Week in Review: July,14, 2023

July 17, 2023

Recap & Commentary

Markets ended the week higher on better-than-expected inflation data and a rebound in optimism that the Fed might be able to orchestrate a “soft” landing. Second quarter earnings season also commenced, with multiple large banks reporting results.

Headline consumer inflation slowed in June to 3.0% from a year ago, down from 4.0% in May. The reading marked the slowest pace of inflation since March 2021. Underlying details showed that core inflation also slowed, but at the same time remains stubbornly high. That helped explain why market expectations for a 0.25% rate hike at the Fed’s next meeting in late July remained unchanged at ~93%. Markets, heartened by the generally positive inflation data and other recent economic readings, appear to once again be embracing the idea that the Fed can achieve an elusive “soft” landing, wherein it manages to return inflation to its longer-term 2% target without triggering a recession.

Second quarter earnings season officially commenced with multiple large banks including JP Morgan, Wells Fargo, and Citigroup reporting. While all three banks exceeded earnings expectations and both JP Morgan and Wells Fargo were generally upbeat in their assessment of current conditions, all three banks increased their loan-loss provisions in anticipation of a deterioration in future conditions. Currently, industry group FactSet expects consolidated S&P 500 earnings growth to fall by 7.1% from second quarter 2022.

Economic Commentary

Headline consumer inflation (CPI) experienced a monthly gain of 0.2% in June, slightly less than the expected 0.3% gain. Energy and food prices rose 0.6% and 0.1%, respectively. Compared to a year ago, CPI rose 3.0%. Excluding energy and food, core CPI rose 0.2% for the month and 4.8% from a year ago. June’s reading marked the first time in six months that core prices posted a monthly gain of less than 0.4%. Core CPI benefitted from airfares and used vehicle prices which fell 8.1% and 0.5%, respectively. These declines were offset by housing rents, which rose 0.5% in June. Recent progress on inflation has been aided by base effects, as surging prices in May and June 2022 have rolled off the year-over-year comparisons. Further progress will be harder to achieve and will require additional moderation in the housing and service sectors.

Producer prices rose 0.1% in June, below the expected forecast of 0.2%.  Compared to a year ago, producer prices increased just 0.1%, the smallest gain in nearly three years. Core prices rose by 0.1% and increased 2.4% since last year. Final demand service sector prices rose 0.2%, the same as May, driven by an increase in deposit services and food and alcohol retailing. Final demand goods prices were unchanged for the month after declining 1.6% in May.

Consumer sentiment jumped 13% in early July, its largest monthly gain since 2006, to the highest level since September 2021. That  Optimism was boosted slowing inflation and job market stability.

Of Note

According to Cox Automotive, used car prices fell 10.3% in June from a year ago, the 10th consecutive month of annual declines and largest decline on record. Despite the declines, used car prices remain ~40% above prepandemic levels.

Market Indices   (As of 07/14/2023)

• Retail Sales
• Housing Starts
• Existing Home Sales
• Industrial Production
• Weekly Jobless Claims