Week in Review: July,21, 2023

July 24, 2023

Recap & Commentary

Markets ended the week modestly higher as investors digested additional corporate earnings reports while awaiting the Fed’s upcoming July meeting.

Investors are treating a 0.25% rate increase at the Fed’s upcoming meeting as a foregone conclusion, pricing in a 99% probability. Barring something unforeseen, markets will be far more interested in Fed Chair Jay Powell’s comments following the meeting. Current market expectations are for the Fed to keep rates unchanged through the end of the year. However, Powell and other Fed officials have remained hawkish in their recent comments, leaving the door open for additional rate hikes before year end.

On Monday, Russia withdrew from the Black Sea Grain Initiative, the deal that had allowed both Ukraine and Russia to export wheat, and other agricultural commodities through the Black Sea. In the ensuing days, Russia bombarded Ukrainian port cities, damaging infrastructure and destroying crops awaiting shipment.  In response, wheat prices jumped by as much as 12%.  The scuttling of the deal which allowed nearly 33 million tons of grain to be shipped in the past year is expected to put renewed upward pressure on global food prices.

Through Friday, 18% of S&P 500 companies had reported second quarter earnings. Thus far, 75% of companies have exceeded their earnings expectations. According to industry group FactSet, consolidated earnings growth is expected to be -9.0%.

Economic Commentary

Retail sales rose 0.2% in June, lagging consensus forecasts for an increase of 0.5%.  Sales were up 1.5% from a year ago. Auto sales and online retailers were the largest contributors to the monthly gain.  The largest sales declines were in gas stations and building materials.  Core sales, which exclude the volatile auto, gas station, and building materials categories rose 0.5% and increased 4.6% since last year.

Housing starts declined 8% to 1.43M in June, missing expectations for 1.48M.  Since last year, starts are also down 8%. The drop in June was attributable to both single and multi family starts.  By geography, starts fell in all four major regions.  This was the largest monthly drop since July 2022, but it came on the heels of a 15.7% increase in May.  The number of homes under construction is near the highest level on record dating back to 1970 as existing homeowners are reluctant to give up their low mortgage rates.  Existing home sales declined by 3.3% in June to 4.16M, narrowly missing the consensus forecast of 4.2M. The median price of an existing home rose to $410,200 but is down approximately 1% since last year.

Industrial production declined 0.5% in June versus expectations for a flat reading.  Manufacturing was the largest detractor with activity falling by 0.3%, reflecting the shift in consumer spending back to services and away from goods.

Of Note

In a further sign of China’s slowing post-pandemic recovery, the country reported 2Q GDP growth of 0.8% from 1Q, slightly better than the expected 0.5% forecast, but down significantly from the 2.2% growth recorded in 1Q23.  On a year-over-year basis, growth reaccelerated from 4.5% to 6.3%, but fell well short of the expected 7.3% forecast.

Market Indices   (As of 07/21/2023)

• 2Q GDP
• New Home Sales
• Pending Home Sales
• Core PCE Inflation
• Durable Goods Orders
• Consumer Confidence
• Manufacturing PMI
• Services PMI
• Weekly Jobless Claims