Tuesday, July 11, 2023

Morning Note: "More Than a Summer Lull" -- And -- "How Long Can the US Economy Hold Out?"

Sentix's monthly economic report is widely watched among global macro analysts, as:
"The Sentix economic index is the "first mover" among the monthly sentiment indicators on economic development. It is surveyed within two days at the beginning of the month among investors registered with Sentix and published shortly afterwards. Thus, it is always the first available among the leading indicators such as the ZEW economic expectations, the ifo business climate or the economic sentiment. As a rule, the Sentix Business Cycle Index has a leading character compared to the other indicators. With its help, the developments of the other indices can usually be estimated very well."
Their July report was released yesterday, and, well, per the below, the global economic setup remains precarious -- despite the notable resilience we've seen in the US:

"More than a summer lull:
• In July, the sentix economic index for the Eurozone fell for the third time in a row. At -22.5 points, it is at its lowest level since November 2022 and clearly misses Bloomberg analysts' estimates. Situation and expectations are weak.
• The situation in Germany, the largest economy in the euro area, remains particularly dramatic. Here, too, we measure the situation, expectations and the overall index (currently -28.4 points!) at the lowest levels since October and November 2022 respectively. And there seems to be no improvement in sight.
• With the exception of the US, which continues to resist the global downturn, there are only negative developments to report across the board. The fifth consecutive decline is particularly severe for the Asian region. The global aggregate also drops for the fifth time in a row to -7.6 points."
So then, the question regarding the US:
"How long will the US economy hold out?
The US economy is the only region to hold tenaciously at the level of the previous month. The US labour market in particular has so far defied all national and international pressures. The US Federal Reserve may have contributed to the "good" result by intervening courageously in the US regional banking crisis and providing liquidity, while at the same time pushing up interest rates. However, this factor is likely to be exhausted, which the investors surveyed reflected with a drop in expectations to -14.5. The pressure on the US economy is thus increasing rather than decreasing." 


Yes, we agree that the Fed's swift intervention into the spring banking scare served to support markets in the manner they've grown very accustomed to... The problem being, as we've pointed out ad nauseum over the past couple of years, we're entering a new regime that -- save for recessionary (and temporary) bouts with disinflation (or even outright deflation) -- breeds a structurally (long-term) higher inflation rate, making Fed intervention a less-easy (if not a more tentative) proposition going forward... Hence, the notion that the results of its latest foray are "likely to be exhausted" and that "the pressure on the US economy is thus increasing rather than decreasing."

Time will tell...

Asian stocks were mostly green overnight, with 13 of the 16 markets we track closing higher.

Same for Europe so far this morning, with 15 of the 19 bourses we follow trading up as I type.

US equity averages are up to start the session: Dow by 107 points (0.32%), SP500 up 0.19%, SP500 Equal Weight up 0.62%, Nasdaq 100 up 0.02%, Nasdaq Comp up 0.13, Russell 2000 up 0.59%.

As for last yesterday’s session, US equity averages closed higher: Dow by 0.6%, SP500 up 0.2%, SP500 Equal Weight up 0.8%, Nasdaq 100 up 0.1%, Nasdaq Comp up 0.2%, Russell 2000 up 1.6%.

This morning the VIX sits at 14.67, down 2.65%.

Oil futures are up 1.97%, gold's up 0.39%, silver's down 0.02%, copper futures are down 0.77% and the ag complex (DBA) is up 0.62%.

The 10-year treasury is up (yield down) and the dollar is down 0.09%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 23 -- led by RRC (Range Resources [new position]), Dutch Bros, XLE (energy stocks), OIH (oil services stocks) and Albemarle -- are in the green so far this morning... The losers are being led lower by MP Materials, AT&T, EWW (Mexico equities), XLP (consumer staples stocks) and JNJ.

Not predicting "a crash," just pointing out that certain underlying developments like, for example, the ones I pointed out in the last market update video, are such that demand our attention:
"...a crash has fundamentally an endogenous, or internal, origin and that exogenous, or external, shocks only serve as triggering factors."

Have a great day!

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