Markets rise after US economy contracts in the first half of 2022

Dow was up 175, advancers over decliners 4-3 & NAZ went up 48.  The MLP index was little changed in the 209s & the REIT index added 2+ to 420.  Junk bond funds were mixed & Treasuries are being purchased, reducing yields.  Oil crawled higher in the 97s & gold jumped 33 to 1770.

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Pres Biden reacted to the GDP report, saying it is "no surprise that the economy is slowing down" amid inflation, despite saying earlier this week that the US would not be entering a recession.  The US economy shrank in the spring for Q2, meeting the criteria for a recession as record-high inflation & higher interest rates forced consumers & businesses to pull back on spending.  GDP, the broadest measure of goods & services produced across the economy, shrank by 0.9% on an annualized basis in Q2, the Commerce Dept said in its first reading of the data.  The forecast expected the report to show the economy had expanded by 0.5%.  "Coming off of last year’s historic economic growth – and regaining all the private sector jobs lost during the pandemic crisis – it’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation," Biden added.  "But even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure."  Biden touted the job market, saying it "remains historically strong, with unemployment at 3.6% and more than 1 million jobs created in the second quarter alone."  "Consumer spending is continuing to grow."  "My economic plan is focused on bringing inflation down, without giving up all the economic gains we have made," Biden noted.   "Congress has an historic chance to do that by passing the CHIPS & Science Act & Inflation Reduction Act without delay."

Biden reacts to recession news after saying it wouldn't happen

US gov debt prices rose after the preliminary GDP reading for Q2 showed an economic contraction.  The yield on the benchmark 10-year Treasury note slipped by 7 basis points to 2.66% & the 2-year yield fell 9 basis points to 2.879%.  Meanwhile, the 30-year Treasury yield moved lower by 2 basis points to 2.975%.  Yields move inversely to prices & one basis point is equal to 0.01%.  Q2 GDP slipped 0.9%, the Bureau of Economic Analysis said, the 2nd-straight negative qtr for GDP, a metric which has historically often coincided with economic downturns.  Though some economists use 2-straight negative quarters of GDP as a shorthand definition for recession, US recessions are officially designated by the National Bureau of Economic Research, which uses a more nuanced definition.  Solid job growth during H1 & impact of high imports on GDP, have led some to speculate that the NBER will not declare a recession during the first 2 qtrs of 2022.  The market's moves came after the Fed decided to raise interest rates by 75 basis points< for a 2nd month in a row to combat high inflation.  Chair Jerome Powell said the central bank will be making rate hike decisions on a meeting-by-meeting basis.  In addition, the Fed also said the US economy is not in recession as “there are just too many areas of the economy that are performing too well.”  The comments pushed US stocks higher yesterday.

10-year Treasury yield falls after preliminary GDP reading shows negative growth

China’s top leaders signaled that no big stimulus for economic growth was on the way, & downplayed the necessity of achieving the “around 5.5%” GDP target.  In H2, authorities said they would stabilize employment & prices.  That high-level mention of stabilizing prices indicates there won't likely be any additional expansionary policies, Wang Jun, a director at the China Chief Economist Forum, said.  He noted high inflation overseas & expected China would face greater inflationary pressure in the coming months.  One of the largest stimulus announcements came in late May when China's State Council, the country's top exec body, announced 33 economic support measures ranging from tax refunds to infrastructure investment.  While Wang expected continued use of credit & local gov bonds to support the economy, he said authorities would not likely “force” 5.5% growth.  China's GDP grew by just 2.5% in H1 from a year ago, after the economy slumped in Q2.  The country's worst Covid-19 outbreak since 2020 locked down the metropolis of Shanghai in Apr & May, while related restrictions in other parts of China hit business activity.  However, China's leaders did not signal any change in the country's “dynamic zero-Covid” policy.

China signals no big stimulus is coming, while Covid controls remain

There was selling after the announcement was made about a contraction in the economy.  But buyers returned to bid prices higher although the advance/decline ratio is modest.  More volatility is expected in the PM.

Dow Jones Industrials

 

Markets holds early gains after Powell says Fed will slow pace of hikes

Dow jumped 436, advancers over decliners an impressive 5-1 & NAZ soared 469.  The MLP index gained 4+ to the 209s & the REIT index was up 4+ to 420.  Junk bond funds were bid higher & Treasuries saw limited buying, nudging rates lower.  Oil continued up 2+ to the 97s & gold was up 7 to 1724 (more on both below).

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The Federal Reserve raised its benchmark interest rate by 75 basis points for the 2nd straight month as it tries to bring scorching-hot inflation under control, a move that threatens to slow US economic growth & exacerbate financial pressure on Americans.  The widely expected move puts the key benchmark federal funds rate 2.25-2.50%, the highest since the pandemic began 2 years ago.  It marks the fourth consecutive rate increase this year; investors will be closely watching Fed Chair Jerome Powell's press conference after the decision for signs of how long the rapid pace of rate hikes will continue.  Hiking interest rates tends to create higher rates on consumer & business loans, which slows the economy by forcing employers to cut back on spending.  Mortgage rates have nearly doubled from one year ago to 5.14%, the highest since 2008, while some credit card issuers have ratcheted up their rates to 20%.  Policymakers have remained confident that they can slow growth enough to tame inflation without dragging the economy into a recession.  But experts are increasingly skeptical that the Fed will be able to achieve that type of outcome — referred to frequently as a "soft landing."  That's in part because at least some of the inflationary pressures stem from unexpected supply disruptions like the Russian war in Ukraine & COVID-19-related lockdowns in China.  While the Fed can control demand, it does not have the necessary tools to address supply.

Powell announces mega-rate hike amid fears of deeper recession

Boeing's (BA), quarterly profit, a Dow stock, fell as it awaited regulatory approval to resume deliveries of its 787 Dreamliner & charges continued to mount at its military & space unit.  EPS fell to 32¢ in Q2 compared with $1 during the same period a year earlier.  Adjusted per-share loss of 37¢, which excludes pension charges, fell short of the 13¢ loss estimate.  Sales in the qtr fell 2% to $16.7B, below the $17.6B estimate.  BA booked a $93M charge on its Starliner space capsule in the qtr.  It successfully launched the Starliner in May, but incurred higher costs after a botched earlier mission.  BA also took a $147M charge on its MQ-25 refueling drone as costs rose to meet requirements set by its US Navy customer.  The company said it had positive operating cash flow in Q2.  It reiterated the target of generating surplus cash for the full year.  "Even as we navigate a difficult environment, we are making progress across key programs and are beginning to hit significant milestones," said CEO David Calhoun.  Monthly production of the 737 MAX has reached 31, up from 16 a year ago, as it deals with supply-chain challenges such as engine shortages that are also affecting rival Airbus.  BA has said it stepped up 737 deliveries in Jun.  The stock was up 19¢.
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Boeing profit falls as plane maker awaits Dreamliner approval

Americans grew even more pessimistic about the US economy over the past month, according to the latest survey on consumer attitudes, intentions & expectations from The Conference Board.  The consumer confidence index for Jul slipped to 95.7 from Jun's revised reading of 98.4, which was adjusted downward by 0.3 points.  It's the lowest index reading since Feb 2021, when levels were 95.2; however, the Jul number remains considerably above the deeply pessimistic readings during the last recession, when the index fell as low as 25.3.  It's the 3rd consecutive month that the index fell, a decline driven by consumers souring on the state of current business conditions.  The index that tracks assessments of current business & labor conditions tumbled to 141.3 from 147.2.  It's a sign that growth has slowed during the 3rd qtr, Lynn Franco, The Conference Board's senior director of economic indicators said.  Consumers' expectations for the next 6 months ahead held relatively steady, but remain at a level that suggests recession risks persist, she noted, adding that inflation continues to weigh heavily.  "As the [Federal Reserve] raises interest rates to rein in inflation, purchasing intentions for cars, homes, and major appliances all pulled back further in July," Franco added.  "Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months."

Consumer confidence slips for third straight month

Gold prices finished a bit higher on the heels of a 2-session decline, then extended their gains into the electronic trading session after the Federal Reserve‘s decision to lift interest rates, as expected.for Aug rose $1 to settle at $1719 an ounce.  Prices edged up to $1723 in electronic trade, shortly after the Fed's policy announcement.  Gold futures ended with a modest gain, then moved up further in the immediate aftermath of the central bank's monetary policy decision in the PM.  Gold clearly had today's rate rise priced in, trading pretty much flat in a tight range before and after the statement.  As a result, the 10-year Treasury rate moved lower, falling to 2.75%, almost 50bps lower than 1 month ago but more importantly, the 10-year real yields moved lower, too, falling to below 40 basis points after reaching levels of over 80bps in mid-Jun.  The fall in real rates indicates investors believe the Fed will likely need to reduce rates sooner than expected to combat slow growth or even recession.  While 10-year inflation expectations have fallen from their highs as well, the persistence of high energy prices increase the possibility of continued elevated levels of inflation, even with slower domestic & global economic growth.  Lower real rates & elevated levels of inflation are supportive for gold prices.

Gold prices end higher, extend gains after the Fed lifts interest rates as expected

Oil futures climbed, with US prices marking their highest settlement in a week.  There's no other way to look at energy prices today without a bullish outlook.  The Energy Information Administration reported much larger inventory draws across the board with US crude, gasoline & distillate supplies all down last week.  Oil crude could regain the $100 level in the days & weeks to come.  Sep West Texas Intermediate crude rose $2.28 (2.4%) to settle at $97.26 a barrel, the highest front-month finish since Jul 20.  Prices extended their gains after the Federal Reserve said in the PM that it would raise its benchmark short-term rate by another 0.75 percentage point.

Oil prices settle at their highest in a week

Dow jumped 400 after the announcement & held that advance for the rest of the session. The rate hike was well advertised & investors liked it.  NAZ benefited from favorable earnings at major companies.  Tomorrow is a new day & it brings GDP.  The data which will show if the economy is in a recession.  Already, it feels that way even if it's only a limited one.

Dow Jones Industrials 

Markets advance ahead of Fed decision

Dow gained 127, advancers over decliners 5-2 & NAZ climbed 294 after key earnings reports.  The MLP index went up 1+ to 207 & the REIT index stayed near 421.  Junk bond funds were in demand so far today & Treasuries saw more buying ahead of the Fed announcement later today.  Oil was up 2+ to the 97s & gold slid back 3 to 1715.

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The Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey found mortgage applications fell 1.8% last week from the previous week.  The decrease was the 4th week in a row as home purchase activity nears pandemic levels.  "Mortgage applications declined for the fourth consecutive week to the lowest level of activity since February 2000," said Joel Kan, MBA's Associate VP of Economic & Industry Forecasting.  The survey comes as inflation woes & market uncertainty have sparked worry in potential buyers, causing them to avoid entering the market.  "Increased economic uncertainty and prevalent affordability challenges are dissuading households from entering the market, leading to declining purchase activity that is close to lows last seen at the onset of the pandemic," he added.  "Weakening purchase applications trends in recent months have been consistent with data showing a slowdown in sales for newly constructed homes and existing homes."  Among the turmoil, Kan said the data showed a stabilization in mortgage rates.  He also expressed optimism for the coming months.  "A potential silver lining for the housing market is that stabilizing mortgage rates and increases in for-sale inventory may bring some buyers back to the market during the second half of the year," Kan said.  He continued:  "With mortgage rates remaining well over 5%, refinance applications are now 83% below last year’s pace."

Home purchase activity nears pandemic levels

Sales of new US homes fell more than expected in Jun to the lowest level in 2 years as rising mortgage rates & the relentless increase in home values slowed activity by edging prospective homebuyers out of the market.  New single-family home purchases tumbled 8.1% to a seasonally adjusted annual rate of 590K units, the lowest level since Apr 2020, the Commerce Dept reported.  They sruvey expected new home sales – which account for a small percentage of total sales – to fall 5.2% last month.  On an annual basis, new home sales are down 17.4%.  The median new house price climbed 7.4% in Jun from the year-ago period to $402K.  There were about 457K new homes on the market at the end of Jun, an increase from 447K units in May.  The interest rate sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in 3 decades in order to cool consumer demand & bring scorching-hot inflation under control.  Combined with high home prices, the rapid rise in borrowing costs has pushed many entry-level homebuyers out of the market.  A new report from Redfin last week showed that the share of sale agreements on existing homes canceled in Jun was just under 15% of all homes that went under contract – the highest since early 2020 at the height of the COVID-19 pandemic.

US new home sales drop to lowest level in 2 years

The White House announced that the Dept of Energy will be issuing a notice to sell 20M more barrels of oil for the Strategic Petroleum Reserve as part of the Biden administration's effort to bring gas prices down.  This makes the 5th such sale that Pres Biden has authorized.  The White House continued to blame "disruptions posed by Russia’s invasion" for the high prices while claiming that the Biden administration's actions are making a tremendous difference.  "In fact, the Department of the Treasury estimates that as a result of these drawdowns both domestically and internationally, the price at the pump for Americans is up to about 40 cents per gallon lower than it otherwise would have been," the White House said.  While gas prices are down significantly since a recent national average price of more than $5 per gallon in Jun, the average is still $4.33, compared to $3.16 from one year ago & approximately $2.39 when Biden first took office in Jan 2021.  Reps slammed the White House after previous sales from the Strategic Petroleum Reserves after it was made known that Ms of barrels were being sent to European & Asian countries, including China.  "The American people deserve answers as to why our emergency energy reserves are being sent to foreign adversaries like the Chinese Communist Party, compromising our energy security and national security," House Energy & Commerce Committee Ranking Member Cathy McMorris Rodgers said.

White House will sell another 20M barrels of oil from US reserves

Tech earnings are driving much the excitement in the stock market.  However, everybody is still waiting to hear from the Fed later.

Dow Jones Industrials