U.S. Economic News:

The number of Americans filing for first-time unemployment benefits fell to a one-month low last week, as the labor market remains resilient despite a slowing economy.  The Labor Department reported initial jobless claims fell by 2,000 to 243,000.  Economists had forecast claims to total 255,000.  Although the economy has slowed, most companies have not resorted to layoffs and many companies are still hiring.  The strong labor market is one of the best safeguards against a severe recession, but the Federal Reserve is worried the shortage of qualified workers might worsen inflation by further pushing up wages.  Meanwhile, continuing claims declined by 19,000 to 1.42 million.  That number remains near a 50-year low.

The number of homebuying transaction in which a contract has been signed, but not yet closed, slipped again in July as the housing market continues to cool.  The National Association of Realtors (NAR) reported its pending home sales index fell in July by 1% (analysts had expected a 3% drop).  Sales dropped for a second month in July, its eighth monthly decline over the past nine months.  Economists use the index to get an “early read” for the direction of home sales in subsequent months.  The drop in pending home sales follows weaker data on the new home and existing home sales fronts, as well as a dip in mortgage application activity.  Compared with the same time last year, sales were down ‑19.9%.

Despite other indications of a slowing economy, the Federal Reserve Bank of Chicago says the U.S. economy gained steam in July following sluggish growth over the last few months.  The Chicago Fed’s National Activity Index rose 0.52 point to 0.27 last month.  Economists polled by FactSet had expected a weaker reading of -0.1.  The Chicago Fed’s National Activity index is composed of 85 economic indicators from four broad categories, designed to gauge overall economic activity and inflationary pressures.  All four broad categories of indicators used to construct the index made positive contributions in July.

Federal Reserve Chairman Jerome Powell delivered a short and blunt message at its Jackson Hole retreat, stating the Fed will keep the job of bringing inflation down until it is done, and that the fight will be costly in terms of jobs and economic growth.  “Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said in his speech.  “Moreover, there will very likely be some softening of labor market conditions.  While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he added.  Wall Street had interpreted his last speech as “dovish” after Powell described the Fed’s benchmark interest rate setting—in a range of 2.25%-2.5%–as “neutral”.  This week, Powell stated that neutral “was not a place to stop or pause” rate hikes—comments seen as “very hawkish” by market participants who drove the Dow Jones industrials to a loss of 1,008 points on Friday.

U.S. businesses grew more slowly this month as high inflation and rising interest rates weighed on consumer spending, a pair of surveys of services and manufacturing activity showed.  For the vast ‘services’ side of the U.S. economy, S&P Global’s U.S. services sector index dropped to 44.1 from 47.3—its fifth decline in a row and its weakest reading since May of 2020.  The U.S. manufacturing index slipped to 51.3 from 52.2—its lowest reading in two years.  Readings above 50 signify expansion, while those below indicate contraction.  Both manufacturers and service-oriented companies such as retailers reported waning sales in August and the lowest demand in more than two years.  On a positive note, the cost of supplies eased for a third month in a row.  That’s a sign inflation pressures may ease following a big run up earlier this year.

Two key gauges of inflation showed inflation pulled back for the first time in more than two years.  The Personal Consumption Expenditures Index (PCE) is rumored to be the Federal Reserve’s “preferred” measure of inflation over the more widely known Consumer Price Index (CPI).  The PCE ticked down -0.1% in July, predominantly due to tumbling gas prices.  The decline was the first pullback in the PCE since April 2020.  Economists had predicted an unchanged reading.  But the narrower measure of inflation that omits food and energy costs, core PCE, edged up 0.1%.  That was below the consensus forecast of 0.2%.  The rate of inflation over the past year dropped to 6.3% from 6.8% in the prior month.  Chief economist Gus Faucher of PNC Financial Services stated, “The open question is whether the Fed can calibrate its rate increases finely enough to push inflation down to 2% over the next couple of years, but without pushing the economy into recession.”

The outlook of the nation’s consumers improved in August as falling energy prices helped lower inflation expectations to their lowest level since December of last year.  The University of Michigan reported its index of consumer sentiment rose 3.1 points to 58.2 this month.  Economists had expected a reading of just 55.2.  Inflation remains a top concern for American consumers, though falling gas prices and attenuating price increases on other goods has helped to lift their economic outlooks.  “The gains in sentiment were seen across age, education, income, region, and political affiliation, and can be attributed to the recent deceleration in inflation,” wrote Joanne Hsu, director of the survey.  A gauge of consumer’s views of current conditions rose to 58.6 in August from 58.1 in July, while an indicator of expectations for the next six months jumped to 58 in August from 47.3 last month. [1]

Random Thought/Image of the Week

Once a company has reached such prominence that its very name becomes the verb for its service, it generally has staying power (feel free to “Google it”).  Not so much with video-conferencing platform Zoom.  This week Zoom reported its slowest quarter ever of revenue growth, with sales rising just 8% over the past year, sending its stock plummeting (another) 16%.  That leaves the  company’s market cap at less than $25 billion, a fraction of its $162 billion market cap at the height of Zoom’s go-go days of the pandemic when its valuation approached some of the largest telecom and communications companies in the world. (Chart from chartr.co).

Structured Note Values

1. XLE/XOP Lowest, XLE Pricing Value 3/25/22: 78.75, Current: 82.84, Delta +5.19%; XOP Pricing Value 3/25/22: 138.60, Current Value: 149.01, Delta +7.51%
2. Lower of GDX/GDXJ; GDX Pricing Value: 4/29/22: 34.99, Current: 24.90 Delta -28.84%; GDXJ Pricing Value 4/29/22: 42.95, Current: 30.94 Delta -27.96%
3. Lower of GDX/GDXJ; GDX Pricing Value: 5/26/22: 32.39, Current: 24.90 Delta -23.12%; GDXJ Pricing Value 5/26/22: 39.67, Current: 30.94, Delta -22.01%
4. ARKK Pricing Value 6/15/22: 39.42, Current: 42.84, Delta +8.68
5. ARKK Pricing Value 7/15/22: 44.11, Current: 42.84, Delta -2.88%
6. SPX Pricing Value 7/18/22: 3863.16, Current 4057.66, Delta +5.03%
7. RTY Pricing Value 7/18/22: 1744.37, Current: 1899.83, Delta +8.91%
8. NDX Pricing Value 7/18/22: 11,452.42, Current: 12,141.71, Delta 6.02% [4]

The Week Ahead

The Atlanta Fed’s GDP model is forecasting 1.6% growth in Q3, while the odds of a
75bps rate hike at the September 21 FOMC are near 60% according to Fed Funds
futures. August’s employment report will be released Friday and could have a big
impact on both projections. The last three NFP reports have exceeded expectations,
so investors will be watching to see how labor markets are holding up. Also, the ADP
jobs report returns after a month’s hiatus with an overhauled methodology that may
provide additional context. Other events of note in the U.S. include consumer
confidence, ISM Manufacturing PMI, Chicago PMI, and factory orders. Overseas,
flash CPI figures for Germany and the EU will be the last inflation updates before the
ECB meets on September 8. The euro has slid below parity with the U.S. dollar for the
first time in 20 years, and policymakers are caught between controlling skyrocketing
prices and raising borrowing costs for highly indebted nations.  [2]

Chart of the Week: S&P 500 Potential H&S Breakdown

The S&P 500 (SPX) is showing compelling signals that could make a bearish case for the coming weeks. Since the June 17 low, the index moved higher by as much as 18% while establishing a series of higher highs and lows. That trend  changed last week, as a technical head and shoulders top formation confirmed with price falling below the neckline
support. A potential target based on the pattern would be near $3,900. One interesting counter indicator, however, is a rising 50-day moving  average, which could offer  support near $4,000.

Click on the Chart to Enlarge. [3]

Sources: [1] Asset Guidance Group analysis, www.stockcharts.com; All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat,0020Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; [2] Data & chart from thehustle.com; [3] tdainstitutional.com; [4] stockcharts.com. 

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.