“It is only through failure and through experiment that we learn and grow.” ~ Isaac Stern

Good evening,

Equities were largely rangebound in the first two days of the week, and on Wednesday, the S&P 500 rose more assertively to close above the 5,600 level for the first time. That was before June CPI numbers came in on Thursday. Headline inflation fell for the first time since 2020 and core CPI rose just +0.06% MoM, and 3.3% YoY. Both showed inflation cooling from May’s data, and both came in below consensus expectations (0.2% and 3.4%, respectively). 

Fundstrat Head of Research Tom Lee had much to say about that, but perhaps his reflexive response was the most telling: “Whoa.”

As followers of our work know, the shelter and auto-insurance components of CPI have long been lagging real-time data and causing inflation to appear higher than it is, but Thursday’s numbers suggest that “both now seem to be cooling.” Owners Equivalent Rent (OER) saw its lowest increase since August 2021, and shelter rose just +0.2% on the month.

The services ex-shelter component also slowed, to 4.92% from 5.01% last month. “Inflationistas have argued that wages will keep services inflation high,” Lee said, “but this number contradicts that,” adding that “wage growth is already visibly slowing, so I don’t see services driving a second wave of inflation.”

Nevertheless, as our Chart of the Week below shows, many investors appear to remain concerned or convinced that inflation will re-accelerate. Back in April, investors expected inflation to climb back to 4.9% in the next 12 months. That peak for forward inflation expectations signaled a bottom for stocks, and although one-year forward inflation expectations are currently at 3.9%, “to me, that is actually still pretty elevated,” Lee said. “It needs to get towards 3%, so there’s a lot of room for the inflation hawks to come down. That means potential upside for stocks, and that’s partly why we urge investors to stay on target.” 

Head of Technical Strategy Mark Newton views the soft CPI numbers as catalytic, noting that the US Dollar and yields both turned down sharply after the latest consumer inflation numbers were released. Rather than a momentary trough, Newton suggested that further “declines in both look likely in the weeks and months to come.” Such a weakening in the dollar would be “generally supportive of rallies in risk assets,” he reminded us, and the same is arguably true for yields, as the correlation between stocks and Treasuries is still “quite strong,” in his view.

FOMC Preview

Twice a year, the Federal Reserve Chair appears before the Senate Committee on Banking, Housing, and Urban Affairs and the House Financial Services Committee to brief them on the state of the economy and the Fed’s monetary policy. Fed Chair Jerome Powell fulfilled this obligation on Tuesday and Wednesday, providing a glimpse into the Fed’s thinking ahead of the next FOMC meeting scheduled for July 31.

One highlight of the testimony came when Chair Powell told senators that “the latest data show that labor market conditions have now cooled considerably from where they were two years ago, and I wouldn’t have said that until the last couple of readings.” He further noted that the risk of elevated inflation had come into better balance with the risk that “reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

Lee commented that “overall, this is positive for equities, in our view, as this mitigates recession risk. In our view, inflation has been falling like a rock and the stubborn shelter and auto insurance have propped up CPI. But unfortunately, a ‘data dependent’ Fed is also thus keeping interest rates unnecessarily high. So, the Fed Chair acknowledging two sided risks is positive for stocks generally.”

Elsewhere

Boeing reached a preliminary agreement to plead guilty to criminal fraud after federal prosecutors found that the aerospace giant had violated the terms of a 2019 deferred prosecution agreement reached after two fatal 737 Max crashes. In admitting to a single charge of conspiracy to defraud the U.S., the company agreed to pay $455 million to fund safety- and compliance-improvement programs, as well as fines of up to $487.2 million (less $243.6 million in fines previously paid). Importantly, the plea deal would not result in a ban from doing business with the government, a distinct possibility for entities with criminal convictions on its record (though viewed as unlikely given Boeing’s importance to government operations). Justice Department officials noted that the plea deal only covers the company’s actions involving the 737 Max crashes and leaves open the possibility of regulatory actions against individual Boeing executives.  

AT&T disclosed that hackers had stolen six months worth of call and text-message logs involving “nearly all” of its 110 million mobile and landline customers. The hackers did not gain access to customers’ names or the content of the messages, but they did obtain the phone numbers involved in every call and message. The metadata in question covers the approximate period between May 1 and Oct. 31, 2022. The company also noted, “Based on information available to AT&T, it understands that at least one person has been apprehended” by law enforcement investigating the incident. (No additional details about the investigation were released.)

Costco will raise membership fees for the first time since 2017, a move that will affect roughly 52 million members including those holding “Executive Memberships.” The fee increases will take effect in September. Its famed $1.50 hot dog deal will remain the same price for now, however.

A federal jury found Bill Hwang guilty of fraud and market manipulation. Federal prosecutors accused Hwang of lying to lenders about the state of Archegos Capital in the months before its implosion in 2021. Archegos CFO Patrick Halligan was also convicted. Hwang’s attorneys indicated they plan to appeal. 

President Biden signed a bill that would make it easier to bring new nuclear reactors in line. The legislation, which passed with bipartisan support, would streamline the licensing process for new reactors and lower the associated fees. It would also require the Nuclear Regulatory Commission to investigate ways to simplify and shorten the environmental review process.

Hurricane Beryl claimed at least 10 American lives after hitting southeast Texas and parts of Louisiana, adding to its death toll after previously rampaging through the Caribbean. Residents in the Houston metropolitan area contended with sustained winds of 75 mph and gusts of 87 mph, along with heavy rain and flooding. Many affected are still without power in the midst of a heat wave. 

Microsoft will pay EUR 20 million ($21.8 million) to settle a European Commission antitrust investigation into its Azure cloud-platform business. Competitors had filed a complaint alleging that Microsoft improperly charged customers less to use its enterprise software on Azure than on rival cloud platforms.

Australia’s Cyber Security Centre accused China of ties to the hacker group APT40. Joined by counterparts in the U.S., UK, Canada, New Zealand, Japan, South Korea, and Germany, the Centre said that APT40 had conducted malicious cyber operations on behalf of China’s Ministry of State Security

Blackstone has purchased the assets of the music catalog company Hipgnosis, giving the private equity giant partial or total ownership of various song catalogs such as those of Neil Young, Shakira, Justin Timberlake, and the Red Hot Chili Peppers, and of individual hits including Mariah Carey’s seasonally ubiquitous hit “All I Want for Christmas Is You”. Blackstone paid $1.6 billion for the company’s holdings.

The Smithsonian has acquired the first known photo of a U.S First Lady, a daguerreotype of Dolley Madison, likely taken in 1846 when she was 78 years old. The photo was purchased at auction at Sotheby’s for $456,000.

And finally: Medical school will be tuition-free for most students at the renowned Johns Hopkins Medical School thanks to a contribution from Michael Bloomberg. The former New York City mayor donated $1 billion to fund an endowment that will cover tuition for students whose parents earn less than $300,000 a year, and also living expenses for students whose parents earn less than $175,000 a year. The endowment will also help fund financial aid for students in public health and nursing, education, and engineering.