“You can never invite the wind, but you must leave the window open.” ~Bruce Lee

Good evening:

Investors had a lot to absorb this week, with earnings season ramping up and big Tech names reporting mostly strong quarterly results. We saw action from central banks around the world, beginning with the FOMC meeting on Wednesday and followed by the European Central Bank and Bank of Japan later in the week. And we ended the week with what Fundstrat Head of Research Tom Lee called a “trifecta” of good economic news, and what Head of Technical Strategy Mark Newton described as an “almost Goldilocks” data situation.

As just about everyone – including those of us at Fundstrat – expected, the FOMC on Wednesday opted for a +25bp rate hike. Many focused more attention on the post-meeting press conference by Fed Chair Jay Powell. As Lee put it, “It is the qualitative views around the Fed’s sense of progress on the inflation war that matter.” 

Powell noted that Fed staffers are no longer forecasting a recession. He acknowledged that “June CPI data came in better than expectations.” And perhaps most importantly, he explicitly said that the Fed would stop hiking before it reached its 2% target, as long as the Fed saw more data to support the view that inflation is “coming down credibly, sustainably.”

That’s what the Fed got on Friday, with the June numbers for Core PCE, the Fed’s preferred inflation measure, coming in at +0.17%, below Street expectations of +0.20%. More tellingly, in Lee’s view: Core Services ex-housing is down from last month and running at 2.64% annualized, and ex-shelter, Core PCE CTG is running at +0.09% MoM.

Wage data, also closely watched by the Fed, was also better than expected: The Employment Cost Index (ECI) came in at 1.0% for the quarter. As Lee noted, this was “the best reading since June 2021 [and] a material downside break.” In his view, wage pressures have been “the stickier part of the inflation narrative,” so this number was key for the Fed. This is shown in our Chart of the Week:

These statistics, along with good readings from the University of Michigan’s One-Year Inflation Expectations survey, helped stocks rebound from a noticeably sharp drop on Thursday, which was triggered at least partly by the Bank of Japan’s announcement regarding its future plans to pursue the country’s yield curve targets. Lee called it “a brutal selloff,” and while Newton called a “rapid trend reversal” and possibly a “peaking out.” All three main indices closed down on Thursday, ending a 13-day win streak for the Dow (something it had not seen since 1987.)

Thursday’s dip had Newton wondering – if ever-so briefly – if we were seeing the start of a short pullback going into August.  “You know, the entire bear market of 2022 lasted 40 weeks and now it’s risen 40 weeks,” he said, asserting “that has importance time-wise, and it directly coincides with a minor cyclical top.” Last week, Newton was already suggesting the need for caution at our weekly huddle, and this week he said: “You know, overall, I think it’s not a great place to add risk at current levels. We have gotten sort of stretched.”

“The reasons I felt markets could weaken are still in place,” he said, adding that despite Friday’s moves, “we have entered a window for short-term trend change. Probably the first week in August we’ll settle a little bit. I don’t think it’s going to be a major pullback, though, not a very deep pullback.”  

This caught the attention of others at our weekly research huddle. One Fundstrat colleague pressed him to be more specific: “How much of a pullback? Like five% to 10%?”

“No, not 10%,” Newton responded. “I would say five is probably a maximum.” Newton has not turned bearish. He specified: “I just think that it's tough to put our foot on the accelerator right now. But it will be time to buy dips. A three to 5% correction would get us down to near 4400, which would actually be a great entry point.” 

Lee remains less phased. “We need to respect these tremors,” he acknowledged. “But we still view corrections as likely shallow, because too many investors remain under-allocated to stocks. But next week matters and hopefully we get good follow through.”

Elsewhere 

UPS and the International Brotherhood of Teamsters averted a strike and removed a major source of potential supply-chain risk, reaching a tentative agreement covering roughly 325,000 employees. The deal reportedly includes an hourly-wage increase of $2.75 this year and $7.50 over the entirety of the proposed five-year agreement.

Economic activity in Europe seems to be slowing, with Germany’s PMI dipping to a 2023 low of 48.3 and France’s falling to 46.6. 

China has named Pan Gongsheng to head the People’s Bank of China (PBOC), succeeding Yi Gang. Pan’s appointment was unusual in that he is not seen as a close political ally of Xi Jinping. He previously held posts as PBOC’s deputy governor and as the country’s top manager of foreign reserves. A trained economist, he has studied at Cambridge University and Harvard.  

Italian Prime Minister Giorgia Meloni visited the White House on Thursday, where the Ukraine war and policy toward China were key areas of discussion. Though Meloni’s conservative domestic policies have concerned President Biden, he has found much in common with her foreign policy stances. 

And finally: A heatwave continues to wreak havoc throughout the northern hemisphere. Wildfires continue to rage in southern Europe. In Sicily, hundreds of thousands were left without electricity and water for days as temperatures as high as 118 degrees caused underground power cables to melt. And at least 175 million Americans are under excessive heat warnings or advisories. We hope everybody stays safe and cool.

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