ANGLES.

Bank of America became the latest to hop aboard the now-rather crowded Happy Train early last week, eagerly joining Team No Recession. The abrupt change of stance comes just a week after Federal Reserve Chair Jerome Powell told reporters that the central bank’s own economists are no longer forecasting a recession. As BofA economists put it in a note to clients on Wednesday;“Recent incoming data has made us reassess our prior view that a mild recession in 2024 is the most likely outcome for the US economy,”

The no-recession narrative appeared to have been endorsed by the latest Job Openings and Labor Turnover Survey (JOLTS), which is reverting to its pre-COVID trend path, showing the number of people hired in June was down by 326k from May. We can now safely say that, since late 2021, hiring has gone from insanely hot to pleasantly warm.

The same trend is evident in the rate at which workers voluntarily quit their jobs. The peak point of people leaving their jobs was around the same time, in November 2021, when the quit rate hit 3.0%, an all-time high. In June 2023, it fell to 2.4%, close to the 2019 average of about 2.3% The Great Resignation has finally given way to The Normal, Healthy Job Market Resignation.

The Bank of England (BOE) copied their big brothers’ homework, following the Fed and the European Central Bank (ECB) and raising interest rates by a quarter of a percent last week and refusing to rule out further hikes.

It was an insanely busy week of earnings reports and it ended up mixed with a negative tilt. There was better than expected news from some (Amazon (AMZN), Caterpillar (CAT), CVS Pharmacy (CVS), Amgen (AMGN), Match (MTCH) and Walgreens (WBA)) and disappointment from others (Apple (AAPL), Pfizer (PFE), Merck (MRK), Paypal (PYPL), Qualcomm (QCOM), Uber (UBER) despite booking its first-ever profitable quarter, Airnb (ABNB) and Etsy (ETSY)).

After a couple of days of churning sideways, markets opened on Wednesday ready to react to the US ratings downgrade (see OTHER NEWS below), spiking market interest rates and the circus of the latest Trump indictment. More importantly, stocks have been in an overbought condition with the S&P 500 above 4500 and just a few percentage points away from a new all-time high and the stage was set for some kind of short-term reversal.

So it wasn’t really a surprise when prices fell quite hard on Wednesday, especially for the FAAMGs and the YUCs as investors appeared to be booking profits on some of their best-performing recent purchases, spurred on by the Fitch news and some mostly disappointing earnings reports that day. Remarkably, this was the first 1%+ fall in the S&P 500 index in a single day since May 23rd.

This skittishness was emphasized by a further dive in stocks late in the day following a nonsense rumor of an active shooter in the Senate building. This is typical of the behavior of a market actively looking for reasons to pull back and take a breather.

After a flat-to-lower Thursday, Friday saw the latest Jobs Report come out pre-market and it had a little bit for everyone — fewer jobs created than expected (187k vs 200k expected), but unemployment a bit lower (3.5% vs 3.6% expected) and wages picked up at a little higher pace than forecast (4.4% up on a year ago). None of this likely moved the dial enough to change anyone's overall market view but, after an initial bounce, the profit-taking resumed and the stock market closed lower again for a third consecutive day of losses and rounding off its worst week since early March.

I wanted to address a misconception that seems to be floating around out there, with the latest inflation figures due out this week (see THIS WEEK’S UPCOMING CALENDAR below) .. it’s important not to confuse disinflation with the idea that the price increases of the past several years will reverse, because they won’t. The longer people have to pay these prices, the more it chips away at excess savings and excess spending, potentially resulting in a spending slowdown in the not-too-distant future which could ultimately damage stock returns. It will be a slow burn though, indeed almost imperceptible.

Disinflation is definitely a positive, but it’s important not to confuse the decline in inflation with the idea that prices are about to drop and give us all some relief. They are not and the best we can hope for is that they simply stop going up as much as they have done.

OTHER NEWS ..

Higher Interest For Your Cash .. Last week saw at least two of the major high yield savings platforms raise their rates for depositors even higher, so I updated my recent article about them, which you can read here, to reflect the new rates and FDIC/SIPC insurance coverages.

Marked Down .. The US was stripped last week of its top-tier sovereign credit rating by Fitch Ratings (see EXPLAINER: FINANCIAL TERM OF THE WEEK below), echoing a move last made more than a decade ago by Standard & Poors. The credit assessor downgraded the US down from it’s highest AAA grade to AA+.

The move was clearly a dressing down for US politics as it comes in the wake of major congressional battles over the nation’s borrowing and repeated politically-driven standoffs over raising the debt limit. While the most recent legislative impasse was quite swiftly resolved, it remains a potential issue of concern going forward particularly in an era when shameless political stunts in Congress in support of extremist political agendas are becoming the norm and have eroded confidence in the US government’s ability to show adequate fiscal management.

Only nine countries now hold the highest credit rating at all three major agencies (S&P Global Ratings, Fitch and Moody’s Investors Service); Germany, Denmark, Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore and Australia. Canada (and now the US) is rated AAA by two out the three.

Fixed Rates Make Life Tricky For The Fed .. Only 11% of US household debt has an adjustable interest rate. That means that the many millions of Americans locked into existing fixed rate mortgages/auto loans/student loans have quite simply not been impacted by the Fed’s year plus campaign of rate hikes. And millions more have paid off these debts already or never had them and are also left unaffected.

This is what can make the Fed’s job difficult as raising interest rates is a blunt tool and drawing a straight line between interest rates, consumer spending and the rate of inflation is not always easy.

Who does it really hit when interest rates rise? Those with adjustable-rate debt like credit cards. The average interest rate on credit card debt continues to rise, recently hitting a record high of 20.7%. Also hurt are those in the market for a new asset purchase that is not accompanied by a sale that often requires financing, like first-time buyers of homes and cars.

Prices and borrowing costs of these assets have rocketed in tandem. The median price of a “starter home” in the US is 46% higher than 2019 levels. The monthly mortgage payment needed to purchase one of these homes has more than doubled over that time.

UNDER THE HOOD ..

On the charts, the S&P 500 index SPX (which closed on Friday at 4478) failed again at the strong resistance level at 4585 and then promptly fell hard. The next upside resistance is at 4536, 4555, 4585 and 4605. All downside support levels were broken last week - the next ones are at 4468, 4451 and 4385.

The Percent of Stocks Within 2% of Their One Year Highs has been expanding nicely recently but slipped a little a couple of weeks ago, providing evidence of investors beginning to take profits in their winners, while rotating into those that remain much further off their highs. We can see this with the Percent of Stocks 20% or More Below Their One Year Highs falling fast to a new 52-week low of below 29% at the end of July.

All this paints a picture of investors are taking profits in their Large Cap winners and rotating into more attractively-priced value-oriented sectors and …

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To the surprise of precisely nobody, the Federal Reserve resumed its campaign of interest rate increases on Wednesday, pushing its target Fed Funds rate up another quarter of a percentage point to a range of 5.25%-5.50%, the highest level since J-Lo joined forces with Ja Rule to point out to us that she was real back in 2001. It marked the eleventh increase since March 2022, at which time the rate was near zero.

There were only the slightest of tweaks to the wording of the committee's eagerly-awaited June policy statement and no hint that the Fed might react to the improved and improving inflation data of recent weeks by pausing its hikes. This left the door wide open to more interest rate increases, but the central bank fell short of saying that it was definitely going to walk through it. The market probability of a hike at the next meeting in September is now 20% (see FEDWATCH INTEREST RATE PREDICTION TOOL below).

In his press conference, Fed chair Jerome Powell, who stated that he didn’t believe inflation would return to the Fed’s 2% target (see ARTICLE OF THE WEEK below) until 2025, gave no guidance at all regarding the next meeting and no clue whatsoever as to what the Fed's parameters are for deciding to either hike further, suspend the rate hike campaign or eventually cut rates.

It felt like an infuriating exercise in saying nothing that left investors none-the-wiser about future Fed intentions. And we all know what happens when there is an information vacuum like this; the market will just fill it with its own thoughts and ideas.

Initially, investors seemed paralyzed with indecision by the lack of information. The S&P 500 Large Cap and Russell 2000 Small Cap indexes finished the day almost completely unchanged with the NASDAQ slightly lower.

Incidentally, readers may have noticed that, unlike most non-financial news outlets, I seldom reference the popular Dow Jones Industrial Average in this report. That’s because it’s a ridiculous, stupid index. So I won’t bother mentioning that it notched a 13th consecutive daily gain on Wednesday, a feat not achieved since 1987, before the streak finally came to an end on Thursday.

As the week continued, markets began to fill that information vacuum, deciding that they had learned absolutely nothing new and therefore we’re right back to where we were on Tuesday with the same expectations and risks and an unchanged timeline for a pause and eventual rate cuts that has helped drive stocks higher in 2023.

Thursday saw a stock market pullback, but as long as the “Three Pillars” of this rally remain in place: solid economic data (hope for a soft/no landing), disinflation and a near-term end to Fed rate hikes, these kind of retreats will probably be short-lived and pretty shallow and so it proved on Friday when stock prices resumed their upward march in earnest.

The European Central Bank (ECB) mimicked the Fed on Thursday, raising for the ninth straight meeting by a quarter point to 3.75% and itself leaving the door open to additional future hikes. ECB Chief Christine Lagarde was certainly more forthcoming than her Fed counterpart; “What I can assure you of is, we are not going to cut,” she said. “We want to break the back of inflation.” The Bank of Japan (BOJ) surprised markets with its own version of a rate hike on Friday, which is essentially loosening its rigid control of the country’s interest rate ceiling.

US economic data continued to spectacularly impress last week and it’s clear that we are currently a million miles away from a recession. The Personal Consumption Expenditures (PCE) Price Index, used by the Fed to measure inflation, confirmed the latest Consumer Price Index (CPI) data by falling to 3.0% annualized, down from 3.8% the previous month and the lowest since March 2021.

There was plenty more besides. Q2 Gross Domestic Product (GDP) obliterated expectations, increasing at an eye-popping annual rate of 2.4%, according to the official second estimate (of three). Durable goods far outpaced projections. Pending Home Sales jumped for the first time in four months. Weekly Jobless Claims moved lower. The quarterly Employment Cost Index, a broad measure of wages and benefits, increased 1.0% in Q2, its slowest advance since 2021. Consumer Confidence (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) rose to a two-year high.

Truckloads of Q2 earnings were released last week as well and despite some disappointments (Microsoft, Exxon-Mobil, Snap Inc, T-Mobile, eBay, Juniper, Chipotle, Bristol Myers), the broad narrative was net positive (Meta/Facebook, Alphabet/Google, Proctor & Gamble, Boeing, Verizon, Intel, GE, Comcast, Ford, 3M, Roku, Royal Caribbean). The expected 8% overall decline in US corporate earnings coming into this results season is looking more and more off-base by the day.

Markets have now embraced the idea that there will be no damaging economic slowdown just as aggressively as they believed at the start of the year that there would be an unavoidable nasty downturn. And, in the same way as those predictions proved to be too grim, the current view likely understates the risks over the coming quarters. The stock market is pricing in no more Fed rate hikes and interest rate cuts beginning in the first half of 2024. Disappointment on either count is where some of the biggest risks lie.

OTHER NEWS ..

What Can We Believe Any More? .. In its lawsuit against the crypto exchange and Binance founder Changpeng Zhao, the Securities and Exchange Commission (SEC) alleged last week that a firm he controlled massively inflated trading volumes on the exchange. Internal messages from Zhao appear to confirm this. Such “wash trading” accounted for more than 70% of trading volume on worldwide crypto exchanges, according to a study based on analysis of data from the second half of 2019. Zhao denies the charges. This obviously throws into even further doubt how much reliance can be placed on any data coming out of crypto-world and pushed into the public domain by its major participants.

That’s Not My Info! .. Two out of three credit complaints filed with the Consumer Financial Protection Bureau are because the consumer’s credit report contains information that belongs to someone else. The US consumer credit watchdog received 197,709 credit report complaints between September 2021 and August 2022. Of those complaints, 66% are because information in the report was not that of the subject of the report, but of someone else.

While misattributing information from one individual to another's account was the top complaint, improper use of credit reports was another common issue, as were concerns about unresolved investigations into existing issues, according to a report from Fair Credit, a law firm that specializes in correcting errors in credit reports.

Some Random Stats From Charlie Biello Of Creative Planning ..

* The US population is now 19% higher than where it was in January 2000 while the inventory of Existing Homes for sale in the US is 37% lower

* The number of car thefts in major US cities in the first six months of 2023 rose by over 104% over the same period in 2019. Kia and Hyundai thefts surged after a popular TikTok challenge using the hashtag #KiaBoys with more than 75 million views on the platform, provided viewers with handy tips on how to steal the cars.

* Extra-virgin olive oil prices have increased 87% over the past year to a record high due to a severe shortage

* Between surveys conducted from 2005 to 2006 and surveys conducted from 2017 to 2020, consumption of bottled water in the US rose 56% while the amount of regular cows’ milk consumed fell by almost 50%

UNDER THE HOOD ..

On the charts, the S&P 500 index SPX (which closed on Friday at 4582) is bumping up against a strong upside resistance level of 4585. Next stops are up at 4596 and 4610. Some downside support has developed at 4558 and particularly at 4529, then again further down at 4492.

It may appear that markets are in conflict right now with stocks apparently gr…

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Less than twenty months after it began, the bear market that engulfed the S&P 500 in early 2022 is now just 260 points away from being completely erased.

2023 has barely passed its midpoint and the market has already blown through even the most optimistic estimates for where Wall Street thought the S&P 500 might be by year end. In the process, it has constantly defied all the early-year gloom accompanied by talk of a guaranteed recession, soaring inflation and an aggressive Federal Reserve interest rate policy.

However, while it’s undeniable that the fears of a hard landing***, inflation and catastrophic consequences from a hawkish Fed have not materialized, the reality is that the current level of the S&P 500 now largely factors all of that in, so recent solid inflation, retail sales and jobs data have really only reinforced what was already widely assumed to be the case.

All this good data did create further “chasing” from FOMO-infected under-invested professional investors and fund managers needing to play catch up which pushed stock prices up further, but with sentiment so overwhelmingly positive and the financial media and many economists now pretty much dismissing any chances of a recession, most of the chasing that’s going to take place has likely already happened.

Case in point, Goldman Sachs analysts last week reduced their perception of the probability of a recession of any kind in the US to just 20% and JP Morgan essentially took the same position.

We’ve basically had the best outcome anyone could have dreamed of at the start of the year and while that means that the gains in stocks are absolutely legitimate, it also means that there’s a strong risk of exhaustion in the near term.

Bottom line, the macroeconomic picture is currently as positive as anyone can possibly hope for, but don’t confuse that with a low-risk environment. The S&P 500 is highly vulnerable to even the slightest of disappointments, particularly in the area of company earnings.

Last week’s earnings results were a mixed bag. Goldman Sachs' 2Q earnings came in weaker than expected, and Netflix's revenue fell short of forecasts, despite showing a surprisingly strong jump in subscribers on the back of its password-sharing ban. United Airlines and Tesla both beat earnings estimates, but with vastly different outcomes for the stocks, nicely up and badly down, respectively. .

The still-deeply (and continually deepening) inverted yield curve (see US TREASURY INTEREST RATE YIELD CURVE below) remains the elephant in the room as the US economy has fallen into a recession 100% of the time when this happens, looking back at over seven decades of data. The question facing investors now becomes; is it actually different this time, or are we watching one of the largest “bull traps” (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) in history develop in real time?

There’s no suspense surrounding the Fed’s upcoming interest rate call on Wednesday (traders see the chance of a quarter point hike at 99.3%). The only real intrigue lies more in whether we will see two consecutive quarter-point hikes across the July and September meetings. That probability fell last week and is currently being priced at around 16%.

There’s no doubt that the previously narrow path to to a soft landing*** is widening all the time and that is keeping the stock market buoyant. This is demonstrated by the fact that the rally is continuing to broaden from just being driven by big dog tech, with the Russell 2000 Small Cap index, the S&P 600 Mid Cap index and even your grandad’s favorite olden-timey Dow Jones Industrial Average index once again outperforming 2023’s two shining stars, the NASDAQ and the S&P 500, last week.

As I outline in THIS WEEK’S UPCOMING CALENDAR below, we are going to learn a lot this coming week. That could possibly include some earnings letdowns, surprisingly hawkish words from Jerome Powell at his press conference on Wednesday and a nasty surprise in the inflation data on Friday. Any of these things (or worse, a combination of more than one of them) could qualify as a “disappointment” which - as I mentioned earlier - could undo a decent amount of the recent gains.

But the glass-is-half-full view of things is that all of these could further extend the trajectory of the current positive narrative and push us closer to the eventual obliteration of what history may eventually refer to as the post-pandemic bear market of the early 2020s.

*** Later this week, I will be sending out a post in which I explain in more detail some of the stock market and economic terminology that is being bandied about everywhere right now, including the concepts of “hard” and “soft” landings.

OTHER NEWS ..

US Finally Catching Up .. The US Federal Reserve last week launched"FedNow", a long-anticipated service aimed at finally modernizing this country's antiquated and cumbersome money transfer system. This service will eventually enable ordinary Americans to send and receive funds (including pay checks) in seconds and 24/7, eliminating the delays and high expenses commonly associated with cash transfers.

The move will bring the US in line with many other countries like the European Union, the UK, India and Brazil, which have had similar services for many years. FedNow has been in development since 2019 and is expected to significantly improve the efficiency and accessibility of the payment system in the US. A properly-functioning electronic payment system in the US might lessen the perceived need for a central bank digital currency.

US Dollar Blues .. The currency is teetering at the lowest level in more than a year after signs of cooling inflation and other data bolstered bets that the Federal Reserve will soon stop hiking interest rates. Many strategists and investors saying a turning point is finally at hand for the dollar. If they’re right, there could be far-reaching consequences for global economies and financial markets. A long-term dollar slide would reduce import prices for developing nations, helping them to ease their inflation pressures. It would also help to bolster currencies like the yen, which has been tumbling for months. More broadly, a softer US currency would tend to boost American firms’ exports at the expense of their counterparts in Europe, Asia and elsewhere.

What it will absolutely NOT do, contrary to ridiculous online and social media conspiracy nonsense that has been spiking recently, is to spell the end of the US Dollar as the world’s reserve currency.

Euro-Problems .. An aging population with a preference for recreation, leisure and job security over earnings and personal financial sustainability has created years of lackluster economic and productivity growth to European Union (EU) countries. The eurozone economy grew about 6% over the past 15 years, measured in dollars, compared with 82% for the US, according to data from the International Monetary Fund (IMF).

That has left the average EU country poorer per head than every US state except Idaho and Mississippi, according to a report this month by the European Centre for International Political Economy. European governments are now finding the old recipes for fixing the problem of economic growth and populations financially unprepared for retirement are either becoming unaffordable or have simply stopped working and most of them appear to have no Plan B.

UNDER THE HOOD ..

On the charts, the S&P 500 index (which closed on Friday at 4536), breached a very important upside resistance level of 4529 last week. Next up are 4559 and 4602. Downside support can be found at 4490 and 4439 and then not much after that till 4350 and 4309.

Smaller Cap stocks still hold the key to any technical-analysis-endorsed market turnaround from bear to bull.

The Percent of Small-Cap Stocks 20% or More Below One Year Highs remains elevated at nearly 43% indicating many smaller stocks are still in bear markets. The outlier status of the Small Cap segment is illustrated by the fact…

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Short and shallow seems to be the growing expectation surrounding any 2023 recession, if it ever even arrives at all. The US economy is stronger than most people expected and inflation is clearly stabilizing. This is the “immaculate disinflation” that many optimists talked about a year ago, with an economy simply showing signs of normalizing after a pandemic. Under this theory, the Federal Reserve may just get to have its cake and eat it, too.

At the beginning of the year, stocks were priced for a meaningful economic slowdown and an earnings drop that never in fact happened. This reality pushed stocks higher through the first quarter and April. Then, the AI craze hit markets and the super-cap tech names carried the S&P 500 higher almost by themselves - giving the (false) impression that the entire stock market was rallying hard and all worries about recession and corporate profit declines were gone. That caused more chasing from those who had sat out the rally up to that point and fueled even higher stock prices.

Now the S&P 500 is trading at a 16-month high based on three assumptions. These are the new pillars of the rally:

* No economic slowdown (i.e., no landing or a soft landing)

* A consistent drop in inflation (over the next few months)

* Fed not hiking interest rates more than expected (one more hike, maybe two at a push)

As long as the economic and inflation data does not damage those pillars, then stocks can hold onto, and maybe even slightly extend, this rally.

The S&P 500 is now only 6% below its all-time high from the first trading day of 2022. That’s quite extraordinary when you think about it. To extend the rally substantially from here and threaten those all-time highs, however, it will take the introduction of something new. Specifically:

* Interest rates actually falling, and/or

* Economic growth further re-accelerating, and/or

* An increase in S&P 500 company earnings (specifically the Earnings per Share ratio).

The reality is that the risks still facing this market are essentially the same ones as we had to start the year. Just because they haven’t materialized yet does not mean that they are no longer present. It’s essential that these risks are monitored and watched for (as I will do for you weekly in this report) because, with pretty much zero cushion should they emerge, it’s a long way down to fundamental value if they do. 

To that end, we saw last week that the Consumer Price Index (CPI) measure of retail inflation fell more than expected to an annualized rate of 3.0% (in fact, 2.97%, unrounded), down from 4.0% a month earlier. It has plunged from a 9.1% year-on-year rate last summer. The closely-watched Core CPI that strips out volatile food and energy costs cooled from 5.3% annualized in May to 4.8% in June.

It’s important, however, to take a step back and note that the headline rate’s big drop has a lot to do with the year-ago month rolling off. Remember, headline CPI rocketed 1.2% in June 2022 alone. Replacing that month in the calculation with June 2023's 0.2% increase shaved a full percentage point off the annual change all by itself.

As has been the case for ever, the financial and mainstream media focused on that drop in headline CPI to a multi-year low, but that’s not the number that the Fed is focused on. It’s that half point drop in annualized Core CPI to under 5% that was the diamond in this data as far as the Fed was concerned.

CPI proved to be a crowd pleaser; stocks moved bigly higher, market interest rates shifted lower, oil and gold prices went back up and the US Dollar accelerated its decline. The next day, CPI’s twin brother, the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers rose just 0.1% from a month earlier and just 2.6% from a year before, the smallest advance since 2020, adding to the pile-on of positive inflation news.

The initial takeaway from the markets was that these numbers indicate that the worst of the inflation crisis looks to be firmly behind us and, while they may not move the needle in that the Fed will almost certainly still raise interest rates by a quarter of a point on July 26th (that probability remains at 93%, see FEDWATCH INTEREST RATE PREDICTION TOOL below), a second swift follow-up increase may be somewhat less likely now given this evidence of solid progress.

Consumer sentiment came in last week at its highest level since September 2021, with its biggest one month improvement since 2006.

The Q2 earnings deluge began on Thursday, investors getting another heathy dollop of good news with numbers from Pepsi, Delta Airlines, JP Morgan Chase, Wells Fargo and Citigroup all looking mighty fine.

Right now, the sun is shining and the birds are singing. It’s not a given that rain clouds will definitely move in, but it is very important to understand that if they do, the storm could be very sudden and very severe and the fact is that most investors are without an umbrella and dressed in t-shirts, shorts and flip-flops.

OTHER NEWS ..

Thursday was a busy day in crypto .. A federal judge came out with the bizarre ruling on Thursday that Ripple Labs’ crypto coin XRP was classified as a security (and therefore potentially subject to regulation from the Securities and Exchange Commission - SEC) if it was bought by an institution, such as a bank or a hedge fund. But, said US District Judge Analisa Torres, it is NOT a security if it is bought by a human being from the general public on an exchange (and therefore not subject to any SEC oversight).

Libertarian fiat-hating bros around the country rejoiced in their parents’ basements in San Francisco or in smelly wooden shacks piled high with ammunition and canned goods halfway up some mountain in Montana and crypto prices surged as the initial interpretation of this ruling was that it may make it more difficult for actual sensible adults to regulate what goes on in the cess-pool of fraud and criminality that is much of currently unregulated crypto-world and the boys may now be left alone and unsupervised to continue committing fraud and corruption and stealing their clients’ funds.

In an ironic twist, on the same day as this frankly nonsense ruling from Judge Torres, former Celsius Network CEO Alex Mashinsky joined the lengthy list of high-profile crypto industry figures to be arrested, accused by US prosecutors of pumping up the price of his firm’s cryptocurrency to entice (human being) customers to the platform — all so he could line his own pockets to the tune of $42 million. He faces both criminal charges and massive regulatory suits from the SEC, the Commodity Futures Trading Commission (CFTC) and the Federal Trade Commission (FTC).

Mashinsky was criminally charged in a 46-page indictment with wire fraud and other crimes, after waging a years-long scheme to mislead customers, according to prosecuting attorneys, before Celsius - having gained popularity by paying high interest rates on digital-asset deposits - imploded last year with more than $1 billion in debt resulting in massive losses for its duped (mostly human being) customers. The company’s former Chief Revenue officer, Roni Cohen-Pavon was also charged with four criminal counts, including fraud - but he is currently hiding out back home in Israel.

UNDER THE HOOD ..

On the shorter term charts, the S&P 500 (which closed on Friday at 4505), blew through upside resistance levels of 4470 and 4485 with the next big one at 4560 while there is no big downside support until 4430.

In the more medium term, the next major upside resistance is at 4529 while initial downside support is down at 4375 and then not much until 4309.

So are bears fully back in hibernation?

While the last week’s index performance was pretty impressive, the improvement in Demand and retreat of Supply was far less so, another divergence between the index illusion and the technical reality.

Currently, we are observing the extraordinary condition of new all-time highs in Demand in the Large Cap segment with Small Ca…

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Fears of an imminent destructive recession and hopes of any interest rate cuts in 2023 are evaporating in equal measure, with each narrative pulling markets in opposite directions.

We learned last week that the Fed was apparently a lot less united at its recent interest rate-setting June meeting than the announced unanimous decision suggested. According to the minutes of that gathering released on Wednesday, some officials favored another quarter-point increase right then and there, but eventually went along somewhat reluctantly with a decision to pause the hikes.

Nearly all members of the rate-setting committee appeared to agree that additional rate increases would likely be needed this year, as the majority still believe there will be recession, albeit a mild one, at some point in the next year or so. The key takeaway? More interest rate hikes are coming, likely starting with the next meeting in a couple of weeks time. More on this later.

Stock markets are pricing in a continued drop in inflation and are not pricing in a meaningful slowdown in growth. Therefore, it logically follows that “stagflation” (stubbornly high inflation in a contracting economy) is the biggest kryptonite for stock prices since it would undermine all the “glass is half full” reasons for the recent rally.

So going into Friday’s Jobs Report, the greatest fear was that it could be stagflationary in nature. What would such a nightmare report look like? ..

* very low job adds (an increase of 100k or below) - implying hiring is slowing,

* the lack of a material increase in the unemployment rate (staying in the mid 3% area or lower) - which would keep the Fed hawkish and likely to continue raising rates higher for longer,

* an increase in wage growth (5% or above) - which would imply a possible bounce back in inflation.

We got a hint on Thursday morning from the ADP private sector-only jobs report which showed more than double the expected level of job creation in June. We also learned from the Job Openings and Labor Turnover Survey (JOLTS) that job cuts by US employers have now fallen to an eight-month low and the quits rate rose by the most in nine months, indicating workers still feel confident in their ability to secure another job and that reports of the end of the Great Resignation were highly exaggerated.

In a perfect example of the lack of room there is for any kind of disappointment that I mentioned in last week’s report, Thursday’s “pre-game” employment data sent stocks plunging and market interest rates surging on Thursday as the higher-for-longer interest rate storyline was strongly bolstered.

But when the real thing came out in the form of the Jobs Report on Friday morning before the market opened, it was reasonably Goldilocks with:

* 209k jobs added and a downward review of the previous month’s number,

* a slight fall to a 3.6% unemployment rate, and

* unchanged 4.4% wage growth.

However, the stock market went on to suffer further losses on Friday, albeit less dramatic than the day before.

It’s now pretty much case-closed for a definite quarter-point interest rate hike on July 26th after the next Fed meeting (93% probability - see FEDWATCH INTEREST RATE PREDICTION TOOL below) and the odds of an immediate follow-up second hike at the following meeting in September are now rising fast (up from nowhere to 24%).

We no longer have the cushion of low expectations provided by the very negative sentiment that we had at the beginning of the year. There now seems to be a broad assumption that stocks will move higher, a very different environment indeed.

Above 4,400 the S&P 500 has fully priced in a lot of good news (it closed on Friday at 4,399) and is also rather stretched from a valuation standpoint.

So, while the major indexes’ market momentum (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) continues to be higher, it’s important to be aware that if economic data and the state of Q2 earnings which start coming out this week (see THIS WEEK’S UPCOMING CALENDAR below) do suddenly turn negative (keep an eye on this weekly report for any signs that this may be the case) then there’s very little support for this market between here and at least 10% lower.

OTHER NEWS ..

Zuckerberg And Musk Face Off .. Mark Zuckerberg’s Meta/Facebook brought forward the launch of Threads, its “Twitter-Killer” micro-blogging social media site which cross-functions within Instagram, with an impressive sign-up rate of 75 million users in the first 48 hours (and that’s with it not even being available in Europe yet) and a lot of advertiser interest. The timing is smart with Twitter users growing more and more dissatisfied with the chaos on the site and open to something new following Elon Musk’s constant meddling with the platform’s features and vetting policies and the huge spike in both technical problems and trashy and toxic content since his takeover.

As The Wall Street Journal put it; “If you’re wondering what it’s like to use the new Threads app, just close your eyes and picture Twitter but with a lot less Elon Musk — and that’s exactly the point.”

Cash Is King In NYC .. More Manhattan property buyers are paying cash than at any other time on record as mortgage rates soar. According to a report on Bloomberg, about two-thirds of all purchases in Q2 2023 were completed without financing, the largest share since the tracking of payment methods began in 2014.

In the luxury tier (the top 10% of the market) the median price for Manhattan deals that closed in the quarter was $6.7 million, up 4% from a year earlier. Across all price ranges, properties traded at a median price of $1.2 million, down 4% from a year ago.

New Yorkers Can’t Catch A Break ... New York City’s air quality dropped once again to unhealthy levels on Wednesday. Instead of Canadian wildfires, however, Fourth of July fireworks and summer pollution were the main culprits this time. Those who managed to escape the city were just as unlucky, as sharks decided to join the rich and famous in hitting the Hamptons for the extended holiday break. Bloomberg reported that five swimmers are suspected to have been bitten.

UNDER THE HOOD ..

The gap between the “Haves” and “Have Nots” is still very distinct in the US stock market. As in most societies, there are far more Have Nots than Haves but the Haves are doing very nicely, thank you very much.

Broad-based Demand, not selective strength, is what drives bull markets, especially at turning points in the cycle. To date, from their respective October lows, the S&P 500 Large Cap Index is up 23% the NYSE Composite Index (which covers all stocks trading on the New York Stock exchange regardless of company size) rose just over 16%, while the S&P 600 Small Cap Index has gained less than 13%.

Another reason for skepticism is that all these gains have also been accomplished on relatively low trading volume, indicating something of a lack of enthusiasm and urgency among buyers.

These cross-currents are very atypical of the dawn of a new bull market, but are very common in unhealthy advances that tend to flame out before becoming sustainable long term turnarounds and caution is still warranted unless or until sustained and powerful broad-based Demand emerges.

The rally from the October 2022 lows embodies technical characteristics inconsistent with a new bull market (as I keep saying over and over). Despite these facts, some may still ask whether it is possible that “this time things could be different?” Exceptions are always possible, but frankly, not probable. And technical analysis (indeed stock market strategy in general) is simply a business of probabilities.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.

THIS WEEK’S UPCOMING CALENDAR ..

And they’re off!! .. Q2 earnings season begins this week including several large US banks set to report and then from there, we'll have weeks of corporate data to digest.

Citigroup, JPMorgan Chase, and Wells Fargo will be this week's big banking earni…

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Q2 and H1 2023 came to close on Friday. I’ll be releasing a full deep-dive review of the quarter in the financial markets in my feed in the next few days. For the moment, suffice to say that the TL;DR for the month of June is that it was defined by higher stock index prices but with a modest narrowing of the performance gap between the Super-Cap tech stocks and the rest of the market.

Recent events in Russia have obviously injected more geopolitical uncertainty into the world, but as long as commodity prices don’t spike meaningfully higher (which they didn’t during the March To Moscow and the aftermath), the stock market is largely ignoring any Russian political volatility.

Stock markets wilted early in the week when the International Monetary Fund (IMF) came out with a statement that gave a thumbs up and a gold star to central banks around the world for continuing with their aggressive interest rate-hiking campaigns, reserving special praise for the highly-proactive European Central Bank (ECB) which reiterated again last week that it plans to regularly raise interest rates over the summer.

The world's leading central bankers from Europe, the UK, Japan and the US (including Fed Chair Jerome Powell) gathered in the pretty resort town of Sintra in Portugal to sit on a lengthy panel. They all conceded that their forceful rate-hiking campaigns are taking much longer than expected to bring inflation back down to target, forcing them all into a higher-for-longer interest rate stance.

While the respective outlooks for major economies have begun to diverge, the US currently looks best positioned to avoid a recession. Nevertheless, Powell put resuming consecutive rate hikes over at least the next two Fed meetings very much back in play, making it clear that the Fed has absolutely not switched to an "every-other-meeting" cadence. "I wouldn't take moving rates on consecutive meetings off the table at all" he said.

These were fighting words aimed at a market that finally and reluctantly seems to be coming round to the idea that maybe the Fed isn’t bluffing about not soon pivoting to rate cuts (see FEDWATCH INTEREST RATE PREDICTION TOOL below).

So if interest rates aren’t coming down any time soon, the best (only?) hope for an accelerating continuation of this stock market rally seems to be higher earnings. And that will begin to come into focus very soon as the Q2 2023 earnings season kicks off in a couple of weeks. As is the way of things, expectation-busting earnings reports will likely cause short-lived euphoria while disappointments will likely be severely punished.

Forecasts are mostly calling for a slight rise in earnings across the board, but there obviously will be outsized attention paid to what the big dogs (AAPL, MSFT, GOOGL, TSLA, NVDA etc.) and proxy stocks for economic activity (WMT, TGT, AMZN, FDX, UPS etc.) have to say. If earnings disappoint (particularly in mega-cap tech), there is definitely a downside risk to stock prices. I’ll stay on top of things there for you so you don’t have to.

Things got progressively more optimistic as the week went on.

* In yet another blow to those recession truthers who bore on about how we already in a recession, the third and final estimate of Q1 2023 Gross Domestic Product (GDP) showed an annualized increase of 2.0%, a marked jump from the second estimate of 1.3%. The upward revision (along with the extremely low unemployment rate) refutes any mad idea that the US is currently undergoing any kind of recession.

* Consumer confidence in June rose to the highest level since January 2022 and the durable goods numbers were consistent with the soft landing hypothesis.

* Wall Street’s biggest banks passed the Federal Reserve’s annual stress test (see EXPLAINER: FINANCIAL TERM OF THE WEEK below).The 23 largest US lenders showed they could successfully withstand a severe global recession and turmoil in real estate markets, the central bank said on Wednesday.

* Confidence abounded about the level of travel and hotel bookings for the July 4th holiday period

This is a market that is looking for any excuse to keep rallying and recently that excuse has been provided by some very solid economic data. If it’s this economic data that is going to help carry the S&P 500 even higher going forward, then it needs to remain really, really good. One of the problems is that it is not always that easy to define what is good and what is not-so-good.

A great example of what I mean by this was last week’s release of the highly-anticipated Personal Consumption Expenditures (PCE) price index, the measure of inflation that the Federal Reserve likes to use to make its interest rate decisions.

It cooled much more than expected, with the headline number rising just 0.1% in the last month for an annualized inflation rate of 3.8%, substantially down from 4.4% the previous month. Looks great, right? Surely, the Fed can back off now, we are charging hard towards its target rate of 2%!

However, the important Core version (which strips out volatile food or energy prices) only inched down to 4.6% from 4.7% year-over-year. This metric’s much slower pace of decline confirms just how sticky proper inflation is proving to be, once you take out the effects of wildly-swinging commodity prices. The market knows that it is this Core number that the Fed focuses hardest on when planning its interest rate policy and that the central bank likely feels that there’s still a lot more work to be done to get core inflation to move down faster.

Momentum in stocks remains higher and the previous week’s pullback needs to be viewed primarily as digestion/consolidation of a pretty intense rally that dates back to April.

The two biggest threats to this rally, as mentioned earlier, are a) an economic slowdown, and b) a downside surprise in Q2 earnings. We need to continue to monitor these data points because disappointment in one or the other - or worse still, both - does have the power to quickly erase the current giddy optimism towards stocks and potentially cause a meaningful pullback.

OTHER NEWS ..

In The Money .. Wall Street interns are getting fatter paychecks. For finance jobs across the US, median intern pay jumped 19% at sixteen top firms studied by Levels.fyi and reported by Bloomberg. At Citadel and Citadel Securities for example, median intern compensation rose 37% in the space of a year to $120 an hour. That’s $19,200 per month before taxes or the annualized equivalent of a $230k salary. Shocker; the firms received 65% more applications compared to last year.

D.I.V.O.R.C.E. .. Goldman Sachs (GS) is desperately trying to end its partnership with Apple (AAPL). The bank had recently extended its partnership with the tech firm through the end of the decade, recently agreed to support Apple’s “buy now, pay later” offering and launched a collaborative retail bank account initiative. 

Now it is apparently in talks to offload those businesses and its Apple credit-card partnership to American Express (AXP) and it seems that Goldman has also discussed transferring its credit card partnership with General Motors to Amex or, frankly, to anyone else who’ll listen.

A retreat from Apple and credit cards would basically end Goldman’s consumer-lending business after it recently stopped issuing personal loans, is trying to sell off GreenSky, the home-improvement lender it bought just last year and announced that it would be de-emphasizing its Marcus savings account product (corporate-speak for: we’ll probably be shutting it down or selling it off sometime soon).

Why is Goldman scrambling so hard to bail out of this arena and consign this experiment to the garbage can? Easy. In January, the bank disclosed that it had lost about $3 billion on its consumer-banking project since 2020.

Three Trill .. Unfazed by any imminent split with Goldman Sachs, Apple saw its valuation break through the $3,000,000,000,000 level last week. Apple is now worth more than the entire UK stock market, which is itself the thir…

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US stocks endured a difficult holiday-shortened week amid concerns that higher interest rates could cause a slowdown in economic growth both here and abroad and a sense that stock market professionals may be starting to take profits on mega-cap tech and put the proceeds into bonds.

There was also a feeling coming into the week that the recent rally had stretched short term valuations a bit and some cooling off of an over-bought condition was to be expected. And that’s exactly what we saw. The S&P 500 snapped its five-week winning streak, falling more than 1.4% (its worst week since March).

Investors have been yawning at “Fedspeak” from various Federal Reserve officials and regional Presidents which has gone in one ear and out the other for about a year now. They have been indulging in a FOMO/AI-led rally since March and scornfully dismissing the notion of any interest rate-related economic pain and an earnings-wrecking recession.

The stock market is essentially saying that it simply doesn’t share the Fed’s ongoing caution and is choosing to disregard it. One side or the other is going to be very wrong here and will have to back down from their current position.

Markets would love a definitive all-clear signal from the Fed that the end of the rate-hiking cycle has arrived. But they are not even getting a sniff.

Last week saw the launch of an onslaught of Fedspeak specifically aimed at pushing back on this stock market skepticism, particularly when Fed Chair Jerome Powell told a House panel that he fully expects more interest rate increases ahead because getting inflation under control “has a long way to go”, while also saying that the frequency of increases would be“more moderate” than the fast and furious back-to-back-to-back rate hikes of the previous fifteen months.

He described the idea of two more rate hikes this year as“a pretty good guess”. The comments were clearly intended to press home the message that the Fed’s June inaction was very much a pause and very not a halt.

Other central banks around the world were also scrambling last week to regain their credibility with a constant drumbeat of attempts to shock markets into believing in stickier inflation (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) and a long, hot summer of ongoing interest rate rises in response. Turkey, which long ago lost the battle to restore any kind of investor trust and is now basically a financial basket case, raised interest rates to 15%.

In the post-Brexit UK, core inflation is at its highest level since Sir Mix-a-Lot pointed out that baby got back in 1992 and food inflation there is currently running at over 18% per year. British bond markets are now even frothier than they were during the chaotic times of Liz Truss’ unhinged 49-day reign as Prime Minister last year. Of the top 25 economies in the world, only Argentina and Turkey currently have a higher level of inflation than the UK. The Bank of England (BOE) reacted with a half a percent hike in interest rates, as did the central bank of Norway. The BOE made it clear that at least three more rises were in the hopper, which is terrifying variable rate mortgage holders who do not have access to long-term fixed rate products like in the US. Meanwhile, the Swiss central bank followed the previous week’s example of the European Central Bank and raised by a quarter of a percent and they also warned of more hikes soon.

The problem with this current consensus view by central banks around the world is that many of the effects of their already-implemented rate hikes have not yet been felt in their economies. Rises in interest rates usually take months or quarters to meaningfully impact growth. Additionally, the economic data that policymakers are relying on for their inflation readings is, by definition, lagging data.

Put these two issues together and you can easily see why many feel that the central banks (including the Fed) are risking an overshoot of interest rate rises which could, of itself, directly cause a painful global recession. This conclusion is strengthened by that often reliable recession indicator, the deepening inversion of the US yield curve (as measured by 2 year interest rates vs. the 10 year), which hit a 40-year high with the shorter rate 0.97% higher than the longer rate on Tuesday morning and stayed there all week (see US TREASURY INTEREST RATE YIELD CURVE below).

On the more optimistic side of things, however, when you look at the important pieces of economic data and track them over recent months, a soft landing (inflation eventually conquered without a meaningful recession) still appears more likely than a hard one. There are few signs that US consumer spending is materially slowing and business spending remains robust. Expectations for the upcoming Q2 2023 earnings season (which kicks off in just three weeks) are quietly ticking higher.

To be clear, this analysis does not mean a hard landing won’t happen. But so far, it’s evident that it isn’t happening. Yes, the economy is most definitely slowing and potential weakness in the service sector and labor market will be significant negatives for growth if they get materially worse. But for now, economic growth is moderating at a pace that is considered consistent with a soft landing and that’s one of the reasons that stocks have proven so resilient in recent weeks.

OTHER NEWS ..

Not so charitable any more .. Charities love to say that "every penny counts". In reality though, individual charitable donations have never mattered less. As reported by Axios last week, it's increasingly just a small number of ultra-high net worth individuals, alongside even fewer old money foundations, who determine whether charities thrive or fall apart.

There's a move away from the previous model of raising smaller sums from many households and toward a much more targeted strategy of just cultivating wealthy donors (or at least the kind of people who still itemize their taxes and can claim the charitable tax deduction) or corporations.

By the numbers: Overall charitable donation in the US dropped in 2022 by $17.3 billion. The amount given by corporations went up, as did bequests and contributions from foundations. But, in a year when Americans’ disposable cash levels have never been higher, charitable giving by individuals fell by a massive $21.9 billion, causing the overall decline.

WFH is winning .. With the pandemic well behind us, evidence continues to mount that working from home will be a lasting feature of the American economy. It's hard to overstate the importance of the fact that more than one-third of American workers aren't schlepping into the workplace each day.

Vast amounts of empty downtown office space, high demand for suburban housing and major shifts in consumer behavior and buying patterns are just a few of the transformative economic changes that can be traced to the WFH revolution.

The Bureau of Labor Statistics' annual survey on Americans’ time use provides some of the most authoritative readings on the trend.

* Nearly 35% of American workers worked from home on an average day last year, up from just 22% a decade earlier.

* Yes, but: Peak work from home (nearly 40% in 2021) may be behind us.

The work-from-home trend is far more pronounced among those with college degrees, of whom about 54% work from home on an average day.

UNDER THE HOOD ..

The S&P 500 came into last week as technically overbought as it has been since 2020 and the risks of a profit-taking pullback loomed large and so it proved as the index moved lower on three of the four trading days, with Friday being the worst of the bunch.

The disjointed recent advance in the Large Cap-weighted price indexes since last October has been anything but typical of a new bull market, as I have repeatedly emphasized in this report. The burden is now on the buyers to extensively broaden the rally into the Mid and Small Cap corners of the market so that it can be sustained. Like a freight train, the more stocks that …

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It was quite an extraordinary week in financial markets and potentially a very consequential one. The S&P 500 closed on Thursday at a higher level than it was the day before the Federal Reserve first started raising interest rates in March 2022. In other words, the index has now officially erased more than a year of Fed-inflicted interest rate pain.

By the time the Fed meeting wrapped up on Wednesday, we had already received significant correspondence from the trenches of the war on inflation. When the Consumer Price Index (CPI) for May came out the day before, we learned that retail inflation has now fallen to below half of last year’s peak, but still remains well above what Federal Reserve officials would like to see.

Overall consumer prices increased just 0.1% from April to May, down from the prior month’s 0.4% increase for a solid drop in the annualized rate to 4.0%, down from 4.9%. The important Core CPI readings which strip out food and energy costs rose 0.4% month-over-month and 5.3% annualized, emphasizing the heavy impact of declining energy prices on the headline readings.

The year-ahead inflation expectations from consumers dropped to 3.3% which, interestingly, is exactly the average annual level of inflation in the US since 1914.

The Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers, which came out early on Wednesday morning shortly before the Fed interest rate announcement, showed an astonishing annualized rate of just 1.1%, well down from 2.9% thirty days earlier.

Markets had already been pretty confident of a long-awaited pause in interest rate hikes by the Fed the next day, but this inflation data sent the probability of no change soaring to 95% going into the Fed announcement on Wednesday afternoon.

What suddenly became important was the “Dot Plot” that the Fed releases quarterly with its interest rate decision. This shows the anticipated future trajectory of interest rates according to each member of the rate-setting committee (see EXPLAINER: FINANCIAL TERM OF THE WEEK, below).

And while the Fed did indeed deliver an announcement of no change in interest rates this time around (a unanimous call) ending 15 months of non-stop hikes, the dot plot showed that 12 of the 18 policymakers penciled in a 2023 year-end Fed Funds rate at or above 5.625% - versus the current rate of 5.125% that they just left unchanged.

So the forecasts implied that a majority of the committee members expect at least two additional quarter-point rate hikes (or one half-point increase) across the four remaining upcoming meetings of the year set for July, September, November and December. One committee member even foresees a full percentage point increase between now and New Year’s Eve.

Following the announcement of no change and the release of the dot plot, Fed Chair Jerome Powell, normally very affable and relaxed at press conferences, appeared rather edgy and irritable when faced with spikier-than-normal questions from financial journalists.

The dot plot initially shocked stock markets whose first reaction was take a big swan dive, but most markets then quickly reversed back upwards when Powell noticeably failed to take the opportunity when it was offered to him by a reporter to commit to a rate hike in July. In the end, most major stock indexes finished Wednesday basically unchanged from Tuesday’s close.

Bond yields (market-driven interest rates) predictably surged in reaction to the dot plot with shorter term rates reacting particularly violently. With shorter term yields moving higher faster than longer term ones, the benchmark inversion of the yield curve between the 2 year and the 10 year steepened further (see US TREASURY INTEREST RATE YIELD CURVE below), pushing towards record territory.

Once again however, stock market professionals seem to be saying that the Fed’s bark is worse than its bite and simply do not believe the dots (which frankly, do have a shaky track record of being ultimately correct). They are wondering aloud that if at least two more hikes really are still necessary, then why not implement one last week? When it was thrown at him, Powell’s answer to that question in the press conference was less than convincing. The sense hung in the air that a rather weak Fed was too afraid of causing a market surprise by raising rates when almost everyone expected them not to.

Stand by for a lot of chatter from Fed officials and presidents in the coming days and weeks as they try to roll out the central bank’s messaging and probably get into a verbal war with a once-again highly skeptical stock market which essentially showed its middle finger to the Fed on Thursday by moving considerably higher, including a new all-time high for Microsoft (MSFT).

In contrast, the Fed’s equivalent, the European Central Bank (ECB) showed much less concern for what the market thinks and raised its interest rate to 3.5%, the highest level in more than two decades. Unlike Powell, ECB President Christine Lagarde shut down debate and nuance and explicitly told everyone to expect even more hikes in the next meeting or even two as the central bank raised its expectations for upcoming Eurozone inflation. This followed recent interest rate hikes from central banks in the UK, Australia and Canada. The US Fed is beginning to look like a bit of an outlier.

Having said all that, not a single dot anywhere on the Fed’s chart indicated an interest rate cut in 2023. Realistic hopes of a swift Fed pivot to actually cutting rates are now in tatters. Powell even referred to the possibility of rate cuts as probably being “a couple of years out” in his press conference.

The deemed probability of interest rates being any lower at the end of the year is now 0%, quite the turnaround from the 100% certainty assigned to this outcome by the market just six weeks ago (see FEDWATCH INTEREST RATE PREDICTION TOOL below).

OTHER NEWS ..

Beyoncé caused inflation in Sweden .. Beyoncé, who launched her world tour in Sweden last month, is partially responsible for the rise of inflation in the country in May, according to Michael Grahn, Danske Bank’s chief economist.

Data published on Wednesday from Statistics Sweden showed that monthly inflation increased there by 0.3% from April to May. The hike was in large part due to a significant increase in prices paid for "a broad set of goods and services, for instance hotel and restaurant visits" and "recreational services" , which include concert tickets.

It seems that Beyoncé's two concerts in the Stockholm were partly to blame. Grahn estimated that two-thirds of that 0.3% inflation experienced in the country in May was tied to Beyoncé’s concerts there on May 10th and 11th. He did also say that"We expect this upside surprise to be reversed in June as prices on hotels and tickets reverse back to normal."

Another one bites the dust .. Crypto exchange CoinEx accepted a ban from operating in New York and to pay $1.8 million to settle state Attorney General Letitia James' lawsuit accusing the cryptocurrency exchange of operating illegally because it failed to register with the state and was unlawfully offering crypto tokens like AMP, LBRY, LUNA and Rally.

CoinEx (otherwise known as Vino Global) can no longer offer, sell or buy securities or commodities in New York and cannot make its platform available anywhere in the state. The settlement includes over a million dollars of refunds to thousands of investors plus a fine. The case was part of James’ enforcement efforts to rein in what she has called "shadowy" crypto companies.

Also, in a reminder of the apparently endless lingering risks of the lack of regulation in the space, South Korean-based crypto lenders Delio and Haru Invest - who each advertised double-digit yields for investors around the world who lent crypto on the platforms - both halted client withdrawals, which is usually a prelude to customers losing all of their deposits.

UNDER THE HOOD ..

The 4,300-4,330 price area in the S&P …

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According to Wall Street’s categorization rules, the S&P 500 index exited bear market territory on Thursday when it closed up more than 20% from its lows from October of last year after spending 248 days there - the longest bear stretch since 1948. However, it still ended the week 10% below its all-time high from January 3rd 2022.

While there’s absolutely nothing in the rules that says we can’t roll over into another new bear market right away, this one we’ve just been through is technically over. For what that’s worth.

With shadow of a debt ceiling crisis now gone and the regional banking catastrophe simply not happening, the path to additional positive surprises is getting narrower and, because so much good news has been priced in already, even a near-perfect best case scenario will likely produce only a modest further rally. Any kind of disappointment, on the other hand, could easily open up a quick 5-10% downward “air pocket” in stock prices, particularly for those assets that have done so well in recent weeks.

Having said that, there’s a definite sense that FOMO is starting to grip those who are under-invested or who’ve been waiting around on the sidelines as the biggest influence on their decision-making shifts from fear at the beginning of the year to extreme greed now (see this report’s new weekly feature; the FEAR & GREED INDEX below).

There’s a growing perception that it might be a bigger risk to be out of the stock market rather than in it. That’s the very definition of the “pain trade”, professional money managers buying stocks not because it’s a rational considered choice, but because they feel pressured to do so by a growing fear of missing an opportunity. Indeed, the head of Citigroup’s US Equity Trading Strategy acknowledged this sentiment just last week when he said on Bloomberg TV, “We are reluctantly staying in the tech trade.”

This causes them to frantically chase stocks higher, driving the indexes up. Until one day they stop. Which could then leave the market a bit like Wile E. Coyote when he suddenly stops running and realizes he has just chased the Roadrunner over the edge of a cliff.

We’re seeing a shift in sector leadership as markets embrace hope for a more broadly robust economy and grow in belief in the soft landing and I would expect the performance gap between the recently-ripping tech and tech-adjacent sectors and the so-far-lagging, more value-oriented consumer sectors to continue to narrow in the short term, at least.

A greater-than-expected rise in weekly unemployment claims on Thursday increased the bets that the Fed will pause raising interest rates this week. It’s important to note that the Fed being “on hold” should not be confused with “job done”. There has been a subtle shift in language from “pause” to “skip” when discussing the Fed not hiking on Wednesday, which is trying to communicate that a pause isn’t a permanent on-hold and it certainly doesn’t mean that rate cuts are imminent.

Tuesday's release of the Consumer Price Index (CPI) measure of retail inflation for May and Wednesday morning’s release of the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers will both be major influences on the Fed who will announce their interest rate decision later on Wednesday (at 2pm ET). While red-hot inflation could spell trouble for those betting on a June pause followed swiftly by a rate cut, definitive signs of a cooldown could have the capability to keep the upward momentum in stock prices going for a while longer.

Interest rates across the old British empire continue to move higher as central banks in Australia and Canada both surprised markets by hiking a quarter of a point last week, citing still-elevated inflation. Particularly in the case of Canada, this rate increase followed a lengthy pause. Blueprint for the Fed?

As can be seen in the FEDWATCH INTEREST RATE PREDICTION TOOL below, many stock market participants still believe that the next change in US interest rates after the assumed pause/skip this time around will be a downward one. The Bank of Canada just reminded us that this may well not be the case.

The World Bank (WB) released updated growth forecasts on Wednesday. The revisions were to the upside with the WB’s anticipated US growth rate for 2023 being raised from 0.5% in January to 1.1%. Global growth expectations also increased from 1.7% in January to 2.1%, with the bank citing “greater-than-expected resilience in major world economies.”

Goldman Sachs analysts came out last week and announced; “We have cut our judgmental probability that the US economy will enter a recession in the next twelve months back to 25%, undoing our upward revision to 35% shortly after the Silicon Valley Bank failure ..“

While a Wall Street analyst’s measure of success is generally a matter of being just slightly less wrong than a competitor, this shift is symptomatic of the mood of many investors that the economic landing may well be softer than was feared coming into 2023. And if there is going to be a meaningful recession, it will be the most well-telegraphed and anticipated one in history as little else has been on investors’ minds for over a year now.

Oh, and Wall Street will simply yawn at the arrival of yet another Trump legal circus just like it has done historically.

OTHER NEWS ..

Regulators at the SEC have had crypto in their sights for a while. Last week they pulled the trigger ..

After months of teasing, the Securities and Exchange Commission (SEC) finally took the gloves off last week when it comes to investor protection in the world of crypto. On Tuesday the SEC sued Coinbase (COIN), alleging that the US’s largest crypto platform violated rules that require it to be held accountable and to register as an exchange and be overseen by the federal agency - predictably crashing the stock. The SEC filed the lawsuit in Manhattan federal court. The SEC alleged that Coinbase traded at least 13 crypto assets that are really unregistered securities (see EXPLAINER: FINANCIAL TERM OF THE WEEK, below) and should have been registered with regulators before they were issued and also that there was illicit activity in crypto-staking. Registration typically involves giving investors financial statements and detailed risk disclosures that are reviewed by regulators.

The case came just 24 hours after the regulator’s 136-page enforcement action against Binance and its founder ChangPeng Zhao alleging that the world’s largest crypto exchange is not only operating an illegal trading platform in the US but (unlike on the list of the Coinbase charges) also improperly misused (pretty much legal-speak for “stole”) customers’ funds, directing them into other entities owned by CZ in a manner that has echoes of the fraudulent activity allegedly carried out by Sam Bankman-Fried at FTX (SBF is facing a criminal trial and potentially decades in jail if convicted). Later in the week, some highly-incriminating messages from CZ were released by the SEC.

Kicking laser-eyed crypto bros while they were down, SEC chairman Gary Gensler, a former MIT blockchain professor who actually really knows his crypto s**t, then came out and said on CNBC that cryptocurrencies are essentially unnecessary in today’s world; “Look, we don’t need more digital currency,” he said “We already have digital currency. It’s called the US dollar. It’s called the euro or it’s called the yen; they’re all digital right now. We already have digital investments.”

Matt Levine of Bloomberg put it this way .. “The SEC, I think, learned three lessons: 1) Almost all crypto tokens are securities, 2) Winning cases against crypto projects for doing illegal securities offerings is pretty easy, 3) Especially when they are also frauds”.

John Reed Stark, former SEC enforcement attorney, even went as far as to say in response to last week’s enforcement actions; “I think anyone who has crypto on any exchange should take it off of that exchange immediately. Period, …

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Despite the best efforts of the whining Congressional arsonists on both sides, the Biden/McCarthy debt deal cruised comfortably through the House of Representatives and the Senate and straight to Biden’s desk for signature yesterday, bringing an end to the whole completely unnecessary psychodrama.

Markets had briefly begun repricing the risk of there still being some kind of US government default, even a self-inflicted very short one, but it soon became clear that, while the burn-it-all-down crew of politicians might soon try to exact some form of internal revenge on their own “ideological traitors” who agreed to these compromises, their rather pathetic opposition to the successful passage of the deal was ultimately entirely impotent.

It’s important to realize that, yes, the market did briefly get a bit jittery but it never really priced in the worst-case debt ceiling scenario. Bringing the whole sorry episode to an end has merely removed a potential catastrophic negative and does not actually add anything new and positive into the macro set up.

What it does do is to now allow the focus of investors (not to mention that of the authors of weekly financial market reports) to return to proper concerns such as employment, whether the Fed hikes interest rates on June 14th and most important, the whole hard landing (inflation conquered at the cost of a meaningful recession) vs. soft landing (no recession or a very shallow one) thing.

Starting with employment; earlier last week, it had been announced that the number of unfilled job vacancies had surprisingly risen from 9.7 million in March to 10.1 million in April (forecasts had been for a decline to 9.4 million). That translated to 1.8 open jobs per unemployed worker in April.

Then on Friday we learned that the US economy created an astonishing 339k jobs in May, instead of the expected number of well below 200k. That is the 14th straight month that payroll numbers have beaten estimates. Plus the large April gains were revised even higher.

The unemployment rate, however, shifted higher, to 3.7%, up from 3.4%, reflecting an increase in the number of people who became unemployed in the last 30 days. Hourly wages only rose slightly, implying an increasingly under-control situation in this area.

Faced with these mixed signals, the stock market went with the recent path of least resistance and moved nicely higher on Friday in what was a rare across-the-board pop that saw most of the “soldiers” move forward into battle and not just the ”generals” as has been the case recently.

Moving on to the expectations for the Fed’s next interest rate announcement in less than two weeks’ time; there’s “no compelling reason” to pause rate hikes at the next Fed meeting, Cleveland Fed chief Loretta Mester said early in the week. The very-important-right-now futures market probability of such a pause at the next meeting swiftly declined as a result but then swung violently back the other way after multiple other Fed speakers like Governor Philip Jefferson, a centrist who often echoes Chair Jerome Powell’s views, proceeded to hint heavily that the Fed would indeed likely “skip” a June rate hike, but added that the rate-lifting cycle was likely not yet over.

Federal Reserve Bank of Philadelphia President Patrick Harker, a voting member of the committee that decides interest rate policy, even came right out and said it; “We should at least skip this meeting”.

The probability of no change in rates on June 14th ended the week at 72%, way more than double its reading of just a week ago (see FEDWATCH INTEREST RATE PREDICTION TOOL below). Inflation numbers ahead will likely solidify the Fed's next move.

In late February and early March, stocks were getting pounded because the February jobs report was a blowout and markets priced in more Fed rate hikes. The “terminal rate” expectations got as high as 5.625% and stocks dropped hard, as they should have. Then, Silicon Valley Bank and Signature Bank failed, soon to be followed by First Republic. Investors priced in a banking crisis and increased chances of recession/hard landing. Turns out neither of those things has happened - at least not yet. Meanwhile, economic data remains really, really resilient and Q1 2023 earnings fell by an awful lot less than had been feared by almost everyone.

Combine that with recent AI euphoria (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) and, by virtue of the “pain trade” I outlined in my April 23rd report, you now have a NASDAQ that has ripped higher for six weeks in a row and an S&P 500 that is only a fraction away from being up 20% from its lows of October 2022, which would technically turn it from a bear market to a bull market by the accepted definition.

As regular readers will be bored of hearing from me by now, I will caveat the fact that headline indexes are strengthening by pointing out that the price of the average stock in the S&P 500 is actually negative for 2023 (vs. the index which is up close to 10%) and that the vast majority of the index’s gain comes from five or six stocks out of the 500. But nevertheless, a scenario whereby the other 495 or so stocks start to play catchup could be very interesting.

There are still many troublesome technical analysis concerns and worrying negative divergences which I continue to outline weekly in UNDER THE HOOD (below) and I am nowhere near calling the death of the bear, but you cannot help but be impressed with the stock market’s recent resilience right now.

OTHER NEWS ..

Grandmothers are the invisible glue .. Grandparents don’t get a lot of air time in the conversation about America’s child-care crisis. Yet some 42% of parents rely on their own parents to help care for children, a figure that is eerily close to the 40% of families that say they don’t have the child care they need.

Grandparents are critical to holding America’s creaking child-care system together, as reported by Bloomberg last week. They are often the first call when the regular day-care plan falls through, but the consequence is that many older women leave the workforce earlier than they’d like, putting their own financial security at risk. Working grandparents, like parents, would benefit from affordable and reliable child care, universal pre-school and paid parental leave.

About half of grandmothers are employed — some because they find work fulfilling, and many because they need the income. Many are also helping their adult children with expenses, including for the grandkids. That means many grandmothers are juggling caregiving with paid work, just as their daughters are. And some are leaving the workforce earlier than they would like to because of those caregiving responsibilities. Although workforce participation among women aged 25-54 just hit a new high again, women over 55 have not yet recovered from their pandemic-induced job losses.

The end of The Great Resignation .. Workers furiously quitting for new, likely higher-paying jobs is a thing of the past, it seems. The historic surge of quitters was a symptom of an on-fire labor market, where demand for workers far outstripped supply. But the quits rate fell to just 2.4% in April, according to last week’s Job Openings and Labor Turnover Survey (JOLTS) and puts us roughly back in line with the average rate of 2019. Even leisure and hospitality workers, once the poster children for the resignation boom, are seeing their quits rate return to pre-pandemic norms and well down from the peak last summer.

Accompanying this narrative is foot-traffic and rent data showing that the pandemic has shifted urban centers of gravity in major cities like New York, Los Angeles and Chicago, with residents no longer fleeing the cities en masse but rather moving away from increasingly sterile office districts to the city neighborhoods with a greater abundance of apartments, bars and restaurants. 

UNDER THE HOOD ..

Very nearly half of all US stocks are now 20% or more below their one-year highs and are th…

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