Week in Review: July,28, 2023

July 31, 2023

Recap & Commentary

Markets ended the week higher as investors digested the fallout from the Fed’s July meeting, better than expected economic data, and positive corporate earnings that boosted risk sentiment. As anticipated, the FOMC lifted its fed-funds rate by 25 basis points to a target range of 5.25% to 5.50%, the highest level in 22 years.  The Fed’s statement was nearly identical to June’s aside from economic growth now being described as moderate as opposed to modest, suggesting the central bank now sees more strength in the economy.  The market believes that July’s meeting decision marked the peak fed-funds rate, pricing in an 80% probability of a pause at the September meeting, and that the next action taken will be a rate cut in the 1st half of 2024.  Fed Chair Powell provided little guidance around further actions stressing that a “data dependent approach” will be taken with regard to future meetings, and that the September meeting could result in another hike or a pause. He noted that the process of returning inflation to 2% “probably has a long way to go” and that policy will stay restrictive until there’s confidence that inflation is sustainably on its way to target.  Powell reaffirmed the Fed’s ongoing commitment to the fight against inflation stating that not fully taming it would be the worst outcome for everyone.

As of Friday, 51% of S&P 500 companies have reported second quarter earnings.  Of these companies, 80% have reported earnings above estimates, better than the 77% beat rate seen over the previous 5 years.  According to FactSet, consolidated earnings growth is expected to be -7.3%.

Economic Commentary

Economic data was generally stronger than anticipated last week, led by 2nd quarter GDP.  Real GDP increased at a 2.4% annualized rate for the quarter, beating the consensus forecast of 1.8% growth.  This quarter’s growth was more broad-based than Q1 with the largest drivers being consumer spending and  business investment.  Within business spending, commercial construction, equipment, and intellectual property investment were all higher. Personal consumption fell since last quarter yet still came in strong enough to contribute more than 1% to GDP growth and highlights the continued strength of the consumer as personal incomes keep rising.

Personal incomes rose 0.3% in June and have increased 5.3% since last year.  This increase helped to bolster consumption during the month which rose 0.5%, slightly ahead of the 0.4% forecast.  Spending on durable goods was a core driver of the increase, up 1.4% since last month.  Spending on non-durable goods and services also contributed, rising 0.5% and 0.4% respectively.  On the inflation front, the data was generally in line with consensus forecasts. PCE prices rose 0.2% for the month and 3% since last year.  Core prices also increased 0.2% and and are up 4.1% since last year. Since last month, prices for goods decreased by 0.1%, while prices for services increased by 0.3%.

Consumer confidence surged past expectations of 112 and came in at 117 on continued optimism for a soft landing.  Greater confidence was seen across all age groups, and among both high- and low-income consumers.

Of Note

As of August 1st, the Energy Department will fully enforce new efficiency regulations that incandescent lightbulbs can’t meet, effectively prohibiting their retail sale.  Consumers will need to purchase more efficient alternatives such as LED bulbs which have a higher upfront cost but may save money over time.

Market Indices   (As of 07/28/2023)

• Manufacturing PMI
• Services PMI
• JOLTs
• Factory Orders
• Nonfarm Payrolls
• Weekly Jobless Claims