The combination of a Fed that did not see it fit to cut interest rates, a reassertion of tariffs for several of our major trading partners and weak jobs numbers were more than the stock market could handle this past week, especially given the run-up off the early April lows when President Trump pivoted on his tariff policies. The silver lining amongst the broad selloff is the increased likelihood of a rate cut after the Fed meets in September. With the major averages having closed at record highs earlier this past week, this pullback is not unexpected, nor do we believe it will amount to more than a few percent unless the President reverts back to his Q1 tariff policies, which politically is not likely or advisable.
· Several of the major technology companies reported earnings this past week including Alphabet (GOOG), Microsoft (MSFT), Meta Platforms (META), Apple (AAPL) and Amazon (AMZN) and other than Amazon did not disappoint. They also reasserted their intentions to spend tens of billions of dollars in capital expenditures to build out their Artificial Intelligence (AI) capabilities.
· According to Zillow economic analyst Anushna Prakash, mortgage rates would need to drop from their current levels, north of six percent, to 4.43% in order to make an average home affordable.” Despite the soft payroll report on Friday, many, including us, don’t think that it will be likely anytime soon.
· The Fed Maintained its key lending rate at current levels although two members voted to cut by 0.25%. Those two, purported on the short list to replace the current Fed Chair Jerome Powell are Governors Michelle Bowman and Christopher Waller. In fact, the number of dissenters (2) marked the most in three decades.
· It’s the revisions that caused the selloff. For certain, the creation of just 73,000 jobs during the month of July disappointed investors on Friday. However, downward revision of 258,000 jobs during the prior two months was the nail in the coffin that sealed the day. It also sealed the fate of Bureau of Labor Statistics Commissioner Erika McEntarfer, who was fired by President Trump Friday afternoon. The President posted on Truth Social, “We need accurate Jobs Numbers. I have directed my Team to fire this Biden Political Appointee, IMMEDIATELY.” We assume he will be replaced by a “Trump Political Appointee.”
It’s The Economy…”
· Non-Farm Payrolls (approximately 80% of the U.S. workforce) rose by 73,000 during July, below the consensus estimate of 102,000. Concerningly, payroll numbers for the prior two months were revised to 14,000 and 19,000, from 147,000 and 144,000 during June and May, for a net loss of 258,000. The rolling three-month average fell to 35,000 from 64,000. Private Sector companies added 83,000 jobs while the Public Sector fell by 10,000. This includes a 12,000 drop in federal government employment during June (-2.4% y/y) and 81,000 year-to-date. Payroll data was influenced by health care (55,000) along with the factor sector (-11,000). The Unemployment Rate ticked up to 4.2% during July from 4.1% in June. The Unemployment Rate had gotten as low as 3.4% in April 2023. The Labor Force Participation Rate slipped to 62.2% during July from 62.3%, well below the pre-COVID peak of 63.3% reached during February 2020 and below the average of 67.1% in 2000, indicating a longer-term structural problem with the labor market as each tenth of a percent represents approximately 168,570 workers. Average Hourly Earnings rose 0.33% or $0.12 to $36.44 during July from $36.32 one month prior and by $1.37 or 3.91% from $35.07 y/y. Average Weekly Earnings rose 0.62% or $7.75 to $1,249.89 during July from $1,242.14 during June. Average Weekly Earnings over the past year have risen by $50.50 or 4.21% from $1,199.39 as Average Hours Worked rose to 34.3 m/m from 34.2. The manufacturing week (Table B-7) remained at 41.0 hours in July when compared to June and versus 40.6 hours y/y. The Average Duration of Unemployment (Table A-12) rose to 24.1 weeks in July from 23.0 weeks in June, above the 19.6 weeks (SAAR) recorded one year ago. The number of Long-Term Unemployed (27 weeks or longer) rose 179,000 or 10.87% to 1,826,000 in July from 1,647,000 in June, above the level of 1,568,000 (SAAR) one year ago. Those unemployed less than 15 weeks totaled 59.1% of the unemployed while those unemployed 15 weeks and over totaled 40.9% as compared to 61.7% and 38.3% one month ago. (Source, U.S. Department of Labor)
· The University of Michigan reported that the Final July Reading of Consumer Sentiment slid to 61.7 (-7.1% y/y) from a preliminary July 61.8, but rose from a final June level of 60.7. The final July expectations component fell to 57.7 (-16.1% y/y) from a mid-July level of 58.6 but rose from a final June 58.1. Lastly, the final July current conditions component rose to 68.0 (8.50% y/y) from a preliminary July 66.8 as well as from a final June 64.8. According to the Survey of Consumers Director, Joanne Hsu, “year-ahead inflation expectations fell for a second straight month, plunging from 5.0% last month to 4.5% this month. This is the lowest reading since February 2025 but above December 2024 just after the election. Long-run inflation expectations receded for the third consecutive month, falling back from 4.0% in June to 3.4% in July. This is the lowest reading since January 2025 but, again, still considerably higher than the December 2024 reading.” (Source, Univ of Michigan)
· The Bureau of Economic Analysis reported that Personal Income rose 0.3% during June (4.7% y/y), after falling 0.4% in May. Disposable Personal Income (personal income less taxes) rose 0.3% (4.3% y/y), after sliding 0.5% during May. Adjusted for inflation, disposable personal income slid fractionally during June (1.7% y/y), after falling 0.7% in May. The Wage & Salary Component rose 0.1% in June (4.8% y/y), after rising 0.3% in May. Personal Consumption Expenditures (PCE), representing approximately 70% of economic activity, rose 0.3% during June (4.7% y/y) after remaining unchanged during May. Personal Savings (Disposable Personal Income Less Outlays) held at an annualized rate of 4.5% during June when compared to May. The PCE Chain Price Index rose 0.3% in June (2.6% y/y) after rising 0.2% during May. Excluding food and energy, the Core PCE rose 0.3% during June (2.8% y/y), after rising 0.2% during May. (Source, Bureau of Economic Analysis)
· Initial Claims for Unemployment Benefits for the week ended July 26th rose 1,000 to 218,000 from 217,000, which was unrevised. The four-week rolling average fell 3,500 to 221,000 from 224,500, which also was left unrevised. Continuing claims for the week ended July 19th remained unchanged at 1,946,000 as compared to the prior week, which was revised 9,000 lower. The continuing claims four-week average fell 2,500 to 1,949,250 from 1,951,750. (Source, U.S. Department of Labor)
· Second Quarter Gross Domestic Product (first estimate), as reported by the Commerce Department, a tally of the output of all goods and services in the United States, rose at an annualized rate of 3.0% (+2.0% y/y), after declining 0.5% during Q1. Final Sales to Domestic Purchasers rose at an annual rate of 1.1% (+2.3% y/y) after climbing 1.5% during Q1. Government Spending (Government Consumption Expenditures and Gross Investment) rose at an annualized rate of 0.5% during Q1 (+2.0% y/y), after dropping 0.6% during the first quarter. Inventory Effect (line 40) subtracted 3.17% from Q2 GDP after adding 2.59 percentage points during Q1. The GDP Chain Price Index rose at an annual rate (SAAR) of 2.0% (2.5% y/y) during Q2, after rising 3.8% in Q1. The PCE Price Index Excluding Food and Energy rose at an annual rate of 2.5% (+2.7% y/y) during Q2 after rising 3.5% during the first quarter. (Source, U.S. Bureau of Economic Analysis)
· The Conference Board’s Consumer Confidence Index rose to 99.2 (-4.6% y/y) during July from 95.2 in June. The present situation index fell to 131.5 in July from 133.0 (-1.2% y/y) while the expectations component rose 6.4% to 74.4 during July from 69.9 during June (-8.3% y/y), continuing to bounce off its lowest level for the latter since October 2011. Those surveyed saying that jobs are “hard to get” rose to 18.9% of respondents during July as compared to 17.2% in June while those claiming that jobs were “plentiful” rose to 30.2% of consumers from 29.4% during those same months.
Economic Reports scheduled to be released this week include the following: on Monday, June Orders for Durable Goods, June Factory Orders and the Service Sector Index Report from the Institute for Supply Management; and, Thursday, the Weekly Report of Initial Claims for Unemployment Benefits, June Consumer Credit, the initial look at Second Quarter Productivity and June Wholesale Inventories.
The Q2 Earnings Beat goes on, to include the following this week Berkshire Hathaway (BRKB), Palantir (PLTR), Amgen (AMGN), Caterpillar (CAT), Advanced Micro Devices (AMD), Eaton (ETN), McDonalds (MCD), Disney (DIS), Uber Technologies (UBER) Shopify (SHOP), Toyota Motor (TM), Eli Lilly (LLY) and Gilead Sciences (GILD)