(Updates with earnings news, unemployment claims. See bold text below).
Good morning contrarians! It is Thursday, July 21, about 0615.
Stocks rallied yesterday, led by tech, with the Nasdaq up 1.6%. The S&P 500 (SPY 0.00%↑) gained 0.6%. The Nasdaq has now been up four out of the last five days and is up almost 4% so far this week. Seems just like the good ol’ days!
State of Play
As of 0615 it looks like risk appetite is abating somewhat.
Stocks are effectively flat. The Nasdaq is clinging to small gains of 0.1% with S&P and Dow Industrials down a bit.
Individual stocks making moves include Tesla (TSLA 0.00%↑), which reported earnings after the close and is up 2.5% after choppy trading overnight. We also have Carnival Cruise Lines (CCL 0.00%↑) dropping by more than 10% after the company announced a share issuance. United Airlines (UAL 0.00%↑) is down 6% after earnings. But then Las Vegas Sands (LVS 0.00%↑) is up 4%.
Commodities are down, with WTI crude oil off almost 5% to trade near $95/barrel. Copper is down 2%.
Cryptos are down, with bitcoin off more than 2% to trade around $23,000. This is partly due to Tesla, which said it had sold 75% of its bitcoin holdings.
Bonds are flat. The 2-year yield is trading at 3.24% whilst the 10-year is at 3.05% so the yield curve is still inverted.
Earnings
It’s a pretty big day for earnings. The biggest one yet this season. We’re due to hear from AT&T (T 0.00%↑), American Airlines (AAL 0.00%↑), Travelers (TRV 0.00%↑), Blackstone (BX 0.00%↑). D.R. Horton (DHI 0.00%↑), and Philip Morris (PM 0.00%↑) among others.
Update: AT&T beat on top- and bottom line estimates, albeit narrowly, but the stock is selling off in the premarket. At issue appears to be a lowering of cashflow forecasts. DHI beat EPS estimates but missed on revenues and lowered guidance for the rest of the year. Philip Morris beat as well and raised revenue guidance.
After the close at 1600 we will get reports from Mattel (MAT 0.00%↑), Domino’s Pizza (DPZ 0.00%↑), and AutoNation (AN 0.00%↑).
Employment
The job market has held up so far in the face of historic Fed tightening. That makes sense as employment is a lagging indicator. It takes awhile for Fed rate hikes to work their way through the economy. But the labor market is showing signs of softening and that has bee most evident in the weekly initial jobless claims, which are the most up-to-date metric we have on hiring.
Last week saw 244,000 new claims, the most since February and the sixth straight week of increases. To reiterate what we said in this space last week (and the week before probably) an increase of 50% off of the lows constitutes a recession. That number is 249,000 so we’re getting quite close.
For this week economists are expecting 240,000 new claims. How this number comes in could go a long way toward determining risk appetite for the day ahead (along with earnings of course).
Update: 251,000 new claims. This is ahead of expectations and officially marks an increase of 50% from the low set in April.
The Bottom Line©
This week has seen the return of risk appetite. Dead cat bounce or the start of a secular trend? The economic data is pointing toward a recession. More importantly, the Fed is removing liquidity from the system. We saw a bunch of selling of risk assets the first six months of the year. Maybe that was overdone? It’s during times like these that the macro folks start to suffer from pretty serious self-doubt. How could the market be so ebullient in light of the economic realities it is facing?
Markets are forward-looking indicators and it would appear the market is now looking ahead of the current Fed tightening cycle and toward days of looser monetary policy. That makes sense on some level because if the Fed is able to engineer a recession, it stands to reason that their next move will be to cut interest rates again. That will be good for risk assets.
The only issue with this is it maybe underestimates the pain and destruction that a recession — even a mild one — will bring. There are many industries (cough, cryptos) begging for what the Austrian economist Joseph Schumpeter called creative destruction (maybe not entirely fair to lump cryptos in with this as creative destruction is supposed to lead to advances in productivity, not devices for gambling and criminality). That’s the argument at least. But as they say, don’t fight the tape.
Earnings Dump, Initial Jobless Claims