U.S. Economic News:

The number of Americans filing for first-time unemployment benefits fell by 2,000 to 231,000 last week.  Economists had expected claims to total 230,000.  The four-week average of claims, smoothed to iron out the weekly volatility, rose by 7,250 to 231,750—the highest level since December.  Meanwhile, the number of people already collecting jobless benefits, known as continuing claims, fell by 3,000 to 1.33 million.  That number is now back to pre-COVID crisis levels.  While still robust, many analysts don’t think the labor market can show much improvement from these levels.  Nancy Vanden Houten, lead U.S. economist at Oxford Economics stated, “The level of claims is still relatively low, but we don’t expect claims to fall much below the levels of the last few weeks.  While labor markets remain very tight, reports of layoffs are increasing.”

Home prices continued to rise in April, according to the latest report from S&P Case-Shiller.  The Case-Shiller 20‑city home price index posted a 21.2% year-over-year gain in April, up a tick from the 21.1% reading the previous month.  A separate report from the Federal Housing Finance Agency showed a 1.6% monthly gain, and that index was up 18.8% from the previous year.  Tampa, Miami, and Phoenix reported the highest year-over-year gains among the 20 cities in April.  By region, price growth was strongest in the South and Southeast, which saw over 30% growth.  D.C., Minneapolis, and Chicago reported the lowest year-over-year gains.  Selma Hepp of S&P CoreLogic noted there was a “notable deceleration of monthly gains in the Western markets.”  And with mortgage rates rising, a “more challenging macroeconomic environment may not support extraordinary home price growth for much longer,” she added.

Pending home sales, which are transactions in which a contract has been signed but not yet closed, rose 0.7% in May, according to the National Association of Realtors.  Analysts had been expecting a drop of 4%.  The increase broke a six-month streak of declines and came even as mortgage rates continued to rise.  Still, compared with the same time last year, sales were down -13.6%.  Regionally, the index jumped the most in the Northeast, and fell both in the Midwest and the West.  Economists look at pending home sales data as an indicator for the direction of existing-home sales in subsequent months.

Confidence among the nation’s consumers fell to a 16-month low as the high price of gas and food weighed on sentiment.  The Conference Board reported consumer confidence fell to 98.7 in June, from 103.2.  Economists had expected just a 3.2 point drop to 100.  The U.S. economy has slowed and is likely to keep slowing with the Federal Reserve raising interest rates to try to tame the highest inflation in 40 years.  In the details, how consumers feel about the economy right now dipped 0.3 point to 147.1, while a similar gauge that asks consumers how they anticipate the next six months fell more sharply to 66.4 from 73.7.  Thomas Simons, money market economist at Jefferies LLC stated, “It looks like this is another piece of evidence showing concerns about a recession are rising among consumers.”

A key gauge of inflation rose sharply in May, largely due to the higher cost of gas and food, but there were signs that price pressures may be starting to ease.  The ‘personal consumption expenditures index’, or ‘PCE-I’, rose 0.6% in May—triple its reading from April.  But a narrower measure of inflation that omits volatile food and energy costs, known as the core PCE, rose by relatively modest 0.3% for the fourth month in a row.  That was below Wall Street’s 0.4% forecast.  The rate of inflation over the past year remained unchanged at 6.3% in April.  The yearly rate has backed off a little after touching a 40-year high a few months ago.  The core rate of inflation also slowed to 4.7% in the 12 months ended in May from 4.9% in April.  Analysts note that the Federal Reserve views the PCE index as the better barometer of inflation over the more popular Consumer Price Index (CPI).

The economy shrank at a -1.6% annual pace in the first quarter, and according to the Atlanta Fed’s GDPNow tracker, the second quarter isn’t looking much better.  The contraction in gross domestic product, the official scorecard for the economy, was the first since the deep recession caused by the pandemic lockdowns in 2020.  As for the second quarter, the latest estimate of the GDPNow model shows a further -1.0% contraction in the economy.  Regardless of where second-quarter GDP clocks in, analysts note the economy is likely to continue to slow.  The Federal Reserve remains on a hiking cycle to try and reign in the highest inflation in over 40 years.  The biggest negative in the updated GDP report was a downward revision in consumer spending, the chief engine of the economy.  That doesn’t bode well for the future.

Orders for goods expected to last three years or more, so-called ‘durable goods’, rose last month with a stronger-than-expected reading.  The Census Department reported durable goods orders rose 0.7% in May, its seventh gain in eight months.  Economists had expected just a 0.2% increase.  The reading showed manufacturers still had plenty of demand for their products, even amid signs the economy was slowing.  Core orders, which strip out the often-volatile transportation sector and military equipment, rose 0.5%.  Orders for new cars and trucks rose 0.5%, while orders for commercial airplanes declined -1.1%.  Chief economist Stephen Stanley of Amherst Pierpont Securities stated, “From everything I have seen, business investment remains strong, though it certainly would not be surprising to see some moderation going forward as borrowing rates and uncertainty regarding the economic outlook rise.”

Finally:  It’s not just housing—the average transaction price of new vehicles sold in June hit a new stratospheric record high of $45,844, up 14% from a year ago.  As automakers continue to struggle with shortages of key parts and semiconductors in particular, inventories remain near historic lows.  Dealers handled the shortages by charging more than list price and filling their lots with only the most expensive vehicles loaded with as many options as possible—and that’s how the ATP (average transaction price) jumped to a new record.  Since June 2019, the ATP has spiked by 36%, or by over ten grand per vehicle! (Chart by wolfstreet.com, data by JD Power) [1]

The Week Ahead

U.S. markets were closed Monday for the Independence Day holiday, leaving a
shortened week busy with releases. Fed chair Powell said last week that the post-pandemic global economy “has been driven by very different forces” and that “we now  understand better how little we understand” regarding inflation, a sobering admission. After U.S. GDP contracted in Q1, the Atlanta Fed now forecasts real growth diminishing further in Q2 by -1.0%, which would fit the technical definition of
recession. This week’s attention shifts to the U.S. employment picture and to what extent inflation is influencing labor trends. Friday’s non-farm payrolls are expected to show slower gains compared to prior months as weekly jobless claims have been rising. Wednesday’s JOLTS report is likely to confirm that employers are still struggling to fill vacancies despite rising wages. Minutes from the June FOMC meeting
could provide insight into the committee’s aggressive pivot. Factory orders, consumer credit, and ISM Services PMI round out the U.S. calendar. Internationally, the RBA’s probable 50bps rate hike may lift the Aussie dollar from 2-year lows. In Europe, a light docket is highlighted by EU economic forecasts, ECB meeting minutes, and German industrial production. China’s inflation figures wrap up the week [2]

Chart of the Week: 10Yr Yields Finally Break Support

Interest rates finally broke a relentless uptrend as an economic slowdown
becomes more of a possibility. At the highs less than a month ago, the 10-year
Treasury Index (TNX) was up over 125% YTD before starting its retreat. The
healthy pullback two weeks ago reverted
to an upsloping support line and the 50
day moving average, but last week’s
drop was different. Not only did it
break technical support, it also
registered a lower high and subsequent
lower low, establishing a short term
downtrend. The MACD is still positive
and the RSI above 40, and there is more potential support near $27. But if rates
continue to fall, greater changes may lie ahead.

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] tdainstitutional.com; [3] stockcharts.com. 

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