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Supply chains are easing. The labor market is coming into balance. Investment bankers are handing in their two weeks notice for private equity.

Are we so back? Let’s dive in.

Economy Heat Check

As of 6/23/2023 market close, unless otherwise stated.

Friday Flashback

• The BOE hiked by 50 bps (consensus was 25 bps), increasing the odds of the UK entering a prolonged recession.

• The SNB hiked by 25 bps. Markets now expect another 25 bps hike in September.

• Odds for another BOC hike are on the rise following Canada’s hot retail sales report, which sent USD/CAD to a 9-month low.

• RBA minutes kept the threat of further rate hikes alive and well. Markets latched on to the debate between a pause and a hike, sending AU and AU yields sharply lower.

• The Australian Treasurer announced on national radio that they intend to finalize the appointment of the next RBA governor by July.

• The PBOC cut their 1-year LPR (Loan prime rate) by 10 bps in attempts to prop up China’s weakening economy.

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Bullish & Bearish

↓ Stock Market: 4300 is the support level the S&P 500 must hold above, but 4500 is the goal for the market to break past for more gains.

↓ Currencies: Low Indian rupee premiums prompt exporters to explore alternative hedges.

↑ Commodities: Copper price surge could signal positive economic outlook amid recession fears.

↑ Gold: Prices are higher in early Asia trade, marking an upturn from recent broad losses.

↑ Oil: Climbs on concerns Russia political issues may impact supply.

↑ Crypto: After a break beyond $30k last week, investors are starting to show more interest in crypto again as they monitor more news from the SEC.

↑ Money-Markets: The CFTC’s Bernstein sees a $5T tokenization opportunity for private funds, led by stablecoins and central bank digital currencies (CBDC).

Week Ahead: Signal to Noise

This week’s market outlook and whether you should actually care.

Signals

The Fight for the Fed

Jerome Powell is back on the streets making some fresh threats that the Fed will likely have to hike rates again. That’s what he warned in his testimony to Congress last week, in case you’re one of those interns who takes a week of vacation during an 8-week internship.

Investors still are still wagering a ~75% chance of a hike next month. But apparently that’s not a good look for some Fed hopefuls gunning for J Pow’s seat. While inflation is the enemy candidates are all campaigning off, it’s how to fight it that they're trying to find original solutions to. From keeping rates steady to simply “discerning the path ahead,” current candidates seem to be having a hard time getting creative.

Three Fed nominees said tackling inflation would be their top priority if confirmed to roles at the central bank. Governor Philip Jefferson, selected by President Biden to be elevated to vice chair, said the economy faces multiple challenges. To no one’s surprise, those include inflation and banking-sector stress.

Second hopeful Adriana Kugler, nominated by Biden to fill a vacancy left by Lael Brainard earlier this year, echoed Jefferson’s remarks. Which are all just echoes of Powell’s current position. Like Powell has consistently also held, Kugler said it’s important to return inflation to the Fed’s 2% target. The final hopeful, Governor Lisa Cook, was just nominated to a new 14-year term. Same stance: she “will stay focused on inflation until our job is done.” Groundbreaking.

With the persistently high core inflation, campaigning with anything other than inflation as your top priority would be like laying off 5% of your workforce to “reduce costs” and then buying two private “company” jets the next quarter. But hey, if DJ Sol can hold his private position this long, power to those in the public sector.

Cars Charge Forward

The global car industry got rocked harder than your Zoom use during Covid. In case you want to put that in professional terms to your MD: it may have gotten rocked harder than almost any other part of the economy due to Covid disruptions. But evidence continues to mount recently that it’s climbing out of its hole.

Global tracked vehicle sales rose on a solid April, according to a recent update from Morgan Stanley. PV SAAR, or the Projected Vehicle Seasonally Adjusted Annualized Rate, now sits around ~74.4M units. The April global tracked PV SAAR ran at ~74.4M units versus a 12-month average of 68.9M. In other words, analysts now estimate the total number of vehicle sales this year, based on the current sales rate, is increasing.

Volume is clearly coming back to the market as production bottlenecks improve. This should allow for mid-single digit sales growth this year, according to S&P Global. Fleet orders and mass customers, who were deprioritized in recent years, have had a higher mix tilt as available supply increases.

Now, it’ll be a matter of whether price and mix will hold, or if we’ll see an increased discounting once backlogs have been worked down.

Housing to Thank Bank Hikes?

In a rare batch of bullish news for the non-recession, there are signs that completions are picking up in residential construction. A big gap has emerged over the last couple of years between multi-family (i.e. apartment buildings) starts and completions. But recently, completions are on a clear upswing. The trend is presumably a sign that parts and labor are becoming easier to come by.

Meanwhile, US single-family housing construction has rebounded recently thanks to historically low numbers of homes for sale. Many households refinanced during the pandemic and locked in low mortgage rates. So Powell’s moving and shaking of interest rates has caused homeowners to stay put and not put their houses on the market.

How this all plays into actual realized consumer price inflation is yet to be determined. But the ongoing signs of healing and normalization continue to be encouraging. Even if it's taken far longer than we all anticipated, that is.

Noise

Monday, June 26:

• US: Dallas Fed Manufacturing Index

• Japan: Service PPI; BOJ Summary of Opinions; Leading Indicator

• UK: CBI Distributive Trades

• EU: Business Climate (Germany)

Tuesday, June 27:

• US: Build Permits; Durable Goods; Redbook; Home Price Indices; Consumer Confidence; Richmond Fed Survey; Texas Service Sector Outlook; Dallas Fed Services Revenues

• Canada: Consumer Price Indices

Wednesday, June 28:

• US: Mortgage Data; Goods Trade Balance, Wholesale Inventories

• EU: ECB Panel Discussion; Fed’s Powell Speaks Before ECB; Money M3, Loans; Consumer Sentiment (Germany); Investor Sentiment (Switzerland)

• China: Industrial Profit

• Australia: Monthly Consumer Price Indices

Thursday, June 29:

• US: GDP; PCE; Initial Jobless Claims; Home Sales

• Japan: Foreign Investment; Retail Sales; Consumer Confidence Index

• New Zealand: NBNZ Business Outlook

• Australia: Retail Sales

• EU: State CPIs, Consumer Price Indices (Germany)

• UK: Broad Money; Mortgage Date; Consumer Credit

• Canada: Business Barometer

Friday, June 30:

• US: Core PCE Inflation; Personal Income; Consumption; Chicago PMI; Michigan Consumer Survey

• Japan: Tokyo CPI; JP Unemployment Rate; Industrial Output; Construction Orders, Housing Starts

• China: NBC Manufacturing, Services and Composite PMIs

• Australia: Broad Money; Private Sector and Housing Credit

• New Zealand: Broad Money

• EU: HICP Flash CPI; Unemployment Rate; Import Prices, Retail Sales (Germany); KOF Indicator, Official Reserves, Retail Sales (Switzerland); Consumer Price Indices (France)

• UK: GDP, Business Investment, Current Account

• Canada: Business Outlook Future Sales

Lit’s Pick & Put

↑ Zürich Airport just won a public tender to manage Brazil’s Natal International Airport for 30 years. The company offered about $65M to secure the rights and will begin paying an annual revenue-based fee in 5 years. The Natal airport, located in Brazil’s northeast, saw 2.3M passengers in 2022 – far below its total yearly capacity of 6.5M.

↓ The LME (London Metal Exchange) sleepwalked into a crisis, unaware of a massive short squeeze centered around metals giant Tsingshan.

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