Hawks, Doves, and a lot of Parrots

After a lackluster start to the month of August, spurred by the U.S. debt rating downgrade and mixed data in the July jobs report, markets rebounded slightly this week. On Thursday, data showed continued cooling on U.S. inflation for the month of July, bolstering expectations of a soft landing. For a second straight month consumer prices rose 0.2%, marking a three-month annualized increase of just 1.9% - the slowest pace since June of 2020. Food and Gasoline prices rose by similar amounts for the month, followed to the upside by automobile repairing and insuring (up 1.0% m/m, 12.7% y/y), and a second straight monthly rise to shelter costs (up 0.4% m/m) despite moderating rent growth. These increases were predominately offset by a large drop in airfares (down 8.1% m/m), used vehicle prices (down 5.6% y/y), a small drop in new vehicle prices, and another dip in medical services costs.

Source: BMO Economics EconoFACTS: U.S. Consumer Price Index (July)

Core CPI, which excludes volatile food and energy costs, saw a similar increase of 0.16% for the second straight month, bringing the yearly core rate to 4.7%. While still elevated, inflation has slowed every month since a 6.6% peak in September.

Source: BMO Economics EconoFACTS: U.S. Consumer Price Index (July)

 

While two months of softened inflation numbers indicate progress in the Fed’s fight for price stability and good news for a hawkish market, it does not necessarily define a trend. Looking past this report, Jerome Powell’s Jackson Hole speech later this month combined with further data should help set expectations into the end of the year. With the next Fed policy meeting set for September the consensus is calling for a pause, something we see possible if the current trends continue into the August CPI data which is set to come out the week before the meeting.

 

Moving over to earnings, with this season mostly behind us, roughly 80% of S&P 500 companies that have reported beat consensus estimates. While earnings results in Q2 have been better than expected, earnings beats have been extremely flattish one day post-earnings compared to historical data. While some of the larger players (AMZN, META, and GOOG/L) saw their shares rally on results, the overall beats were not as rewarded as they were in years prior. A key reason is that while EPS beats have been strong, revenue beats have been lower than normal, suggesting company performance has stemmed from cost cutting rather then thriving off a strong economy. With the Fed continuing to raise rates, this result was expected but it is still worth applauding the efficiency and effectiveness of corporate America’s cost controls to maintain profitability during this period.

 

An important takeaway from this earnings cycle is the stabilization of forward guidance. There is not much talk of recession risk from companies as banking stresses have calmed, the jobs market is healthy, and the economy has momentum. Since April, the S&P 500 EPS estimate has held steady, and relatively upbeat guidance has increased potential earnings growth in Q3 and pushed up 2024 Q1 estimates.

We expect to see some volatility over the coming months as the markets will remain sensitive to news and data. However, as analysts and economists continue to align their narratives based on the positive trends we are seeing, markets should respond accordingly.

 

 

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