Risk appetite did not stand a chance given it is month end, peak earnings are passing by, and most of corporate America is still complaining about trouble finding workers and over persistent supply chain issues. US stocks were dragged down by a big miss from Amazon and cautious comments from former FDA chief Scott Gottleib that he wouldn’t be surprised if, on the whole, we’re infecting up to a million people a day right now.
Big-tech seems unlikely to get another fresh catalyst here, so many investors look like they are ready to turn cautious as Wall Street becomes fixated over figuring out how soon will the economy make substantial progress in the labor market recovery.
St. Louis Fed president James Bullard stated that the Fed should taper in the fall and finish tapering by early next year. He added that the Fed should have the option to move on interest rates if inflation does not come down next year. The divide in the Fed will continue to grow, but the market won’t react unless hawkish shifts come from Clarida, Brainard, Waller, or Evans.
Wall Street was also surprised by Amazon’s disappointing earnings results. The pandemic boom for Amazon is over and this rare earnings miss will likely prove to be a buying opportunity for investors. Retail growth had to slow down at some point and the investment in the future should prove positive for the stock’s long-term value.
Today’s economic data didn’t really give financial markets a clear picture. The standout was the 1.0% rise in June’s personal spending, above the consensus of 0.7%. Personal income also came in slightly positive which bodes well for the robust US consumer.
The second quarter employment cost rose 0.7%, a miss of the 0.9% estimate, but that was hampered by a tight labor supply. Nothing in today’s data suggest wages are about to skyrocket and that means the Fed will be in wait-and-see mode over the next few months.
The core PCE deflator rose 0.4%, a miss of the 0.6% estimate, but that hardly means inflation has peaked. The Fed’s preferred inflation gauge, Core PCE year-over-year rose 3.5%, which was below the 3.7% consensus estimate. Given the softer-than-expected inflation readings and modest income gain, the Fed can stick to the transitory script a while longer.
The July final reading of University of Michigan sentiment improved from 80.8 to 81.2, while expectations also bumped higher from 78.4 to 79.0. The inflation surveys moderated with the 1-year outlook dipping to 4.7% and the 5–10-year outlook to 2.8%. The US consumer is strong and that won't change even give the current delta variant surge across the country.
The dollar was mixed as risk aversion remained the dominant theme for the last trading day of week. The greenback is slightly higher, while Treasury yields slumped as the China selloff deepens, negative Amazon earnings, rising worries over the delta variant, and headwinds for the IPO market.
Crude prices are giving back some of this week’s gains as delta variant concerns refuse to ease and as risk appetite sentiment deteriorates. Oil was unfazed from incremental comments from Russian Deputy Prime Minister Novak nor quarterly earning results from oil giants Exxon and Chevron. Novak, the former energy minister, noted that the OPEC+ output increase of 400,000 bpd each month is adequate, slight posturing ahead of the next meeting over output.
Exxon and Chevron both reported earnings and their guidance supported the argument that this market will remain tight. Chevron’s earnings slides noted that in the Permian, even with our reduced activity levels, production is expected to be comparable to last year. Exxon’s production was 3.582 million bpd, a 15-year low, which was less than the analysts’ forecast of 3.683 million.
Big oil is not ramping up spending in news wells and focusing on debt reduction, which should keep OPEC+ happy with their steady plan of increasing output. OPEC+ is not losing market share to the US, which should mean the oil market is still poised to go much higher.
Gold’s great week is ending on a down note, but bullion bulls are probably feeling pretty optimistic. Gold appears to be close to triggering technical buying following the aftermath of the Fed, persistent delta variant concerns, and depressed global bond yields. The biggest risk for gold is a blockbuster nonfarm payroll report that is well above the 1-million level. As long as the Fed seems to be struggling to reach their substantial progress over the labor market recovery, the stimulus trade should be alive and well for gold.
Gold is consolidating between its’ 50- and -100 day SMAs, but that should prove temporary given the bullish factors for Treasuries. If gold can clear the $1,850 level next week, prices might not have much difficulty making a run towards $1,900.
After the longest winning streak in 2021 and rallying towards the top of the recent two-month trading range, Bitcoin was poised for a pullback. Today’s Bitcoin decline appears to be modest and unlikely to trigger anything but a buying opportunity for fund managers. Retail interest is strong, while institutional interest is somewhat lagging and needing fresh endorsements. Bitcoin volatility might remain elevated over the weekend and traders should not be surprised if a spike occurs towards the$42,000 level during some illiquid times.
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