Here’s The Asset Guidance Group Outlook for the Week Ahead…

U.S. Economic News:

The number of Americans filing for first-time unemployment benefits fell to a 3 ½ month low last week, a sign the labor market remains resilient even as the overall economy softens.  The Labor Department reported new jobless claims declined by 6,000 to 222,000—its fourth consecutive decline.  Economists had expected an uptick to 235,000.  New claims had fallen as low as 166,000 in late March before turning higher over the summer.  They recently topped out at 261,000 before rolling over again.  Meanwhile, the number of people already collecting unemployment benefits rose by 36,000 to 1.47 million.  That number remains near a 50-year low.  Thomas Simons, economist at Jefferies LLC noted, “There is a little bit more turnover in the labor market than what we experienced last year and early in 2022, but it remains the case that workers who are let go are still having a relatively easy time finding a new job.”

Investors looking for some clarity on the condition of the vast ‘services’ (roughly 70% of GDP) side of the U.S. economy were left wanting following the release of a pair of reports from ISM and S&P.  The Institute for Supply Management (ISM) reported their barometer of business conditions at companies such as restaurants and hotels rose to 56.9 In August, up from 56.7 in the prior month.  It exceeded the consensus forecast for a drop to 55.5 and was the highest reading since April.  However, a separate report from S&P Global Market Intelligence showed their measure—the U.S. Services PMI Business Activity index fell to 43.7—down 3.6 points from July.  It was that index’s weakest reading since May 2020.  Chris Williamson, chief business economist at S&P Global stated the slide underscores the risk of a “deepening recession” as households and businesses grapple with the rising cost of living.  With more insight into this stark contrast, Josh Shapiro, chief U.S. economist at MFR Inc. said that divergences in the past have tended to be resolved with ISM weakening to a level more consistent with the PMI.

The Federal Reserve’s ‘Beige Book’, a collection of anecdotal reports from each of the Federal Reserve’s member banks, stated the U.S. economy is likely to get weaker as the Fed battles rising inflation.  The economy grew slightly through the end of August, the Beige Book survey found, but the outlook for the economy over the next year “remained generally weak”.  Of relief to consumers, the survey said the sharp increase in prices earlier in the year has begun to fade, but that inflation “remained elevated”.  Inflation reached a nearly 41-year high of 9.1% in June.  In addition, shortages of labor and supplies, while less acute, still “continued to hamper production.”  Of note, “increased talk of recession” has become more common.  Fed officials say they are not trying to trigger a recession, but they acknowledge there’s a growing risk of one as they try to tame high inflation.

Federal Reserve Chair Jerome Powell said this week the central bank won’t be distracted by political interference as it lifts interest rates higher to try to bring inflation down.  Powell said, “I can also assure you that we never take into consideration external political considerations,” at a Cato Institute monetary conference.  So far, Powell has had the support of President Joe Biden but progressive Democrats, including Sen. Elizabeth Warren, have argued that rate hikes will lead to too much unemployment.  In other remarks at Cato, Powell said the Fed accepts its responsibility for price stability, which is 2% inflation over time.  “I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done,” Powell said.  Powell made clear that investors should be prepared for rates that will stay higher for longer.  “History cautions against prematurely loosening policy,” he said. [1]

Random Thought/Image of the Week

In October of 1973 the members of the Organization of Arab Petroleum Exporting Countries, led by Saudi Arabia, proclaimed an oil embargo targeted at nations that had supported Israel during the Yom Kippur War.  The embargo led to the price of oil rising nearly 300% in the United States, and the formation of the Strategic Petroleum Reserve (SPR) an emergency stockpile of petroleum maintained by the Department of Energy.  President Biden has authorized the release of much of that capacity to reduce the price of gas at the pump, causing the level to drop (precipitously) to less than 450 million barrels today—its lowest level since 1984.  Critics have questioned whether it’s wise to reduce the stockpile in the midst of rising geopolitical tensions, while others point to recently falling gas prices as proof that the drawdown was necessary – and worked.  (Chart from chartr.co.)

Structured Note Values

1. XLE/XOP Lowest, XLE Pricing Value 3/25/22: 78.75, Current: 80.60, Delta +2.35%; XOP Pricing Value 3/25/22: 138.60, Current Value: 143.21, Delta +3.33%
2. Lower of GDX/GDXJ; GDX Pricing Value: 4/29/22: 34.99, Current: 25.10; Delta -28.27%; GDXJ Pricing Value 4/29/22: 42.95, Current: 31.14 Delta -27.50%
3. Lower of GDX/GDXJ; GDX Pricing Value: 5/26/22: 32.39, Current: 25.10 Delta -22.51%; GDXJ Pricing Value 5/26/22: 39.67, Current: 31.14, Delta -21.50%
4. ARKK Pricing Value 6/15/22: 39.42, Current: 44.60, Delta +13.14%
5. ARKK Pricing Value 7/15/22: 44.11, Current: 44.60, Delta -1.11%
6. SPX Pricing Value 7/18/22: 3863.16, Current 4067.36, Delta +5.29%
7. RTY Pricing Value 7/18/22: 1744.37, Current: 1882.82, Delta +7.94%
8. NDX Pricing Value 7/18/22: 11,452.42, Current: 12,112.31, Delta 5.76% [4]

The Week Ahead

Inflation is the theme of the week, with the U.S. set to announce August’s CPI and
PPI readings, the last before the Fed’s next meeting. With the slide in gasoline,
consumer prices are expected to ease MoM, but the data is not likely to alter the
FOMC’s intended path. The economy’s much desired soft landing is still in play based
on the strong labor market, and Thursday’s retail sales report will provide an update
on consumer spending in the face of high food prices and shrinking personal savings.
Other events of note include Treasury auctions, regional manufacturing updates,
and consumer sentiment to close out the week. Major U.S. industries will be
watching negotiations between the freight railroads and union workers, as a
nationwide rail strike could cripple supply chains. Overseas, the UK will also release
CPI figures along with monthly GDP and retail sales, but the Bank of England has
pushed back its interest rate meeting one week to September 22 as the country
enters a period of national mourning. The Eurozone issues economic sentiment
numbers in a quiet week. Finally, China’s monthly data dump, which includes retail
sales and industrial production, may set the tone for Friday’s trade.  [2]

Chart of the Week: Bitcoin

As exciting as the price action of Bitcoin has been in the past, it’s been an uneventful  summer. Bitcoin futures (/BTC) lost over 70% of their value from the highs last November, but have held steady since reaching $20,000 back in June. The largest cryptocurrency has mostly been rangebound between $19,000 and $25,000. Last week it rose nearly 14% in three days and 10%+ on Friday alone. There’s still work to be done to break out of the range, but holding the June lows along with a significantly higher low for the RSI indicator are encouraging first steps. The next and more important step would be to rally above the August highs, then mark a higher low on the next pullback. 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. 

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