The Week Behind

After the S&P 500 rejected its 200d SMA on Tuesday, markets traded flatly until Friday. Between higher-than-expected inflation in Europe, rising treasury yields, and signs of life in oil, all major indices ended the week in the red. The DOW escaped nearly unscathed, shaving only 0.16%. The S&P took a 1.21% cut. In the face of higher rates, the NASDAQ underperformed, dropping 2.62%. 

Highlights

• FOMC minutes revealed a conflicted FED.
• Big box retail came up big: WMT, TGT, HD, and LOW did not fail to impress.
• To close the week, financial conditions tightened as the US2YR revisited June highs, the US10YR touched 3%, and oil experienced a small rally. Despite these tailwinds, from an indice perspective, the markets appeared rather resilient.

Defensive posturing characterized Friday’s tape: healthcare, energy, and staples gained, while technology and cyclicals dragged. Given the relative outperformance of more diversified market indices compared to growth-heavy strategies, such as ARKK that lost ~14% this week, I hypothesize we are in the midst of repositioning, which could continue this week. Managers are diversifying holdings by taking profits in growth, which experienced a phenomenal run, and allocating to value laggards: prudent portfolio management. It is not necessarily an indictment of equities or the current rally as some commentators have suggested. I’m not saying we aren’t overdue for a breather, but if this were an indictment on equities, then that money would’ve been held in cash, not reallocated to value-oriented segments of the market.

Is a Conflicted FED a Data-Dependent FED?

From a price action perspective, the FOMC minutes was the definition of a non-event. However, I expected the minutes to lack substance. For the first time in a while, I found them rather interesting. Known hawks appeared concerned with overtightening. Known doves did not appear satisfied with the collapse in commodities. To summarize, the FED lacked the same unity exhibited in June when they surprised the market with 75bps following 9.1% CPI. The minutes from that meeting showcased a unanimous vote and general agreement surrounding the situation. Fast forward to now, there appears to be an unwillingness amongst hawks to be hawkish and doves to be dovish. Perhaps, the FED actually is more data-dependent than ever. As someone who owns stocks and is rooting for a soft landing, this is exactly where you want the FED’s individual members: willing to interpret the data without bias to inform their policy decisions.  

The Week Ahead

We have a packed week with respect to earnings and economic releases. 

With respect to the former, we have a lot of industry leaders reporting: Nvidia (NVDA), Snowflake (SNOW), Salesforce (CRM), Dollar Tree (DLTR), Dollar General (DG), and Affirm (AFRM). This list is far from exhaustive, but let’s focus on three names in particular: NVDA, DLTR, and DG.

• NVDA, a leader in the semiconductor industry, is known for high-performance and data center chips. While it already pre-released a substantial downward revision due to gaming, NVDA is a huge name in the semiconductor space, which tends to lead the overall market. 
• DLTR and DG are known to perform well heading into recession. If they drop after earnings, then I think the market is telling us the best is behind DLTR and DG, which implies the worst is over for recessionary sentiment. 

With respect to the latter, Manufacturing PMI and New Home Sales release Tuesday; our weekly dose of jobs data releases Thursday. The main event is Friday: PCE. Last month’s 6.8% Headline was a new peak. 4.8% Core was a MoM increase of 0.1%. Bulls need a sub-6.8% Headline, but I would want to see something near 6.3%, where Headline sat for two consecutive periods before peaking last month. With respect to Core, anything below last month’s 4.8% would be welcome. If it nudges below 4.7%, which was May’s number, then that would be even more bullish. Given housing’s weight on PCE, I’m not sure the most bullish outcome is the most probable; however, I do expect MoM declines for both Headline and Core.

Finally, the FED has its annual meeting at Jacksonhole this week. While no policy decisions are expected to be made, I expect the messaging to be hawkish in an attempt to eliminate the idea of easing financial conditions in 2023. Over the last two weeks, Friday as the exception, financial conditions have loosened meaningfully. Despite numerous FED officials explicitly stating a 2023 rate cut is off the table, the market has called the FED’s bluff: forecasting a shallow, FED-caused recession met by a rate cut. I think the FED will take advantage of the stage Jacksonhole provides to try and jawbone the market back into compliance with their narrative. While this represents a headwind, it could be met by PCE tailwinds.  

A Contrarian Take On Consumer Strength As Illustrated By Big Retail

The big box retailers had good numbers. Many analysts have claimed that this is a check mark in the argument for consumer strength. Consumers are shopping at Walmart (WMT), not trading down to Dollar Tree, Aldis, etc… However, I think if this strength persists and is unexplainably stronger than expected, it actually provides evidence of broadening consumer weakness. Instead of WMT’s earnings showing lower-income households are holding up, I think it could actually be showing middle-income consumers are trading down.In a recent CNBC interview, Walmart CEO says people are ‘price-focused’ regardless of income level. As a result, he expects Walmart’s $50 Thanksgiving Meal Kits, which feed a family of 4-8, to attract a wider-audience. Perhaps I am biased, but in my experience, for many U.S. families, Thanksgiving is a relatively extravagant affair: dress up, travel, cook for an audience, etc… If Walmart’s $50 value attracts people from higher-income households that would otherwise spend a substantial amount of money and time preparing or traveling for the occasion, I do not believe Walmart’s success should be cited as a positive for broad consumer strength.