is sulking in the corner. It appears companies have thrown in the towel, reducing their inventories and worsening the demand drought. Output and prices are taking a nosedive, making everyone wonder if manufacturing even exists anymore.

It's a tale of two economies, causing headaches for MPs. The services sector tends to call the shots, leaving the Bank of England with more work to do to tame the stubbornly high inflationary pressures in the realm of services. Jobs are still growing, but at a slower pace. This is especially the case in manufacturing, where it seems like they're just twiddling their thumbs with extra capacity.

Germany 

Hold on to your lederhosen, because the land of precision engineering and bratwurst has some much less precise economic updates. In a tale of two sectors, Germany's economic performance in May had the signature sophistication we’ve come to expect. Sadly, its manufacturing sector stumbled like an abroad student at Oktoberfest.

The HCOB German Flash Composite Purchasing Managers' Index (PMI) stole the limelight with a rise to 54.3 in May, surpassing expectations and showcasing the fastest expansion in over a year. The services sector led the charge, waltzing its way to a reading of 57.8 – the highest since August 2021. The performance hints at resilient consumer spending, defying the inflation-induced difficulties that gripped household purchasing power.

But then the manufacturing sector tripped over itself, dragged down by a slump in Chinese manufacturing. The manufacturing PMI stumbled to a three-year low of 42.9. This leaves expectations for the outlook at their lowest point in five months. Despite the stumble, job creation managed to keep a steady beat, remaining solid overall.

While Germany’s services sector outperforms promises and consumer spending chugs along, its manufacturing sector struggles to find its footing. Certainly, many of these troubles stem from external circumstances (cough, China). Although the overall economic activity expanded for the fourth consecutive month, the waning manufacturing sector left observers with a sense of unease.

Japan

New Fed Governor, new economic outlook. Japan's private sector is growing rapidly, with the May flash PMI data showing the fastest rate since October 2013.

Both the manufacturing and services sectors contributed to this expansion, marking the first time they have both grown simultaneously since June 2022. The robust growth suggests that Japan's GDP could increase by around 2% annually.

The service sector, including travel, recreation, and transportation, performed exceptionally well, driven by improved private consumption and international tourism. Employment levels in the service sector also expanded at a strong pace.

On the other hand, manufacturing output grew at a slower rate but still marked the first month of growth in almost a year. The sector benefited from increased domestic orders and improved supply chain conditions. While the gap between manufacturing and services remains, the data indicates a narrowing of the gap compared to previous months.

Despite the positive growth, inflationary pressures in Japan remained elevated, although they eased slightly from April. Service providers faced increased input costs, which led to higher prices for their clients. Manufacturing input cost inflation decreased, reflecting improved supply chain conditions. However, both input cost and output price inflation remained high, consistent with Japan's elevated consumer price index.

Overall, the flash PMI data suggests that Japan's strong economic expansion will likely continue in the near term. The future output index indicates positive sentiment and supports expectations of sustained growth. The positive correlations between the composite PMI and the Nikkei 225 index also provide optimism for the equity market. While the weaker domestic currency plays a role, the strong performance of the Japanese economy, as indicated by the PMI data, supports the positive outlook.

Still to Come: US PCE

In a shocking turn of events even Stevie Wonder saw coming, the Fed boosted the core PCE (Personal Consumption Expenditures) to a staggering 3.8% ahead of tomorrow’s latest release.

As the Fed released the minutes from their May meeting, it's becoming apparent that the path ahead is not an easy one. With core PCE inflation revised up to 3.8%, it's hard to imagine the Fed hitting the pause button in June. And let's not forget the recession looming in Q4 2023, which will likely impact projected economic growth.

The key factor here is the expected credit tightness due to stress in the banking sector, but its magnitude remains uncertain. While it may cause a recession, its effect on inflation is less clear, leaving us in a sticky stagflationary situation.

Sadly for J Pow, there’s even more here to consider before he can bro down this Memorial Day weekend. The wealth effect is still at play, with the US consumer sitting on record levels of home equity and the stock market hovering near all-time highs. Until home values drop and the stock market corrects significantly, the consumer is unlikely to slow down.

It’s still a balancing act the Fed is treading as lightly as a high schooler sneaking in from a night out, fighting against asset price bubbles they themselves helped create. So, it's safe to say that the hiking trend will likely continue. That is, unless a disturbance related to the US debt ceiling shakes things up. As traders await tomorrow’s PCE print, the implications of elevated and sticky inflation, coupled with a potential default, cast a shadow over the stock market's optimistic outlook.

Meme Bank

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