Stocks, Bonds Respond to Better Economy

Stocks gained ground over the past week as traders weighed better economic reports against the possibility of more Federal Reserve rate hikes. The Dow, S&P 500 and Nasdaq climbed more than 1.3%. Commodities also posted gains, with WTI crude oil back up to $72/barrel. On the other hand, bonds have sold off in recent sessions as interest rates pushed higher. A stronger economy does imply higher rates.

Recent economic data show that the economy isn’t slipping into recession. The Atlanta Fed’s GDPNow index suggests the economy achieved 2% growth last quarter. New home sales accelerated in May to the fastest annual rate in over a year. And business spending fared better than anticipated. New orders for capital goods excluding aircraft & defense equipment—a proxy for corporate capital spending—accelerated to 3.1% from year-ago levels. Finally, consumers are beginning to feel better about the economy. The University of Michigan’s Consumer Sentiment survey halted a 3-month slide and began to recover last month.

And yet, the manufacturing side of the economy continues to struggle. S&P Global’s US Manufacturing Index held steady at 46.3, but that level implies contraction. A similar survey from the Institute of Supply Management (ISM) showed further deterioration to 46.0 in June. Production activity remained weak, and we’re starting to see some layoffs. Consumer demand for goods is obviously soft. There are, however, a couple of positive details in these reports. First, supply chains are in good shape and product inventories are generally low. Also, firms are reporting significantly lower cost inflation. We’re finally putting pandemic-related distortions in the rear-view mirror.

Economist Ed Yardeni believes that rather than an economy-wide recession, we’ve seen recessionary conditions roll through certain sectors —like manufacturing, housing and commercial real estate. But ongoing strength in consumer spending & the labor market, as well as government stimulus prevented a more serious downturn. At this point, he expects housing to begin recovering and is raising his economic growth forecast. “We now see a 75% of a soft landing (up from 70%) – subject to change depending on what the Fed does, which depends on what inflation does.”