Economy & Earnings Holding Up

Major stock market indices opened higher this morning on the back of stronger economic data and corporate earnings announcements. At the moment, the Dow is up 360 points and the SP 500 is up 1.3%. Commodities, on the other hand, are lower. WTI crude oil continues to slide, now trading around $92/barrel. Cooper is down 1.7% today, and 22% year-to-date. Even gold is sagging. The bond market is mixed, with long-term Treasuries falling in price but junk corporates modestly positive. Once could argue that Treasury bond strength over the last 2 ½ months represented a flight to safety with an eye to the likelihood of economic recession. But Some of that is clearly beginning to unwind.

Bonds traders are continually recalibrating expectations for Federal Reserve interest rate hikes. Last week Fed Chair Powell seemed to suggest the Fed would slow the pace in coming months. But since then several Fed officials have walked back his comments. St. Louis Fed President Bullard said he needs to see “convincing evidence” of slowing inflation before the Fed will “feel like we’re doing enough.”

Of course, investors are balancing rate hike expectations against their impact on growth. Some economic indicators have softened over the last couple of months—single-family home sales, mortgage applications, GDP growth, ISM Manufacturing new orders & employment. But other data like ISM Services and corporate capital spending remain solid. And, crucially, the labor market is still very strong, leading Bloomberg’s Connor Sen to wonder if we might be experiencing a “jobful recession.” In other words, we may dodge the usual wave of layoffs that typically characterize a recession. Let’s hope so.

ISM’s closely-watched gauge of service business activity in the US improved unexpectedly last month, leading Bloomberg economist Yelena Shulyatyeva to conclude that “chatter of imminent recession overstates the magnitude of the current slowdown.” Employment activity broadly slowed over the last two months, and industries such as real estate and retail softened. But overall demand for business & consumer services was strong and layoffs remain rare. There was some evidence of improved supply chains and lower cost inflation.

Starbucks (SBUX) reported decent second quarter results and the stock is up 3% this morning. Sales rose 9% from year-ago levels due to price increases, but profits fell due to higher labor & commodity costs. China’s Covid shutdowns also dented results. These headwinds, however, are well known by investors, who are choosing to focus on signs of recovery. For example, price increases in the US didn’t hurt transaction volume. Outside of China demand seems to be just fine.