Weekend Update #131
Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.
The S&P 500 index extended its bull market rally from a low in October 2022. The S&P 500 is now up over 23.0% from that point. Strikingly, five stocks within the S&P 500 index contributed +41.83% of gross index percentage change and included Microsoft, Nvidia, Apple, Meta and Broadcom, all in rank order. The rally has been relatively sector specific, predominantly led by tech, and as of late, the craze around generative AI.
On Wednesday, Jerome Powell and his Federal Open Market Committee agreed to put a pause on the rate hike cycle after 10 straight hikes since March 2022. Markets responded in mixed fashion into the day’s close, as the bullish rate pause in June was contrasted with a bearish +50 bps shift upward in the Fed’s 2023 rate outlook. The change in the Fed’s dot plot, along with hawkish commentary from Powell, put a damper on what was a strong trading. (This move is being called a “hawkish skip” by market participants.) After a night of digestion, however, markets surged again on Thursday, riding the momentum of Artificial Intelligence. Swap markets continue to price in rate cuts before year-end.
In other news, cruise-line operators continued on a YTD tear after both BofA and JPMorgan Chase highlighted the cruise industry’s strong near-term demand and long-term visibility. On Wednesday, UnitedHealth Group Inc. slumped after an executive indicated that increasing demand for surgeries and other medical care may push expenses higher than expected. In a record IPO this year, CAVA Group Inc. stock nearly doubled into Thursdays close on its trading debut. On Friday, Russian President Vladmimir Putin said that the country had delivered its first tactical nuclear weapon to Belarus, just three months before announcing its intent to do so.
Weekly Performance
S&P 500 4,409.59 +2.58%
Dow Jones 34,299.12 +1.25%
Nasdaq 13,689.57 +3.25%
Key Economic Readouts This Week
Headline CPI MoM — Actual: +0.1%; Expected: +0.1%; Prior: +0.4%
Headline CPI YoY — Actual: +4.0%; Expected: +4.1%; Prior: +4.9%
Headline PPI MoM — Actual: -0.3%; Expected: -0.1%; Prior: +0.2%
Headline PPI YoY — Actual: +1.1%; Expected: +1.5%; Prior: +2.3%
FOMC Rate Decision (Upper Bound): 0 bps change; Rates Remain at 5.25%
Retail Sales MoM — Actual: +0.3%; Expected: -0.2%; Prior: +0.4%
Thank you Blue Room Analyst IAN CARTER
Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.
The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5 to 5-1/4 percent. Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
OVERVIEW
United States Producer Price Index YoY and MoM
PPI is a family of data that gauges the costs of production. There are three areas of PPI classification that use the same pool of data from the BLS: industry, commodity and commodity-based final and intermediate demand (FD-ID).
Finished Goods YoY~ Finished goods are goods that have completed the manufacturing process but have not yet been sold or distributed to the end user.
Final Demand ~ PPI for final demand measures the average change in prices received by domestic producers of goods, services and construction sold for personal consumption, capital, investment, government and export.
Last week, the U.S. Securities and Exchange Commission charged the two largest crypto exchanges in the world, Binance and Coinbase. The two complaints are a culmination of a string of enforcement actions brought by the agency to the industry since the beginning of the year. The SEC, and particularly the Chairman, Gary Gensler, have taken the view that the majority of companies within the crypto space are intentionally non-compliant with securities laws and rife with fraud. At the same time, crypto advocates have suspected that there is an ongoing effort to effectively shadow-ban crypto in the U.S., dubbed “Operation Choke Point 2.0” which references a previous government initiative to cut off certain industries from the banking sector and implement informal rulings that do not explicitly ban these companies, but effectively cripple their operations. Regardless of the SEC’s motivation, these enforcement actions undoubtedly hinder crypto’s progress in the U.S., and the future of the industry will likely be decided in court as both Coinbase and Binance intend to fight the allegations.
Consumer sentiment lifted 8% in June to 63.9, reaching its highest level in four months, reflecting greater optimism as inflation eased and policymakers resolved the debt ceiling crisis.
The outlook over the economy surged 28% over the short run and 14% over the long run. The fact that nearly all demographic groups exhibited these improvements — with the exception of the youngest consumers — illustrates the near-consensus that macroeconomic prospects improved this month.
Sentiment is now 28% above the historic low from a year ago and may be resuming its upward trajectory since then. As it stands, though, sentiment remains low by historical standards as income expectations softened. A majority of consumers still expect difficult times in the economy over the next year.
The Bureau of Labor Statistics’ latest CPI report for the month of May 2023 showed a 4.0% year-over-year increase in All Items—10 basis points below the expected 4.1% increase. The measure rose 0.40% month-over-month which was in-line with expectations.
Food and Energy
The Food category fell from 7.7% year-over-year growth to 6.7%. Most individual components fell with the exception of Meats, saw a slight acceleration of growth from 0.3% to 0.4% year-over-year and Fruits and Vegetables, whose price increases rose from 2.0% to 2.7% from April to May year-over-year. The rate of decrease in Energy accelerated, falling from 5.1% decline in April to 11.7% in May, fueled by decreases in both energy commodities and services.
All Items Less Food and Energy
The year-over-year increase fell from 5.5% in April to 5.3% in May. Similarly, most components saw decreases in growth, including Household furnishings and supplies. Education and communication commodities saw a moderation in price declines, rising from (8.3%) to (6.9%) from April to May, while prices in Alcoholic Beverages rose from 4.6% to 4.8% year-over-year.
A component closely watched by the Fed, Services Less Energy Services, also saw a slowdown in price appreciation, falling from 6.8% year-over-year to 6.6%. Although Shelter fell from 8.1% to 8.0% growth, it is still at an elevated level. A subcomponent of this, Owners’ Equivalent Rent of Residences, also saw an equivalent decline in growth. Categories that declined in price growth also include:
Water and Sewer and Trash Collection Services
Medical Care Services
Transportation Services
Recreation Services and Education & Communication Services
The component that did see ann increase is Other Personal Services, which has a relatively low weighting in the index. Haircuts and Other Personal Services fell from 5.3% to 4.9% year-over-year growth, but items that increased include:
Legal Services
Funeral Expenses
Laundry and Dry Cleaning Services
Apparel Services and Other Than Laundry and Dry Cleaning
Financial Services
In sum, although there was a general decline in core prices from April to May, the pace of year-over-year growth is still above the Fed’s inflation target of 2.0%. We expect the Fed to hold rates higher for longer in their effort to achieve their goal of price stability.
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