Fast Fading Economy, More Data, FOMC, Markets, Student Debt, Trading OXY

People look to me and say

Is the end near, when is the final day?

What’s the future of mankind?

How do I know, I got left behind

Everyone goes through changes

Looking to find the truth

Don’t look at me for answers

Don’t ask me. I don’t know.

– Osbourne, Rhoads, Daisley (Ozzy Osbourne), 1980

Holy Meltdown, Batman !!

It’s not like everyone watches the S&P Global (formerly Markit) Flash PMIs here in the US. Here, we have long focused on the once a month ISM Manufacturing and Non-Manufacturing Indexes (PMIs). Still, it becomes difficult not to notice when an economic data point as broad reaching as are the surveys released by S&P Global simply collapses.

On Tuesday morning, the S&P Global Manufacturing Flash PMI hit the tape at 51.3 for August falling short of expectations for something around 51.8. This was down from July’s 52.2, and the worst looking release for that series since August 2020. Still, above 50 is expansionary, so the number is not the end of the world.

However, the S&P Global Services Flash PMI printed at an absolutely grotesque 44.1. That’s deeply into contractionary territory, missed expectations for 49.8, and was down from July’s already very nasty looking 47.3. This was the worst month for this item since much of the country was in a mandated shutdown in June of 2020.

For those who follow the S&P Global Composite PMI – I like to keep them separate – the August flash hit the tape at 45.0, down from July’s 47.7. In plain English, according to America’s purchasing managers, overall economic activity contracted in July and sunk even further into contraction in August. Blame whatever you want… blame high inflation, shortages of key materials, delays in deliveries of finished and unfinished goods, and rising interest rates.

Fact is, that outside of the labor market data that economists have chosen to follow (because not all labor market related data points agree), the US economy is fading fast. We have plenty of company. Eurozone flash PMIs look fairly gnarly as well, Germany in particular, as those economies have been hit by the fallout and rising prices for both food and energy commodities associated with Russia’s now six month old war on Ukraine. Oh, and Asia is no prize either. This is global.

About 15 minutes later, the Census Bureau reported July New Home Sales of 511K (SAAR), falling well short of consensus (574K), down from July’s 585K, and the weakest print for that series since January of 2016. This came on the heels of other also very weak housing related data-points for July such as Housing Starts and Existing Home Sales.

On Tap

Later this morning, we’ll hear more about the US economy in July when the Census Bureau reports Durable Goods Orders. Expectations, as readers can see below, are for a slowing of the pace across all metrics. The Core Capital Goods print is the real focus there, not the headline number.

After that, probably late this morning, the Atlanta Fed will revise its GDPNow model, the closely followed real-time snapshot of third quarter economic growth. Atlanta currently has the third quarter running at +1.6% (q/q, SAAR), which if realized would feel like a breath of fresh air after six months of economic contraction.

As we move from the overnight session into very early Wednesday, futures trading in Chicago were pricing in a 51% probability of a 75 basis point increase made to the range for the Fed Funds Rate target on September 21st. This is up from a majority probability for a 50 bps hike earlier this week. These futures markets are now pricing in just a 25 bps hike on November 2nd, implying that November has not moved despite the visible movement for September.

Futures markets were still showing the range for the FFR ending the year at 3.5% to 3.75% and the tightening cycle climaxing at 3.75% to 4% in March 2023, before retracing itself slightly by June of 2023.

Hatzius

Goldman Sachs (GS) Chief Economist Jan Hatzius appeared on Bloomberg TV on Tuesday. He sees financial markets battening down the hatches for Fed Chair Jerome Powell’s speech this Friday, and subsequently the September 21st FOMC policy statement. About Powell’s perceived hawkishness, he’s not so sure.

Hatzius said that Powell “will make clear that the job is not yet done”, and that “they (The FOMC) are very committed to bringing inflation back down to 2%.”

However, Hatzius also said, “I think he will lay out a case, as he did in his last press conference, for slowing the pace of increases. We had two 75-basis point moves. Our expectation would be, barring significant data surprises, that the September move is 50. I don’t think he will be specific about the number, but I do think he will be saying that there is a risk of over-tightening, and therefore it makes sense to go a little more slowly than the outsized increases.”

My sentiment exactly.

Tumbleweeds

Tuesday was essentially a day off for US equity markets. Not for currency markets as the US dollar trades at very uncomfortable global valuations, and not commodity markets as US natural gas spiked to a 14 year high and then plunged as Freeport LNG announced that it anticipates a return to partial operations at the Quintana, Texas terminal in early November. The hope had been that the ball would start rolling in October. What this means is that US nat gas remains in the US for longer just as colder weather descends upon Europe.

As for stocks, only the Dow Transports (+0.65%) and the Philadelphia Semiconductor Index (+0.74%) really showed any life on Tuesday. The Russell 2000, Nasdaq Composite, Nasdaq 100, and the S&P 500, 400, and 600 all closed out the Tuesday session anywhere from +0.18% to -0.22%. In other words, close to “unchanged.” Winners beat losers by just a smidge at the Nasdaq Market Site, while losers beat winners, also by just a smidge at the NYSE. Advancing volume took a 55.9% share of composite NYSE trade and a 53.5% share of composite Nasdaq trade.

While there’s nothing horrific in that performance, one might have hoped for more as markets digested Monday’s selloff. Seven of the 11 S&P sector-select SPDR ETFs shaded red for the day, as Energy (XLE) , up 3.61%, easily led the daily performance tables. Cyclicals led for the session, with defensive types at the bottom, sandwiching growth.

Aggregate trading volume actually contracted on Tuesday from already nearly anemic levels on Monday. This is expected as Powell’s speech on Friday draws near. Trading volume across the S&P 500 has not touched the trading volume 50 day SMA for that index since July 29th, and that was an “end of quarter” event. Without such forced flows, the index has not hit its 50 day trading volume SMA since July 5th.

Controversy

Plans are apparently being made for President Biden to make an announcement on Wednesday about his proposal for dealing with student loan debt. Scuttlebutt has it that the president will push out the moratorium on student loan debt repayments until after the midterm elections, while announcing $10K in loan forgiveness across the board for those earning less than $125K per year. This, of course, places the onus on taxpayers and damages lenders as well as stakeholders in those lenders.

Now, I don’t mean to sound like a hard man, and I do have relatives who have had and have student debt. I just have a few questions. Given that the majority of student debt holders lie in the top 60% of earners nationally, and you are choosing that group for some kind of debt relief in a broad move, over other groups, I have some questions…

1) What do you do for the kid who paid back his or her debt?

2) What do you do for the guardians who either paid their child’s tuition up front or paid off their debt for them?

3) What do you do for the kid who never went to school at all for economic reasons?

4) What do you do for the kid who spent four years serving his or her country in order to pay for school?

5) What do you do for the kid who served his or her country trying to pay for school who suffered an unfortunate outcome?

6) What do you do for the kid who has a hefty non-school related debt-load?

Each of those persons is treated unfairly should all or a portion of student debt be forgiven. Each of them is owed more than a “that’s too bad, pal.”

Breakout?

Taken a good look lately at Warren Buffett’s recent target, Occidental Petroleum (OXY) ?

Readers will note that despite OXY’s strong run, and the stock having retaken its 21 day EMA and 50 day SMA, that for this name both the daily MACD and reading for Relative Strength are strong, but not yet technically overbought.

Readers will also note that support from June into August had been found at a 38.2% retracement of the stock’s December 2021 through late May rally. That support has formed the bottom of what looks to be a cup or a saucer with no handle. The stock can do two things here, and they both tend to be positive (unless they break).

Currently, we have a cup with a $74 pivot (left side of the cup). This would place my target price at $90. Now, should the stock start to sell off from here, the cup pattern will develop a handle. Upon such an occurrence, the pivot moves from the left side of the cup to the right. At this moment, the two potential pivots are essentially at the same level, leaving my target unimpacted. That said, we do not know if that right side apex has yet been built. Yes, this trade has been a winner. Yes, I am still bullish from here.

Economics (All Times Eastern)

07:00 – MBA 30 Year Mortgage Rate (Weekly): Last 5.45%.

07:00 – MBA Mortgage Applications (Weekly): Last -2.3%.

08:30 – Durable Goods Orders July): Expecting 0.6% m/m, Last 1.9% m/m.

08:30 – ex-Transportation (July): Expecting 0.2% m/m, Last 0.3% m/m.

08:30 – ex-Defense (July): Expecting 0.3% m/m, Last 0.4% m/m.

08:30 – Core Consumer Goods (July): Expecting 0.3% m/m, Last 0.5% m/m.

10:00 – Pending Home Sales (July): Expecting -2.8% m/m, Last -8.5% m/m.

10:30 – Oil Inventories (Weekly): Last -7.056M.

10:30 – Gasoline Stocks (Weekly): Last -4.642M.

The Fed (All Times Eastern)

No public appearances scheduled.

Today’s Earnings Highlights (Consensus EPS Expectations)

After the Close: (ADSK) (1.57), (BOX) (.27), (NVDA) (.49), (CRM) (1.03), (SNOW) (-.01), (SPLK) (-.35), (WSM) (3.48) 

(XLE and NVDA are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)

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