U.S. stock markets last week again reacted positively to economic and earnings data, reminding us that the stock market is a discounter of future economic conditions and expected Fed actions – not economic conditions today or last month.
- Headline CPI for July is unchanged with a good chance it will fall in August, as a result of declining gasoline prices which were down 7.7% in July and expected to fall by another 11% in August.
- Core CPI was up a modest 0.3% month over month in July which is an annualized rate of 3.8%. Over the past 12 months core inflation is up 5.9% but with a now much improving outlook – which the stock markets are seeing as increasing the probability of more benign Fed interest rate increases in September, November and December.
- Consumer sentiment (University of Michigan) improved in August, helped by falling gasoline prices. Current conditions are still vexing consumers but their outlook is much improved.
- U.S. and European earnings are coming in better than expected at 9% and 16% (y/y), respectively, with nominal sales growth at 15% and 28% (JPMorgan).
- China’s economy is slowly but steadily growing as it eases zero-Covid-tolerance restrictions, which is a positive counterweight to slowing growth elsewhere. It provides propulsion without straining energy and commodity prices.
- We will have another round of monthly reports on employment growth, personal consumption expenditures price inflation, CPI and other economic data before the mid-September Fed meeting, so plenty of opportunity for volatility in financial markets.
Positive movement in the Leading Indicators Index, earnings per share growth and a positive yield curve are important to positive stock market performance, so we continue to watch them carefully.
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