Fed Gets Permission to Pause Rate Hikes

Stocks jumped at the open but quickly pared gains. Currently, the Dow is up 130 points and the S&P 500 is up .3%. The big story today is inflation (see below). But a close second is oil, which has picked up about $10/barrel over the last month. Of course, there is nothing more episodic in mainstream investing than oil. But WTI crude up around $84/barrel is beginning to resuscitate energy stocks, which performed terribly during the first half of 2023.

The Bureau of Labor Statistics (BLS) provided fresh evidence that inflation is cooling. The Consumer Price Index (CPI) posted its third consecutive monthly gain of .2% or less in July. Back in 2021 and 2022 it was not unusual for CPI to jump .5% or more in a month. Economists and investors are busy parsing report details, and most are concluding that inflation is falling just enough to keep the Federal Reserve from raising interest rates again next month. Goods prices actually fell in July, and while services prices are still rising, the rate of change has been fairly tame over the last few months. “Core CPI,” which excludes food & energy and is thought to be a better measure of underlying inflation, finally looks to be under control with back-to-back monthly gains of just .2%.

July’s Employment Situation Report provided another reason for the Fed to stop raising interest rates. The economy generated 187,000 new jobs in July vs. 200,000 expected, and BLS revised down previously reported tallies for May and June. This is to be expected in the face of much high interest rates courtesy of the Fed. And indeed, this is what the Fed wants to see: evidence that the demand and supply of labor are coming into better balance. But otherwise the report spoke to continued resilience. The unemployment and under-employment rates both declined. Average hourly earnings held steady at about 4.4%. And the prime age labor force participation rate rose to 83.4%.

Disney (DIS) reported mixed second quarter results yesterday. Total revenue grew 4% from the year-ago quarter, a bit lower than analysts expected. But while earnings per share fell 6%, that was significantly better than expected. CEO Bob Iger—back from retirement–is cutting costs to improve profitability.
Theme parks managed to post 11% y/y revenue growth despite weakness in Florida. On the other hand, traditional TV (ESPN, ABC) was pretty soft with slower revenue growth & lower profitability. Disney is exploring ways to rid itself of these properties. Disney+ streaming service attracted fewer new subscribers than anticipated, but the service lost less money than in previous quarters due to aggressive cost-cutting. What’s more, management lowered guidance for capital spending. Investors seemed to like the report and the stock is up 3% this morning.