Inflation monthly report for July as expected, YoY gain slightly better.
The U.S. economy created 818,000 fewer jobs than originally reported in the 12-month period through March 2024, the Labor Department reported Wednesday.
As part of its preliminary annual benchmark revisions to the nonfarm payroll numbers, the Bureau of Labor Statistics said the actual job growth was nearly 30% less than the initially reported 2.9 million from April 2023 through March of the following year.
That’s about 65,000 less per month.
For the most part, the Feds are aware and cognizant of revisions – not a new trend. In fact, this is a preliminary estimate. The final revision will be issued in February 2025.
But the magnitude may be a little surprising.
Job growth in the U.S. through March is expected to have been much weaker than estimated, which could spur calls for deeper interest rate cuts amid concerns that the Federal Reserve may have waited too long to start its easing cycle.
The Bureau of Labor Statistics is expected to issue a preliminary benchmark revision to payroll growth for the 12 months ending March on Wednesday at 10 am ET.
Economists at Wells Fargo expect the reading to be at least 600,000 weaker than initially estimated. JPMorgan expects a decline of about 360,000, while Goldman Sachs said it could be as large as a million.
The revision may have some impact on Fed Chair Jerome Powell’s speech at Jackson Hole on Friday, given the Fed’s dual mandate of promoting maximum employment and stable prices.
A large downward revision “could reignite concerns around a weaker employment picture,” said Charu Chanana, head of FX strategy, Saxo. “This is something that Powell may need to address, and if the jobs report on September 6 shows significant weakness, it could bolster the case for a 50-basis point rate cut.”
“The revision shouldn’t alter our views of the current labor market too much as the direction and general magnitude of this revision has been known for some time, but a particularly bad revision would reinforce the case for easing,” said 22V Research’s Peter Williams.
CPI rises 0.2% M/M in July, as expected, core CPI increase also in line
The 10 Year is at 3.87%, up from 3.84, futures are flat. I suspect that after the benign PPI report yesterday, perhaps there were expectations of even lower CPI growth.
The Japanese market dropped over 10% overnight over the collapse of the carry trade – basically for decades, traders and hedge funds would borrow cheaper in Yen (lower interest rates), deploy in USD (higher interest rates) and leverage their trades for maximum gain. As long as interest rates moved in the same direction in both countries it worked for the most part. However, last week the Japanese central bank raised interest rates – strengthening the Yen, but even as the Feds sat put, treasury yields crashed from around 4.25 to 3.75 in a short period, the biggest fall from 4.10 to 3.75 occurred in 3-4 days.
US Futures are down over 2%, continuing the sell off from Friday.
I don’t believe anyone in our group trades or trades on margin. However, I do want to reinforce some things we spoke about in the past two weeks.
Not catching a falling knife. I had spoken about this last week and how the Doom Loop from algo traders could continue, the same principle goes for carry traders, and plenty will be shaken out today but we can’t predict when this will stop completely. The VIX (Volatility or Fear gauge) has risen to 52.
Continue playing defense – In the past month, since I sold some 15-20%, the vast majority of recommendations have been holds and only buy on dips, so defense remains key.
We’ll take a further look towards the end of the day.
Personal Consumption Expenditures (PCE) Numbers for June 2024
The numbers are fairly benign.
PCE 0.1% MoM as expected
PCE 2.6% YoY V 2.5% expected.
Core PCE 0.2% MoM as expected, and 2.6% YoY as expected.
Revisions – minor
No surprises, the S&P 500 futures are up 0.86%, Nasdaq Comp up 1%. The 10 year is down to 2.23%.
After the disastrous 3.6% drop in the Nasdaq composite and 2.3% drop in the S&P 500, yesterday, don’t be in a hurry to jump back in. Or as they say on Wall Street – don’t catch a falling knife.
Analysts were right to badger Google’s management on monetization of AI, and Google’s inability to give straight answers made them realize that all that spending is going to see returns a few years out. It was a cue to offload and led to the overbought M-7 and tech crashing. Tesla didn’t help either with the usual vagueness – an inherently risky stock with a lot of promises.
The other big reason for the fall yesterday was algorithmic trading, or computerized trading. Algo trading uses the VIX (The Volatility Index) as a trigger for selling/buying. The VIX is often known as the Fear Gauge, and it was pretty fearful on Wednesday shooting up from 14.72 to 18.04 – a 23% jump! For the most part of 2024, the VIX has stayed steady between 12-14, so this was way out in uncertain territory.
As of writing the VIX is at 19.17, up 6%. If you recall we had another 2%, drop last week, at that time the VIX had shot up to 16.52.
THE DOOM LOOP – When markets are over leveraged, overbought or over concentrated a big fall sends it into a doom loop. An example of this would be a mutual or Index fund manager or ETF having to sell stocks because of redemptions – so he/she’s selling and driving prices down, which further leads to investors knocking on the door for more redemptions…and so on. Similarly, if you’re trading in a margin account you have to sell to meet the margins…this is self-perpetuating – a doom loop.
For Algo traders its worse, the triggers to buy and sell are preset – “stop loss limits”, the speed is too fast to have any human control, and most computerized trading firms will not allow overrides.
I would wait for the dust to settle. The S&P 500 is down almost 5% from its all-time high and the Nasdaq 8.5%. These could head to correction territory, especially the Nasdaq, which again is not the end of the world – we had a great first half of the year. There are big earnings next week – MSFT, AMZN, AAPL, META, will update then.
The anti-China rhetoric likely will continue till elections. The Biden administration wants further curbs on exports, and Trump wants Taiwan to pay for protection….
The markers opened weak with the S&P 500 down 1% and the tech heavy NASDAQ Composite (COMP) down 1.75%. The rhetoric will likely not let up till the elections as both parties will try and outdo each other in jingoism. ASML (ASML) was beaten down 10% in spite of great results, reaffirming guidance and bookings. With the ongoing rotation to interest sensitive cyclicals, this pre-election noise will only add to tech volatility. The COMP is now down about 3% from its high and will likely correct further, we saw that big drop of 2% last Thursday, I would expect to see more of these. I’m not going to buy the tech dip, either wait it out or even take more money off the table on good days.
Analysts forecast that the S&P 500 index’s earnings will likely grow above 12% for the second quarter and about 11-12% for the year to 247.
Source: FactSet
This is way above the 8% average growth, mostly because of a weaker Q2-2023, when earnings actually declined 4% over the previous year.
Besides, S&P 500 earnings have been stagnant at $220 for the past two years so 2024 had beat the average significantly just to catch up and revert to the mean.
Here are past 5 years – basically smoothening out the effects of Covid. After the big pandemic fall of 14% in 2020, there was that massive jump of 48% in 2021, and then two years of indigestion and inflation, which now leads to the 12% expected jump in 2024.
FactSet estimates that over the past ten years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.8% on average – everybody sandbags, (under promises and over delivers). I wouldn’t be surprised if earnings actually close over $250 for 2024.
Great, earnings look good with the 11-12% increase, but what about valuations?
The bottom-up target price for the next 12 months for the S&P 500 is 6006.66, which is 7.6% above the closing price of 5,584.54.
The Forward P/E Ratio is 21.4, which is above the 10-Year Average (17.9), and above the 5-year average of 19.3.
The two main causes for the high P/E
a) Out performance and AI expectations, from the Magnificent 7, which controls about 33% of the index.
b) Decline in inflation and expectations of interest rate cuts.
I believe there is exhaustion in the M-7 – there is over participation (everybody and their uncle own Nvidia) and over bought. We we saw it for a bit in the last 3 weeks with Nvidia slowing down, but Apple and Tesla picked up the slack – Tesla rose 40% and 7 days in a row! What looked like a possible correction in the middle of June, never really materialized.
Secondly, now the 10 year has finally come down to about 4.19% and two interest rate cuts are a certainly after benign inflation numbers (still high over 3% and above the Fed target of 2% but definitely in the right direction). I believe the 10 Year will be between 3.5% and 3.75% for the most of 2025, if not lower.
Strategy for the second half of 2024 and beyond. High valuations should keep the index in check, and even cause a 5-7% correction, which is actually a good thing in my opinion. Lower interest rates will keep a floor.
What should we do? In my opinion,
I’ve been pyramiding in the two big pharma companies – Eli and Novo, which is the exact opposite of cost averaging, buying smaller quantities even as they get higher, simply this obesity craze will last, and they’re relatively inured with strong pipelines.
As usual, the first to report were the big banks. I always look at credit provisioning and charge offs as indicators of economic weakness.
JP Morgan (JPM) confirmed guidance for the rest of the year for earnings and revenue; earnings growth will be less than 1%, while revenues will grow at a modest 5%. JPM did increase credit loss provisioning to $3.05Bn, higher than 2.8Bn earlier, this is also higher than 1.88Bn in Q1, and 2.9Bn in Q2. Charge offs (mainly on credit card delinquencies) were also higher by $820Mn at $2.2Bn. Jamie Dimon, CEO of JP Morgan, was cautious as usual, JPM tends to over-provide for losses and has been doing it for years.
Wells Fargo (WFC) didn’t need to increase provisioning, but its charge offs were also higher – net loan charge-offs, as a percentage of average total loans, increased to 0.57% from 0.50% in Q1 and 0.32% in Q2 2023. WFC’s bigger problem is net interest income, it now expects full-year 2024 net interest income to fall 8%-9% from 2023’s $52.4B, compared with its prior guidance of down 7%-9%.
Citi (C) was mixed with higher charge offs but lower provisioning, and also commentary from the CEO, that lower FICO score customers are pulling back on spending. In addition, he’s seeing signs that delinquencies may be bending back down.
These don’t set off any alarm bells but does confirm what we’ve been hearing for most of the year, that outside of tech, the economy is lackluster, and that inflation is stunting growth, especially for lower and middle income groups.